Zebrowski v. American Standard Insurance Company of Wisconsin
ORDER granting in part and denying in part 11 Motion to Dismiss. Signed by Chief Judge Jeffrey L. Viken on 9/21/17. (SB)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
AMERICAN STANDARD INSURANCE
COMPANY OF WISCONSIN,
Plaintiff Greg Zebrowski initiated this action against defendant American
Standard Insurance Company of Wisconsin. (Docket 1). Plaintiff’s complaint
advances four counts: breach of contract, bad faith, attorney’s fees and
punitive damages. Id. at pp. 3-5. Defendant filed an answer. (Docket 6, later
amended at Docket 23). Defendant moves to dismiss each count of plaintiff’s
complaint. (Docket 11). The court has jurisdiction. 28 U.S.C. § 1332; (Docket
1 at p. 1).
In October 2011, Travis Neal was intoxicated while driving his car and he
rear-ended plaintiff’s car. (Docket 1 at p. 1). Plaintiff suffered serious injuries.
Id. at pp. 1-2. When this car accident occurred, defendant was providing
plaintiff with underinsured motorist coverage. Id. at p. 2. The insurance
contract covered plaintiff’s initial medical payments. Id. Plaintiff settled with
Mr. Neal’s insurance provider, SAFECO Insurance Companies, for $90,000 in
December 2013. Id.
By February 2014, plaintiff requested his policy limit of $150,000 from
defendant. Id. Defendant denied the request in May 2014. Id. That month
plaintiff filed suit in South Dakota state court. Id.; (Docket 13-1). Plaintiff’s
state court complaint consisted of one count: underinsured motorist coverage.
(Docket 13-1 at p. 4). Before trial commenced, “the parties stipulated that the
underinsured motorist coverage policy limits applicable to [the] case [were]
$250,000 and the liability limits from Travis Neal’s insurer [were] the amount
of $100,000[, which] must be subtracted from the underinsured motorist
coverage policy limits.” (Docket 13-4 at p. 2). Based on that agreement, “any
verdict in excess of $250,000 would result in the Court having to enter a
judgment in the amount of $150,000.” Id.
In September 2015, a jury found for plaintiff and awarded him $400,000
plus $14,327 in interest for his injuries and damages. (Docket 1 at p. 3). The
state court judge entered a judgment in the amount of $154,099.83, reflecting
the parties’ stipulation plus interest. (Docket 13-4 at pp. 2-3). Defendant
satisfied the judgment on October 12, 2015. (Docket 13-5).
Plaintiff then filed this action, claiming:
Defendant . . . engaged in a deliberate pattern and practice of
ignoring and undervaluing Plaintiff’s claim under its policy of
insurance in order to decrease the amount of claim expenses it
must pay to its insured. . . .
Defendant unreasonably and fraudulently elevated its own
interests above those of Plaintiff, did not promptly or in good faith
pay the claim of its insured, and refused to settle in good faith,
forcing Plaintiff to sue for the benefit to which he was entitled
under his insurance contract. . . .
Defendant deliberately handled Plaintiff’s claim in a manner
designed to force its insured to capitulate to a low settlement offer
or commence litigation, which Defendant knows is expensive and
stressful, and which invariably delays and dilutes payment of
benefits that Defendant knows are owed and to which its insured
(Docket 1 at p. 3). Defendant denies these allegations and moves to dismiss
the complaint. (Dockets 23 at p. 3 & 11).
“It is, of course, well-settled that in a suit based on diversity of
citizenship jurisdiction the federal courts apply federal law as to matters of
procedure but the substantive law of the relevant state.” In re Baycol Prods.
Litig., 616 F.3d 778, 785 (8th Cir. 2010) (internal quotation marks omitted).
Defendant provides several grounds for dismissing the counts in plaintiff’s
complaint. (Docket 11). Applying South Dakota law to substantive issues, the
court addresses each parties’ arguments count-by-count.
I. COUNT I: BREACH OF CONTRACT
In support of his breach of contract claim, plaintiff asserts:
Defendant was informed of the October 6, 2011, collision resulting
in injury to Plaintiff, and Plaintiff advised Defendant of his claim
for underinsured motorist benefits under his policy of insurance,
and otherwise fully cooperated with defendant in connection with
the claim. . . .
Defendant failed its duty under the contract of insurance to fairly
and adequately evaluate the claim and pay the full amount of
damages owed its insured, and refused to offer a reasonable and
good faith settlement, all in breach of its contract of insurance with
(Docket 1 at p. 3).
Defendant presents two bases for dismissing this cause of action:
it is barred by (1) South Dakota statute and (2) issue preclusion. (Docket
11 at p. 2).
A. SDCL § 58-11-9.5
First, defendant argues SDCL § 58-11-9.5 prohibits plaintiff’s breach of
contract claim. (Docket 12 at pp. 9-10). That statute provides:
Subject to the terms and conditions of such underinsured motorist
coverage, the insurance company agrees to pay its own insured for
uncompensated damages as its insured may recover on account of
bodily injury or death arising out of an automobile accident
because the judgment recovered against the owner of the other
vehicle exceeds the policy limits thereon. Coverage shall be limited
to the underinsured motorist coverage limits on the vehicle of the
party recovering less the amount paid by the liability insurer of the
party recovered against.
SDCL § 58-11-9.5. Because defendant satisfied the judgment from the state
case, it contends plaintiff seeks double recovery, which is inconsistent with the
statute. (Docket 12 at pp. 9-10).
In response, plaintiff argues defendant incorrectly characterizes its cause
of action. (Docket 17 at pp. 5-7). Plaintiff relies on Garrett v. BankWest, Inc.,
the South Dakota Supreme Court case establishing the following principle:
“Every contract contains an implied covenant of good faith and fair dealing
which prohibits either contracting party from preventing or injuring the other
party’s right to receive the agreed benefits of the contract.” 459 N.W.2d 833,
841 (S.D. 1990). The Garrett Court held this principle “allows an aggrieved
party to sue for breach of contract when the other contracting party, by his
lack of good faith, limited or completely prevented the aggrieved party from
receiving the expected benefits of the bargain. A breach of contract claim is
allowed even though the conduct failed to violate any of the express terms of
the contract agreed to by the parties.” Id.
Plaintiff goes on to argue his complaint articulates a breach of contract
claim as Garrett contemplates. (Docket 17 at pp. 6-7). According to defendant,
there are many problems with plaintiff’s breach of contract claim even if it is
understood as relating to an implied covenant of good faith and fair dealing.
(Docket 21 at pp. 6-12).
Even if the court finds plaintiff properly articulates a breach of contract
claim consistent with SDCL § 58-11-9.5, defendant’s second argument—issue
preclusion—requires dismissal of the cause of action.
B. ISSUE PRECLUSION
“The law of the forum that rendered the first judgment controls the res
judicata analysis.” Schaefer v. Putnam, 827 F.3d 766, 769 (8th Cir. 2016).
When resolving a motion to dismiss based on res judicata, the court “accept[s]
the non-moving party’s factual allegations as true and construe[s] all
reasonable inferences in favor of the nonmovant.” Id. “Res judicata consists of
two preclusion concepts: issue preclusion and claim preclusion.” Estate of
Johnson by & through Johnson v. Weber, 898 N.W.2d 718, 733 (S.D. 2017).
“Issue preclusion refers to the effect of a judgment in foreclosing relitigation of
a matter that has been litigated and decided, and also is referred to as direct or
collateral estoppel.” Id. (internal quotation marks omitted). In contrast, claim
preclusion has a broader effect because it “prevents the relitigation of a claim
or issue that was ‘actually litigated or which could have been properly raised.’ ”
Dakota, Minn. & E. R.R. Corp. v. Acuity, 720 N.W.2d 655, 660 (S.D. 2006)
(emphasis added) (quoting Nelson v. Hawkeye Sec. Ins. Co., 369 N.W.2d 379,
381 (S.D. 1985)). “The doctrine of res judicata is premised on two maxims: [a
person] should not be twice vexed for the same cause and it is for the public
good that there be an end to litigation. Res judicata seeks to promote judicial
efficiency by preventing repetitive litigation over the same dispute.” People ex
rel. L.S., 721 N.W.2d 83, 90 (S.D. 2006) (internal citations and quotation
“The collateral estoppel doctrine ‘bar[s] relitigation of an essential fact or
issue involved in the earlier suit’ if a four-part test is satisfied: ‘(1) Was the
issue decided in the prior adjudication identical with the one presented in the
action in question? (2) Was there a final judgment on the merits? (3) Was the
party against whom the plea is asserted a party or in privity with a party to the
prior adjudication? (4) Did the party against whom the plea is asserted have a
full and fair opportunity to litigate the issue in the prior adjudication?’ ”
Hamilton v. Sommers, 855 N.W.2d 855, 866 (S.D. 2014) (quoting Estes v.
Millea, 464 N.W.2d 616, 618 (S.D. 1990)).
“In examining whether these elements are present, a court should
construe the doctrine liberally, unrestricted by technicalities. However,
because the doctrine bars any subsequent litigation, it should not be used to
defeat the ends of justice. Instead, courts ‘must give careful consideration to
the case at hand before erecting the doctrine’s preclusive bar.’ ” L.S., 721
N.W.2d at 90 (quoting Federated Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 401
i. SAME ISSUE
“In the first step, [the court] must make a ‘determination of the precise
issues’ litigated and decided in the state proceeding [ ] and the issues raised in
the present case.”1 SDDS, Inc. v. State of S.D., 994 F.2d 486, 493 (8th Cir.
1993) (quoting Melbourn v. Benham, 292 N.W.2d 335, 338 (S.D. 1980)).
In arguing this element of issue preclusion, defendant asserts that when
“determining whether two separate suits involve the same claim or cause of
action, South Dakota courts apply Restatement (Second) Judgments, § 24,
which is often referred to as the ‘transaction test.’ ” (Docket 12 at p. 12). This
statement is not true. Whether a state applies the transaction test set forth in
the Restatement is a significant point, and when courts discuss or adopt the
test, they often provide thorough reasoning. See, e.g., Villareal v. United Fire &
Casualty Co., 873 N.W.2d 714, 719-25 (Iowa 2016) (extensively discussing the
South Dakota law, a court’s analysis of the similarity in the prior
judgment and the current case is comparable in both issue and claim
preclusion. Compare Hamilton, 855 N.W.2d at 866 (issue preclusion), with
L.S., 721 N.W.2d at 90 (claim preclusion). South Dakota courts have clearly
delineated how to conduct that analysis in claim preclusion: “the Eighth
Circuit [ ] in Hanson v. Hunt Oil Co., 505 F.2d 1237, 1240 (8th Cir. 1974),
established the test which this Court has repeatedly applied: whether the
wrong for which redress is sought is the same in both actions.” Dakota, 720
N.W.2d at 661 (internal quotation marks omitted). But South Dakota cases
applying issue preclusion have not directly held the same inquiry must be
used. See Hamilton, 855 N.W.2d at 866; Estes, 464 N.W.2d at 618. As a
result, in stating the law on this aspect of issue preclusion, the court is careful
to draw from South Dakota cases (or federal cases citing South Dakota law)
applying issue preclusion—and not claim preclusion.
As noted above, South Dakota law applies to issue preclusion in this
case. See Schaefer, 827 F.3d at 769. To support defendant’s argument about
the transaction test, it cites four cases: one case from the United States Court
of Appeals for the Eighth Circuit, two from the United States District Court for
the District of South Dakota and a South Dakota Supreme Court case. (Docket
12 at p. 12). The South Dakota Supreme Court case, Christians v. Christians,
cites the Restatement (Second) of Judgments for the background rationale of
res judicata, but it does not adopt the transaction test. See 637 N.W.2d 377,
387 (S.D. 2001).
The federal court cases defendant relies on do not apply South Dakota
law. In each case, the party invoking res judicata does so based on a prior
federal case. See Lane v. Peterson, 899 F.2d 737, 739-42 (8th Cir. 1990);
Yankton Sioux Tribe v. U.S. Dep’t of Health & Human Servs., 496 F. Supp. 2d
1044, 1047-52 (D.S.D. 2007); First Nat’l Bank in Sioux Falls v. First Nat’l Bank
S.D., No. CIV. 06-4101, 2008 WL 895931, at *1-4 (D.S.D. Mar. 31, 2008).
Those cases apply federal res judicata principles. See Porn v. Nat’l Grange
Mut. Ins. Co., 93 F.3d 31, 33-34 (1st Cir. 1996) (“Because the judgment in the
first action was rendered by a federal court, the preclusive effect of that
judgment in the instant diversity action is governed by federal res judicata
principles.”).2 “This is true whether the first action is based on federal question
commits a parallel error. To set out the elements of issue
preclusion, he cites Loudner v. United States, 330 F. Supp. 2d 1074, 1079
(D.S.D. 2004). (Docket 17 at p. 9). The prior judgment in Loudner came from
a federal court and not a South Dakota court. Loudner, 330 F. Supp. 2d at
jurisdiction or on diversity jurisdiction.” Rymer Foods, Inc. v. Morey Fish Co.,
116 F.3d 1482, at *4 (7th Cir. 1997) (unpublished opinion); see United States
v. Saint Louis Univ., No. 07-CV-0156, 2012 WL 359995, a *2 (S.D. Ill. Feb. 2,
2012) (citing Rymer for this proposition).
The South Dakota Supreme Court has not adopted the transaction test.
As stated above, the court “must make a ‘determination of the precise issues’
litigated and decided in the state proceeding [ ] and the issues raised in the
present case.” SDDS, 994 F.2d at 493 (quoting Melbourn, 292 N.W.2d at 338).
While plaintiff grounds his breach of contract claim in the implied
covenant of good faith and fair dealing, he is still asserting a contract breach.
Whether defendant violated the contract’s express provisions or an implied
covenant, plaintiff must demonstrate “ ‘(1) an enforceable promise; (2) a breach
of the promise; and (3) resulting damages.’ ” Dziadek v. Charter Oak Fire Ins.
Co., 867 F.3d 1003, 1009 (8th Cir. 2017) (quoting Bowes Constr., Inc. v. S.D.
Dep’t of Transp., 793 N.W.2d 36, 43 (S.D. 2010)). The contract at issue is the
underinsured motorist coverage defendant provided plaintiff. In Dziadek,
where Ms. Dziadek sued for violation of an underinsured motorist insurance
agreement, the Eighth Circuit stated South Dakota law entitled Ms. Dziadek to
“any ‘detriment caused by the breach,’ including interest.” Id. (quoting SDCL
§ 21-2-2). The South Dakota statute the Eighth Circuit cited provides: “The
detriment caused by the breach of an obligation to pay money only is deemed
to be the amount due by the terms of the obligation with interest thereon.”
SDCL § 21-2-2.
“[T]he precise issue[ ]” in the present action is defendant’s violation of its
contract with plaintiff. See SDDS, 994 F.2d at 493. The remedy is “the
amount due by the terms of the obligation with interest thereon.” SDCL § 212-2. In his state court case, plaintiff pursued the portion of his insurance
policy limits not covered by Mr. Neal’s insurance. (Docket 13-1). He believed
defendant violated their insurance agreement by not paying the full extent of
his policy, and he sought redress by recovering what he did not collect from
SAFECO. Id. That is a claim for breach of contract. Although his prior case
held defendant responsible for express terms in its insurance agreement with
plaintiff, and this case relates to violating an implied covenant of good faith and
fair dealing, both actions are for breach of a contract. They involve the same
“precise issue[,]” SDDS, 994 F.2d at 493, and the same remedy is available.
SDCL § 21-2-2.
The court finds the first element of issue preclusion is met.
ii. FINAL JUDGMENT, PARTIES AND OPPORTUNITY
Neither party disputes that plaintiff’s state court case resulted in a final
judgment which defendant satisfied. (Dockets 13-4 & 13-5). Plaintiff and
defendant are the same parties as those in the prior case. (Docket 13-1).
Based on the court’s determination plaintiff’s state court action presented the
same issue as his current breach of contract claim, the court finds plaintiff had
“a full and fair opportunity” to litigate breach of contract. Hamilton, 855
N.W.2d at 866. The judgment plaintiff received evidences this. (Docket 13-4).
The court finds the second, third and fourth elements of issue preclusion
are met. The court dismisses count I.
II. COUNT II: BAD FAITH
To set forth his bad faith cause of action, plaintiff asserts:
Defendant tortuously failed to conduct a reasonable good faith
investigation of Plaintiff’s claim and instead set about to
administer the claim in a manner calculated only to provide
Defendant with a basis to underpay Plaintiff’s claim and reduce
Defendant’s expenses. . . .
Defendant either knew or should have known of the lack of
reasonable basis for denial of benefits. . . .
Defendant also failed to give equal consideration to the interests of
Plaintiff, ignored the facts that support his claim, and ignored law
that requires payment of the claim. . . .
Defendant’s actions constitute bad faith, including but not limited
to, the following:
a. Defendant breached its duty to adjust Plaintiff’s claim in
good faith and to investigate every available source of
information in pursuit of minimum facts necessary to
support a denial of the claim;
b. Defendant took actions which injured the Plaintiff’s rights;
c. Defendant failed to fulfill their continuing duty to
investigate and evaluate Plaintiff’s claim.
(Docket 1 at p. 4).
Defendant provides two grounds for dismissing plaintiff’s bad faith claim.
(Docket 11 at p. 3). First, defendant argues Rule 12(c) of the Federal Rules of
Civil Procedure requires dismissal because the cause of action fails to plead
sufficient facts. Id. And second, defendant contends claim preclusion bars
plaintiff’s bad faith count. Id.
A. Rule 12(c)
Federal Rule of Civil Procedure 12(c) provides: “[a]fter the pleadings are
closed—but early enough not to delay trial—a party may move for judgment on
the pleadings.” Fed. R. Civ. P. 12(c). “The same standards that govern motions
to dismiss under Rule 12(b)(6) also govern motions for judgment on the
pleadings under Rule 12(c).” Ellis v. City of Minneapolis, 860 F.3d 1106, 1109
(8th Cir. 2017).
Under Rule 12(b)(6), plaintiff must plead “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). Two “working principles” underlie Rule 12(b)(6) analysis. See
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). First, courts are not required to
accept as true legal conclusions “couched as . . . factual allegation[s]” in the
complaint. See id. “Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.” Id. (quoting
Twombly, 550 U.S. at 555) (internal quotation marks omitted). The court does,
however, “take the plaintiff's factual allegations as true.” Braden v. Wal-Mart
Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009). Second, the plausibility
standard is a “context-specific task that requires the reviewing court to draw
on its judicial experience and common sense.” Iqbal, 556 U.S. at 678 (citation
omitted). The complaint is analyzed “as a whole, not parsed piece by piece to
determine whether each allegation, in isolation, is plausible.” Braden, 588
F.3d at 594.
Defendant argues plaintiff’s bad faith claim must meet the heightened
pleading standard established in Rule 9(b). (Docket 12 at pp. 14-15). Rule 9(b)
requires a party “alleging fraud or mistake[ to] state with particularity the
circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P.
9(b). “The particularity requirement serves 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.
Rule 9(b) contrasts with Rule 8(a)(2), the pleading standard for most
federal cases calling for a “a short and plain statement of the claim showing
that the pleader is entitled to relief[.]” Fed. R. Civ. P. 8(a)(2). Plaintiff asserts
he need not meet Rule 9(b)’s standard because it does not apply to bad faith
claims. (Docket 17 at pp. 12-16). Plaintiff relies on a recent decision from this
court, Haney v. Am. Family Mut. Ins. Co., 223 F. Supp. 3d 921 (D.S.D. 2017)
(Piersol, J.). (Docket 28).
In the Haney case, Mr. Haney alleged bad faith against his insurer for
refusing to pay more than it offered to cover his roof’s hail damage. Id. at 923.
The insurer moved to dismiss the bad faith claim, arguing Rule 9(b) applied
and Mr. Haney failed to meet the Rule’s standard. Id. at 924-25. The court
extensively analyzed Rule 9(b) and bad faith, ultimately holding “the
heightened pleading standards of Rule 9(b) do not apply to first-party bad faith
claims under South Dakota law.”3 Id. at 925-27. The court explained:
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.
Id. at 926 (citing Austin v. Auto Owners Ins. Co., Civil Action No. 12-0345,
2012 WL 310693, at *3 n.7 (S.D. Ala. July 30, 2012)). Haney provides a wellreasoned and careful discussion on the specific issue of bad faith claims and
Rule 9(b), and defendant does not provide sufficient reason to upset Haney’s
holding. See id.
Despite Haney, defendant argues the Rule 9(b) standard applies. (Docket
29). Defendant argues that even though plaintiff’s complaint lacks a fraud
cause of action, it includes allegations of fraud, implicating Rule 9(b). Id. at
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. at 925 (quoting Hein
v. Acuity, 731 N.W.2d 231, 235 (S.D. 2007)) (internal quotation marks omitted).
In this case, plaintiff advances a first-party bad faith claim. See id.
In the Eighth Circuit, “[c]laims ‘grounded in fraud’ must meet [the Rule
9(b)] heightened pleading requirement.” Streambend, 781 F.3d at 1010
(quoting United States ex re. Roop v. Hypoguard USA, Inc., 559 F.3d 818, 822
(8th Cir. 2009)). “While Rule 9(b) clearly applies to common law claims of
fraud, it also applies to claims that require proof of fraud as a prerequisite to
establishing liability.” Dunne v. Res. Converting, LLC, No. 4:16 CV 1351, 2017
WL 564485, at *6 (E.D. Mo. Feb. 13, 2017) (applying Rule 9(b) to unjust
enrichment). The Eighth Circuit noted in Streambend “some of [its] sister
circuits also apply Rule 9(b) to associated claims where the core allegations
effectively charge fraud.” Streambend, 781 F.3d at 1010-11 (citing cases from
the United States Court of Appeals for the First and Ninth Circuits) (internal
quotation marks omitted). When a complaint does not advance a fraud claim
but includes some allegations relating to fraud which fail to meet Rule 9(b),
“the only consequence [is that] any allegations of fraud would be stripped from
the claim.” In re NationsMart Corp. Secs. Litig., 130 F.3d 309, 315 (8th Cir.
1997); see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003)
(quoting this holding from NationsMart in concluding: “if particular averments
of fraud are insufficiently pled under Rule 9(b), a district court should
‘disregard’ those averments, or ‘strip’ them from the claim. The court should
then examine the allegations that remain to determine whether they state a
Because plaintiff does not assert common law fraud or a fraud-grounded
claim, the court reviews the complaint for assertions related to fraud. The
complaint expressly refers to fraud twice. (Docket 1 at pp. 3, 5). In the facts
section, plaintiff states: “Defendant unreasonably and fraudulently elevated its
own interests above those of Plaintiff, did not promptly or in good faith pay the
claim of its insured, and refused to settle in good faith, forcing Plaintiff to sue
for the benefit to which he was entitled under his insurance contract.” Id. at
p. 3 (emphasis added). Plaintiff’s punitive damages count asserts: “Defendant
acted with oppression, fraud, express and implied malice, and a reckless
disregard for the interests and rights of Plaintiff by refusing to provide
compensation benefits owed to Plaintiff, entitling Plaintiff to an award of
punitive damages pursuant to SDCL 21-3-2.” Id. at p. 5 (emphasis added).
Even if the court strips the fraud-related aspects from these allegations, the
analysis below shows there is no material change in the sufficiency of plaintiff’s
complaint under Rule 12(b)(6).4
Although plaintiff’s allegations related to fraud must meet Rule 9(b), the
complaint as a whole must meet Rule 8(a)(2). See Streambend, 781 F.3d at
1010-11; Haney, 223 F. Supp. 3d at 925-27. Under South Dakota law, a bad
faith claim must show “the existence of a contract of insurance; a loss
compensable under the terms of the policy; the absence of a reasonable basis
for denial of the claim; and that the insurer knew there was not a reasonable
basis to deny the claim or that the insurer acted in reckless disregard of the
also argues the thrust of plaintiff’s bad faith claim is an
allegation grounded in fraud. (Docket 29 at pp. 4-5). The court rejects this
argument based on the distinctions between fraud and bad faith set out in
Haney. See 223 F. Supp. 3d at 925-27.
existence of a reasonable basis to deny the claim.” Brooks v. Milbank Ins. Co.,
605 N.W.2d 173, 177 (S.D. 2000); see Haanen v. N. Star Mut. Ins. Co., 1:16CV-01007, 2016 WL 6237806, at *2 (D.S.D. Oct. 25, 2016) (citing Brooks for
the elements of bad faith). As noted earlier, Rule 8(a)(2) mandates “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.’ ” Haney, 223 F. Supp. 3d at 927 (quoting Iqbal, 556 U.S. at
678-79). The relevant statements in plaintiff’s complaint are as follows:
Plaintiff . . . suffered injuries when an intoxicated tortfeasor, Travis
Neal, negligently rear-ended his vehicle . . . on or about October 6,
2011. . . .
Defendant . . . was providing underinsured motorist coverage to
Plaintiff in October of 2011. . . .
Plaintiff . . . settled with the tortfeasor’s insurance provider,
SAFECO Insurance Companies, for payment of $90,000 toward his
injuries. . . .
[W]ith total special damages resulting from the collision well in
excess of $325,000, counsel for Plaintiff informed Defendant that
Plaintiff’s underinsured motorist coverage would need to be utilized
and requested the $150,000 available within the policy limits of
Plaintiff’s coverage. . . .
Plaintiff thoroughly detailed and substantiated his significant
injuries and losses in writing along with his request to Defendant
Defendant responded that it would not be extending coverage in
any amount under Plaintiff’s policy. . . .
Plaintiff . . . file[d] suit [in South Dakota state court.] . . .
Plaintiff received an offer from Defendant of $50,000 in ‘full and
final settlement’ of his claim . . .
[A] jury . . . awarded $400,000, plus $14,327 in interest, [to
plaintiff] for his injuries and damages.
(Docket 1 at pp. 1-3). These allegations mirror those Mr. Haney set forth and
this court determined met Rule 8(a)(2). See Haney, 223 F. Supp. 3d at 927-28.
Mr. Haney’s complaint stated:
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
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 of this roof” . . . .
28. American Family told Haney . . . that “Nothing additional is
owed on your claim.”
Id. at 927.
The Haney court decided “[i]t is clear . . . that the pleadings are not mere
conclusions.” Id. Taking “plaintiff’s factual allegations as true[,]” Braden, 588
F.3d at 594, the court finds plaintiff’s complaint in this case justifies the same
determination: plaintiff states facts setting forth a bad faith claim “plausible on
its face.” Twombly, 550 U.S. at 570. Plaintiff’s complaint meets Rule 8(a)(2)
and the court denies defendant’s Rule 12(c) motion to dismiss.
B. CLAIM PRECLUSION
Defendant’s second argument for dismissal is claim preclusion. (Docket
11 at p. 3). The court previously addressed the legal principles of res judicata.
See supra Section I.B. “Claim preclusion refers to the effect of a judgment in
foreclosing litigation of a matter that never has been litigated, because of a
determination that it should have been advanced in an earlier suit[.]” Weber,
898 N.W.2d at 733 (internal quotation marks omitted). For claim preclusion to
apply under South Dakota law, “four elements must be established: (1) a final
judgment on the merits in an earlier action; (2) the question decided in the
former action is the same as the one decided in the present action; (3) the
parties are the same; and (4) there was a full and fair opportunity to litigate the
issues in the prior proceeding.” L.S., 721 N.W.2d at 89-90. The court
addresses the second element at the outset.
i. SAME QUESTION
“Under South Dakota law, . . . ‘[t]he test for determining if both causes of
action are the same is a query into whether the wrong sought to be redressed is
the same in both actions.’ ” Hanig v. City of Winner, S.D., 527 F.3d 674, 677
(8th Cir. 2008) (quoting Bank of Hoven v. Rausch, 449 N.W.2d 263, 266 (S.D.
1989)). “[T]he Eighth Circuit [ ] in Hanson v. Hunt Oil Co., 505 F.2d 1237,
1240 (8th Cir. 1974), established the test which [the South Dakota Supreme
Court] has repeatedly applied: whether the wrong for which redress is sought is
the same in both actions.” Dakota, 720 N.W.2d at 661 (internal quotation
Defendant asserts “South Dakota law again instructs that this Court
should turn to the Restatement (Second) of Judgments § 24 in resolving this
question.” (Docket 12 at pp. 22-23). In support, defendant cites two cases. Id.
at p. 22. One is First National Bank, a federal case, which, as the court
explained above, is not applicable. See First Nat’l Bank, 2008 WL 895931, at
*4-5; supra Section I.B.i. Defendant also cites Am. Family Ins. Group v.
Robnik, 787 N.W.2d 768, 774 (S.D. 2010). In Robnik, the South Dakota
Supreme Court cites the Restatement for overarching res judicata principles
and does not mention or adopt the transaction test. Id. at 774-76. For
reasons parallel to the court’s explanation regarding South Dakota law and the
Restatement’s transaction test, the court rejects defendant’s argument.
In his state court case, plaintiff alleged defendant breached its contract
with plaintiff to provide underinsured motorist coverage. See supra Section
I.B.i.; (Docket 13-1). “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.”
Hein, 731 N.W.2d at 235. “In these cases, the parties are adversaries, and
therefore, an insurer is permitted to challenge claims that are fairly debatable.
However, a frivolous or unfounded refusal to comply with a duty under an
insurance contract constitutes bad faith.” Id.
“A breach of contract is defined as ‘[a] violation of a contractual
obligation, either by failing to perform one’s own promise or by interfering with
another party’s performance.’ ” Weitzel v. Sioux Valley Heart Partners, 714
N.W.2d 884, 894 (S.D. 2006) (quoting Black’s Law Dictionary 182 (7th ed.
1999)). “ ‘A breach may be one by non-performance, or by repudiation, or by
both.’ ” Id. (quoting Black’s Law Dictionary 182 (7th ed. 1999)). In contrast,
“bad faith can extend to situations beyond mere denial of policy benefits.”
Dakota, 771 N.W.2d at 629. “Bad faith conduct may include the failure to
conduct a reasonable investigation concerning the claim.” Id. “A bad faith
claim in South Dakota may be based on a ‘failure to comply with a duty under
the insurance contract,’ but still must involve ‘an insurance company
consciously [engaging] in wrongdoing.’ ” Anderson v. W. Nat. Mut. Ins. Co.,
857 F. Supp. 2d 896, 904 (D.S.D. 2012) (quoting Dakota, 771 N.W.2d at 629).
A plaintiff asserting breach of contract seeks redress for the wrong of
“violation of a contractual obligation . . . .” Weitzel, 714 N.W.2d at 894.
Plaintiffs taking aim at bad faith target much more. “A bad faith claim is
tortious in nature and intended to (1) punish an insurer in order to deter
future ‘acts deemed socially unacceptable’ and (2) compensate a claimant for
the loss of damages caused by the bad faith conduct.” Tripp v. W. Nat. Mut.
Ins. Co., 664 F.3d 1200, 1206 (8th Cir. 2011) (quoting Trouten v. Heritage Mut.
Ins. Co., 632 N.W.2d 856, 863-64 (S.D. 2001)). The “wrong for which [they
seek] redress,” Dakota, 720 N.W.2d at 661, “must ‘involve ‘an insurance
company consciously [engaging] in wrongdoing.’ ” Anderson, 857 F. Supp. 2d
at 904 (quoting Dakota, 771 N.W.2d at 629). The court finds this element of
claim preclusion is not met. Defendant’s motion to dismiss count II on this
ground is denied.
III. COUNT III: ATTORNEY’S FEES
Plaintiff’s claim for attorney’s fees states:
The denial of full payment of benefits owed pursuant to Plaintiff’s
underinsured motorist claim was made vexatiously and without
reasonable cause, entitling Plaintiff to an award of attorney’s fees
incurred in an effort to secure Defendants’ compliance with the
terms of the policy coverage, pursuant to SDCL 58-12-3.
(Docket 1 at p. 4).5
Defendant, assuming plaintiff’s breach of contract claim fails, argues this
claim should be dismissed because it must be supported by breach of contract
and not bad faith. (Docket 12 at pp. 27-28). In interpreting SDCL § 58-12-3,
the Eighth Circuit held, “[w]e see no provision in South Dakota law for
assessment of attorney fees in tort actions challenging an insurer’s handling of
an insurance claim.” Kirchoff v. Am. Cas. Co., of Reading, Penn., 997 F.2d
401, 407 (8th Cir. 1993); see Isaac v. State Farm Mut. Auto. Ins. Co., 522
N.W.2d 752, 763 (S.D. 1994) (citing Kirchoff for this holding). This is a tort
action because the court dismissed plaintiff’s breach of contract claim. See
this cause of action, plaintiff’s complaint also includes citations to
South Dakota law on unfair trade practices. (Docket 1 at p. 4). Plaintiff’s brief
states this was an error and he has no objection to the court dismissing this
aspect of his attorney’s fees claim. (Docket 17 at p. 32). The court dismisses
plaintiff’s claim for attorney’s fees pursuant to SDCL § 58-33-46.1.
supra Section I. Under Kirchoff, the court must dismiss the third count in
plaintiff’s complaint for attorney’s fees pursuant to SDCL § 58-12-3.6
IV. COUNT IV: PUNITIVE DAMAGES
Plaintiff’s final cause of action is for punitive damages and asserts:
Defendant acted with oppression, fraud, express and implied
malice, and a reckless disregard for the interests and rights of
Plaintiff by refusing to provide compensation benefits owed to
Plaintiff, entitling Plaintiff to an award of punitive damages
pursuant to SDCL 21-3-2.
(Docket 1 at p. 5).
Assuming the court would dismiss plaintiff’s bad faith claim, defendant
first argues this claim should be dismissed because it is not properly grounded
in a bad faith claim. (Docket 12 at p. 30). This argument fails because the
court rejected defendant’s argument for dismissing plaintiff’s bad faith claim.
See supra Section II.
Defendant next argues for dismissal based on Rule 12(c) of the Federal
Rules of Civil Procedure. (Docket 12 at pp. 30-32). The court stated the legal
standard for Rule 12(c) above. See supra Section II.A.7
attorney’s fees under SDCL § 58-12-3 need not completely
foreclose recovery of any attorney’s fees related to this case. See Hurley v.
State Farm Mut. Auto. Ins. Co., No. CIV. 10-4165, 2012 WL 6012803, at *2-6
(D.S.D. Dec. 3, 2012) (“In the insurance context, attorney’s fees incurred while
litigating a breach of contract action are generally available as an element of
compensatory damages in a bad faith action.”)
it does with plaintiff’s bad faith claim, defendant contends the
heightened pleading standard of Rule 9(b) should apply to plaintiff’s punitive
damages claim. (Docket 12 at pp. 31-32). Even if Rule 9(b) did apply and the
court disregarded the fraud-related aspect of count IV, the court’s conclusion
on the motion to dismiss this claim does not change.
“Under South Dakota law, punitive damages may not be recovered unless
expressly authorized by statute.” Haney, 223 F. Supp. 3d at 928 (citation and
internal quotation marks omitted). South Dakota law authorizes punitive
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, or in any case of wrongful injury to
animals, being subjects of property, committed intentionally or by
willful and wanton misconduct, in disregard of humanity, the jury,
in addition to the actual damage, may give damages for the sake of
example, and by way of punishing the defendant.
SDCL § 21-3-2. Plaintiff may seek punitive damages in a bad faith action if he
sufficiently alleges “oppression, fraud, or malice . . . .” Id. (emphasis added);
see Haney, 223 F. Supp. 3d at 928. “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.’ ” Haney, 223 F. Supp. 3d at 928 (quoting
Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 699 (S.D. 2011)). “[M]alice is
either actual or presumed.” Id. “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. Murdock, 488 N.W.2d 885, 891 (S.D.
Earlier the court stated the facts supporting plaintiff’s bad faith claim.
See supra Section II.A. The court must take those “factual allegations as true.”
Braden, 588 F.3d at 594. Those facts sufficiently articulate malice and a claim
for punitive damages that is “plausible on its face.” Twombly, 550 U.S. at 570;
see Haney, 223 F. Supp. 3d at 928-29 (denying a motion to dismiss punitive
damages grounded in similar facts). The court denies defendant’s motion to
dismiss plaintiff’s claim for punitive damages under Rule 12(c).
Based on the above analysis, it is
ORDERED that defendant’s motion to dismiss (Docket 11) is granted in
part and denied in part. Counts I and III of plaintiff’s complaint are dismissed.
Counts II and IV are not dismissed.
Dated September 21, 2017.
BY THE COURT:
/s/ Jeffrey L. Viken
JEFFREY L. VIKEN
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