Opinion
Civil Action 2:23-cv-01239
05-23-2024
FEDERATED ADMINISTRATIVE SERVICES and FEDERATED HERMES, INC., Plaintiffs, v. ENDURANCE AMERICAN INSURANCE COMPANY and CONTINENTAL CASUALTY COMPANY, Defendants.
ECF No. 27
William S. Stickman Judge
REPORT AND RECOMMENDATION ON DEFENDANTS' MOTION TO DISMISS COUNT III OF PLAINTIFFS' COMPLAINT
Kezia O. L. Taylor, United States Magistrate Judge
For the reasons set forth herein, it is respectfully recommended that Defendants' Motion to Dismiss Count III of Plaintiffs' Complaint, ECF No. 27, be DENIED.
I. PROCEDURAL AND FACTUAL HISTORY
The procedural and factual histories, and the allegations underlying Plaintiffs' action, are provided at length and with sufficient clarity in the pleadings filed in this early-stage professional and management liability insurance, and excess insurance, coverage litigation. See e.g., ECF Nos. 1, 27-29. Briefly then:
Defendants collectively provided Plaintiffs' professional liability “insurance tower” by way of a Primary Policy and Excess Policy. ECF No. 1 at 2, 7, 10. Generally, the Primary Policy provides up to $10 million of liability coverage on account of covered claims, subject to a $2.5 million retention. The Excess Policy provides an additional $10 million in coverage. ECF No. 1 at 9-10.
Plaintiffs (collectively “Insureds”) are a global asset manager (Hermes) and its subsidiary (FAS). Insureds bring this action against Defendants (collectively “Insurers”) for (a) failure to indemnify a claim for which Insureds were entitled to coverage under the terms of the applicable policies and (b) additional damages caused by Insurers' bad faith, e.g, the untimeliness and unreasonableness of positions taken in their “costs of correction” coverage processing. The four (4) claims of Plaintiffs' Complaint allege breach of contract, entitlement to declaratory judgment, breach of the implied covenant of good faith and fair dealing, and Pennsylvania's bad faith statute, 42 Pa. C.S.A. § 8371, respectively. ECF No. 1.
Plaintiffs assert entitlement to coverage for loss resulting from FAS' “failure to register under the Securities Act [of 1933] certain shares . . . due to an administrative oversight.” ECF No. 1 at 2. The 28-page Complaint provides extensive allegations regarding the policies' terms, the causes of loss, Insureds' negotiations and exploration of alternative avenues to settling shareholder claims,requests for coverage made, and a detailed chronology of the parties' claims processing communications, all of which Plaintiffs assert plausibly ground their causes of action. In so doing, they include numerous specific allegations regarding the policies' coverage - “in addition to [coverage] for written demands, lawsuits, and other formal “Claims” - for “costs of correction,” i.e., for Insureds' costs to preemptively correct time-sensitive situations and mitigate losses where possible, thus reducing their legal liability. Plaintiffs allege that Defendants' (a) wrongful denial of policy coverage for Plaintiffs' settlements with affected shareholders and (b) “bad faith claims handling,” including unreasonable delays and failures to provide coverage to which Plaintiffs were entitled under the inherently time-sensitive costs of correction provisions caused Plaintiffs to suffer damages. As noted in Section III, these allegations are relevant to Plaintiffs' claim for Defendants' breach of the implied convent of good faith and fair dealing under common law (the “implied covenant” claim). Plaintiffs seek damages as a result of Insurers' “failure to honor their contractual obligations” to indemnify Plaintiffs' covered loss and “failure to act in good faith,” including by “improper claims-handling tactics” such as dilatoriness; ignoring supportive evidence; and failing to provide responses to requests for coverage, including costs of correction coverage, determinations. Id. at 5, 20-21, 24-25.
Plaintiffs were made aware of this oversight by communication from a government regulator in early March 2023. Id. at 11.
Insureds sought an alternative to a traditional “recission offer” which they feared could require liquidation of the Tender Fund's entire portfolio. Id. at 11-12.
See e.g., id. at 16-17 (discussing Insureds' request for costs of correction coverage and communications reiterating that Insureds' delays were increasing its losses daily). See also ECF No. 27 at 9-12 (recounting timings of communications, including Plaintiffs' March 31st notice of circumstances to Defendants, parties' April 10th status conference including discussion of Plaintiffs' cost of corrections coverage request formally made that day, Defendants' April 25th set of questions and requests to Plaintiffs and the latter's 200-page two-day turn around, and Defendants' repeated “investigation ongoing” responses to Plaintiffs' requests for coverage determinations during May).
Defendants assert, in moving to dismiss said implied covenant claim, that “Count III's substantive allegations are subsumed by the allegations of Count I, alleging breach of the policies' express provisions; Plaintiffs have failed to identify any damages arising from Count III that are separate or distinct from those for Court I; and Plaintiffs' allegations supporting Count III are identical to those asserted in Count IV” and thus “Pennsylvania law requires [it] be dismissed, as it is subsumed by a statutorily-established cause of action.” ECF No. 27 at 8.
Rather than providing their Brief in Support of the pending Motion as a separate filing, Defendants have “incorporated” it in said Motion. ECF No. 27 at 4 et seq.
Responsive briefing has been completed and the issues raised in the pending motion are ripe for disposition. See ECF Nos. 27-29.
As explicated below, the Court concludes that at the present stage of this litigation, and under the applicable plausibility standard, Plaintiffs have stated a cause of action for Defendants' breach of the implied covenant of good faith and fair dealing. The claim being sufficiently alleged and not wholly subsumed within either of Plaintiffs' claims for breach of contract or statutory bad faith, it is respectfully recommended that the pending motion be denied.
II. STANDARD OF REVIEW UNDER RULE 12(b)(6)
Under the “notice pleading” standard embodied in Rule 8 of the Federal Rules of Civil Procedure, a plaintiff must come forward with “a short and plain statement of the claim showing that the pleader is entitled to relief.” As further explicated in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), a claimant must state a “plausible” claim for relief, and “[a] claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Although “[f]actual allegations must be enough to raise a right to relief above the speculative level,” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), a plaintiff “need only put forth allegations that raise a reasonable expectation that discovery will reveal evidence of the necessary element.” Fowler v. UPMC Shadyside, 578 F.3d 203, 213 (3d Cir. 2009) (quotation marks and citations omitted); see also Covington v. Int'l Ass'n of Approved Basketball Officials, 710 F.3d 114, 117-18 (3d Cir. 2013); Thompson v. Real Estate Mortg. Network, 748 F.3d 142, 147 (3d Cir. 2014).
In addition to the complaint, courts may consider matters of public record and other matters of which they may take judicial notice, court orders, and exhibits attached to the complaint when adjudicating a motion to dismiss under Rule 12(b)(6) without converting said motion into one for summary judgment. Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994) (citing 5A Wright and Miller, Federal Practice and Procedure: Civil 2d, § 1357; Chester County Intermediate Unit v. Pennsylvania Blue Shield, 896 F.2d 808, 812 (3d Cir. 1990)). See also U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (noting that “a document integral to or explicitly relied upon in the complaint may also be considered without converting the motion to dismiss into one for summary judgment.”) (italics in original).
III. ANALYSIS
A. Count III States a Claim Which is Not Subsumed Within Count I
Defendants move for dismissal of Plaintiffs' claim for Defendants' breach of their implied covenant of good faith and fair dealing under principles of common law. Defendants' first argument in advancing their motion is that Count III of the Complaint is subsumed within Count I - Plaintiffs' claim for breach of contract “alleging breach of the policies' express provisions.” ECF No. 27 at 8. They relatedly assert that Plaintiffs have failed to identify any damages separate and distinct from Defendants' failure to indemnify.
Defendants understandably misapprehend the holdings of the cases cited by the parties, and other informative case law, as applied to the circumstances of the case sub judice. More particularly:
The covenant of good faith and fair dealing reflects “an implied duty to bring about a condition or to exercise discretion in a reasonable way,” i.e., a way in accord with the parties' justifiable expectations. USX Corp. v. Prime Leasing Inc., 988 F.2d 433, 438 (3d Cir. 1993). And in Pennsylvania, “a duty of good faith and fair dealing is implicit in an insurance contract.” Smith v. Allstate Ins. Co., 904 F.Supp.2d 515, 521 (W.D. Pa. 2012). “Examples of bad faith can include ‘evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance.'” Benchmark Grp., Inc. v. Penn Tank Lines, Inc., 612 F.Supp.2d 562, 583 (E.D. Pa. 2009) (quoting Somers v. Somers, 418 Pa. Super. 131, 613 A.2d 1211, 1213 (1992)).
See also Birth Center v. St. Paul Cos., 567 Pa. 386, 787 A.2d 376, 379 (2001); Dercoli v. Pennsylvania Nat'l Mut. Ins. Co., 520 Pa. 471, 554 A.2d 906, 908 (1989) (noting that “utmost fair dealing should characterize the transactions between an insurance company and the insured”); Ironshore Specialty Ins. Co. v. Conemaugh Health Sys., Inc., 423 F.Supp.3d 139, 152-56 (W.D. Pa. 2019) (“Pennsylvania law imposes a duty on an insurer to . . . act in good faith at all times, giving the interests of the insured the same consideration it gives its own.”) (citing Dercoli, 554 A.2d at 909).
As Defendants correctly observe, Pennsylvania law does not recognize a separate breach of this common law duty where the claim is subsumed by one brought for breach of contract. Simmons v. Nationwide Mut. Fire Ins. Co., 788 F.Supp.2d 404, 409 (W.D. Pa. 2011) (cited in ECF No. 27 at 6-7). As our sister Courts for the Middle and Eastern Districts of Pennsylvania have noted, however, a plaintiff may bring separate claims for breach of contract and breach of the duty of good faith and fair dealing when those two actions are based on separate conduct. See Lomma v. Ohio Nat'l Life Assurance Corp., 283 F.Supp.3d 240, 266-67 (M.D. Pa. 2017) (declining to dismiss implied covenant claim at the pleading stage where, despite “spare, but pointed allegations,” it could not be said that it was based on the same conduct which formed plaintiffs' claim for breach of contract); Clunie-Haskins v. State Farm Fire & Cas. Co., 855 F.Supp.2d 380, 388 (E.D. Pa. 2012) (holding that where “the conduct forming the basis of [p]laintiffs' breach of contract claim-the failure to defend or indemnify-is not the same conduct as their claim for breach of the duty of good faith and fair dealing . . . [p]laintiffs' two claims do not merge”).
See also Meyer v. Cuna Mut. Grp., CIV.A. 03-602, 2007 WL 2907276, at *13-15 (W.D. Pa. Sept. 28, 2007), aff'd sub nom. Meyer v. CUNA Mut. Ins. Soc., 648 F.3d 154 (3d Cir. 2011) (observing that despite the general proposition precluding separate implied covenant claims in most cases, “courts have recognized that in limited circumstances-specifically including the insurer/insured relationship-a plaintiff may be able to bring an independent contractual claim for breach of a duty of good faith and fair dealing”) (citing Creeger Brick and Bldg. Supply Inc. v. Mid-State Bank and Trust Co., 385 Pa.Super. 30, 560 A.2d 151, 154 (Pa.Super.Ct.1989)).
In other words, Pennsylvania law bars a plaintiff from bringing both a breach of contract claim and an implied covenant claim where the latter's basis on the same conduct renders it redundant. See King of Prussia Equip. Corp. v. Power Curbers, Inc., 158 F.Supp.2d 463, 467 (E.D. Pa. 2001) (granting summary judgment on implied covenant claim and concluding that it “add[ed] nothing of consequence to the breach of contract claim” where breach of duty allegedly arose from essentially the same actions: defendant's withholding information to induce plaintiff's continued contractual performance); Smith, 904 F.Supp.2d at 522 (noting that “claims for breach of the contractual duty of good faith and fair dealing have been dismissed where . . . redundant”). In contrast, and as noted supra, Plaintiffs sub judice assert, in detailed allegations, that Insurers breached the implied covenant by separate conduct including their unreasonableness, delays and unresponsiveness to Plaintiffs' requests regarding costs of correction, i.e., regarding inherently urgent coverage intended to enable Insureds to preemptively correct time-sensitive situations and mitigate losses and their liability.
As Plaintiffs correctly observe, a “basic purpose of this coverage is to permit prompt correction by insured companies of operations-based errors in order to avoid” further liability and loss. ECF No. 28 at 14 (quoting D&O/E&O Liability Insurance, ICI Mutual (May 31, 2023) (full citation hyperlink provided at id. at n. 1)).
In addition, Defendants' assertions to the contrary notwithstanding, Plaintiffs have plausibly alleged extra-contractual damages, e.g., increased liability and further damages incurred in consequence of Defendants' bad faith conduct regarding their costs of correction coverage. See generally ECF Nos. 1 and 28. Cf. ECF No. 27 at 16; ECF No. 29 at 6-8. More specifically, Plaintiffs' have detailed additional damages in the form of strict liability for “statutory interest at the rate of approximately $72,000 per day due to the statutory interest” accruing on “damages owed to the affected shareholders.” ECF No. 28 at 13-14. They further allege that their total loss was increased by “at least $648,000 due to the accruing statutory interest owed” over the three- month window in which Defendants continued their unreasonable processing delays and effective refusals to provide a costs of correction coverage determination. Id. at 15-16. Cf. Gray v. Nationwide Mutual Ins. Co., 422 Pa. 500, 223 A.2d 8, 11 (Pa. 1966) (holding that, unlike a simple breach of contract action to recover benefits due under the policy, insurer's alleged breach of its duty of good faith entitled insurer to seek compensatory damages in excess of the policy limits); Birth Center of St. Paul Cos., 567 Pa. 386, 787 A.2d 376, 390 (Pa. 2001) (same).
To the extent that Defendants assert that the relevant allegations made in the Complaint were insufficient to Plaintiffs' claim under the pleading requirements of the Federal Rules, the Court finds to the contrary for reasons discussed in the text of Section III. Cf. ECF No. 29 at 3-4 (characterizing Plaintiffs'' allegations as “conclusory” while asserting on motion to dismiss that insurers “duly responded”). Compare generally ECF No. 28. To the extent Defendants intend - from their Reply's assertion that the additional factual history included in Plaintiffs' responsive Brief in Opposition is “improper and untimely” - that such supplemental factual allegations are prejudicial or deserving of exclusion, the Court notes that there are proper procedures for such a challenge. The Court further advises, as an initial impression, that it would be inclined to find any such properly moved assertion predicated on purported unfair surprise stemming from the existence of statutory interest requirements frivolous. Cf. ECF No. 29 at 1; id. at 6 (objecting that accruing statutory interest was “mentioned nowhere in the Complaint”) (emphasis in original).
As subsequently noted by both this Court and our sister Court for the Middle District of Pennsylvania, Gray and Birth Center stand for the proposition that when an insurer's maladministration of its claim procedures subjects its insured to liability or loss in excess of that inherent in the underlying claim, its insured may pursue an independent compensatory cause of action for the insurer's breach of its implied covenant. Meyer, 2007 WL 2907276, at *14; Adams v. Nationwide Mut. Fire Ins. Co., 3:13-CV-677, 2013 WL 12099385, at *1-2 (M.D. Pa. May 22, 2013). Although Meyer and Adams observe that the extra-contractual loss in Grey and Birth Center was attributable to the insured's liability to a third party, as explicated supra the same circumstance obtains here. Plaintiff has plausibly alleged that unreasonable delay in Defendants' claim processing gave rise to its statutorily-prescribed increased liability to the third-party shareholders.
Thus, in assessing whether Plaintiffs have stated a claim for Insurers' breach of their common law implied duty of good faith and fair dealing that is sufficiently separate from their claim for breach of contract, the Court concludes that - under the currently applicable standard of review - they have.
The Court advises the parties for clarity that, as discussed in text, supra, the substantive law of Pennsylvania imposes an implied covenant of good faith and fair dealing in every insurance contract. Defendants' present motion does not concern the existence, applicability or scope of that substantive rule of law. Rather, at bottom it merely concerns whether a claim for breach of such an implied covenant must be included within a count for breach of other, express covenants within the same contract, or whether it may be set forth in a separate count. Matters of pleading form appear to the Court to be quintessential questions of procedure, which in federal court are ordinarily governed by federal law, including the Federal Rules of Civil Procedure. See Rules Enabling Act, 28 U.S.C. § 2072 (authorizing Supreme Court to “prescribe, by general rules, the forms of . . . pleadings, . . . and the practice and procedure of the district courts” provided that the rules “shall not abridge, enlarge or modify any substantive right”); Fed.R.Civ.P. 1 (with exceptions not applicable here, “[t]hese rules govern the procedure in the United States district courts in all suits of a civil nature”); Hanna v. Plumer, 380 U.S. 460, 465 (1965) (under “the Enabling Act[,] federal courts are to apply . . . federal procedural law”). It therefore appears that the question now before this Court may be governed by the federal rules. Indeed, since the court has found that the claims in Counts I and III are founded on separate conduct, maintenance of separate counts may actually be mandated by federal law - specifically, by Rule 10(b), which provides that “[i]f doing so would promote clarity, each claim founded on a separate transaction or occurrence . . . must be stated in a separate count.” Fed R. Civ. P. 10(b). As the Supreme Court explained in Hanna:
When a situation is covered by one of the Federal Rules, . . . the court has been instructed to apply the Federal Rule and can refuse to do so only if the Advisory Committee, this Court, and Congress erred in their prima facie judgment that the Rule in question transgresses neither the terms of the Enabling Act nor constitutional restrictions.380 U.S. at 471. Nevertheless, because other Courts in this Circuit have applied Pennsylvania law to the “separate count” question without discussing whether it is substantive or procedural; and because the parties have likewise concentrated their briefing on state law; and most importantly, because it appears to the Court that Pennsylvania law and federal law both permit maintenance of a separate count for breach of an implied covenant in the present circumstances: the Court deems it unnecessary to decide which law governs.
B. Count III States a Claim Which is Not Subsumed Within Count IV
Defendants' second argument in advancing their motion is that the “allegations supporting Count III are identical to those asserted in Count IV” - Plaintiffs' claim for “a statutorily-established cause of action” and should therefore be dismissed. ECF No. 27 at 8. Here again, the Court must disagree with Defendants' application of the law. More particularly:
Count IV of Plaintiffs' Complaint brings a claim under Pennsylvania's bad faith insurance statute, 42 Pa. C.S.A. § 8371. In order to plead a claim for bad faith under Section 8371, an insured must show that the insurer had no “reasonable basis” for its actions and “knew of or recklessly disregarded” the fact that it lacked that reasonable basis. Rancosky v. Wash. Nat'l Ins. Co., 642 Pa. 153, 170 A.3d 364, 365 (2017); see also Merrone v. Allstate Vehicle & Prop. Ins. Co., No. 3:18-cv-193, 2019 WL 5310576, at *5 (W.D. Pa. Oct. 21, 2019).Section 8371 provides that on a finding of bad faith conduct, the court may award (a) interest on the amount of the claim from the date it was made, (b) punitive damages, and (c) court costs and attorney fees against the insurer.
As the Ironshore Court observed:
Actions constituting bad faith under Section 8371 are not limited solely to a denial of coverage-bad faith may also include a lack of investigation, unnecessary or unfounded investigation, failure to communicate with the insured, or failure to promptly acknowledge or act on claims. Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir. 1999). Bad faith can also include poor claims-handling, the insurer's failure to act with diligence or respond to the insured, scattershot investigation, and similar conduct. Rancosky, 170 A.3d at 379 (Wecht, J., concurring). Failure to properly defend litigation against an insured may also give rise to bad faith liability. See Hollock v. Erie Ins. Exch., 54 Pa. D & C 4th 449, 508 (Pa. C.P. 2002). Payment of the claim does not grant immunity from liability for bad faith. Barry v. Ohio Cas. Grp., No. 3:04-cv-188, 2007 WL 128878, at *11 (W.D. Pa Jan. 12, 2007). Bad faith claims may arise from conduct before, during, or after litigation. O'Donnell v. Allstate Ins. Co., 734 A.2d 901, 906 (Pa. Super. Ct. 1999).423 F.Supp.3d at 155.
In other words, this statutorily available sanction for bad faith is expressly limited to additional damages for misconduct within its scope. The statutory remedies do not include, and are distinct from, the compensatory, direct and consequential damages that may be available to the insured on account of the insurer's breach. Cf. ECF No. 1 at 25 (Count III, seeking (a) compensatory, direct and consequential damages; (b) interest and court costs as permitted by law; and (c) other permitted relief).
One would, of course, expect commonality in the allegations supporting both the underlying liability for compensatory damages and the statutorily-imposed liability for additional damages in other form(s).
Moreover, the Pennsylvania Supreme Court has unambiguously held that Section 8371 did not abrogate a plaintiff's entitlement to compensatory damages under its “common law contract rights.” Birth Center, 567 Pa. 386, 787 A.2d at 386 (“[T]he statute authorizes courts, which find that an insurer has acted in bad faith toward its insured, to award punitive damages, attorneys' fees, interest and costs. [It] does not reference the common law, does not explicitly reject it, and the application of the statute is not inconsistent with the common law. Consequently, the common law remedy survives.”) (citations omitted).Defendants' argument for dismissal of Count III on grounds that it is subsumed by Section 8371 is therefore meritless.
See also id. at 389 (“Today, we hold that where an insurer acts in bad faith, by unreasonably refusing to settle a claim, it breaches its contractual duty to act in good faith and its fiduciary duty to its insured. Therefore, the insurer is liable for the known and/or foreseeable compensatory damages of its insured that reasonably flow from the insurer's bad faith conduct.”).
In assessing whether Plaintiffs have stated a claim for Insurers' breach of their common law implied duty of good faith and fair dealing that is sufficiently separate from their claim for a statutorily-established cause of action, the Court thus concludes that - under the currently applicable standard of review - they have.
IV. CONCLUSION
The Court observes in conclusion that the case will go forward, and the same discovery will be relevant, and the same facts will be in evidence as to Plaintiffs' Count III and other underlying claims and their requests for relief. Defendants remain free to re-raise Plaintiff's potential entitlement to maintenance of their Count III claim at a later time and under a different standard of review.Meanwhile, for the reasons specifically set forth above, it is respectfully recommended that Defendants' pending motion, ECF No. 27, be DENIED.
The Court notes that the substantial majority of (a) relevant cases cited by the parties and (b) cases reviewed by this Court in rendering its conclusions were being decided, appropriately, on summary judgment.
In accordance with the Federal Magistrate Judge's Act, 28 U.S.C. §636(b)(1)(B) and (C), and Rule 72.D.2 of the Local Rules of Court, the parties are allowed fourteen (14) days from the date of service of this Report and Recommendation to file written objections thereto. Any party opposing such objections shall have fourteen (14) days from the date of service of objections to respond thereto. Failure to file timely objections will constitute a waiver of any appellate rights.