America Service Group Inc. v. Zurich American Insurance Company

Filing 51

MEMORANDUM signed by District Judge Aleta A. Trauger on 5/17/2011. (hb)

UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
AMERICA SERVICE GROUP, INC.,

Plaintiff,

v.
ZURICH AMERICAN INSURANCE COMPANY,
Defendant.

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Case No. 3:10-cv-0616
Judge Trauger

MEMORANDUM
Pending before the court is the plaintiff’s Motion for Leave to Amend Complaint (Docket
No. 38), to which the defendant has responded (Docket No. 39), the plaintiff has filed a reply
(Docket No. 46), and the defendant has filed a sur-reply (Docket No. 44). For the reasons
discussed herein, the plaintiff’s motion will be granted.
FACTUAL AND PROCEDURAL BACKGROUND1

This case concerns an insurance policy issued by the defendant, Zurich American
Insurance Company (“Zurich”), to the plaintiff, America Service Group, Inc. (“ASG”). ASG is a
Delaware corporation with its principal place of business in Brentwood, Tennessee, and Zurich
is a New York corporation with its principal place of business in Schaumburg, Illinois.

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On November 2, 2010, the court ruled on the defendant’s Motion to Dismiss several
claims asserted in the plaintiff’s First Amended Complaint. (Docket No. 27.) In so doing, the
court provided a recounting of the facts as stated in that Complaint. (Id.) As the proposed
Second Amended Complaint seeks to add a claim but not amend any of the underlying facts
(Docket No. 38 Ex. 1), the court provides essentially the same factual recounting as in the
November 2, 2010 Memorandum.
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In 2004, ASG was in the market for directors’ and officers’ liability insurance coverage
for the directors and officers of the company. ASG sought both a primary policy and an
“excess” policy, which would provide insurance coverage for liability above the cap set by the
primary policy. Additionally, ASG “sought full coverage without a prior acts endorsement.”
(Docket No. 38 Ex. 1 at 4.) If the excess policy had a prior acts endorsement, it would only
cover a claim that arose out of events that occurred after the policy period commenced. A policy
without a prior acts endorsement would not have this temporal limitation.
In November 2004, Zurich issued ASG a proposal for excess coverage that, according to
ASG, “omitted any reference to a prior acts endorsement” and quoted a premium of $86,250.
(Id.) ASG claims to have accepted this offer for excess coverage.
On November 22, 2004, Zurich issued an insurance “binder” related to the Excess Policy,
which, while quoting the same premium, indicated that the Policy would be limited by a prior
acts endorsement. According to ASG, the binder indicated, however, that “Zurich would remove
the prior acts endorsement upon receipt of a warranty letter from ASG within ten business days”
and that “Zurich could remove the prior acts endorsement upon receipt of the warranty letter at
any time, including after expiration of the ten-day period.” (Id. at 5.) The warranty letter, in
essence, was to represent that, as of the effective date of the Excess Policy, ASG had no
knowledge of any conduct that might give rise to a claim under the Excess Policy.
ASG paid for, and Zurich issued, the Excess Policy (with the prior acts endorsement
pending the warranty letter), effective November 21, 2004. The Excess Policy provided $5
million in coverage after exhaustion of the $10 million in coverage provided by the primary

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policy, which was issued by a different entity. ASG maintains that the ten-day window for
submission of the warranty letter was not a “material” term in the Excess Policy. (Id. at 3.)
That is, it was “customary” for Zurich to accept warranty letters outside of the ten-day window,
and, here, “Zurich’s representatives assured ASG and/or the brokers that Zurich would remove
the prior acts endorsement upon receipt of a warranty letter after the ten-day period passed.” (Id.
at 5.)
Indeed, ASG maintains that, throughout their relationship, Zurich “continued to lead
ASG and/or the brokers to believe that the prior acts endorsement would be removed after
receipt of the warranty letter.” (Id. at 6.) In November 2005, Zurich and ASG renewed the
Excess Policy for another year and, during the negotiations regarding the renewal, “Zurich again
indicated its willingness to remove [] the prior acts endorsement from the Excess Policy when it
received a warranty letter from ASG dated as of November 21, 2004, the effective date of the
Excess Policy,” and Zurich “did not condition” its removal of the endorsement on receiving the
warranty letter by a specific date. (Id.)
On April 7, 2006, ASG submitted a warranty letter to Zurich stating that, on November
21, 2004, it had “no knowledge or information of any act, error or omission which might give
rise to a claim, suit or action under the Excess Policy.” (Id.) The Complaint also states that,
“between April 2006 and June 2006, four putative federal securities class action lawsuits were
filed [in this district] against ASG, a subsidiary of ASG, and certain directors and officers.” (Id.)
These lawsuits alleged that ASG’s stock price had been artificially inflated beginning on
September 2, 2003.
On April 11 and 12, 2006, ASG formally notified Zurich of the first and second lawsuits

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and sought defense and indemnity. On April 13, 2006, Zurich notified ASG’s insurance broker
that it was “rejecting ASG’s warranty letter ‘due to the time period that has passed.’” (Id. at 7.)
On August 16, 2006, Zurich issued its “preliminary views on coverage” letter, which stated that
the prior acts endorsement barred coverage under the Excess Policy. (Id.) ASG claims that
repeated demands for Zurich to pay ASG’s defense and indemnity costs in excess of the primary
policy limits have been unsuccessful.
Following settlements in the securities litigation in September 2009 and February 2010,
ASG’s losses related to that litigation have exceeded the limits of the primary policy. Zurich
continues to refuse to cover ASG’s “excess” losses.
On June 23, 2010, ASG filed this lawsuit, and the First Amended Complaint, which was
timely filed on August 25, 2010, asserted nine claims. (Docket No. 20.) On September 20,
2010, the defendant moved to dismiss five of those claims. (Docket No. 24.) In its November 2,
2010 ruling, the court granted the motion to dismiss as to the plaintiff’s promissory fraud claim
and otherwise denied the motion. (Docket No. 27 at 14.)

In dismissing the promissory fraud

claim, the court stated:
As ASG properly recognizes, the “forward looking” nature of the alleged fraud dictates
that ASG’s claim under Tennessee law is one for promissory fraud. See Styles v.
Blackwood, 2008 WL 5396804, *7 (Tenn. Ct. App. Dec. 29, 2008). To establish a claim
for promissory fraud, the party asserting the claim must show that a material promise of
future conduct was made with the intent not to perform, that reliance on the promise was
reasonable, and that the party asserting promissory fraud was injured thereby. Id. Given
that “not every broken promise starts with a lie,” intent is “the most difficult element” of
the claim to establish. Id.
Moreover, a higher pleading standard applies to claims of fraud, including promissory
fraud. Schmidt v. Martin, 2005 WL 2100645, *2 (W.D. Tenn. Aug. 19, 2005). When
alleging fraud, “a party must state with particularity the circumstances constituting
fraud.” Fed. R. Civ. P. 9(b). This requires allegations about “the time, place, and content
of the alleged misrepresentation . . . ; the fraudulent intent of the defendants; and the
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injury resulting from the fraud.” United States ex rel. SNAPP, Inc. v. Ford Motor Co.,
532 F.3d 496, 504 (6th Cir. 2008) (citation omitted). Rule 9(b), however, “should be
interpreted in harmony with Rule 8’s statement that a complaint must only provide ‘a
short and plain statement of the claim’ made by ‘simple, concise, and direct allegations.’”
Id. at 503. The key consideration is whether the complaint gives the defendant “fair
notice” of the fraud claim and enables the defendant to prepare a responsive pleading. Id.
at 504. . . .
The Amended Complaint fails to provide any substantive detail regarding the time,
place, and content of the alleged misrepresentations or the fraudulent intent of the
defendants. Indeed, the Amended Complaint indicates that, at the time that the alleged
misrepresentations were made, Zurich did not have an intent to defraud, given that the
Amended Complaint maintains that Zurich commonly accepted warranty letters outside
the ten-day window noted in the insurance binder. (Docket No. 20 at 5.) There is every
indication from the Amended Complaint that, had ASG not been sued at the same time
that it tried to submit the warranty letter, Zurich would have accepted the letter and
removed the prior acts endorsement. In light of this, the promissory fraud claim (count
VI) will be dismissed.
(Id. at 7-9.)
On April 14, 2011, the plaintiff filed the pending motion to add a claim under the
Tennessee Consumer Protection Act (TCPA). (Docket No. 38.) The plaintiff does not propose
to add any factual content to the Complaint, rather suggesting that the factual content alleged is
sufficient to support the claim that the plaintiff suffered “ascertainable losses” when the
defendant violated the TCPA by employing “unfair and/or deceptive practices,” that is, denying
the claim for excess policy coverage after the policy was paid for and “refusing to accept the
warranty letter” after previously treating the letter as a “pro forma, nonmaterial requirement.”
(Docket No. 38 Ex. 1 at 15.)
ANALYSIS
I.

Motion for Leave to Amend – Legal Standard
In general, “the court should freely give leave [to amend] when justice so requires.” Fed.

R. Civ. P 15(a)(2). In ruling on a motion for leave to amend, the court may consider several

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factors, including “undue delay in filing, lack of notice to the opposing party, bad faith by the
moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to
the opposing party, and futility of amendment. . . . Notice and substantial prejudice to the
opposing party are critical factors in determining whether an amendment should be granted.”
Wade v. Knoxville Utils. Bd., 259 F.3d 452, 458-59 (6th Cir. 2001) (quoting Head v. Jellico
Hous. Auth., 870 F.2d 1117, 1123 (6th Cir. 1989)). “A motion for leave to amend may be denied
for futility if the court concludes that the pleading as amended could not withstand a motion to
dismiss.” Midkiff v. Adams County Regional Water Dist., 409 F.3d 758, 767 (6th Cir.
2005)(internal quotation omitted). Despite these rationales for denying leave to amend, in
general, the mandate that leave is to be “freely given . . . is to be heeded.” Foman v. Davis, 371
U.S. 178, 182 (1962).
II.

The Plaintiff’s Motion
The central issue of dispute between the parties here is whether, in light of the court’s

dismissal of the promissory fraud claim due to the plaintiff’s failure to meet the “heightened”
pleading standard, the proposed TCPA claim, which is premised on the same facts, would fail as
well.2 (See Docket Nos. 39, 44, and 46.)
The defendant argues that the motion for leave to amend must be denied as futile because
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The plaintiff’s initial motion maintained that the amendment issue was “straightforward”
and indicated that the only potentially complicating issue was the TCPA’s one-year statute of
limitations, which, based upon the court’s previous ruling, started running in September 2009.
(Docket No. 38 at 1-2.) The plaintiff argued that its failure to assert this claim prior to April
2011 was not problematic because the TCPA claim “arose out of the conduct, transaction or
occurrence set out in the original pleading,” and, therefore, for statute of limitations purposes,
the claim “relates back” to the date of the initial filing in June 2010. (Id. at 2 quoting Anderson
v. Young Touchstone Co., 735 F. Supp.2d 831, 835 (W.D. Tenn. 2010) and citing Fed. R. Civ. P
15(c)(1)(B)). The defendant does not raise the statute of limitations issue in either its response
or sur-reply, and, at this stage, there appears to be no dispute that the TCPA claim is timely.
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“claims under the TCPA are held to the same heightened pleading standard as claims for fraud
under Federal Rule of Civil Procedure 9(b),” and, as noted above, when pleading fraud, it is the
plaintiff’s burden to allege the specific time, place, and content of the alleged misrepresentation
or deceitful conduct.3 (Docket No. 39 at 5-6.) Moreover, the defendant argues, the plaintiff has
failed to make “any allegations consistent with an unfair and deceptive business practice” and
has failed to state how it was deceived by the alleged misconduct. (Id. at 6-7.) In light of the
court’s findings that the allegations in the First Amended Complaint were insufficient to state a
claim for fraud under the “heightened” standard, the defendant argues, the TCPA claim could not
survive a motion to dismiss, and, therefore, the motion for leave to amend must be denied. (Id.
at 8-9.)
In its reply, the plaintiff argues that “common law fraud claims and TCPA claims are not
to be treated as one and the same.” (Docket No. 46 at 1.) That is, a “deceptive” act, under
Tennessee law, is different from a “fraudulent” act, and, therefore, “allegations supporting a
TCPA claim are not subject to the same analysis as those supporting fraud.”4 (Id. at 2.) The
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The defendant also adds a series of unpersuasive arguments in footnotes. The defendant
maintains that the plaintiff’s motion should be denied simply because the plaintiff’s counsel
made an apparent error of confusion in the TCPA section of the proposed Second Amended
Complaint, occasionally (but not always) referring to the parties by the wrong names. (Docket
No. 39 at 4.) While this certainly looks sloppy and should be corrected upon the filing of the
Second Amended Complaint, it is hardly a basis for denying the motion under the liberal Rule
15(a). The defendant also adds footnotes about the ultimate validity of the factual underpinnings
of ASG’s claims and about a bill pending in the Tennessee legislature that would, apparently
prospectively, limit the application of the TCPA to insurance companies. (Docket No. 39 at 5.)
Neither of these points bear on whether the Complaint should be amended to allege a claim that
arose in September 2009.
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The plaintiff suggests that this pleading standard issue was resolved in its favor by Davis
v. McGuigan, 325 S.W. 3d 149, 162 (Tenn. 2010). (Id. at 2-3.) Davis involved a motion for
summary judgment and the majority’s opinion did not directly address whether there is a
“heightened” pleading standard for TCPA claims, although the dissent stated that claims under
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plaintiff contends that the facts alleged in the proposed Second Amended Complaint
“sufficiently explain Zurich’s unfair and deceptive business practice of agreeing to provide – and
accepting premiums for – prior acts coverage, customarily accepting warranty letters subsequent
to a ten-day window . . . and treating receipt of a warranty letter as a pro forma requirement, then
rejecting the warranty letter as ‘too late’ after a claim is made to avoid coverage.” (Id. at 5-6.)
The TCPA prohibits the use of “[u]nfair or deceptive acts or practices affecting the
conduct of any trade or commerce.” Tenn. Code Ann. § 47-18-104(a). Therefore, a plaintiff
pleading a TCPA claim is generally considered to have the burden to plead an “unfair or
deceptive” act or practice and that such conduct caused an “ascertainable” loss. See Tucker v.
Sierra Builders, 180 S.W.3d 109, 115 (Tenn. Ct. App. 2005). An “unfair or deceptive” act or
practice is a “material representation, practice or omission likely to mislead a reasonable
consumer.” Ganzevoort v. Russell, 949 S.W.2d 293, 299 (Tenn. 1997). This standard applies
equally in the insurance context; that is, while insurance company conduct is covered by the
TCPA, the plaintiff must ultimately demonstrate deceit or unfair conduct on the part of the
insurer. Myint v. Allstate Ins. Co., 970 S.W.2d 920, 926 (Tenn. 1998). Mere denial of a claim is
insufficient – deceptive or unfair conduct by the insurer is frequently shown through violations
of policy terms, deception about the terms of the policy, or other unfair conduct. Id.
The defendant is correct that at least one court, applying the TCPA, indicated that the
exact same pleading standard for fraud applies to claims under the TCPA, including the
requirement that the plaintiff “specify the time and place of the Defendants’ alleged TCPA
violations.” McKee Foods Corp. v. Pitney Bowes, Inc., 2007 WL 896153, *5 (E.D. Tenn. Mar.
the TCPA must be pled with the “same specificity applicable to fraud claims.” Davis, 325 S.W.
3d at 162, 174.
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22, 2007). However, based on this court’s review of the law, it appears that the prevailing view
is that, while the “unfair and deceptive acts” that make up the TCPA claim must be pled with
“specificity” and “particularity,” there is no explicit requirement that the plaintiff allege the
specific “time, place, and content” of misrepresentations or deceptions. See Metro. Property &
Cas. Ins. Co. v. Bell, 2005 WL 1993446, *5 (6th Cir. Aug. 17, 2005); Harvey v. Ford Motor
Credit Co., 8 S.W.3d 273, 275-76 (Tenn. Ct. App. 1999); Humphries v. W. End Terrace, Inc.,
795 S.W. 2d 128, 132 (Tenn. Ct. App. 1990).
Rather, with an eye toward the dual goals of (1) putting the defendant on clear notice of
the alleged misconduct and (2) “liberally [] protect[ing] consumers in Tennessee and elsewhere,”
most courts appear to conduct a careful review of the complaint allegations to determine if the
plaintiff has sufficiently alleged an “ascertainable” injury from specific unfair and deceptive
conduct. Morrison v. Allen, 2009 WL 230220, *10 (Tenn. Ct. App. Jan. 30, 2009); Taylor v.
Standard Ins. Co., 2009 WL 113457, *5 (W.D. Tenn. Jan. 13, 2009)(“[the plaintiff] has failed to
allege any specific facts that support her conclusory allegations that [the defendant] employed
any unfair or deceptive business practices in evaluating her [insurance] claim. She does not
allege that [the defendant] violated the terms of the policy, deceived her about the terms of the
policy, or acted unfairly in its initial determination with respect to her claim. . . . As the
allegations in the complaint are not sufficient to state a violation of the TCPA, [the] motion to
dismiss [the plaintiff’s] TCPA claim is granted.”); Scraggs v. La Petite Acad., 2006 WL
2711689, *4 (E.D. Tenn. Sept. 21, 2006)(“[t]here are no facts indicating how the alleged
misrepresentation of defendant was deceptive and/or unfair, nor that plaintiffs suffered a loss as
a result of it. Accordingly, the Court will dismiss plaintiffs' TCPA claim.”).

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Recognizing that there is a heightened standard for pleading claims under the TCPA but
also recognizing that common law promissory fraud and a statutory cause of action under the
TCPA are different causes of action with different proof requirements and different remedial
goals, the court finds that the proposed Second Amended Complaint does sufficiently state a
claim under the TCPA. Providing specific facts about the parties’ course of dealing, the plaintiff
alleges that, over time, the defendant led the plaintiff to believe that the warranty letter was, as
the plaintiff puts it, a “pro forma” requirement that would not ultimately be an impediment to full
coverage as long as the letter was eventually provided. (Docket No. 38 Ex. 1 at 15.)
Indeed, the plaintiff specifically alleges that, during the November 2005 re-negotiation,
the defendant “did not condition removal of the prior acts endorsement on receipt of the
warranty letter within any specified time period.” (Id. at 6.) The plaintiff alleges that it
submitted the warranty letter five months later (when the lawsuits were filed against the
plaintiff), and the defendant, seeing that it would likely have to provide coverage if it accepted
the letter, decided to suddenly vastly elevate the warranty letter’s importance from a pro forma
requirement to a fundamental prerequisite of coverage with a specific time horizon under which
it had to have been provided. Given that the defendant’s alleged prior representations could have
reasonably given the plaintiff a sense of complacency on this issue, it can be fairly said that the
plaintiff has alleged specific and particular facts showing “unfair” or “deceptive” conduct in the
insurance context. Moreover, the plaintiff has sufficiently alleged an “ascertainable” loss – the
money that the defendant has not provided in response to the claim for excess coverage.

CONCLUSION
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As the TCPA claim would survive a motion to dismiss, the plaintiff’s Motion for Leave
to Amend is not futile, and, therefore, the motion will be granted. The plaintiff shall file a
Second Amended Complaint that corrects the typographical errors made in the proposed version
submitted to the court.
An appropriate order will enter.
_______________________________
ALETA A. TRAUGER
United States District Judge

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