Landon et al v. American Family Mutual Insurance Company

Filing 18

ORDER denying 5 Motion to Dismiss Counts II and III. Signed by U.S. District Judge Karen E. Schreier on 12/15/2017. (JLS)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
STEPHEN LANDON and
DIANNE LANDON,
Plaintiffs,
vs.

4:17-CV-04059-KES

ORDER DENYING MOTION TO
DISMISS COUNTS II AND III

AMERICAN FAMILY MUTUAL
INSURANCE COMPANY,
Defendant.
On April 25, 2017, plaintiffs, Stephen and Dianne Landon, filed a
complaint alleging breach of contract, bad faith, punitive damages, and
vexatious refusal to pay against defendant, American Family Mutual Insurance
Company. Docket 1. American Family moves to dismiss Count II (bad faith)
and Count III (punitive damages) of the complaint for failure to state a claim
under Federal Rule of Civil Procedure 12(b)(6). Docket 5. Plaintiffs oppose the
motion. Docket 9. For the reasons that follow, the court denies American
Family’s motion to dismiss.
BACKGROUND
The facts alleged in the complaint, accepted as true, are as follows:
In June 2014, a hailstorm damaged plaintiffs’ home and numerous other
homes in their Sioux Falls, South Dakota, neighborhood. The hailstorm caused
extensive damage to plaintiffs’ shake shingle roof. At the time of the hailstorm,

plaintiffs had in effect a homeowner’s insurance policy with American Family
that listed hail damage as a covered loss. After the hailstorm, plaintiffs timely
filed a claim to American Family for the damage caused to their home.
Sometime after the plaintiffs submitted their claim, an authorized agent
of American Family inspected plaintiffs’ home and determined that the roof,
gutters, and downspouts were damaged by the hailstorm. Based on that
inspection, American Family determined that $2,810.75 was a reasonable
amount to repair the damage. American Family had notice that the homes
adjacent to plaintiffs’ home as well as other homes in the neighborhood also
suffered extensive hail damage. These homes, some of which were insured by
American Family, were compensated for the full replacement value of the
damage caused to the homes by the hailstorm.
Plaintiffs repeatedly told American Family that $2,810.75 was
insufficient to fix the damage caused to their home by the hailstorm. Despite
plaintiffs’ numerous requests that American Family cover the full replacement
value of the damage caused to their home, American Family continued to rely
on its initial investigation when assessing the value of the damage to plaintiffs’
home.
LEGAL STANDARD
A court may dismiss a complaint “for failure to state a claim upon which
relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To 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.’ ” Ashcroft v. Iqbal, 556 U.S. 662,
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678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“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.” Id. “The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a
defendant has acted unlawfully.” Id.
The court determines plausibility by considering only the materials in the
pleadings and exhibits attached to the complaint, drawing on experience and
common sense, and viewing the plaintiff’s claim as a whole. Whitney v. Guys,
Inc., 700 F.3d 1118, 1128 (8th Cir. 2012). Inferences are construed in favor of
the nonmoving party. Id. at 1129 (citing Braden v. Wal-Mart Stores, Inc., 588
F.3d 585, 595 (8th Cir. 2009)). A well-pleaded complaint should survive a
motion to dismiss “even if it strikes a savvy judge that actual proof of those
facts is improbable, and that a recovery is very remote and unlikely.” Twombly,
550 U.S. at 556 (internal quotations omitted); accord Johnson v. City of Shelby,
135 S. Ct. 346, 346 (2014) (per curiam) (“Federal pleading rules call for ‘a short
and plain statement of the claim showing that the pleader is entitled to relief,’
Fed. R. Civ. P. 8(a)(2); they do not countenance dismissal of a complaint for
imperfect statement of the legal theory supporting the claim asserted.”).
A heightened pleading standard applies when a complaint alleges fraud
or mistake. See Fed. R. Civ. P. 9(b). Under Federal Rule of Civil Procedure 9(b),
a party alleging fraud or mistake “must state with particularity the
circumstances constituting fraud or mistake.” Thus, to satisfy Rule 9(b), the
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party alleging fraud “must typically identify the ‘who, what, where, when, and
how’ of the alleged fraud.” BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908,
917 (8th Cir. 2007) (quoting United States ex rel. Costner v. URS Consultants,
Inc., 317 F.3d 883, 888 (8th Cir. 2003)).
As described by the Eighth Circuit Court of Appeals, the particularity
requirement of Rule 9(b) serves three important purposes:
First, it deters the use of complaints as a pretext for fishing
expeditions of unknown wrongs designed to compel in terrorem
settlements. Second, it protects against damage to professional
reputations resulting from allegations of moral turpitude. Third, it
ensures that a defendant is given sufficient notice of the
allegations against him to permit the preparation of an effective
defense.
Streambend Props. II, LLC v. Ivy Tower Minneapolis, LLC, 781 F.3d 1003, 1010
(8th Cir. 2015) (quotation omitted). “Claims ‘grounded in fraud’ must meet this
heightened pleading requirement.” Id. (citations omitted). “The level of
particularity required depends on . . . the nature of the case and the
relationship between the parties.” BJC Health Sys., 478 F.3d at 917 (citing
Payne v. United States, 247 F.2d 481, 486 (8th Cir. 1957)). “Rule 9(b) should be
read ‘in harmony with the principles of notice pleading.’ ” Id. (quoting Schaller
Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 746 (8th Cir. 2002)).
DISCUSSION
American Family presents two primary arguments in support of its
motion to dismiss. American Family first argues that plaintiffs’ claims for bad
faith and punitive damages are subject to dismissal because they fail to meet
the heightened pleading standard of Rule 9(b). American Family next argues
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that even if plaintiffs’ claims for bad faith and punitive damages are not subject
to a heightened pleading requirement, the claims are still subject to dismissal
because they fail to satisfy the notice pleading requirement of Rule 8(a)(2).
Because this case is before the court on diversity jurisdiction, the court will
apply South Dakota’s substantive law and federal procedural law to resolve
American Family’s motion to dismiss. Gasperini v. Ctr. for Humanities, Inc., 518
U.S. 415, 427 (1996) (“Under the Erie doctrine, federal courts sitting in
diversity apply state substantive law and federal procedural law.”).
I.

Count II: Bad Faith
Bad faith litigation arises in either the first- or third-party context. Hein

v. Acuity, 731 N.W.2d 231, 235 (S.D. 2007). “Third-party bad faith is
traditionally based on principles of negligence and arises when an insurer
wrongfully refuses to settle a case brought against its insured by a third-party.”
Id. (citing Kunkel v. United Sec. Ins. Co. of N.J., 168 N.W.2d 723, 726 (S.D.
1969)). “First-party bad faith, on the other hand, 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);
Champion v. U.S. Fid. & Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987)). Because
plaintiffs allege that American Family, as their insurer, failed to reasonably
investigate their claim or pay benefits owed to them under their insurance
contract and had a practice of failing to reasonably investigate and pay similar
claims, this case presents a first-party bad faith dispute.
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In Dakota, Minnesota & Eastern Railroad Corp. v. Acuity, 771 N.W.2d
623, 629 (S.D. 2009), the South Dakota Supreme Court announced the test
that governs bad faith claims.
[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, implicit in
that test is our conclusion that the knowledge of the lack of a
reasonable basis may be inferred and imputed to an insurance
company where there is a reckless disregard of a lack of reasonable
basis for denial or a reckless indifference to facts or to proofs
submitted by the insured.
Under these tests of the tort of bad faith, an insurance company,
however, may challenge claims which are fairly debatable and will
be found liable only where it has intentionally denied (or failed to
process or pay) a claim without a reasonable basis.
Id. (alterations in original) (quoting Walz v. Fireman’s Fund Ins. Co., 556
N.W.2d 68, 70 (S.D. 1996)). Because the parties are adversaries in first-party
bad faith cases, if an insured's claim is fairly debatable either in fact or law, an
insurer cannot be said to have denied the claim in bad faith. Id. at 630 (citing
46A C.J.S. Insurance § 1873 (2008)). An insurer’s “frivolous or unfounded
refusal to comply with a duty under an insurance contract constitutes bad
faith.” Hein, 731 N.W.2d at 235 (citing Champion, 399 N.W.2d at 324). An
insurer may also commit bad faith by failing to conduct a reasonable
investigation of an insured’s claim. Dakota, Minn. & E. R.R. Corp., 771 N.W.2d
at 629 (citing Walz, 556 N.W.2d at 70).
When determining whether an insurer had a fairly debatable reason to
deny a claim or whether the insurer acted unreasonably when denying a claim,

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courts view the decision “at the time the insurer made the decision to deny or
litigate the claim, rather than pay it.” Id. at 630; see also McDowell v. Citicorp
U.S.A., 734 N.W.2d 14, 19 (S.D. 2007) (stating that even where an insurance
company eventually pays a claim for benefits, the insurer can be liable under a
bad faith claim for unreasonably delaying payment of a claim without a
reasonable basis for the delay if the insured suffered a compensable loss as a
result). Whether an insurer acted in bad faith is a question of fact. Dakota,
Minn. & E. R.R. Corp., 771 N.W.2d at 629-30.
A. Whether plaintiffs’ first-party bad faith claim is subject to
heightened pleading requirements under Federal Rule of Civil
Procedure 9(b)?
Irrespective of the above-described substantive law of first-party bad
faith in South Dakota, American Family argues that the substance and
construction of plaintiffs’ bad faith allegations here requires plaintiffs to plead
their allegations with particularity under Rule 9(b). See Docket 6 at 6-7;
Docket 11 at 2-4. Plaintiffs disagree and instead contend that the notice
pleading under Rule 8(a)(2) is the applicable pleading standard. Docket 9 at 46. Central to the parties’ arguments regarding the applicable pleading standard
for plaintiffs’ claims is the court’s recent decision in Haney v. American Family
Mutual Ins. Co., 223 F. Supp. 3d 921 (D.S.D. 2017) (Piersol, J.). Thus, before
analyzing the arguments presented here, the court will first examine the
decision in Haney.
The facts of Haney are as follows: In June 2014, Haney’s roof was
damaged in a hailstorm that hit Sioux Falls, South Dakota. Id. at 923.
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Following the hailstorm, Haney submitted a claim for damages to his roof to
American Family Mutual Insurance Company, his insurer. Id. An authorized
agent of American Family inspected Haney’s roof, and listed $3,890.15 as the
reasonable repair cost. Id. Haney disagreed with that estimate and later
provided American Family with a report indicating that the cost to repair his
roof as a result of the hailstorm was $68,259.61. Id. After receiving this report,
American Family conducted another inspection of Haney’s home. Id. Although
this inspection indicated that Haney’s roof was damaged in the hailstorm,
American Family refused to offer to pay any more on Haney’s claim. Id.
Based on American Family’s refusal to pay more than $3,890.15 on his
claim, Haney filed a federal lawsuit against American Family alleging breach of
contract, bad faith, punitive damages, and vexatious refusal to pay. Id.
American Family moved to dismiss Haney’s claims for bad faith and punitive
damages. Id. at 923-24. American Family’s primary argument in support of its
motion to dismiss was “that Haney’s bad faith claim, as a species of fraud,
must comport with the heightened pleading requirements of Rule 9(b) . . . .”
Id. at 924-25.
As observed by the court in Haney, the South Dakota Supreme Court
“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).” Id at 925.
Thus, in order to determine whether first-party bad faith claims are grounded
in fraud, the Haney court examined the foundation of South Dakota’s law
regarding third-party bad faith claims for guidance. See id. at 925-26 (citing
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Kunkel v. United Sec. Ins. Co. of N.J., 168 N.W.2d 723 (S.D. 1969)). 1 After
analyzing this foundation, the Haney court observed that what is “[n]otably
absent . . . is reference to the heightened pleading requirement of Rule 9(b).”
Id. at 926.
Because the South Dakota Supreme Court had not explicitly determined
whether first-party bad faith claims were grounded in fraud, the Haney court
also analyzed whether other federal courts had applied Rule 9(b)’s particularity
requirement to first-party bad faith claims. See id. at 926-27. The court’s
review revealed no case that had applied Rule 9(b) to a first-party bad faith
case. Id. Thus, given the lack of authority supporting American Family’s
argument, the Haney court found “that the heightened pleading standards of
Rule 9(b) do not apply to first-party bad faith claims under South Dakota law.”
Id. at 927. The Haney court then evaluated Haney’s complaint using Rule
8(a)(2) and concluded that the complaint stated a plausible claim for relief
sufficient to defeat American Family’s motion to dismiss. Id. at 927-28.
Here, plaintiffs urge the court to adopt the rationale from Haney and
deny American Family’s motion to dismiss. Docket 9 at 4-6. American Family
argues that Haney—if the decision is correct—is distinguishable from the
plaintiffs’ case. See Docket 6 at 6. The distinguishing fact, according to
American Family, is that unlike the plaintiff in Haney, plaintiffs here have

The Kunkel case is recognized as the origin of South Dakota’s third-party bad
faith cause of action. Haney, 223 F. Supp. 3d at 925 n.2 (citing Roger M.
Baron, When Insurance Companies Do Bad Things: The Evolution of the “Bad
Faith ” Causes of Action in South Dakota, 44 S.D. L. Rev. 471, 481 (1998–1999)).
1

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“erased any distinctions that may exist between bad faith and fraud by
asserting a theory of bad faith that is inescapably grounded in fraud.”
Docket 11 at 2. Thus, because plaintiffs “proceed on a theory of fraudulent bad
faith,” American Family argues that Rule 9(b) is the applicable pleading
standard. Id. at 4 (emphasis omitted).
To support its argument that plaintiffs are required to comply with
Rule 9(b), American Family notes that plaintiffs’ complaint explicitly alleges
fraud by stating that “American Family’s actions, including its claims-handling
process, were undertaken with oppression, fraud, and malice.” Docket 1 ¶ 45. 2
American Family further argues that plaintiffs’ theory of bad faith appears to
allege that (1) American Family fraudulently designed its claim handling
process to deny and delay paying valid claims and (2) American Family
fraudulently and maliciously applied this practice when denying plaintiffs’
claim. Docket 6 at 6 (citing Docket 1 ¶¶ 40-42, 45). Thus, according to
American Family, plaintiffs’ explicit use of the word fraud, combined with their
theory of fraudulent bad faith, is sufficient to bring plaintiffs’ complaint under
the Eighth Circuit’s statement that “[c]laims ‘grounded in fraud’ must meet
[Rule 9(b)’s] heightened pleading requirement.” Streambend, 781 F.3d at 1010
(citation omitted).
Plaintiffs vehemently disagree with American Family’s interpretation of
their theory of bad faith as well as with American Family’s attempt to
distinguish the court’s decision in Haney. Docket 9 at 4-6. Plaintiffs contend
2

Paragraph 45 contains the sole reference to “fraud” in plaintiffs’ complaint.
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that their single use of the word “fraud”—which is located in the punitive
damages count of the complaint—does not require them to meet Rule 9(b)’s
particularity requirement. Id. at 5. Plaintiffs further contend that American
Family’s failure to cite a single case where a court required a party to allege a
first-party bad faith claim with particularity undermines American Family’s
entire argument. See id. at 5-6. Plaintiffs also note that while their use of the
word “fraud” in the complaint was intentional, the term was not used in
isolation. See id. at 5 (citing Docket 1 ¶ 45) (stating that the word fraud was
used as a part of the string of terms “oppression, fraud, and malice”). Instead,
plaintiffs argue that their sole purpose in using the word “fraud” in their
complaint, was to mirror SDCL § 21-3-2, 3 which is the South Dakota statute
that triggers plaintiffs’ right to recover punitive damages. Docket 9 at 5.
Having reviewed the various arguments presented by the parties, the
court concludes that plaintiffs are not required to plead their allegations with
particularity under Rule 9(b). Several considerations inform the court’s
conclusion. First, because “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.’ ”
Haney, 223 F. Supp. 3d at 926 (quoting 5A Charles Alan Wright & Arthur R.
Miller, Federal Practice and Procedure § 1297 (3d ed. 2004)); see also 5A

SDCL § 21-3-2 provides: “In any action for the breach of an obligation not
arising from contract, where the defendant has been guilty of oppression,
fraud, or malice . . . the jury, in addition to the actual damage, may give
damages for the sake of example, and by way of punishing the defendant.”
3

11

Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1298
(3d ed. 2004) (cautioning courts from taking too narrow of an approach that
“fails to take account of the general simplicity and flexibility contemplated by
the federal rules” when applying Rule 9(b)). Second, as noted by the court in
Haney, other federal courts have declined to categorically apply Rule 9(b)’s
heightened pleading requirement to first-party bad faith claims. See Haney,
223 F. Supp. 3d at 926 (citing Austin v. Auto Owners Ins. Co., Civil Action No.
12-0345-WS-B, 2012 WL 3101693, at *3 n.7 (S.D. Ala. July 30, 2012); id. at
927 (citing GMP Techs., LLC v. Zicam, LLC, 2009 WL 5064762, at *3 (N.D. Ill.
Dec. 9, 2009)). Thus, although American Family is correct that Haney does not
stand for the proposition that a first-party bad faith claim can never be subject
to Rule 9(b)’s heightened pleading requirements, the lack of case law applying
Rule 9(b) to a first-party bad faith claim weighs against doing so here. 4

During the court’s own review of bad faith cases in federal courts, the court
was unable to find a case that dismissed a plaintiff’s bad faith claim for failure
to plead that claim with particularity under Rule 9(b). In fact, the court’s review
indicated that several courts have reached the same result as the court in
Haney and declined to apply Rule 9(b)’s particularity requirement to a
plaintiffs’s bad faith claim. See, e.g., Zebrowski v. Am. Standard Ins. Co. of Wis.,
Civ. 16-5018-JLV, 2017 WL 4220452, at *6-8 (D.S.D. Sept. 21, 2017) (citing
Haney, 223 F. Supp. 3d at 925-27) (applying the holding of Haney and
observing that even if the court stripped away plaintiff’s allegations of fraud,
the complaint as a whole was sufficient to satisfy Rule 8(a)(2)); Camp v. N.J.
Mfrs. Ins. Co., CIVIL ACTION NO. 16-1087, 2016 WL 3181743, at *3 n.2 (E.D.
Pa. June 8, 2016) (declining to apply Rule 9(b) to adjudge plaintiff’s allegation
of bad faith); Wheeler v. Assurant Specialty Prop., 125 F. Supp. 3d 834, 840
(N.D. Ill. 2015) (citations omitted) (compiling sources supporting proposition
that allegations of bad faith are not subject to heightened pleading); Diaz v.
Bank of Am., N.A., Civil Action No. 1:12-CV-01208-JEC-LTW, 2013 WL
12248082, at *5 (N.D. Ga. Jan. 17, 2013) (“Defendants, however, do not offer
any authority for their position that a bad faith claim is akin to a fraud or
4

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Third, while plaintiffs’ complaint does use the word “fraud,” the purpose
of using the word was to mirror the relevant statutory authority that allows
plaintiffs to seek punitive damages. See SDCL § 21-3-2 (indicating that where a
defendant acted with “oppression, fraud, or malice” a jury can award punitive
damages). Thus, the court is unpersuaded by American Family’s argument that
plaintiffs’ singular use of the word “fraud,” with the intention of mirroring the
applicable statutory authority, transforms their argument into one that should
be subject to the heightened pleading under Rule 9(b). See Wheeler, 125 F.
Supp. 3d at 840 (citations omitted) (concluding that the “singular mention” of
deception in plaintiff’s breach of contract claim did not “require the imposition
of a heightened pleading standard, as the claim exist[ed] independent of any
allegations of fraud or deception contained in the complaint”); cf. Zebrowski,
2017 WL 4220452, at *7-8 (first-party bad faith case where court concluded
that the complaint, which used the word “fraud” twice, satisfied the
requirements of Rule 8(a)(2), and noting that the result would be the same even
if the court stripped the complaint of its allegations referencing fraud).
Fourth, although the Eighth Circuit has observed that “[c]laims
‘grounded in fraud’ must meet [Rule 9(b)’s] heightened pleading requirement[,]”
Streambend, 781 F.3d at 1010 (citation omitted), the decision of when to apply
Rule 9(b) must be informed by the general purposes of Rule 9(b). See id. Those
purposes, as described above, are to prevent fishing expeditions and dispose

misrepresentation claim, such that the heightened Rule 9(b) pleading standard
applies. As such, this Court declines to adopt Defendants' theory.”).
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early of unfounded fraud claims advanced only for their nuisance value,
safeguard the reputation of defendants, and to give defendants sufficient notice
of allegations against them to allow the defendant to prepare a defense. See id.;
see also Olson v. Fairview Health Servs. of Minn., 831 F.3d 1063, 1073 (8th Cir.
2016) (citing 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 1296 (3d ed. 2004)). Here, the court fails to see how the general
purposes of Rule 9(b) would be served by requiring plaintiffs to plead their
allegations against American Family with particularity. 5 See Haney, 223 F.
Supp. 3d at 926 (citing Austin, 2012 WL 3101693, at *3 n.7) (indicating that in
a first-party bad faith case, an insurer is aware of the insured’s allegations that
the insurer lacked a reasonable basis to deny paying the insured’s claim and
thus the insurer has sufficient notice of a defense to the insured’s claim).
And fifth, to the extent that American Family’s briefing in support of its
motion to dismiss can be read to argue that this court should reach the
opposite decision as the court in Haney—meaning the court would find that
first-party bad faith claims are akin to fraud and thus subject to heightened
pleading under Rule 9(b)—the court’s own review of South Dakota’s
substantive law regarding first-party bad faith, supra at 5-7, leads the court to
reach the same result as the court in Haney. Supporting this conclusion are
prior decisions of the South Dakota Supreme Court indicating that insurers
Given American Family’s briefing here, it appears to the court that American
Family has formulated a defense to plaintiffs’ bad faith claim and is able to
articulate that defense. Further, in the event that the facts uncovered in
discovery prove not to support plaintiffs’ bad faith claim, American Family will
have the chance to dispose of the case at the summary judgment stage.
5

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must give equal consideration to an insured’s interests when evaluating an
insured’s claim, even if those interests are adverse to the insurer’s own
interests. See Trouten v. Heritage Mut. Ins. Co., 632 N.W.2d 856, 864 (S.D.
2001); Helmbolt v. LeMars Mut. Ins. Co., 404 N.W.2d 55, 58 (S.D. 1987).
Further, as indicated earlier, whether an insurer acted in bad faith is a
question of fact. Dakota, Minn. & E. R.R. Corp., 771 N.W.2d at 629-30. Thus,
the court will review the sufficiency of plaintiffs’ allegations under the notice
pleading standard of Rule 8(a)(2).
B. Whether plaintiffs’ first-party bad faith claim satisfies the
requirements of Federal Rule of Civil Procedure 8(a)(2)?
American Family argues that even under the notice pleading standard of
Rule 8(a)(2), a fatal deficiency of plaintiffs’ complaint is that the complaint
“liberally insists that [American Family] engaged in bad faith conduct without
bothering to allege specific facts to support this legal conclusion.” Docket 6 at 8.
According to American Family, the non-legal conclusions from plaintiffs’
complaint are boiled down to five facts that are insufficient to support plaintiffs’
allegations of bad faith. See id. (summarizing plaintiffs’ complaint). American
Family further contends that what is absent from plaintiffs’ complaint are
specific facts describing the extent of damage to plaintiffs’ home or what basis
plaintiffs have for asserting that American Family disregarded the damage to
plaintiffs’ home. Id.
Plaintiffs respond by arguing that American Family’s insistence on
requiring plaintiffs to allege their bad faith claim using “specific facts” is

15

inappropriate at the motion to dismiss stage. Docket 9 at 6. This is because at
the motion to dismiss stage, the court is required to accept plaintiffs’ wellpleaded allegations as true and draw all reasonable inferences in the plaintiffs’
favor. See, e.g., Schriener v. Quicken Loans, Inc., 774 F.3d 442, 444 (8th Cir.
2014) (citation omitted). Plaintiffs further contend that once the court
compares their allegations with the relevant South Dakota substantive firstparty bad faith law, it is clear the complaint satisfies the requirements of
Rule 8(a)(2). Docket 9 at 7-9.
After accepting the well-pleaded allegations in plaintiffs’ complaint as
true and drawing all reasonable inferences in plaintiffs’ favor, Schriener, 774
F.3d at 444, the court concludes that plaintiffs have pleaded a claim to relief
under South Dakota’s substantive first-party bad faith law. To plead a firstparty bad faith claim in South Dakota, plaintiffs must plausibly allege that
American Family had “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 [of
plaintiffs’ claim] . . . .” Dakota, Minn. & E. R.R. Corp., 771 N.W.2d at 629 (last
alteration added) (citing Walz, 556 N.W.2d at 70). Here, plaintiffs have met that
burden by alleging, in part, that (1) they had an insurance policy with
American Family that listed hail damage as a covered loss at the time of the
storm, (2) American Family inspected their home and refused to pay for the full
extent of the damage, and (3) American Family knew or had a reckless
disregard of the lack of a reasonable basis for offering only $2,180.50 for the
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damage to plaintiffs’ home even though plaintiffs insisted that $2,180.50 was
insufficient to fix the damage to plaintiffs’ home and due to the fact that
American Family had already paid for the full damage that the hailstorm
caused to homes owned by other American Family insureds in plaintiffs’
neighborhood. See Docket 1 at 2-4. Thus, because plaintiffs have plausibly
alleged a first-party bad faith cause of action, American Family’s motion to
dismiss count two of the complaint must be dismissed.
II.

Count III: Punitive Damages
American Family also moves to dismiss plaintiffs’ request for punitive

damages. Docket 6 at 12-15. As previously noted by this court, “punitive
damages are a form of relief and not a ‘claim’ that is subject to a Rule 12(b)(6)
motion to dismiss.” Benedetto v. Delta Air Lines, Inc., 917 F. Supp. 2d 976, 984
(D.S.D 2013) (citing Sec. Nat'l Bank of Sioux City v. Abbott Labs., Civ. No. 11–
4017, 2012 WL 327863, at *21 (N.D. Iowa Feb. 1, 2012) (“[P]unitive damages
are not a cause of action, and as such, so long as there are surviving claims,
they are not subject to a motion to dismiss.”)). Thus, because plaintiffs’ bad
faith count survives American Family’s motion to dismiss, the motion to
dismiss plaintiffs’ claim for punitive damages is denied.
CONCLUSION
American Family moves to dismiss Count II (bad faith) and Count III
(punitive damages) of plaintiffs’ complaint for failure to state a claim under
Federal Rule of Civil Procedure 12(b)(6). The court finds that plaintiffs have
stated a plausible claim for relief under South Dakota’s substantive law
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regarding first-party bad faith. Plaintiffs’ allegations of bad faith are subject to
review under the pleading standard for Federal Rule of Civil Procedure 8(a)(2),
and are not subject to the heightened pleading requirements of Federal Rule of
Civil Procedure 9(b). Because plaintiffs have stated a plausible first-party bad
faith claim, their claim for punitive damages also survives American Family’s
motion to dismiss. Thus, it is
ORDERED that American Family’s motion to dismiss Counts II and III
(Docket 5) is denied.
DATED December 15, 2017.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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