Henry Carlson Company v. Arch Insurance Company et al

Filing 37

ORDER granting in part and denying in part MOTION to Dismiss for Failure to State a Claim. Signed by U.S. District Judge Karen E. Schreier on 8/5/2014. (KC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
HENRY CARLSON COMPANY, a
South Dakota corporation,
Plaintiff,
vs.
ARCH INSURANCE COMPANY, a
Missouri corporation;
INNOVATIVE RISK
MANAGEMENT, a Texas corporation;
and
GALLAGHER BASSETT SERVICES,
INC., a Delaware corporation,
Defendants.

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Civ. 13-4133-KES

ORDER

Plaintiff, Henry Carlson Company, brought suit against defendants, Arch
Insurance Company, Innovative Risk Management, and Gallagher Bassett Services,
Inc., alleging claims for breach of contract, negligence/insurance malpractice, first
party bad faith, unfair trade practices, and fiduciary duty. Defendants Arch Insurance
and Gallagher Bassett move to dismiss HCC’s claim for first party bad faith or, in the
alternative, move for a more definite statement of the claim. Defendants Arch
Insurance and Gallagher Bassett also move for a more definite statement with respect
to the other claims asserted by HCC. HCC resists the motion. For the following
reasons, defendants’ motion is granted in part and denied in part.

BACKGROUND
The facts, according to the First Amended Complaint,1 are as follows:
HCC and its subsidiaries contracted with Arch Insurance to provide various
business coverages, including workers’ compensation and general liability. Arch
Insurance exercised some of the claims handling functions and delegated others to
Gallagher Bassett and Innovative Risk Management. Claims were routinely
mishandled due to the action and/or policies of Arch Insurance, Gallagher Bassett,
and/or Innovative Risk Management.
Specifically, Arch Insurance failed to properly handle or investigate claims made
under the workers’ compensation policy and/or general liability policy issued to HCC.
Also, Arch Insurance, Gallagher Bassett, and Innovative Risk Management, jointly or
separately, made, issued, or circulated untrue statements misrepresenting the terms of
the policies Arch Insurance issued to HCC. One or more of the defendants also failed
to fully disclose information and details pertinent to the parties’ business relationships.

1

When reviewing a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the court assumes that all facts in the complaint are true and construes any
reasonable inferences from those facts in the light most favorable to the nonmoving
party. Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir. 2008).
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DISCUSSION
I.

Bad Faith
Defendants move to dismiss HCC’s claim for bad faith for failure to state a

claim upon which relief can be granted. To decide a motion to dismiss under Rule
12(b)(6), the court may consider the complaint, some materials that are part of the
public record, and materials embraced by the complaint. Porous Media Corp. v. Pall
Corp., 186 F.3d 1077, 1079 (8th Cir. 1999). To survive a motion to dismiss, the
complaint must contain “enough facts to state a claim to relief that is plausible on its
face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The factual content in the
complaint must “allo[w] the court to draw the reasonable inference that the defendant
is liable for the misconduct alleged.” Braden v. Wal-Mart Stores, 588 F.3d 585, 594 (8th
Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
In its First Amended Complaint, HCC alleges that Arch Insurance failed to
properly handle or investigate claims made under the workers’ compensation policy
and/or general liability policy issued to HCC, that Arch Insurance, Gallagher Bassett,
and Innovative Risk Management, jointly or separately, made, issued, or circulated
untrue statements misrepresenting the terms of the policies Arch Insurance issued to
HCC, and that one or more of the defendants failed to fully disclose information and
details pertinent to the parties’ business relationships.

3

HCC’s claim for bad faith is a first-party bad faith claim. “First-party bad faith
is an intentional tort and typically occurs when an insurance company consciously
engages in wrongdoing during its processing or paying of policy benefits to its
insured.” Bertelsen v. Allstate Ins. Co., 833 N.W.2d 545, 561 (S.D. 2013).2 Defendants
argue that HCC’s First Amended Complaint fails to state a claim for three reasons: it
does not identify an existing insurance contract; it does not allege that a claim was
unreasonably denied; and it does not allege what duty was breached.
First, although HCC does not identify a specific contract, HCC does allege that
it contracted with Arch Insurance in such a manner that Arch Insurance provided a
workers’ compensation policy and/or a general liability policy to HCC. The reasonable
inference can thus be made that there exists an insurance contract between HCC and
Arch Insurance that can plausibly form the basis for HCC’s bad faith claim.
Second, under South Dakota law, “[f]or proof of bad faith, there must be an
absence of a reasonable basis for denial of policy benefits or failure to comply with a
duty under the insurance contract and the knowledge or reckless disregard of the lack
of a reasonable basis for denial[.]” Id. (emphasis added). “In the first-party context,

2

Defendants cite to South Dakota law in their brief with the assumption that
South Dakota law governs, noting that “Plaintiff does not allege where the alleged
injury occurred, therefore, it is unknown what law governs the first party bad faith
claim.” Docket 25 at 2. HCC also refers to South Dakota law in its brief. Therefore,
the court assumes South Dakota law governs for purposes of resolving defendants’
motion.
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there exists a contractual relationship, whereby the insurer has accepted a premium
from its insured to provide coverage. Because of the nature of this relationship, [the
South Dakota Supreme Court] recognized . . . that bad faith can extend to situations
beyond mere denial of policy benefits.” Dak., Minn. & E. R.R. Corp. v. Acuity, 711
N.W.2d 623, 629 (S.D. 2009) (internal citations and quotations omitted). For example,
“[b]ad faith conduct may include the failure to conduct a reasonable investigation
concerning the claim.” Id. at 629. Based on the foregoing, HCC’s assertions that Arch
Insurance failed to properly handle or investigate claims made under the workers’
compensation policy and/or general liability policy issued to HCC, that Arch
Insurance, Gallagher Bassett, and Innovative Risk Management, jointly or separately,
made, issued, or circulated untrue statements misrepresenting the terms of the policies
Arch Insurance issued to HCC, and that one or more of the defendants failed to fully
disclose information and details pertinent to the parties’ business relationships, is
enough to state a plausible claim for bad faith against Arch Insurance even though
there are no allegations that a claim was unreasonably denied.
And third, the court is unaware of what defendants mean—or what they
expect—when they claim that HCC did not allege what duty was breached. “Every
insurance contract includes the duty of good faith and fair dealing. . . . The breach of
that duty is called bad faith.” S.D. Pattern Jury Instruction 30-20-10. It is
straightforward that by asserting a bad faith claim, HCC is alleging that the duty of
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good faith and fair dealing was breached. Indeed, HCC explicitly stated that
“Defendant Arch owes a duty of good faith and fair dealing to its insured, Henry
Carlson Company.” Docket 5 at 4.
After drawing all reasonable inferences in favor of HCC, the court finds that
the First Amended Complaint states a claim for bad faith that is plausible on its face.
Defendants move in the alternative for a more definite statement. Federal Rule
of Civil Procedure 12(e) provides:
A party may move for a more definite statement of a pleading to which a
responsive pleading is allowed but which is so vague or ambiguous that
the party cannot reasonably prepare a response. The motion must be
made before filing a responsive pleading and must point out the defects
complained of and the details desired.
For example, “the defendant can request a more definite statement of the complaint in
order to enable the preparation of an answer.” 5C Charles Alan Wright & Arthur R.
Miller, Federal Practice and Procedure § 1376 (3d ed. 2014) (hereinafter Wright & Miller).
Such a motion is made when there is a major ambiguity or omission in the complaint
that renders it unanswerable. Tinder v. Lewis Cnty. Nursing Home Dist., 207 F. Supp. 2d
951, 959 (E.D. Mo. 2001).
Defendants contend that the First Amended Complaint is so vague and
ambiguous that they are unable to reasonably respond to HCC’s bad faith claim.
Specifically, defendants note that HCC failed to identify under what policy the claim is
based, what claim forms the basis of the allegations, the nature and/or source of the
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damages alleged, and the time frame of the actions forming the basis of the bad faith
claim. HCC argues that no more detail is necessary, specifically noting that the parties’
prior dealings and communications should be enough to allow defendants to respond.
The court agrees that the First Amended Complaint is too vague. Although
HCC asserted that it contracted with Arch Insurance, HCC fails to identify the
contract(s) that forms the basis for its bad faith claim. Furthermore, HCC does not
provide any reference in time as to when the bad faith conduct occurred. Without
such information, Arch Insurance is unable to reasonably respond to HCC’s bad faith
claim. Thus, defendants’ motion for more definite statement is granted with respect to
HCC’s bad faith claim.3 In providing a more definite statement, HCC should identify
which contract(s) forms the basis for its bad faith claim against Arch Insurance and
provide some reference to when the alleged bad faith conduct occurred.
II.

Breach of Contract
Defendants also move for a more definite statement in relation to HCC’s

breach of contract claim. Defendants take issue with HCC’s failure to identify the
contract upon which the allegation is based or what claims were allegedly mishandled.
While acknowledging that specific claims are subject to discovery, see Wright & Miller,

3

Granting defendants’ Rule 12(e) motion while denying their Rule 12(b)(6)
motion is consistent. See Wright & Miller, § 1376 (“[A] plausible claim, which would
survive a Rule 12(b)(6) motion, may be pleaded vaguely enough to make a response
impossible, which would make it vulnerable to a Rule 12(e) motion.”).
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§ 1376 (noting that Rule 12(e) motions are often denied on grounds that the
information requested was properly the subject of the discovery process), identifying
the specific contract(s) that was allegedly breached and the time frame of such breach
is necessary for defendants so they can submit an informed and intelligible answer.
Thus, such information should be provided.
III.

Negligence/Insurance Malpractice
Defendants contend that without knowing what functions performed by

defendants Gallagher Bassett and Innovative Risk Management are at issue, they
cannot reasonably respond to HCC’s negligence/insurance malpractice claim. HCC
pleaded that Gallagher Bassett and Innovative Risk Management made, issued, and
circulated untrue statements misrepresenting the terms of the policies Arch Insurance
issued to HCC and also failed to disclose information and details pertinent to the
parties’ business relationships. Such conduct identifies certain functions performed by
Gallagher Bassett and Innovative Risk Management that are at issue. Anything more is
subject to discovery. Thus, no more definite statement is needed for HCC’s
negligence/insurance malpractice claim.
IV.

Unfair Trade Practices
Defendants move for a more definite statement on HCC’s claim for unfair

trade practices. Defendants seek information pertaining to the policy or policies on
which the claim is based, who “Travelers” is referring to, and what trade practices
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form the basis of its allegations. By providing the contract(s) that forms the basis of
this suit, as mentioned above, defendants’ concerns about knowing which policies on
which the claim is based should be alleviated. Also, HCC noted in its brief that
“Travelers” was a typo and the correct party is Arch Insurance. Lastly, the trade
practices that are apparently at issue here are the making, issuing, and circulating
untrue statements misrepresenting the terms of the policies Arch Insurance issued to
HCC and the failing to disclose information and details pertinent to the parties’
business relationships. Thus, no additional detail is necessary.
V.

Fiduciary Duty
Defendants argue that HCC should be required to identify which defendant

owed it a fiduciary duty and which defendant is alleged to have breached the same.
Defendants also seek more detail regarding what “information” was not disclosed that
was pertinent to the parties’ business relationships.
HCC has clarified that it is claiming each defendant was a fiduciary and
breached the duty of disclosure. Docket 33 at 2. Nevertheless, the court agrees that
the First Amended Complaint is too vague with respect to the nature of the
“information and details pertinent to the parties’ business relationships.” Without a
more specific description of the “information and details pertinent to the parties’
business relationships,” defendants cannot reasonably admit, deny, or assert a 12(b)
defense. Without a description of the information that they allegedly failed to disclose,
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any attempt at answering HCC’s allegations would be nothing more than a shot in the
dark. Thus, HCC must provide a more definite statement to allow defendants an
opportunity to answer.
VI.

Punitive Damages
Defendants request a more definite statement relating to HCC’s request for

punitive damages. In requesting punitive damages, HCC alleged that defendants are
guilty of oppression, fraud, actual malice, and/or presumed malice and that
defendants acted intentionally or with willful and wanton misconduct, and in disregard
for the rights of others. Punitive damages are a form of relief and are not a claim or
cause of action. As such, an answer to the claim for relief is not necessary. Thus, the
court finds HCC’s request for punitive damages and the description of why it is
entitled to punitive damages sufficient to put defendants on notice that HCC is
seeking punitive damages.
CONCLUSION
The First Amended Complaint states a claim for bad faith that is plausible on
its face. Nonetheless, the First Amended Complaint’s allegations pertaining to the bad
faith claim are pleaded vaguely enough to make a response difficult. Likewise, HCC’s
claims for breach of contract and breach of fiduciary duty are also too vague and
require more definite statements. Accordingly, it is

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ORDERED that defendants’ motion is granted in part and denied in part
consistent with this order.
Dated August 5, 2014.
BY THE COURT:

/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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