Accident Insurance Company v. Classic Building Design, LLC et al

Filing 25

ORDER granting 8 Motion to Dismiss Counterclaim of Defendant/Counter-Plaintiff Classic Building Designs, LLC filed on behalf of the Plaintiff/Counter-Defendant Accident Insurance Company is granted to the extent that Classic's claims for punitive or bad faith damages are dismissed without prejudice as not ripe. Signed by District Judge Keith Starrett on May 6, 2011 (dsl)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
HATTIESBURG DIVISION

ACCIDENT INSURANCE COMPANY
VERSUS

PLAINTIFF
CIVIL ACTION NO. 2:11cv33KS-MTP

CLASSIC BUILDING DESIGNS, LLC;
MARTHA PACE; ABC INDIVIDUALS;
AND XYZ ENTITIES

DEFENDANTS

MEMORANDUM OPINION AND ORDER
This matter is before the court on a Motion to Dismiss Counterclaim of
Defendant/Counter-Plaintiff Classic Building Designs, LLC (“Classic”) [#8] filed on
behalf of the Plaintiff/Counter-Defendant Accident Insurance Company (“AIC”). The
court, having reviewed the motion, the response, the pleadings and exhibits on file and
being otherwise fully advised in the premises finds that the motion is well taken and
should be granted to the extent hereinafter stated. The court specifically finds as
follows:

FACTUAL BACKGROUND
This matter arises from a claim for damages by Martha Pace against AIC’s
putative insured, Classic Building Design, LLC. Specifically, Classic was the general
contractor in charge of building Pace’s home located at 11 Centerstone, Hattiesburg,
Mississippi. The house was constructed in 2005. Subsequently, on or about February
26, 2010, a globe from a light fixture in the bathroom fell, striking Pace on the head.
Pace contends she suffered physical injury and has incurred in excess of $100,000 in

medical bills as a result of the light falling and striking her head. According to the claims
of Pace, the light fixture was not properly installed at the time the house was
constructed, resulting in the globe falling. There are allegations that Classic did not
install the light fixture at issue, but rather such fixture was installed by a subcontractor
hired by Classic.
AIC first issued a commercial general liability policy to Classic on or about March
13, 2008, which was renewed for the policy period March 13, 2009 through March 13,
2010. Included in the policy that AIC first issued to Classic was a Contractors Special
Condition endorsement, which states as follows:
As a condition precedent to coverage for any claim for injury or damage
based, in whole or in part, upon work performed by independent
contractors, the insured must have, prior to the start of work and the date
of the “occurrence” giving rise to the claim or “suit”:
(1) received a written indemnity agreement from the independent
contractor holding the insured harmless for all liabilities, including
costs of defense, arising from the work or the independent
contractor;
(2) obtained certificates of insurance from the independent
contractor indicating that the insured is named as an additional
insured and that coverage is maintained with minimum limits of
$500,000 per occurrence;
(3) obtained proof that the independent contractor has workers
compensation insurance if required by the state in which the job(s)
is located; and
(4) obtained proof that all licenses as required by local and/or
stated statute, regulation or ordinance are up to date.
The insured must maintain the records evidencing compliance with
paragraphs (1) through (4) for a minimum of five years from the expiration
date of this policy. If coverage indicated under (2) and (3) above are not
maintained, we shall have no obligation to defend or indemnify any
insured for work performed by independent contractors on your behalf
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represented by the certificate of insurance referenced (2) and (3) above.
The insurance provided by this policy shall be excess over and above any
other valid and collectible insurance available to the insured under
paragraph (2).
On or about February 16, 2011, following a demand on AIC to provide defense
and indemnity of Pace’s claims, a Reservation of Rights was forwarded to Robert D.
Brewer of Classic, thereby reserving any and all rights to review its coverage position
for any and all damages allegedly sustained. In the Reservation of Rights letter, AIC
specifically and expressly reserved its rights to deny coverage, but did not deny
coverage pending its investigation into coverage for the claims made by Martha Pace.
On February 17, 2011, as part of its investigation into coverage, AIC filed its
declaratory judgment action seeking an Order from this court declaring its rights and
responsibilities under the Policy arising out of Pace’s claims. On March 18, 2011,
Classic filed its Answer and Counterclaim for gross negligence and “bad faith” denial of
coverage in which Classic is seeking attorneys’ fees, costs, compensatory and punitive
damages. AIC has thus filed the present motion pursuant to Federal Rules of Civil
Procedure 12 asserting that since it has not denied coverage to Defendants arising out
of the claims of Martha Pace, there can be no bad faith, as a matter of law.

STANDARD OF REVIEW
The Defendant has moved the Court to dismiss this matter under Rule 12(a)(4)
and (b)(6) for failure of the Plaintiffs to state a claim upon which relief can be granted.
In ruling on a 12(b)(6) motion, the Court may not go outside the pleadings, specifically

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the complaint in this case. "The Rule 12(b)(6) motion . . . only tests whether the claim
has been adequately stated in the complaint." 5A C. WRIGHT & A. MILLER, FEDERAL
PRACTICE AND PROCEDURE: Civil 2d § 1356 at 298 (1990).
As the Fifth Circuit has stated, "We may not go outside the pleadings. We accept
all well-pleaded facts as true and view them in the light most favorable to the Plaintiff.
We cannot uphold the dismissal 'unless it appears beyond doubt that the Plaintiff can
prove no set of facts in support of his claim which would entitle him to relief.'" Colle v.
Brazos County, Texas, 981 F.2d 237, 243 (5th Cir. 1993)(internal footnotes and citations
omitted). See also, Cinel v. Connick, 15 F.3rd 1338, 1341 (5th Cir. 1994).
While a complaint need not contain detailed factual allegations to survive a
12(b)(6) motion, the United States Supreme court has held that a plaintiff’s “obligation to
provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Bell Atlantic Corp. v. Twombly, 550 U.S. 540, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d
929, 940 (2007)(other citations omitted). Of course, if any matters outside the complaint
are considered, the motion is converted to one for summary judgment. See Murphy v.
Inexco Oil Co., 611 F.2d 570, 573 (5th Cir. 1980).
Along with its Motion to Dismiss, AIC has presented evidence which is outside
the current pleadings in this matter. As such, AIC asserts that under Fed.R.Civ.Proc.
Rule 12(c), this court has within its discretion the authority to dismiss the Counterclaim
against AIC with prejudice. AIC further argues that it is clear that the Counter-Plaintiff
has pled no facts that entitle it to recover at common law against AIC, therefore, all
claims against AIC made by Counter-Plaintiff in its Counterclaim should be dismissed
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with prejudice, as a matter of law.

LAW AND ANALYSIS
The law regarding an insurer’s liability for bad faith refusal to defend has been
clearly defined in Mississippi case law. In the instant case, to make a viable claim for
bad faith against AIC, Counter-Plaintiff must show that AIC (1) denied its claims, here
for defense and indemnity, without an arguable or legitimate basis either in fact or law,
and (2) did so with malice or gross negligence in disregard of the their rights. See U.S.
Fidelity & Guar. Co. v. Wigginton, 964 F.2d 487, 492 (5th Cir.1992) (citing Dunn v. State
Farm Fire and Casualty Co., 711 F.Supp. 1362, 1364 (N.D.Miss.1988), aff'd, 927 F.2d
869 (5th Cir.1991)).
To defeat such a claim, AIC need only show that it had reasonable justifications,
either in fact or in law, to deny coverage, if it did at all. Id. An insurer “is said to have an
arguable reason for acting if there is credible evidence that supports the conclusions on
the basis of which he/she acts.” Blue Cross & Blue Shield of Mississippi v. Campbell,
466 So. 2d 833 (Miss. 1984). Whether an insurer had an arguable reason to deny an
insured's claim is an issue of law for the Court. Id. See also Foster v. Globe Life &
Accident Ins. Co., 808 F.Supp. 281 (N.D. Miss. 1992); and Caldwell v. Alfa Ins. Co., 686
So.2d 1092 (Miss. 1996). The law is also well settled that the possible insured, here
Classic, has the ultimate burden of establishing a claim for bad faith denial of an
insurance claim. Id.
The first thing that Classic must show is that AIC has actually denied it coverage
for the instant claim. Classic cannot do so under the facts in this case. AIC issued a
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reservation of rights letters, which specifically stated;
Since the facts underlying the Claimant’s claims either
involve claims that are not sufficiently factually alleged, may not be
covered by AIC’s Policy, or may invoke an exception to coverage
under AIC’s above-referenced policy, AIC is hereby notifying you
that it is reserving its rights to disclaim coverage for indemnification
and/or defense of all or part of the Claimant’s claims should AIC’s
investigation reveal that there is no coverage for the claims
discussed herein.
Please be advised, these views and reservations are not
intended in any way to be exhaustive or exclusive, and AIC
expressly reserves all its rights under its Policy discussed herein,
including but not limited to, the right to raise additional policy terms
and conditions as defenses to coverage as appropriate. Our failure
to cite other policy language at this time does not preclude AIC
from raising other defenses in the future should the situation so
warrant.
At this time, AIC’s investigation into the matters surrounding
this claim is continuing and AIC has not determined the full extent
of coverage, if any, which is afforded to you under its policy. AIC,
therefore, reserves any and all rights which it may have under the
terms and provisions of the subject policy, pending the outcome of
its investigation. At the present time, we are not aware if suit has
been filed against you. In the event that suit has been or eventually
is filed against you in this matter, a potential conflict of interest
could arise between you and any lawyer hired by AIC to defend
your interests in said lawsuit. Therefore, you need to know that if
you feel the need to hire or retain additional independent legal
counsel to represent your interests with regard to any such suit
eventually filed by Claimant, please advise AIC accordingly, and
AIC will pay reasonable attorney’s fees for the hiring and retention
of the independent legal counsel of your own choosing, in addition
to the counsel that may ordinarily be provided to you by AIC.
Please note, however, that by providing a defense for you in any
suit filed by or on the behalf of the Claimant, AIC is in no way
waving these or any other coverage defense to the claims which
have been made against you.
Of critical importance is whether Classic can state a viable claim against AIC for
filing the instant action for Declaratory Judgment, while offering to defend it in any
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underlying action filed by Pace under a reservation of rights. This issue has been taken
up by the Mississippi Courts, both State and Federal, in the past, and resoundingly, has
been responded to in the negative.
As a District Court for the Southern District of Mississippi stated in Mutual
Assurance, Inc. v. Banks, 113 F.Supp.2d 1020, 1024 (S.D.Miss.2000);
The court finds that Mutual simply filed the instant declaratory action to
determine coverage and simultaneously reserved its rights to deny such
coverage while providing Dr. Doyle with a defense against the Banks’
allegations. Contrary to Dr. Doyle’s assertion, filing a declaratory action to
determine whether coverage exists is not indicative of bad faith, especially
where the declaratory action was filed prior to the underlying state court
action. Although an insurance company has a duty to investigate as
discussed infra, there is simply no evidence indicating that Mutual has
denied coverage.
In Stratford Ins. Co. v. Cooley , 985 F. Supp. 665, 673 (S.D. Miss. 1996), the
court spoke much more directly when it stated the following:
Under no circumstances could it reasonably be concluded that Stratford
acted in bad faith by instituting this declaratory judgment action to
determine a legitimate coverage dispute rather than contributing its policy
limits to a pre-litigation settlement which may or may not have resulted in
a complete release of Cooley. Accordingly, Stratford is entitled to
summary judgment on this claim by Cooley.
Similarly, other courts, including the Mississippi Supreme Court, have held that
the instigation of an action for declaratory judgment to determine coverage is not, itself,
evidence of “bad faith” and it may actually be prima facia evidence of “good faith”. See
Employers Mutual Casualty Co. v. Tompkins, 490 So.2d 897, 905 (Miss.1986) (holding
that “although the timing of the declaratory judgment action, one day after the state suit
was filed, invites comment that it was to delay Tompkins’ claim, we nevertheless hold
the filing of the federal action was in good faith because the doors of that court were
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open to the appellant for the presentation of it’s theory of the uninsured motorist act”);
Allstate Ins. Co. v. Ashley, 998 F.2d 300 (5th Cir. 1993) (holding that fling of declaratory
judgment action to determine uninsured motorist carrier’s limits was not an act of bad
faith “as a matter of law”). See also, e.g., Western Fire Ins. Co. v. Copeland, 651
F.Supp. 1051)(S.D.Miss.1987) (Russell, J.); Scottsdale Ins. Co. v. AFC Inc., NO.
1:06CV1242LG-JMR, 2007 WL 2475935 (S.D.Miss., August 28, 2007) (Guirola, J.)
In response to AIC’s Motion to Dismiss the Counterclaim filed by Classic for bad
faith, Classic failed to address the primary issue, namely whether the filing of the
declaratory judgment action constitutes bad faith. Rather, the arguments made by
Classic primarily speak to the merits of the coverage action, which issues are not
presently before the court. The relevant issue here is not whether coverage actually
exists for the claims made by Pace against Classic, but rather whether the mere filing of
the instant declaratory judgment action by AIC asking this court to declare whether
coverage exists constitutes bad faith. The court concludes that it does not.
Finally, it appears that whether inclusion of the Contractors Special Condition
endorsement rendered the policy unconscionable or constitutes wrongful conduct or
bad faith on the part of AIC is also raised as an issue. However, that issues is not
properly before the court at this time. Since there has been no denial of the underlying
claim related to Pace’s alleged injuries, there simply can be no bad faith claim
maintained against AIC at this time. The merits controversy relating to the coverage
issues and unconscionability of the Contractors Special Condition endorsement are best
left for determination at the summary judgment stage, not this preliminary dismissal
stage.
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IT IS THEREFORE ORDERED AND ADJUDGED that the Motion to Dismiss
Counterclaim of Defendant/Counter-Plaintiff Classic Building Designs, LLC [#8] filed on
behalf of the Plaintiff/Counter-Defendant Accident Insurance Company is granted to the
extent that Classic’s claims for punitive or bad faith damages are dismissed without
prejudice as not ripe.
SO ORDERED AND ADJUDGED this the 6th day of May, 2011.

s/Keith Starrett
UNITED STATES DISTRICT JUDGE

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