Haney v. Am. Family Mut. Ins. Co.

• Decision Date: 03 February 2017
• Docket Number: CIV 16–4113
• Citation: 223 F.Supp.3d 921
• Parties: Steve HANEY, Plaintiff, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of South Dakota

223 F.Supp.3d 921

Steve HANEY, Plaintiff,

v.AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Defendant.

CIV 16–4113

United States District Court, D. South Dakota, Southern Division.

Signed February 3, 2017

Derek A. Nelsen, Eric T. Preheim, Fuller & Williamson, LLP, Sioux Falls, SD, for Plaintiff.

Steven J. Morgans, Myers Billion, LLP, Sioux Falls, SD, Ross W. Johnson, Faegre Baker Daniels LLP, Des Moines, IA, for Defendant.

MEMORANDUM OPINION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS

Lawrence L. Piersol, United States District Judge

Pending before the Court is Defendant's Motion to Dismiss Count II (bad faith) and Count III (punitive damages) pursuant to Federal Rule of Civil Procedure 12(b)(6) failure to state a claim for which relief can be granted. Doc. 8. The Court has considered all filings and for the following reasons, Defendant's motion is denied.

BACKGROUND

In June of 2014, a hailstorm damaged numerous homes and other property in and around Sioux Falls, South Dakota. Soon thereafter, Plaintiff Steve Haney ("Haney") submitted a claim for hail damage sustained on his home to Defendant, American Family Mutual Insurance Company ("American Family"). Particularly, Haney had sustained damage to his shake shingle roof.

In July of 2014, Adam Palace, an authorized agent of American Family, inspected Haney's home. Based on that inspection, Mr. Palace concluded that there was little to no hail damage to the roof and listed $3,890.15 as a reasonable amount to repair the damage. Two years later, in July of 2016, Haney provided American Family with a report from a roofer that indicated that there was hail damage to the entire roof and that $68,259.61 was needed to repair the damage.

On August 3, 2016, American Family conducted another inspection of Haney's roof and found that hail damage was evident on all the slopes of the roof. On August 8, 2016, American Family issued a letter to Haney indicating that nothing additional would be paid on the claim.

On August 11, 2016, Haney filed a lawsuit in federal court against American Family alleging breach of contract, bad faith, punitive damages, and vexatious refusal to pay. American Family filed a Motion to Dismiss Count II (bad faith) and Count III (punitive damages) pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Particularly, American Family argues that Haney's bad faith claim and request for punitive damages fail to satisfy the federal pleading requirements set forth in Rules 9(b) and 8(a)(2) of the Federal Rules of Civil Procedure, and thereby Haney has failed to state a claim upon which relief can be granted.

LEGAL STANDARD

In considering a motion to dismiss under Rule 12(b)(6), the factual allegations of a complaint are assumed true and construed in favor of the plaintiff, "even if it strikes a savvy judge that actual proof of those facts is improbable ...." Bell Atlantic Corp v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), cited with approval in Data Mfg., Inc. v. United Parcel Serv., Inc. , 557 F.3d 849, 851 (8th Cir. 2009). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘ entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do [.]" Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (internal citations omitted). The complaint must allege facts, which, when taken as true, raise more than a speculative right to relief. Id. (internal citations omitted), see also Benton v. Merrill Lynch & Co, Inc. , 524 F.3d 866, 870 (8th Cir. 2008).

Although a plaintiff, in defending a motion under Rule 12(b)(6), need not provide specific facts in support of its allegations, Rule 8(a)(2)"requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief." Twombly , 550 U.S. at 555 n.3, 127 S.Ct. 1955 (further explaining that "[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing not only ‘fair notice’ of the nature of the claim, but also ‘grounds' on which the claim rests."); see also Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ("the pleading standard Rule 8 announces does not require ‘detailed factual allegations,’ but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation"). Rule 8(a)(2) is satisfied "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. As such, a claim must have facial plausibility to survive a motion to dismiss. Id. Determining whether a claim has facial plausibility is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679, 129 S.Ct. 1937.

When a complaint contains allegations of fraud or mistake, Rule 9(b) requires a party to "state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b). " ‘Circumstances' include such matters as the time, place and contents of false representations, as well as the identity of the person making the representation and what was obtained or given up thereby." Bennett v. Berg , 685 F.2d 1053, 1062 (8th Cir. 1982). "Because one of the main purposes of the rule is to facilitate a defendant's ability to respond and to prepare a defense to charges of fraud, conclusory allegations that a defendant's conduct was fraudulent and deceptive are not sufficient to satisfy the rule." Commercial Prop. Invs, Inc. v. Quality Inns Int'l, Inc. , 61 F.3d 639, 644 (8th Cir. 1995) (internal citations omitted).

DISCUSSION

In a two-part argument, American Family claims (1) that Haney's bad faith claim, as a species of fraud, must comport with the heightened pleading requirements of Rule 9(b), and if not, (2) that Haney's bad faith claim fails to satisfy the notice pleading standards under Rule 8(a)(2). As a federal court sitting in diversity,¹ the Court will apply the substantive law of South Dakota to resolve the above-stated issues. See Erie R. Co. v. Tompkins , 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) (finding that federal courts apply state substantive law and federal procedural law).

COUNT II: BAD FAITH

1. Whether South Dakota first-party bad faith is subject to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure

"[B]ad faith litigation can be classified as either first—or third-party bad faith." Hein v. Acuity , 2007 S.D. 40, ¶ 9, 731 N.W.2d 231, 235 ; see also Champion v. United States Fid. & Guar. Co. , 399 N.W.2d 320 (S.D. 1987) (the case in which the Supreme Court of South Dakota first recognized a cause of action for insurance bad faith). "First-party 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. (citing Gruenberg v. Aetna Ins Co. , 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, 1036 (1973). In order to prove a first-party bad faith claim, an insured must show (1) "an absence of a reasonable basis for denial of policy benefits [,]" and (2) "the knowledge or reckless disregard of a reasonable basis for denial .... Champion , 399 N.W.2d at 324. "[T]he knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is reckless disregard or a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured." Id

While South Dakota law recognizes a cause of action for insurance bad faith, it has not directly addressed whether first-party bad faith is akin to fraud and thus subject to the heightened pleading requirements of Rule 9(b). Although American Family argued in its initial memorandum that Kunkel v. United Sec Ins Co of N J , 84 S.D. 116, 168 N.W.2d 723 (1969) and Jennings v. Jennings , 309 N.W.2d 809 (S.D. 1981) stood for the proposition that "under South Dakota law, ‘bad faith is a species of fraud[,]’ " the Court disagrees. Instead, the Court finds that Kunkel , Cernocky v. Ind. Ins Co. of North Amer., 69 Ill.App.2d 196, 216 N.E.2d 198 (1966) (cited in Kunkel ), and Hilker v. Western Auto Ins Co of Ft Scott, Kan. , 204 Wis. 1, 235 N.W. 413 (1931) (cited in Cernocky ) establish that Rule 9(b) pleading requirements do not apply to first-party bad faith claims.

In Kunkel ,² while the court discusses comparisons between fraud and bad faith, the court does not hold that they are equal or that a plaintiff must show fraud in order to prevail on a bad faith claim. Kunkel , 168 N.W.2d at 725–26. Rather, the court equates bad faith and negligence, finding that "the character and extent of the insurer's negligence are factors to be considered by the trier of fact in determining if there is bad faith." Id at 726. Additionally, the Kunkel court cites to Cernocky —"where the court distinguished fraud and bad faith." Id at 732. In Cernocky , the court opined that allegations of fraud, negligence, or bad faith may render an insurance company liable. Cernocky , 216 N.E.2d at 204. In so doing, the court found that while some jurisdictions equate bad faith with fraud, here "[t]he ‘fraud’ standard [was] not required." Id at 205, 216 N.E.2d 198. The Cernocky court also cited to Hilker for the proposition that,

Terms which are not strictly convertible or synonymous have been used by different courts to indicate the same thing. Negligence has been used by some courts to mean the same thing that other courts have designated as bad faith. Bad faith, especially, is a term of variable significance and rather broad application. Generally speaking, good faith means being faithful to one's duty or obligation; bad faith means being recreant thereto. In order to understand what is meant by

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