Liberty Mutual Insurance Group v. Panelized Structures, Inc.

Filing 40

ORDER Granting 29 Motion to Dismiss 1st and 2nd Claims in Third-Party Complaint and Denying 25 Motion to Dismiss. Signed by Judge James C. Mahan on 6/7/11. (Copies have been distributed pursuant to the NEF - ASB)

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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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LIBERTY MUTUAL INSURANCE
GROUP,

2:10-CV-1951 JCM (PAL)

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Plaintiff,

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v.

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PANELIZED STRUCTURES, INC., et
al.,

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Defendants.

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ORDER

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Presently before the court is plaintiff Liberty Mutual’s motion to dismiss the defendant

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Panelized Structures’ counterclaim for failure to state a claim for which relief may be granted. (Doc.

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#25). Defendant filed an opposition (doc. #30) and a supplemental opposition (doc. #33). Plaintiff

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filed a reply. (Doc. #34).

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Also before the court is third-party defendant Arizona Labor Force, Inc.’s (“ALFI”) motion

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to dismiss the third-party complaint. (Doc. # 29). Third-party plaintiff Panelized Structures filed

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an opposition. (Doc. # 37). Third-party defendant filed a reply. (Doc. #38).

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I. Background

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Plaintiff Liberty Mutual insured a temporary labor company, ALFI, for injuries to its

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employees, and defendant Panelized Structures contracted with ALFI to provide a temporary

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employee for construction purposes. Under state law, Panelized Structures was required to carry

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workers’ compensation insurance for its employees. ALFI for its part, expressly told customers the

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James C. Mahan
U.S. District Judge

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labor contract would provide the required insurance and included the cost of the premium in the

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contract price.

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employment with Panelized Structures and received insurance benefits from Liberty Mutual.

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Thereafter, Liberty Mutual began subrogation proceedings against the defendant to recover those

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payments.

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An employee subsequently was injured during the course of his temporary

The procedural history is as follows.

Plaintiff Liberty Mutual initiated subrogation

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proceedings against defendant Panelized Structures. Panelized Structures then counterclaimed

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against the plaintiff, and thereafter Liberty Mutual filed a motion to dismiss the counterclaim.

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Panelized Structures, also a third-party plaintiff, issued a third-party complaint against third-party

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defendant ALFI, who has also filed a motion to dismiss.

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A federal court sitting in diversity jurisdiction is required to apply state substantive law and

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federal procedural law. Freund v. Nycomed Amersam, 347 F.3d 752, 761 (9th Cir. 2003) (quoting

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Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996)). Additionally, under Federal Rule

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of Civil Procedure 12(b)(6), a court may dismiss a complaint when it fails to state a claim for which

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relief may be granted.

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II. Plaintiff Liberty Mutual’s Motion to Dismiss (doc. #25)

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The counterclaim alleges that plaintiff Liberty Mutual breached its contractual and fiduciary

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duties when it commenced subrogation actions against the defendant/counter-claimant, Panelized

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Structures. At issue is which party carries the ultimate responsibility for payment to an injured

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worker under a required workers’ compensation policy.

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In the motion to dismiss (doc. #25), Liberty Mutual asserts that there must be a direct

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contractual relationship between the parties to support a claim for bad faith. Without such a

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relationship, Panelized Structures lacks standing to bring a bad faith claim. Panelized Structures

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responds that the court should convert the motion to dismiss to a motion for summary judgment

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because resolution of the motion requires the court to consider evidence extraneous to the complaint.

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Alternatively, Panelized Structures requests this court stay consideration of the motion pending

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discovery to determine first if the defendant is an “insured” under the insurance contract. The court

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James C. Mahan
U.S. District Judge

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declines to stay resolution of the pending motions, finding it appropriate to now consider each on

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the merits.

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A. Conversion of Motion to Dismiss to Motion for Summary Judgment

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Federal Rule of Civil Procedure 12(d) permits a court to convert a motion under Rule

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12(b)(6) to a motion for summary judgment when “matters outside the pleadings are presented to

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and not excluded by the court.” Here, Panelized Structures claims Liberty Mutual’s reference to the

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insurance contract between itself and ALFI is extraneous evidence used to argue that Panelized

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Structures is not an “insured” under the contract. Thus, Panelized Structures asserts the motion to

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dismiss should be converted to a motion for summary judgment.

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Federal procedural law holds that “documents whose contents are alleged in a complaint and

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whose authenticity no party questions, but which are not physically attached to the pleading, may be

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considered in ruling on a Rule 12(b)(6) motion to dismiss.” Branch v. Tunnell, 14 F.3d 449, 454

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(9th Cir. 1994) (specifically holding that such considerations do not convert a motion to dismiss into

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a motion for summary judgment), overruled on other grounds by Galbraith v. County of Santa Clara,

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307 F.3d 1119 (9th Cir. 2002).

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Here, the court finds that consideration of the insurance contract does not convert the motion

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into a motion for summary judgment. The counterclaim itself refers to the contract (doc. #20 pg.11)

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as does the motion to dismiss (doc. #25). The insurance contract is not extrinsic evidence as it is the

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legal basis for the claims between the parties. Accordingly, the court treats the motion as a motion

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to dismiss and applies the relevant standards.

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B. Dismissal under Federal Rule of Civil Procedure 12(b)(6)

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Nevada law has not squarely addressed whether a third-party, claiming benefits, who falls

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within an insurance policy’s definition of an “insured,” has a contractual relationship with the insurer

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such that the third-party may allege claims of bad faith arising from that relationship. Bergerud v.

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Progressive Casualty Ins., 453 F. Supp. 2d 1241, 1246 (D. Nev. 2006). Without guidance from the

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state, a federal court must sit in the place of the highest state court and use its best judgment to

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predict the preferred resolution of the issue using existing state law and other sources. Strother v.

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U.S. District Judge

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S. Cal. Permanente Med. Group, 79 F.3d 859, 865 (9th Cir. 1996).

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Liberty Mutual asserts this case should be dismissed because third-party claimants do not

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have standing to claim bad faith when no contractual relationship exists between the parties. Gunny

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v. Allstate Ins. Co., 108 Nev. 344 (1992); see also United Fire Ins. Co. v. McClelland, 105 Nev. 504

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(1989) (requiring a contractual relationship in Nevada to assert a bad faith claim). Gunny involved

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a young man in a boating accident who sued his father’s insurance company for bad faith. The case

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was dismissed because the plaintiff did not present any evidence that he was a specific intended

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beneficiary or that he substantially relied on the contractual relationship. Gunny, 108 Nev. at 345.

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Similarly in McClelland, the plaintiff was not named on the insurance policy but was her husband’s

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dependent. 105 Nev. at 504. The Nevada Supreme Court held a third-party beneficiary does not

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have a contractual relationship to support a claim of bad faith when the claim is based on the denial

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of another’s benefits. Id. at 511-12.

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In support of its position, the Court in McClelland adopted the reasoning of Hatchwell v,

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Blue Shield of California, 198 Cal. App. 3d 1027 (1988). A careful reading of Hatchwell yields a

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subtle distinction between bad faith claims where (1) the insurer denies a third-party’s claim for

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benefits and (2) when the insurer denies another party’s claim to benefits which will ultimately be

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paid to the third-party. The court held that an express beneficiary, or a third-party who is an

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“insured” person under the terms of the policy, has standing if “she is the claimant whose benefits

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are wrongfully withheld.” Bergerud, 453 F. Supp. 2d at 1248. Additionally, both Gunny and

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McClelland indicate that a “third-party claimant who is a specific intended beneficiary of an

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insurance policy might have a contractual relationship to support a bad faith claim.” Id. at 1247.

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The court interprets this Nevada Supreme Court precedent as endorsing bad faith claims of a third-

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party “insured,” where the third-party claims benefits as the intended beneficiary.

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Here, Panelized Structures has claimed benefits for itself and not for either the injured

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employee or ALFI. Specifically, Panelized Structures has claimed as an “insured” beneficiary, that

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Liberty Mutual was under a duty to never bring subrogation proceedings against it. This issue has

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not been addressed by the Nevada Supreme Court.

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U.S. District Judge

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Panelized Structures pled in its counterclaim that it was an “insured” under the insurance

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contract. Accordingly, by pleading that it is an implied “insured” beneficiary, Panelized Structures

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has alleged a claim for which relief may be granted. Nevada law requires good faith and fair dealing

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on the part of the insurer in dealing with its insured parties. See Powers v. United Services Auto.

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Ass’n, 114 Nev. 690, 700-01 (1998). The court declines to resolve the issue at this juncture, as a

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motion to dismiss concerns itself with the pleading standard rather than the substance of the claims

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alleged. The court finds that the claim has been adequately pled.

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III. ALFI’s Motion to Dismiss (doc. #29)

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Third-party plaintiff Panelized Structures claims that ALFI intentionally, or in the alternative,

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negligently, misrepresented that it carried workers’ compensation insurance for the protection of the

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temporary employees of Panelized Structures. The third-party complaint also alleges breach of

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contract, claiming that Panelized Structures was covered by the insurance contract between Liberty

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Mutual and ALFI, which Liberty Mutual breached by refusing to protect Panelized Structures from

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a personal injury suit by the temporary employee and also initiating subrogation proceedings to

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recover the benefits paid to the employee. Panelized Structures then filed suit against ALFI to

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recover for the intentional and negligent misrepresentations and breach of contract. ALFI claims the

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motion to dismiss will likely become moot after consideration of the first motion to dismiss (doc.

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#25). The court agrees.

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The insurance contract is the controlling issue in this case. Any fault by ALFI necessarily

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requires determining if the insurance contract is ambiguous. Panelized Structures correctly asserts

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that any ambiguity in the insurance contract must be resolved in favor of the insured and against the

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insurer. See Safeco Ins. Co. v. Capri, 101 Nev. 429 (1985). Thus, the controlling question is

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whether any ambiguity shows that Panelized Structures is an implied insured. If answered in the

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affirmative, the third-party complaint against ALFI becomes moot. If not, Panelized Structures can

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move forward with its complaint.

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However, Panelized Structures already acknowledged that ALFI attempted and intended to

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provide workers’ compensation insurance to Panelized Structures. By its own admission, ALFI

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U.S. District Judge

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obtained the insurance protection for the benefit of its future customers and had a reasonable

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expectation and interpretation of the insurance contract. (Doc. #30). Panelized Structures cannot

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now claim either intentional or negligent misrepresentation. Thus, Panelized Structures’ first two

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claims are rendered moot upon the above disposition of Liberty Mutual’s motion to dismiss. (Doc.

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#25).

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Accordingly,

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IT IS HEREBY ORDERED ADJUDGED AND DECREED that plaintiff Liberty Mutual

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Insurance Group’s motion to dismiss (doc. #25) be, and the same hereby is, DENIED.

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IT IS FURTHER ORDERED ADJUDGED AND DECREED that third-party defendant

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Arizona Labor Force, Inc.’s motion to dismiss the first and second claims for relief in the third-party

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complaint (doc. #29) be, and hereby is, GRANTED.

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DATED June 7, 2011.

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UNITED STATES DISTRICT JUDGE
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James C. Mahan
U.S. District Judge

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