Granite State Ins. Co. v. New Way Out, Corp.
| Decision Date | 02 June 2020 |
| Docket Number | CIVIL ACTION 19-0848-WS-M |
| Parties | GRANITE STATE INSURANCE COMPANY, Plaintiff, v. NEW WAY OUT, CORPORATION, et al., Defendants. |
| Court | U.S. District Court — Southern District of Alabama |
This matter is before the Court on a motion to dismiss filed by the plaintiff. (Doc. 33). The defendants have filed a response, (Doc. 35), the plaintiff a reply, (Doc. 36), and the motion is ripe for resolution. After careful consideration, the Court concludes that the motion is due to be granted.
According to the complaint, (Doc. 1), the defendants are a provider of residential services to special needs customers ("New") and three entities that subcontracted with New to provide such services. The plaintiff issued a policy to New as to which the subcontractor defendants were also named insureds.1 New performed services under contract with a state agency. In February 2019, New lost its certification from the state agency to provide such services due to three incidents of physical abuse by the subcontractors' employees.
The defendants filed a counterclaim, Count Two of which was for "bad faith/failure to investigate" and Count Three of which was for "bad faith/denial ofclaim." (Doc. 11 at 4-5). The Court construed these as claims for abnormal and normal bad faith, respectively, and granted the plaintiff's motion to dismiss these counts for failure to allege all the elements of the asserted causes of action. (Doc. 31). The subcontractors filed an amended counterclaim re-asserting Counts Two and Three, (Doc. 32),2 which is the target of the instant motion to dismiss.
According to the amended counterclaim, New filed claims on the policy on behalf of the subcontractors, which were denied. In May 2019, New then sued the subcontractors ("the underlying lawsuit") for negligence, wantonness, breach of contract, and "alleged murder." The plaintiff appointed lawyers to represent the subcontractors in the underlying lawsuit under a reservation of rights. In July 2019, the parties to the underlying lawsuit reached a settlement. In August 2019, pursuant to that settlement, each of the subcontractors made an offer of judgment of $3 million, with the proviso that the judgment be satisfied exclusively from proceeds of the plaintiff's policy. New filed acceptances of the offers of judgment the same day the offers were filed. Days later, Judge Youngpeter entered judgment accordingly, incorporating the restriction that the judgment is payable exclusively from insurance proceeds. (Doc. 32 at 2-5, 7; Doc. 32-6 at 4). Each settlement agreement provided that, upon entry of judgment, New released each subcontractor from any claim or demand whatsoever, for any damage of any kind whatsoever, related to the underlying action. (Doc. 32-7 at 3; Doc. 32-8 at 3; Doc. 32-9 at 3-4).3 The complaint seeks a declaration that no coverage exists for the claims New asserted in the underlying lawsuit and that the plaintiff is not liable to New for the agreed judgment entered in the underlying lawsuit. (Doc. 1 at 2, 12).
According to the amended counterclaim, the lawyers appointed by the plaintiff to represent the subcontractors advised them to make the offers of judgment. Having done so, the plaintiff "now seeks to abandon the terms of the Settlement" by failing to offer New the policy limits. Such a failure to pay by the plaintiff would "void the Settlement Release and subject the Named Insureds to the excess verdict [sic]." (Doc. 32 at 5-6).
Count Two of the amended counterclaim is styled as a claim for "bad faith/failure to investigate/settle." Count Two references the "enhanced obligation of good faith" resting on an insurer that defends its insureds under a reservation of rights, which obligations include a duty to investigate, but it alleges no breach of that duty.4 Instead, Count Two alleges that, because the subcontractors' liability was so clear and the damages so catastrophic, the plaintiff had a duty to offer policy limits to New in exchange for a release of New's claims against the subcontractors. The plaintiff's failure to do so, both before and after the agreed judgment was entered, constituted a bad faith failure to settle. (Doc. 32 at 7-9).
Count Three is styled as a claim for "abnormal bad faith." Count Three alleges that the plaintiff denied the subcontractors' "request that the terms of [the] Settlement in question be satisfied" and that the plaintiff had no debatable reasonfor this denial, since the counsel it appointed to represent the subcontractors in the underlying lawsuit all advised giving an offer of judgment. In addition, the entry of judgment legally obligated the plaintiff to pay "those damages for which there is coverage in the policy." The plaintiff exhibited bad faith by failing to investigate the claims against the subcontractors, by not paying a judgment its appointed counsel recommended, and by filing this declaratory judgment action. (Doc. 32 at 10).
The plaintiff argues that the amended counterclaim does not plead bad faith with the plausibility demanded by Rule 8(a)(2) as construed by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009). The plaintiff further argues that the amended counterclaim alleges no recoverable damages attributable to the plaintiff's alleged bad faith. For both reasons, the plaintiff argues that Counts Two and Three of the amended counterclaim fail to state a claim on which relief can be granted. (Doc. 33 at 2, 13).5
"[I]t is also well-settled that a bad-faith-failure-to-settle claim does not exist where the insured is subject to no personal loss from a final judgment ...." Federal Insurance Co. v. Travelers Casualty and Surety Co., 843 So. 2d 140, 144 (Ala. 2002) (describing Evans v. Mutual Assurance, Inc., 727 So. 2d 66 (Ala. 1999)). In Evans, the insured's policy limits were $1 million. The jury returned a verdict for $10 million but, while the resulting judgment was on appeal, the insurer settled with the plaintiff for $5 million. 727 So. 2d at 67. The Alabama Supreme Court held that a cause of action for bad faith failure to settle never "accru[ed]," because the insured "was never subject to a final judgment ordering the payment of money that [the insured] personally - and not his insurer - would have to pay," and the insurer's "paying the settlement absolved [the insured] of any personal liability" prior to the judgment becoming final after appeal. Id. at 68. After Evans, "an insured will never be able to assert a bad-faith-failure-to-settle claim against an insurer" where the insured is not personally exposed to payment of any part of the judgment. Federated, 843 So. 2d at 145.
The plaintiff relies on Federated. (Doc. 33 at 9). The defendants do not deny its holding or its applicability, but they argue that the subcontractors are still potentially exposed to payment of the judgment. They do not deny that the settlement agreements, the embedded releases, the accepted offers of judgment, and the judgment itself, all preclude New from seeking to satisfy the judgment from the subcontractors. They insist, however, that New could withdraw from the agreements and pursue the subcontractors for the full amount of the judgment. (Doc. 35 at 8-9). For this proposition, they rely on the following language from the agreements: "Each of the Parties represents and warrants that the individuals signing this Settlement Agreement on their behalf have full authority to do so." (Doc. 32 at 5; Doc. 32-7 at 5; Doc. 32-8 at 4; Doc. 32-9 at 5). According to thedefendants, this language means the subcontractors warranted that the plaintiff authorized the entry of $9 million worth of judgments collectible solely from the plaintiff, which it thereby consented to pay. If the plaintiff did not so authorize the settlement, "then the agreement is non-binding on New Way Out and New Way Out is free to pursue the Judgment remedies from each Subcontractor Defendant." (Doc. 35 at 9).
Patently, this is not what the quoted language means. The "Parties" to each settlement agreement were New, a subcontractor, and the individual owner of the subcontractor. The subcontractors are all entities, and each owner signed on behalf of his or her respective entity, while the CEO of New executed the agreements on behalf of New. The quoted language is merely stock verbiage confirming that the individual signing the settlement agreement is authorized by the settling entity (a subcontractor, not the plaintiff) to execute the agreement on behalf of that entity (the subcontractor, not the plaintiff).6 The defendants' remarkable suggestion that the quoted provision warrants the plaintiff's approval of a settlement to which the defendants concede it was not a party, (Doc. 35 at 8), is nothing short of untenable.
The defendants submit an affidavit from New's CEO for the proposition that New reserves the right to collect the judgment from the subcontractors if it deems the terms of the settlement agreement to have been breached. (Doc. 32-11). The defendants identify no possible basis for such action other than their misguided reliance on the authority clause discussed above. Nor do they explain how New could with impunity violate the explicit judicial prohibition oncollection from the subcontractors as reflected in the judgment, or how such extra-legal action could support a claim for bad faith failure to settle.
In any event, all of the defendants' arguments focus on future "possibility." (Doc. 35 at 8). As noted, under Alabama law a claim for bad faith failure to settle cannot accrue before the insured is subject to a final judgment that the insured will have to pay. Because the subcontractors are not now, and have never been, subject to such a final judgment, no such cause of action has accrued.
Alabama law recognizes two forms of bad faith: "normal" and "abnormal." These are not two torts but a single...
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