Haney v. American Family Mutual Insurance Company

Filing 21

Memorandum Opinion and Order denying 8 Motion to Dismiss. Signed by U.S. District Judge Lawrence L. Piersol on 2/3/2017. (JLS)

UNITED STATES DISTRICT COURT

rILED
FEB 0 3 2017

DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION

STEVE HANEY,

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CIV 16-4113

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Plaintiff,

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ORDER DENYING DEFENDANT'S

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vs.

MEMORANDUM OPINION AND

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MOTION TO DISMISS

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Hs

AMERICAN FAMILY MUTUAL

INSURANCE COMPANY,

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Defendant.

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Pending before the Court is Defendant's Motion to Dismiss Count II (bad faith) and
Count III (punitive damages) pursuant to Federal Rule of Civil Procedure 12(b)(6) failure to state
a claim for which relief can be granted. Doc. 8. The Court has considered all filings and for the
following reasons. Defendant's motion is denied.
BACKGROUND

In June of 2014, a hailstorm damaged numerous homes and other property in and around

Sioux Falls, South Dakota. Soon thereafter. Plaintiff Steve Haney ("Haney") submitted a claim

for hail damage sustained on his home to Defendant, American Family Mutual Insurance

Company ("American Family"). Particularly, Haney had sustained damage to his shake shingle
roof.

In July of 2014, Adam Palace, an authorized agent of American Family, inspected

Haney's home. Based on that inspection, Mr. Palace concluded that there was little to no hail
damage to the roof and listed $3,890.15 as a reasonable amount to repair the damage. Two years
later, in July of 2016, Haney provided American Family with a report from a roofer that
indicated that there was hail damage to the entire roof and that $68,259.61 was needed to repair
the damage.

On August 3, 2016, American Family conducted another inspection of Haney's roof and
found that hail damage was evident on all the slopes of the roof. On August 8, 2016, American

Family issued a letter to Haney indicating that nothing additional would be paid on the claim.
On August 11, 2016, Haney filed a lawsuit in federal court against American Family

alleging breach of contract, bad faith, punitive damages, and vexatious refusal to pay. American
Family filed a Motion to Dismiss Count II (bad faith) and Count 111 (punitive damages) pursuant
to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Particularly, American Family argues

that Haney's bad faith claim and request for punitive damages fail to satisfy the federal pleading

requirements set forth in Rules 9(b) and 8(a)(2) of the Federal Rules of Civil Procedure, and
thereby Haney has failed to state a claim upon which relief can he granted.
LEGAL STANDARD

In considering a motion to dismiss under Rule 12(b)(6), the factual allegations of a

complaint are assumed true and construed in favor of the plaintiff, "even if it strikes a savvy
judge that actual proof of those facts is improbable . . . ." Bell Atlantic Corp v. Twombly, 550
U.S. 544, 556 (2007), cited with approval in Data Mfg, Inc. v United Parcel Serv, Inc., 557
F.3d 849, 851 (8th Cir. 2009). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss
does not need detailed factual allegations, a plaintiffs obligation to provide the 'grounds' of his

'
entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do[.]" Twombly, 550 U.S. at 555 (internal citations

omitted). The complaint must allege facts, which, when taken as true, raise more than a
speculative right to relief. Id. (internal citations omitted^, see also Benton v Merrill Lynch &
Co, Inc., 524 F.3d 866, 870 (8th Cir. 2008).

Although a plaintiff, in defending a motion under Rule 12(b)(6), need not provide

specific facts in support of its allegations. Rule 8(a)(2) "requires a 'showing,' rather than a
blanket assertion, of entitlement to relief." Twombly, 550 U.S. at 555 n.3 (further explaining that

"[wjithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy
the requirement of providing not only 'fair notice' of the nature of the claim, but also 'grounds'
on which the claim rests."); see also Ashcroft v Iqbal, 556 U.S. 662, 678 (2009)("the pleading
standard Rule 8 announces does not require 'detailed factual allegations,' but it demands more
than an unadorned, the-defendant-imlawfully-harmed-me accusation."). Rule 8(a)(2) is satisfied

"when the plaintiff pleads factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. As such, a claim

must have facial plausibility to survive a motion to dismiss. Id. Determining whether a claim
has facial plausibility is "a context-specific task that requires the reviewing court to draw on its
judicial experience and common sense." Id at 679.
When a complaint contains allegations of fraud or mistake, Rule 9(b) requires a party to
"state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b).
'"Circumstances' include such matters as the time, place and contents of false representations, as
well as the identity of the person making the representation and what was obtained or given up

thereby." Bennett v Berg, 685 F.2d 1053, 1062 (8th Cir. 1982). "Because one of the main
purposes of the rule is to facilitate a defendant's ability to respond and to prepare a defense to
charges of fraud, conclusory allegations that a defendant's conduct was fraudulent and deceptive
are not sufficient to satisfy the rule." Commercial Prop. Invs, Inc. v. Quality Inns Int'l, Inc., 61
F.3d 639,644(8th Cir. 1995)(internal citations omitted).
DISCUSSION

In a two-part argument, American Family claims (1) that Haney's bad faith claim, as a

species of fraud, must comport with the heightened pleading requirements of Rule 9(b), and if
not, (2) that Haney's bad faith claim fails to satisfy the notice pleading standards under Rule

8(a)(2). As a federal court sitting in diversity,^ the Court will apply the substantive law of South
Dakota to resolve the above-stated issues. See Erie R. Co. v Tompkins, 304 U.S. 64 (1938)
(finding that federal courts apply state substantive law and federal procedural law).
Count II: Bad Faith

I. Whether South Dakotafirst-party badfaith is subject to the heightened pleading
requirements ofRule 9(b) ofthe Federal Rules ofCivil Procedure
"[B]ad faith litigation can be classified as either first- or third-party bad faith." Hein v.
Acuity, 2007 SD 40, Tf 9, 731 N.W.2d 231,235; see also Champion v United States Fid & Guar
Co , 399 N.W.2d 320 (S.D. 1987)(the case in which the Supreme Court of South Dakota first
recognized a cause of action for insurance bad faith). "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." Id (citing Gruenberg v. Aetna Ins
Co., 510 P.2d 1032, 1036 (Cal. 1973). In order to prove a first-party bad faith claim, an insured

' The Court finds that Haney is a resident of Sioux Falls, South Dakota and American Family is a company
organized outside of South Dakota, with its principal place of business located outside of South Dakota.

must show (1)"an absence of a reasonable basis for denial of poliey benefits[,]" and (2) "the
knowledge or reckless disregard of a reasonable basis for denial . . .

Champion, 399 N.W.2d

at 324. "[T]he knowledge of the laek of a reasonable basis may be inferred and imputed to an
insurance company where there is reckless disregard or a lack of a reasonable basis for denial or
a reckless indifference to facts or to proofs submitted by the insured." Id
While South Dakota law recognizes a cause of action for insurance bad faith, it has not

directly addressed whether first-party bad faith is akin to fraud and thus subject to the heightened
pleading requirements of Rule 9(b).

Although American Family argued in its initial

memorandum that Kunkel v United Sec Ins Co of N J, 168 N.W.2d 723 (S.D. 1969) and

Jennings v Jennings, 309 N.W.2d 809 (S.D. 1981) stood for the proposition that "under South
Dakota law,'bad faith is a species of fraud[,]"' the Court disagrees. Instead, the Court finds that
Kunkel, Cernocky v Ind Ins Co. ofNorth Amer., 216 N.E.2d 198 (111. App. Ct. 1966)(cited in

Kunkel), and Hilkerv Western Auto Ins Co ofFt S'coh, iiian., 235 N.W.413(Wis. 1931)(cited
in Cernocky) establish that Rule 9(b) pleading requirements do not apply to first-party bad faith
elaims.

In Kunkel^ while the court discusses comparisons between fraud and bad faith, the court
does not hold that they are equal or that a plaintiff must show fraud in order to prevail on a bad
faith claim. Kunkel, 168 N.W.2d. at 725-26. Rather, the court equates bad faith and negligence,

finding that "the character and extent of the insurer's negligence are factors to be considered by
the trier of fact in determining if there is bad faith." Id at 726. Additionally, the Kunkel court
cites to Cernocky—"where the court distinguished fraud and bad faith." Id at 732. In Cernocky,
the court opined that allegations of fraud, negligence, or bad faith may render an insurance

company liable. Cernocky, 216 N.E.2d. at 204. In so doing, the court found that while some
jurisdictions equate bad faith with fraud, here "[t]he 'fraud' standard [was] not required." Id at
205. The Cernocky court also cited to Milker for the proposition that.
Terms which are not strictly convertible or synonymous have been used by
different courts to indicate the same thing. Negligence has been used by some
courts to mean the same thing that other eourts have designated as bad faith. Bad

faith, especially, is a term of variable significance and rather broad application.
Generally speaking, good faith means being faithful to one's duty or obligation;
2

The Kunkel case was the origin ofthe third-party bad faith cause of action in South Dakota See Roger M, Baron,

When Insurance Companies Do Bad Things The Evolution ofthe "Bad Faith"Causes ofAction in South Dakota,
44SD L Rev 471,481 (1998-1999)

bad faith means being recreant thereto. In order to understand what is meant by
bad faith, a comprehension of one's duty is generally necessary, and we have
concluded that we can best indicate the circumstance under which the insurer may

become liable to the insured by failure to settle by giving with some particularity
our conception of the duty which the written contract of insurance imposes upon
the carrier.

Id. (quoting Hilker, 235 N.W. at 414). Notably absent from the Kunkel, Cernocky, and Hilker
courts' analyses is reference to the heightened pleading requirement of Rule 9(b). However,

given the fact that South Dakota has only indirectly determined that Rule 9(b) does not apply to
bad faith claims, the Court will not end its analysis there.
Few courts have addressed whether a claim for bad faith is subject to the heightened

pleading requirements of Rule 9(b). 5A Charles Alan Wright, et al. Federal Practice and
Procedure § 1297 (3d ed.) (opining that "the distinction—between what constitutes fraud and
what does not for purposes of Rule 9(b)—is far from clear."). Since Rule 9(b) is a special
pleading requirement, contrary to the general approach of Rule 8, "its scope of application
should be construed narrowly and not extended to other legal theories or defenses." Id For

example, federal courts in Alabama have declined to extend Rule 9(b) pleading requirements to
claims for insurance bad faith finding that.

In an ordinary fraud case, the Rule 9(b) who/what/when/where specificity is
necessary to apprise the defendant of what it is alleged to have done wrong.
Without knowing the particulars of the fraudulent statement it is accused of
making, a defendant cannot respond properly. Here, however, [the insurer]
knows exactly what [the insured] contends it did wrong, with regard to a specific

policy number and claim, plus [the insured's] allegations that there was no
arguable basis for not paying the claim and that [the insurer] knew it. Armed with
this kind of pleading detail, defendant is fully equipped to prepare a defense, and
cannot plausibly profess to be in the dark as to [the insured's] claim. Rule 9(b)
has no role here.

Austin V Auto Owners Ins Co, 2012 WL 3101693, at *3 n.7 (S.D. Ala., 2012); see also
Scottsdale Indem. Co v. Martinez, Inc, 2013 WL 360139, at *3 (N.D.Ala., 2013) (quoting

Austin)?

Additionally, an Illinois federal court analyzed whether Rule 9(b)'s pleading

^ American Family cites to Jason's Port City Health Club, Inc v Hartford Fire Ins Co ,2005 WL 1527692(S D.
Ala June 27, 2005), a 2005 Alabama district court case, for the proposition that "claims of bad faith under Alabama
law are subject to Rule 9(b)" However, in 2013, the Austin Court found that the Jason's Port City decision does not
support the position that insurance bad faith claims need to be plead with particularity Austin, at *2 n 3 In that
case,"the undersigned merely 'assumed'—without finding—'that claims of bad faith under Alabama law are subject
to Rule 9(b)

Id

requirement applied to bad faith. GMP Technologies, LLC v. Zicam, LLC,2009 WL 5064762, at
*3 (N.D.IIL, 2009). In GMP Technologies, the court refused to extend Rule 9(b) requirements to
allegations of bad faith and noted that:
No federal court has ruled on whether the "bad faith" exception to federal

preemption must be pled with particularity, and the Seventh Circuit has not
addressed the question of the applicability of Rule 9(b) to allegations of bad faith.
However, at least one appellate court has addressed the general question and
found that allegations of bad faith are distinct from those of fraud, and so do not
require pleading with particularity. See Stern v Gen Elec Co., 924 F.2d 472,
476 (2d Cir.1991). Moreover,"bad faith" is no more similar to "fraud" than it is
to "[m]alice, intent, [and] knowledge," which Rule 9(b) allows litigants to plead
generally. See Fed.R.Civ.P. 9(b). The court finds that GMP's allegations of"bad
faith" are subject to the general pleading requirement of Federal Rule of Civil
Procedure 8(a).
Id

For the reasons articulated above, this Court finds that the heightened pleading standards

of Rule 9(b) do not apply to first-party bad faith claims under South Dakota law. Instead,

Haney's bad faith claim will be evaluated under the notice pleading standards of Rule 8(a)(2).
2. Whether the Complaint satisfies the requirements ofRule 8(a)(2) ofthe Federal Rules of
Civil Procedure

Rule 8(a)(2) requires that a pleading contain "a short and plain statement of the claim
showing that the pleader is entitled to relief[.]" Fed. R. Civ. P. 8(a)(2). Although Rule 8(a)(2) is
a relatively low threshold, it "does not unlock the doors of discovery for a plaintiff armed with
nothing more than conclusions." Iqbal, 556 U.S. at 678- 79.
Here, Haney's Complaint alleges, in part, that:

5. Haney purchased a policy of homeowner's insurance from American Family,
which was in effect before and after June 2014.

6. In June 2014, Haney's home was damaged in a hailstorm.
7. The ... hailstorm caused ... damage to Haney's shake shingle roof.

9. Haney submitted a timely claim to American Family ....

13. Adam Palace [an authorized agent of American Family] listed $3,890.15 as a
reasonable amount to repair the damages to the shingles of Haney's home.

22. American Family [] received a . . . report establishing that $68,259.61 was
needed to properly repair the damage ....

23. American Family then conducted another inspection of Haney's roof....

24. The [report from the second inspection] established that "Functional hail
damage was evident on all slopes ofthis roof ....
28. American Family told Haney . . . that "Nothing additional is owed on your
claim."

Doc. 1 at 2-4.

It is clear to this Court that the pleadings are not mere conclusions. Count II of

the Complaint thus satisfies the pleading standards of Rule 8(a)(2) in order to overcome a
Rule 12(b)(6) motion to dismiss.
Count III: Punitive Damages

"Under South Dakota law, punitive damages may not be recovered unless expressly

authorized by statute." Hill v Auto Owners Ins Co , 2015 WL 2092680, at *7 (D.S.D., 2015).
SDCL 21-3-2 provides, in part, that:

In any action for the breach of an obligation not arising from contract, where the
defendant has been guilty of oppression, fraud, or malice, actual or presumed,...
the jury, in addition to the actual damage, may give damages for the sake of
example, and by way of punishing the defendant.

As such,"while[SDCL 21-3-2] does not allow punitive damages for a breach of contract,

it does permit them in the case of a tort arising independent of the contract obligation . . . ."
Biegler v American Family Mut. Ins Co ,2001 SD 13, 42, 621 N.W.2d 592, 604. A claim for
punitive damages, however, must allege "oppression, fraud, or malice." SDCL 21-3-2(emphasis
added); see also Biegler, 2001 SD 13,f 44,621 N.W.2d at 605(emphasis added)("Since[SDCL
21-3-2] is in the disjunctive, it is only necessary to prove [oppression, fraud, or malice].").
South Dakota courts have found that "[a]n insurer's clear breach of contract or denial of a

claim that is not fairly debatable may indicate malice." Bertelsen v Allstate Ins. Co, 2011 SD

13, t 41, 796 N.W.2d 685, 699. Under the statute, malice is either actual or presumed. Hill,
2015 WL 2092680, at *8 ("A showing of either type of malice is sufficient to support punitive
damages.").

Actual malice is a positive state of mind, evidenced by a positive desire and
intention to injure one another, actuated by hatred or ill will towards that person.
Presumed malice may not, however, be motivated by hatred or ill will, but is
present when a person acts willfully or wantonly to the injury of others.
Case V Murdoch, 488 N.W.2d 885, 891 (S.D. 1992). With respect to presumed malice, the

South Dakota Supreme Court has stated that to show "willful or wanton" misconduct,
There must be facts that would show that [the] defendant intentionally did
something . . . which [the defendant] should not have done or intentionally failed
to do something which [the defendant] should have done under the circumstances
that it can be said that [the defendant] consciously realized that [the defendant's]
conduct would in all probability, as distinguished from possibility, produce the

precise result which it did produce and would bring harm to the plaintiff.
Berry v Risdall, 576 N.W.2d 1, 9 (S.D. 1998). "Whether a defendant's conduct is willful and
wanton is determined by an objective standard, rather than the defendant's subjective state of
mind." Hill, 2015 WL 2092680, at *8 (citing Berry, 576 N.W.2d at 9).

In the present case, the Court has found that Haney's allegations of bad faith satisfy the
notice pleading requirement of Rule 8(a)(2). See supra Count II Bad Faith. Therefore,

pursuant to SDCL 21-3-2, the claim for punitive damages may remain if the Complaint
sufficiently pleads "malice." SDCL 21-3-2. Here, the Court finds the following: Haney had a

policy of insurance with American Family in June of 2014. A June 2014 hailstorm damaged
Haney's home, specifically his shake shingle roof. Haney submitted a timely claim to American
Family. American Family found that $3,890.15 was a reasonable amount to repair the damage.

Two years later, Haney's roofer found that the roof had suffered significant hail damage and that
$68,259.61 was needed to properly repair the damage. American Family received the roofer's

report and conducted another inspection of Haney's roof. The subsequent inspection revealed
that there was hail damage on "all slopes of the roof and that $3,890.15 was not a reasonable
amount to fix the damage. However, American Family disregarded both the roofer's report and

the subsequent inspection, and instead found that "[njothing additional was owed on [the]
claim." See Doc. 1.

Based on these allegations, the Court finds that the Complaint sufficiently alleges malice

and thus supports a claim for punitive damages. As such, American Family's motion to dismiss
Count III (punitive damages)is denied.

CONCLUSION

The Court will not extend Rule 9(b)'s heightened pleading standard to Haney's bad faith
claim, and under Rule 8
(a)(2)'s pleading standard, Haney states a viable bad faith claim against
American Family. For these reasons, the Court also finds that Haney's claim for punitive
damages is viable and survives the motion to dismiss. Accordingly
IT IS ORDERED

I. That American Family's Motion to Dismiss Count II (bad faith) and Count III (punitive
damages). Doc. 8, is denied.
Dated this 3rd day of February, 2017.
BY THE COURT:

l(3jjJUJUuui
awrence L. Piersol
ATTEST:

JOSEPH HAAS,CLERK

BY:

United States District Judge