Westfield Insurance Company v. Icon Legacy Custom Modular Homes et al
Filing
46
MEMORANDUM (Order to follow as separate docket entry) re Plaintiff's 31 MOTION to Dismiss; Defendant's 45 MOTION to Continue Case Management Schedule.Signed by Honorable Matthew W. Brann on 8/29/16. (km)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
WESTFIELD INSURANCE COMPANY, :
:
Plaintiff,
:
:
v.
:
:
ICON LEGACY CUSTOM MODULAR :
HOMES AND ICON LEGACY,
:
:
Defendants.
:
No. 4:15-cv-00539
(Judge Brann)
MEMORANDUM
August 29, 2016
I.
BACKGROUND1
For all of its procedural machinations, the facts of this case are rather
straightforward. Defendant was sued in two separate state court proceedings in
New York and Massachusetts, and Plaintiff, its insurer, agreed to defend it as to
those actions subject to a reservation of rights. Plaintiff then initiated this action
in federal court, seeking a declaration that it owes Defendant no defense or
indemnity under the subject policy as to those actions.
1
The following facts are gleaned from, and viewed in the light most favorable to, the
non-moving party’s brief in opposition to the motion to dismiss. ECF No. 34.
-1-
When Defendant was sued for a third time, now in Vermont state court,
Plaintiff in turn amended its federal court complaint and sought a similar
declaration as to the newly filed Vermont action. In response, Defendant filed a
counterclaim alleging that Plaintiff’s decision to deny coverage as to the Vermont
action was made in bad faith, a claim that has essentially forestalled
determination of the underlying breach of contract claims. Plaintiff thereafter
filed a motion to dismiss, arguing that Defendant has failed to plausibly plead
sufficient facts supporting its bad faith claim.
The central issue on that motion is therefore not the viability of Plaintiff’s
explanation for its refusal to cover—that is a matter for a different day and
perhaps, for extrajudicial determination. Instead, I must only determine whether
the Defendant has alleged facts plausibly suggesting bad faith on Plaintiff’s part.
It has not. In fact, considering the sparse allegations in combination with
Plaintiff’s thorough letter explaining its refusal to cover, I am convinced that the
insurance bad faith claim should be dismissed with prejudice.
II.
LAW
Under Federal Rule of Civil Procedure 12(b)(6), a defendant may file a
motion to dismiss for “failure to state a claim upon which relief can be granted.”
-2-
Such a motion “tests the legal sufficiency of a pleading” and “streamlines
litigation by dispensing with needless discovery and factfinding.” 2 “Rule 12(b)(6)
authorizes a court to dismiss a claim on the basis of a dispositive issue of law.” 3
This is true of any claim, “without regard to whether it is based on an outlandish
legal theory or on a close but ultimately unavailing one.”4
Beginning in 2007, the Supreme Court of the United States initiated what
some scholars have termed the Roberts Court’s “civil procedure revival” by
significantly tightening the standard that district courts must apply to 12(b)(6)
motions.5 In two landmark decisions, Bell Atlantic Corporation v. Twombly and
Ashcroft v. Iqbal, the Roberts Court “changed . . . the pleading landscape” by
“signal[ing] to lower-court judges that the stricter approach some had been
taking was appropriate under the Federal Rules.”6 More specifically, the Court in
2
In re Hydrogen Peroxide Litigation, 552 F.3d 305, 316 n.15 (3d Cir. 2008) (Scirica,
C.J.) (quoting Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 675 (7th Cir. 2001)
(Easterbrook, J.)). Neitzke v. Williams, 490 U.S. 319, 326–27 (1989).
3
Neitzke, 490 U.S. at 326 (citing Hishon v. King & Spalding, 467 U. S. 69, 73 (1984)).
4
Neitzke, 490 U.S. at 327.
5
Howard M. Wasserman, The Roberts Court and the Civil Procedure Revival, 31 Rev.
Litig. 313 (2012).
6
550 U.S. 544 (2007); 556 U.S. 662, 678 (2009). Wasserman, supra at 319–20.
-3-
these two decisions “retired” the lenient “no-set-of-facts test” set forth in Conley
v. Gibson and replaced it with a more exacting “plausibility” standard.7
Accordingly, after Twombly and Iqbal, “[t]o survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’”8 “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”9 “Although the
plausibility standard does not impose a probability requirement, it does require a
pleading to show more than a sheer possibility that a defendant has acted
unlawfully.”10 Moreover, “[a]sking for plausible grounds . . . calls for enough
facts to raise a reasonable expectation that discovery will reveal evidence of
[wrongdoing].”11
7
Iqbal, 556 U.S. at 670 (citing Conley v. Gibson, 355 U.S. 41 (1957)) (“[a]cknowledging
that Twombly retired the Conley no-set-of-facts test”).
8
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).
9
Iqbal, 556 U.S. at 678.
10
Connelly v. Lane Const. Corp., 809 F.3d 780, 786 (3d Cir. 2016) (Jordan, J.) (internal
quotations and citations omitted).
11
Twombly, 550 U.S. at 556.
-4-
The plausibility determination is “a context-specific task that requires the
reviewing court to draw on its judicial experience and common sense.”12 No
matter the context, however, “[w]here a complaint pleads facts that are ‘merely
consistent with’ a defendant’s liability, it ‘stops short of the line between
possibility and plausibility of entitlement to relief.’”13
When disposing of a motion to dismiss, a court must “accept as true all
factual allegations in the complaint and draw all inferences from the facts alleged
in the light most favorable to [the plaintiff].”14 However, “the tenet that a court
must accept as true all of the allegations contained in the complaint is
inapplicable to legal conclusions.”15 “After Iqbal, it is clear that conclusory or
‘bare-bones’ allegations will no longer survive a motion to dismiss.”16
“Threadbare recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice.”17
12
Iqbal, 556 U.S. at 679.
13
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557 (internal quotations
omitted)).
14
Phillips v. Cnty. of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008) (Nygaard, J.).
15
Iqbal, 556 U.S. at 678 (internal citations omitted).
16
Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (Nygaard, J.).
17
Iqbal, 556 U.S. at 678.
-5-
As a matter of procedure, the United States Court of Appeals for the Third
Circuit has instructed that:
Under the pleading regime established by Twombly and Iqbal, a
court reviewing the sufficiency of a complaint must take three steps.
First, it must tak[e] note of the elements [the] plaintiff must plead to
state a claim. Second, it should identify allegations that, because
they are no more than conclusions, are not entitled to the
assumption of truth. Finally, [w]hen there are well-pleaded factual
allegations, [the] court should assume their veracity and then
determine whether they plausibly give rise to an entitlement to
relief.18
III.
ANALYSIS
A.
Pennsylvania Law Applies To The Resolution Of Defendant’s
Insurance Bad Faith Counterclaim, Because Pennsylvania Has A
Strong Interest In Protecting Its Insured Residents And Because
The Eventual Economic Impact Of The Uninsured Claims Would
Be Felt By The Defendant In Pennsylvania.
“In the absence of a specific federal policy or interest dictating the use of
federal choice of law rules, it is well settled in this Circuit that a [ ] court faced
with the issue of which substantive state law to apply to a claim for relief in an
adversary proceeding applies the choice of law rules of the forum state.” 19 I
therefore turn to the choice of law rules of the Commonwealth of Pennsylvania
to determine which state law should be applied.
18
Connelly, 809 F.3d at 787 (internal quotations and citations omitted).
19
Id.
-6-
Pennsylvania’s choice-of-law analysis follows a “flexible rule which
permits analysis of the policies and interests underlying the particular issue
before the court.”20 Under this approach, Pennsylvania courts are to apply the
law of the forum with the ‘most interest in the problem,’ rather than the law of
the place of injury.”21 “We must first determine whether there is a true conflict
between the relevant laws.”22 “If a true conflict exists, the Court must then
determine which state has the greater interest in the application of its law.” 23
However, as the Third Circuit has explained, “[i]f two jurisdictions’ laws
are the same, then there is no conflict at all, and a choice of law analysis is
unnecessary.”24 Thus, “if there are no relevant differences between the laws of
the two states, or the laws would produce the same result . . . the court does not
have to engage in a choice of law analysis, and may refer to the states’ laws
interchangeably.”25
20
Specialty Surfaces Int’l, Inc. v. Cont’l Cas. Co., 609 F.3d 223, 229 (3d Cir. 2010)
(quoting Griffith v. United Air Lines, Inc., 416 Pa. 1, 21, 203 A.2d 796, 805 (1964)).
21
Hammersmith v. TIG Ins. Co., 480 F.3d 220, 227 (3d Cir. 2007) (quoting Griffith, 203
A.2d at 806).
22
Specialty Surfaces, 609 F.3d at 230.
23
Hammersmith, 480 F.3d at 231 (internal citation and quotation marks omitted).
24
Id. at 230.
25
Id. at 229.
-7-
Although the Defendant has devoted several pages to an enumeration of
insurance bad faith claims in every state whose rules could conceivably apply to
the instant dispute, it is not evident to the Court that the laws of those states
materially differ. This is particularly true as to the ultimate determination
regarding the type of culpability that constitutes bad faith. Tellingly, Defendant
believes it has stated a plausible claim under every state’s law to which it cites. If
true, that proposition means that one (or perhaps both) of two consequents must
also be true: either (1) the laws of the cited jurisdictions do not materially differ;
or (2) Defendant has pled an exceptionally strong insurance bad faith claim
sufficient to satisfy even the most demanding common law rubrics. Based upon
my review of the matter, the former option is likely the more genuine
characterization of the situation.
Nevertheless, the parties have requested—and the shared interest in a
“just, speedy, and inexpensive” disposition of this matter requires—that this
Court provide some semblance of clarity as to the issue of applicable law before
this matter proceeds much further. Alternating among the elements and
procedural requirements for a common law tort as expressed in five distinct
states is, in my view, ill-advised. Moreover, it would not be unimaginable for
-8-
detailed briefing on this issue to later reveal certain procedural or substantive
nuances between certain of these states’ laws capable of altering the parties’
rights. Considering the facts available to the Court, I now hold that the law of the
Commonwealth of Pennsylvania applies to this dispute.
The Third Circuit has characterized Pennsylvania’s choice of law analysis
“as a combination of the approaches of both the Restatement II (contacts
establishing significant relationships) and interests analysis (qualitative appraisal
of the relevant States’ policies with respect to the controversy).”26 Specifically,
“[t]he law applicable to the interpretation of insurance policies is the same as that
which applies to contracts. Contracts mean what the parties intend.”27 In
Hammersmith v. TIG Insurance Co., for example, the Third Circuit applied § 188
of the Restatement (Second) of Conflict of Laws to resolve a conflict arising
under Pennsylvania state choice of law analysis. That section, entitled “Law
Governing in Absence of Effective Choice by the Parties,” provides the following
factors for a court’s consideration in cases involving disputes arising from
commercial contracts:
26
Hammersmith, 480 F.3d at 231.
27
Quinney v. Am. Modern Home Ins. Co., 145 F. Supp. 2d 603, 607 (M.D. Pa. 2001)
(Caputo, J.).
-9-
(a)
the place of contracting,
(b)
the place of negotiation of the contract,
(c)
the place of performance,
(d)
the location of the subject matter of the contract, and
(e)
the domicile, residence, nationality, place of incorporation and place
of business of the parties.
The first wrinkle in this analysis, however, is the apparent distinction
between breach of contract claims, which follow the above choice-of-law
analysis, and insurance bad faith claims, which although owing their genesis to
some underlying insurance agreement, typically employ a choice-of-law analysis
centered more closely on the residence of the insured. United States Magistrate
Judge Martin C. Carlson of this Court examined this distinction in Davis v. Geico
General Insurance Co., a 2013 report and recommendation adopted by the
Honorable Christopher C. Conner. In Davis, Judge Carlson explained:
In addition, although the parties do not address this issue, we note
that in some cases it is entirely appropriate for a federal court sitting
in diversity to conduct separate analyses to determine which state’s
law should apply to a bad-faith claim, where another state’s law
may arguably apply to a separate issue of contract interpretation.
See Robeson Indus. Corp. v. Hartford Accident & Indem. Co., 178
F.3d 160, 168 (3d Cir.1999) (“[C]onflict of laws principles do not
require that all legal issues presented by a single case be decided
under the law of a single state. Instead the choice of law decisions
can and should be made on an issue-by-issue basis, and thus the law
- 10 -
of different states can apply to different issues in the same case.”).
We believe this observation in Robeson has force in this case, where
the defendants have moved only to dismiss the plaintiff’s bad-faith
claim in Count II of the complaint, where this particular claim did
not accrue until the plaintiff became a Pennsylvania resident, and
where the bad-faith claim arose out of a dispute with the plaintiff’s
insurance company that began in Pennsylvania.28
Previously, in Kilmer v. Connecticut Indemnity Co., then Chief Judge
Thomas I. Vanaskie, writing for this Court, held that Pennsylvania law applied
as to an insurance bad faith claim brought by a Pennsylvania couple against a
Connecticut insurer, after a fire destroyed the couple’s New York ski lodge.29 In
Kilmer, Judge Vanaskie cited to § 193 of the Restatement (Second) of Conflicts of
Law. That section, entitled “Contracts of Fire, Surety or Casualty Insurance,”
provides as follows:
The validity of a contract of fire, surety or casualty insurance and the
rights created thereby are determined by the local law of the state
which the parties understood was to be the principal location of the
insured risk during the term of the policy, unless with respect to the
particular issue, some other state has a more significant relationship
. . . to the transaction and the parties, in which event the local law of
the other state will be applied.
Judge Vanaskie noted that although the location of the insured risk (the
New York ski lodge) was undisputed, several factors existed that counseled for
28
957 F. Supp. 2d 544, 551 (M.D. Pa. 2013).
29
189 F. Supp. 2d 237, 239–40.
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application of the law of Pennsylvania, the home state of the insureds. Judge
Vanaskie listed those factors:
(1)
the [plaintiffs] are both domiciled and reside in Pennsylvania;
(2)
the insurance policy in question was negotiated in Pennsylvania;
(3)
the agent through whom the policy was issued is located in
Pennsylvania;
(4)
the premium was paid in Pennsylvania;
(5)
the insurance company who issued the policy is licensed in
Pennsylvania;
(6)
the insurance company who issued the policy is competing with
other insurance companies domiciled and doing business in
Pennsylvania; and
(7)
the [plaintiffs] naturally expected the laws of Pennsylvania to
protect them.30
According to Judge Vanaskie, “[b]ecause the protection of insured parties
is the primary public policy behind laws governing duties owed by an insurer to
an insured,” Pennsylvania law applied regardless of the out-of-state location of
the subject property.31 As the court continued, “[t]he Third Circuit has made
clear that the protection of insured parties is the primary public policy
30
Kilmer v. Connecticut Indem. Co., 189 F. Supp. 2d 237, 245 (M.D. Pa. 2002).
31
Id. at 245 (quoting Gen. Star Nat. Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d 377, 379
(3d Cir. 1992)).
- 12 -
underlying laws governing duties owed by an insurer to an insured.”32 In
particular, Judge Vanaskie explained that “with regard to Pennsylvania’s bad
faith statute, courts have held that the policy behind [it] . . . is that the
Pennsylvania legislature was concerned about protecting its own
residents/insured from overreaching insurance companies.”33 As such, he
concluded that “under its conflict of laws principles, in order to ensure that the
insured parties are protected from the bad faith of an insurer, Pennsylvania
would apply its own local law on the issue of whether [the insurer] acted in bad
faith in its handling of [plaintiffs’] insurance claim.”34
I find Judge Vanaskie’s decision in Kilmer persuasive for two reasons.
First, it clearly prioritizes the factors for district courts to balance when
confronted with a choice of law analysis in the insurance bad faith context. It
leaves little doubt that primary factor to be considered is the state of residence of
the insured, guided by the policy motive that the insured’s home state enjoys a
32
Id. at 246.
33
Id. at 246–47 (citing Celebre v. Windsor–Mount Joy Mut. Ins. Co., No. CIV. A. 93–
5212, 1994 WL 13840, *2 (E.D.Pa. Jan.14, 1994) (citing Thomson v. Prudential Prop. &
Cas. Ins. Co., Civ. A. No. 91–4073, 1992 WL 38132, *4 (E.D.Pa. Feb.20, 1992))
(“Pennsylvania has a great interest in protecting its residents from possible
misconduct of insurance carriers operating within its borders.”).
34
Id. at 247.
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significant interest in ensuring its citizens’ rights vis-à-vis those of insurers. In
this case, those factors point toward the applying Pennsylvania law, the state of
Defendant’s incorporation as well as its principal place of business.
Moreover, Kilmer speaks to a second wrinkle in the choice-of-law analysis.
Specifically, how is a court’s analysis affected where the state residency of the
insured ultimately differs from that of the location of the real property forming
the basis for the underlying insurance contract? Judge Vanaskie’s analysis makes
clear that such disparity has little effect upon the choice-of-law analysis, leaving
the residency of the insured as the dominating factor in the insurance bad faith
context.
I consider that analysis to set forth a clear rule, which happens to be
supported by the practical aspects of an insurance contract. Most apparently, the
rule set forth in Kilmer and applied again here promotes business certainty, a
concept that Judge Vanaskie recognized stems from a legal rule’s
“predictability.”35 When an insurer contracts out its services and agrees to
reimburse the other party in the event of an accident or similar disaster, it must
have some sense as to which state’s laws will govern future coverage decisions.
35
Id. at 246.
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Otherwise, an insurer who contracts with a manufacture whose ultimate
products make it to every state in the country would have little more guidance as
to the rules of good faith denials than could be gleaned from a random dart
throw. If one of its purposes is to grease the wheels of commerce, our law must
chart a clearer path.
In the analogous context of bad faith failure to settle claims, the United
States Court of Appeals for the Eighth Circuit authored a decision in 2012 that
contributed to clarity in the choice-of-law analysis for bad faith claims alleged
against insurers. In that case, an excess insurer sued a primary insurer for bad
faith failure to settle.36 Both businesses insured a trucking company that was
involved in a fatal highway accident.37 After the primary carrier neglected to
settle the underlying personal injury matter, a jury returned a verdict that
exposed the excess carrier to a $17 million liability.38
The Eighth Circuit clarified that regardless of the site of the traffic incident
or the ultimate verdict, the location of the injury in a bad faith insurance claim
36
Am. Guarantee & Liab. Ins. Co. v. U.S. Fid. & Guar. Co., 668 F.3d 991, 993 (8th Cir.
2012).
37
Id.
38
Id.
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was the insured’s place of business—“the place where an economic injury occurs
because it is where the economic impact is felt.”39 “We agree,” the Eighth Circuit
wrote, that “the place where an insured feels the economic impact of an excess
verdict is the place where an injury occurs for purposes of a . . . choice-of-law
inquiry in a bad faith failure-to-settle case.”40
Other federal courts in Pennsylvania have taken similarly bright-line
approaches to the choice-of-law determination in insurance bad faith cases. For
instance, in Asplundh Tree Expert Co. v. Pac. Employers Ins. Co., the United
States District Court for the Eastern District of Pennsylvania clarified that the
factor that mattered the most was not the state in which denial occurred, but the
state “where the failure to receive the allegedly expected benefits was felt.” 41
Again, in Celebre v. Windsor–Mount Joy Mutual Insurance Company, the same
court applied the law of the state where the insured was doing business and
therefore where “the loss occurred.”42
39
Id. at 997 (internal quotation marks and citations omitted).
40
Id.
41
No. CIV. A. 90-6976, 1991 WL 147461, at *7 (E.D. Pa. July 25, 1991)
42
Id.
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Lastly, in Continental Casualty Co. v. Diversified Industries., Inc., the same
district court held that the proper law to apply was that of the state “where the
failure to receive the expected insurance proceeds was felt.”43 It went on to
explain that:
This contact is significant. This is because “persons who cause injury
in a state should not ordinarily escape liabilities imposed by the
local law of that state.” Restatement (Second) of Conflicts § 145,
comment e. Although AT & T claims that the place where the
tortious conduct occurred is paramount, Comment e to Section 145
explains that the place of the tortious conduct is usually significant
only if the state where the injury occurred either cannot be
determined or bears little relation to the parties. In the present case,
the injury occurred in Pennsylvania, a state having a significant
connection to the parties. As noted above, all parties to the CGL
Policies were doing business in Pennsylvania at the relevant time
periods.44
In light of these precedents, I hold that Pennsylvania law should apply to
Defendant’s bad faith counterclaim. The parties do not dispute that Defendant
Icon Legacy Custom Modular Homes to whom the subject policy was issued is a
Pennsylvania limited lability company with its principal place of business in
Selinsgrove, Snyder County, Pennsylvania. Thus, the policy was issued to a
43
884 F. Supp. 937, 952 (E.D. Pa. 1995).
44
Id.
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Pennsylvania resident, who would feel the ultimate economic impact of a
coverage decision in Pennsylvania.
Further, as the declination of coverage letter suggests, “the Policy was
likely delivered to the Pennsylvania address listed on the Declarations Page, and
the Policy was issued from the Pennsylvania agency that is also listed on the
Declarations Page. Moreover, like the policy in Village, the Policy itself stipulates
that it is subject to Pennsylvania law.”45 Thus, given Pennsylvania’s strong
interests in protecting its own businesses against insurance bad practices as well
as the numerous factual considerations suggesting that issuance of the instant
policy was primarily a Pennsylvania matter, I now hold that the law of
Pennsylvania should apply to Defendant’s bad faith claim.
Moreover, although several of the insurance cases cited above discuss the
potential for applying distinct state law to bad faith and breach of contract claims
arising out of the same policy, absent significant evidence to the contrary, I find it
likely that based upon these considerations, Pennsylvania law should apply to
the breach of contract and any related claims advanced in this litigation.
45
ECF No. 28 Ex. 7 at 4.
- 18 -
B.
Defendant Has Failed To Plausibly State A Claim For Insurance
Bad Faith Under Pennsylvania Law.
In the Commonwealth of Pennsylvania, insurance bad faith claims are
governed by Title 42 of the Pennsylvania Consolidated Statutes, Section 8371,
which states as follows:
§ 8371. Actions on Insurance Policies.
In an action arising under an insurance policy, if the court finds that
the insurer has acted in bad faith toward the insured, the court may
take all of the following actions:
(1)
Award interest on the amount of the claim from the date the
claim was made by the insured in an amount equal to the
prime rate of interest plus 3%.
(2)
Award punitive damages against the insurer.
(3)
Assess court costs and attorney fees against the insurer.
“Although the bad faith statute does not include a definition of ‘bad faith,’
the term encompasses a wide variety of objectionable conduct.”46 As the Superior
Court of Pennsylvania explained in Brown v. Progressive Insurance Co., “bad
faith exists where the insurer did not have a reasonable basis for denying benefits
under the policy and that the insurer knew of or recklessly disregarded its lack of
46
Condio v. Erie Ins. Exch., 2006 PA Super 92, ¶ 14, 899 A.2d 1136, 1142 (2006).
- 19 -
reasonable basis in denying the claim.”47 “Bad faith conduct also includes lack of
good faith investigation into facts, and failure to communicate with the
claimant.”48
However, “mere negligence or bad judgment is not bad faith.”49 “To
support a finding of bad faith, the insurer’s conduct must be such as to import a
dishonest purpose.”50 “In other words, the plaintiff must show that the insurer
breached its duty of good faith through some motive of self-interest or ill will.”51
To establish a claim under the Commonwealth’s bad faith statute, a
plaintiff “must demonstrate by clear and convincing evidence that: 1) the insurer
lacked a reasonable basis for its handling of a claim; and, 2) the insurer knew of
or recklessly disregarded the lack of a reasonable basis.”52 “[T]his heightened
standard requires the insured to provide evidence ‘so clear, direct, weighty and
47
Brown v. Progressive Ins. Co., 2004 PA Super 346, ¶ 31, 860 A.2d 493, 501 (2004)
(internal citations and quotation marks omitted).
48
Id.
49
Id. at ¶ 34.
50
Id. (internal quotation marks omitted).
51
Id.
52
Moran Indus., Inc. v. Netherlands Ins., Co., 2014 WL 643723, at *9 (M.D. Pa. Feb. 19,
2014) (Brann, J.).
- 20 -
convincing as to enable a clear conviction, without hesitation, about whether or
not the defendants acted in bad faith.’”53
Accordingly, because “the essence of a bad faith claim must be the
unreasonable and intentional (or reckless) denial of benefits,”54 an insurer can
“defeat a claim of bad faith by showing that it had a reasonable basis for its
actions.”55
The averments in Defendant’s insurance bad faith counterclaim read in
their entirety as follows. The Court has substituted the names of the state court
plaintiffs with those of their respective states:
178.
Westfield does not have a good faith basis for its denial of a
defense to Icon in the [Vermont] Action.
179.
Westfield agreed to defend the [New York] and
[Massachusetts] Actions based on similar allegations as those
contained in the [Vermont] Action and has at all times
continued to defend the [New York] and [Massachusetts]
Actions.
180.
Westfield’s decision to deny a defense to Icon in the
[Vermont] Action while agreeing to defend the [New York]
53
Amica Mut. Ins. Co. v. Fogel, 656 F.3d 167, 179 (3d Cir. 2011) (Ambro, J.) (quoting
Bostick v. ITT Hartford Grp., 56 F.Supp.2d 580, 587 (E.D.Pa.1999)).
54
Id. (quoting UPMC Health Sys. v. Metro. Life Ins. Co., 391 F.3d 497, 506 (3d Cir.2004)
(Barry, J.)).
55
Amica, 656 F.3d at 179.
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and [Massachusetts] Actions is arbitrary, capricious and/or
frivolous.
181.
[The Vermont Plaintiff’s] claim for property damage and/or
bodily injury falls within the Policy’s coverage and the
products completed operations coverage and Icon is entitled
to a defense for the claims asserted by [the Vermont Plaintiff].
182.
Westfield’s denial of coverage for [the Vermont Plaintiff’s]
claim was made in bad faith.
183.
Icon is entitled to recover damages for Westfield’s bad faith
handling of the [Vermont] claim regardless of the law that
applies.56
In essence, because Plaintiff has agreed to defend in certain purportedly
similar matters, denial here, Defendants argue, constitutes bad faith. That is a
strained argument, supported by very sparsely pled facts, even when viewed in
the light most favorable to the insured.
Most apparently, even taking for granted the similarity between any set of
claims, coverage of some claims and denial of others is not per se evidence of bad
faith insurance practices. For example, consider a hypothetical set of five claims,
all of which are “similar” but none of which the insurer believes in good faith it
is legally bound to offer coverage. The insurer could, if it wanted, offer coverage
in none or all or two or three of those cases. Denial would not be made in bad
56
ECF No. 29 at 35–36.
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faith under the law. Rather, it would be made based upon a calculated business
judgment, risk avoidance, litigation forecasts, etc. The point is that “similarity”
among claims is a poor predictor of bad faith denials in cases where either the
claims’ alleged similarity or the claims’ coverage under the policy is not clearly
established. I perceive both of those elements to be lacking here.
Moreover, Plaintiff points out that coverage of the prior two claims to
which Defendant compares the instant action was actually made under a
reservation of rights. I consider it a poor use of judicial resources to create
judicial rules that make it costlier for insurers to offer initial coverage under a
reservation of rights letter. Were Defendant’s argument accepted, insurers would
be less willing to offer coverage while a claim was initially being investigated for
fear that one coverage decision might be viewed as an admission as to that claim
or a comparable one in related litigation. Similar policy justifications underlie
determinations by the Federal Rules of Evidence mandating that subsequent
remedial measures and offers to pay initial medical or hospitalization costs be
deemed irrelevant in associated legal proceedings.57
57
See Fed. R. Evid. 407, 409.
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Finally, I note that, most damning for Defendant’s bad faith counterclaim,
Plaintiff has provided the Court a copy of its coverage denial letter.58 Plaintiff has
accurately characterized its declination letter as “detailed.”59 The ten-page,
single-spaced letter sets forth, from Plaintiff’s perspective, the applicable choiceof-law analysis, the pertinent policy definitions, the facts surrounding the claim,
the justifications that it provides for why those facts do not trigger coverage, and
various legal decisions that it suggests support its denial of the claim.60
58
ECF No. 28 Ex. 7. In Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., the
leading decision on the issue of consideration of external documents at the motion to
dismiss stage, the Third Circuit instructed as follows:
We now hold that a court may consider an undisputedly authentic
document that a defendant attaches as an exhibit to a motion to
dismiss if the plaintiff’s claims are based on the document. Otherwise,
a plaintiff with a legally deficient claim could survive a motion to
dismiss simply by failing to attach a dispositive document on which it
relied.
998 F.2d 1192, 1196 (3d Cir. 1993) (Cowen, J.) (internal citations omitted).
Further, according to the Third Circuit, “a document integral to or explicitly relied
upon in the complaint may be considered without converting the motion to dismiss
into one for summary judgment.” Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014)
(internal citations and quotations omitted) (emphasis in original). This is because
“the primary problem raised by looking to documents outside the complaint—lack
of notice to the plaintiff—is dissipated [w]here the plaintiff has actual notice . . . and
has relied upon these documents in framing the complaint.” Id. “[W]hat is critical is
whether the claims in the complaint are based on an extrinsic document and not
merely whether the extrinsic document was explicitly cited.” Id.
59
See, e.g., ECF No. 32 at 2.
60
See ECF No. 28 Ex. 7.
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“[T]hose jurisdictions which have recognized a cause of action for bad
faith conduct have cautioned that if the claim is ‘fairly debatable,’ no liability in
tort will arise.”61
While I need not decide the merit of Plaintiff’s justifications
for its refusal to insure Defendant as to the Vermont action, I have seen enough
to conclude that Defendant fails to plausibly state a claim that Plaintiff’s denial
lacked a reasonable basis.
In Smith v. American Equity Insurance Co., for example, the United States
District Court for the Eastern District of Pennsylvania granted a defendant
insurance company’s motion for summary judgment as to an unfair business
practices claim on the basis of that defendant having provided an adequate
denial letter.62 The court in Smith explained that the letter was written by a
claims adjuster who inspected the property and determined that the water
damage for which coverage was denied was the result of decay and long-term
deferred maintenance, which was not properly classified as interior water
61
O’Donnell ex rel. Mitro v. Allstate Ins. Co., 1999 PA Super 161, ¶ 32, 734 A.2d 901,
910 (1999).
62
Smith v. Am. Equity Ins. Co., 235 F. Supp. 2d 410 (E.D. Pa. 2002).
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damage caused by the force of the wind.63 The court held that the letter in that
case “disclose[d] a facially reasonable basis for rejecting [the] claim.”64
Again, in Smith v. State Farm Fire and Casualty Co., the same district court
granted a defendant insurance company’s motion for summary judgment as to a
bad faith claim brought pursuant to Pennsylvania law.65 The denial letter in that
case read, in part, as follows:
Water had been penetrating the stucco finish of the home and
resulted in rot and deterioration to the sheathing. This condition was
caused by a latent defect or workmanship issue in the application of
the stucco. . . . State Farm is not able to extend coverage or any
payments for the replacement of the stucco for any rotted sheathing
found below the stucco or for any insulation which is replaced as a
result of mold.66
The court characterized the insurance company’s argument as “at least arguable”
and concluded that “[the insurance company’s] denial letter establishes a
reasonable basis for its decision by detailing the damage to the property, the
63
Id. at 413.
64
Id.
65
Smith v. State Farm Fire & Cas. Co., No. CV 15-670, 2015 WL 7568326 (E.D. Pa. Nov.
25, 2015).
66
Id. at *5.
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relevant portions of the policy provisions, a summary of communication with
[the insureds], and the ultimate reason for the denial.”67
C.
The Instant Motion Is Granted With Prejudice, Because Undue
Delay Would Substantially Prejudice Plaintiff And Because
Subsequent Amendment Would Be Futile.
Federal Rule of Civil Procedure 15 sets forth the mechanisms for amending
a pleading prior to trial. Section 15(a)(1) applies to amendments as a matter of
course. Amendment as a matter of course is inapplicable here, because
Defendant elected not to make such an amendment within the two time periods
provided for in that section. Section 15(a)(2), entitled “Other Amendments,”
explains that “[i]n all other cases, a party may amend its pleading only with the
opposing party’s written consent or the court’s leave. The court should freely
give leave when justice so requires.”
The Third Circuit has “previously discussed when a court may deny leave
to amend under Rule 15(a)(2).”68 In Shane v. Faver, for example, then Circuit
Judge Samuel A. Alito, Jr. stated that “[a]mong the grounds that could justify a
denial of leave to amend are undue delay, bad faith, dilatory motive, prejudice,
67
Id. at *5–6 (“Pennsylvania courts have declined to recognized bad faith where the
insurer made a reasonable legal conclusion based on an area of the law that is
uncertain or in flux.”) (internal quotation marks and citations omitted).
68
Holst v. Oxman, 290 F. App’x 508, 510 (3d Cir. 2008).
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and futility.”69 “‘Futility’ means that the complaint, as amended, would fail to
state a claim upon which relief could be granted.”70 “In assessing futility, the
District Court applies the same standard of legal sufficiency as applies
under Rule 12(b)(6).”71
“Moreover, substantial or undue prejudice to the non-moving party is a
sufficient ground for denial of leave to amend.”72 “The issue of prejudice requires
that we focus on the hardship to the [opposing party] if the amendment were
permitted.”73 “Specifically, we have considered whether allowing an amendment
would result in additional discovery, cost, and preparation to defend against
new facts or new theories.”74
“The decision to grant or deny leave to amend a complaint is committed to
the sound discretion of the district court.”75 “Factors the trial court may
appropriately consider in denying a motion to amend include undue delay,
69
213 F.3d 113, 115 (3d Cir. 2000) (quoting In re Burlington Coat Factory Sec. Litig., 114
F.3d 1410, 1434 (3d Cir.1997) (Alito, J.).
70
Shane, 213 F.3d at 115.
71
Id.
72
Cureton v. Nat’l Collegiate Athletic Ass’n, 252 F.3d 267, 273 (3d Cir. 2001).
73
Id.
74
Id.
75
Coventry v. U.S. Steel Corp., 856 F.2d 514, 518 (3d Cir. 1988).
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undue prejudice to the opposing party, and futility of amendment.”76 For
instance, “if the proposed change clearly is frivolous or advances a claim or
defense that is legally insufficient on its face, the court may deny leave to
amend.”77
Dismissal of Defendant’s bad faith claim with prejudice is warranted on
two separate grounds. First, the delay associated with future amendment would
severely prejudice Plaintiff by extending the period of unwarranted coverage.
Second, subsequent amendment would be futile.
The longer the Court delays disposition of the bad faith claim at the
motion to dismiss stage, the longer it takes the Court to reach the merits of
Plaintiff’s coverage decisions as to all three state litigation claims. Thus, the quite
striking risk to Plaintiff is that it continues to offer coverage under a reservation
of rights agreement as to claims that it is not legally bound to cover. On the other
hand, delay does not prejudice the Defendant in a reciprocal fashion. Either it is
76
Averbach v. Rival Mfg. Co., 879 F.2d 1196, 1203 (3d Cir. 1989) (quoting Foman, 371
U.S. at 182.
77
Ross v. Jolly, 151 F.R.D. 562, 565 (E.D. Pa. 1993) (citing 6 Wright, Miller, & Kane,
Federal Practice & Procedure: Civil 2d § 1487). See also Vosgerichian v. Commodore
Int’l Ltd., No. Civ. A. 92-CV-4867, 1998 WL 966026, at * 3 (E.D. Pa. Nov 6, 1998) aff’d
sub nom Vosgerichian v. Commodore Int’l, 191 F.3d 446 (3d Cir. 1999).
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or is not receiving the coverage it is properly owed under the policy. In fact, it
can be argued that an expedited determination as to the instant denial would
conceivably benefit Defendant if such denial is in fact a breach on Plaintiff’s part.
Otherwise, denial with prejudice simply avoids the scenario of improper
insurance proceeds.
In addition, subsequent amendment would be futile. Plaintiff has
proffered its denial letter, a letter integral to the bad faith claim, setting forth a
good faith, reasonable basis for the ultimate decision as to the Vermont denial.
Absent thoroughly pled factual evidence that the statements in the declination
letter were nothing more than a ruse to wrongfully deny coverage, I would still
dismiss the pending bad faith. Further, the allegations here are so sparse that
they confirm the necessity of dismissal with prejudice.
IV.
CONCLUSION
Consistent with the foregoing analysis, Plaintiff’s Motion to Dismiss is
granted with prejudice.
An appropriate Order follows.
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BY THE COURT:
/s Matthew W. Brann
Matthew W. Brann
United States District Judge
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