Selective Ins. Co. of S.C. v. Sela
| Decision Date | 27 November 2018 |
| Docket Number | Case No. 16-CV-4077 (PJS/SER) |
| Citation | 353 F.Supp.3d 847 |
| Parties | SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, Plaintiff/Counter-Defendant, v. Amit SELA, Defendant/Counter-Claimant. |
| Court | U.S. District Court — District of Minnesota |
Kristi K. Brownson, Aaron M. Simon, Lindsey A. Streicher, and Olivia M. Cooper, BROWNSON NORBY, PLLC, for plaintiff/counter-defendant.
Christopher H. Yetka, Christopher L. Lynch, and Patricia E. Volpe, BARNES & THORNBURG, LLP, for defendant/counter-claimant.
Patrick J. Schiltz, United States District JudgeDefendant/counter-claimant Amit Sela was insured under a homeowner's policy issued by plaintiff/counter-defendant Selective Insurance Company of South Carolina ("Selective"). In June 2015, Sela's property was damaged by a hailstorm, and Sela sought to be indemnified by Selective. After an investigation, Selective denied Sela's claim on grounds of fraud. Specifically, Selective found that Sela had lied when he claimed that certain property had been damaged only by the June 2015 hailstorm when, in fact, that property had also been damaged by an earlier hailstorm—a hailstorm that had occurred before Sela was insured by Selective. After Sela contested Selective's findings, Selective brought this action, seeking a declaration that it is not liable to Sela. Sela filed an answer and a counterclaim, seeking indemnification for his losses.
Sela has now moved for leave to amend his counterclaim to add a claim under Minn. Stat. § 604.18 (" § 604.18") for bad-faith denial of insurance benefits. That statute forbids the insured from making a bad-faith claim in his initial pleading, but instead requires the insured to later move for leave to amend his pleading to add a bad-faith claim. The insured's motion must be accompanied by one or more affidavits establishing the factual basis for the bad-faith claim, and the insurer may submit affidavits in opposition to the motion. A court may not grant the motion unless the court finds, on the basis of the affidavits, that the insured has established a prima facie case of bad faith. See § 604.18, subd. 4(a).
Sela's motion for leave to amend raises two difficult questions: First, in deciding whether Sela should be given leave to amend his counterclaim to add a bad-faith claim, should this Court apply § 604.18, or should this Court instead apply the Federal Rules of Civil Procedure ()? And second, should Sela's motion for leave to amend be granted?
In an April 26, 2018 order, Magistrate Judge Steven E. Rau found that the procedural requirements of § 604.18 do not govern in federal court—and, applying the far less demanding requirements of the Federal Rules, Judge Rau found that Sela's motion for leave to amend should be granted. Selective now objects to both of Judge Rau's conclusions. Specifically, Selective argues that Judge Rau should have applied § 604.18—and that, under either § 604.18 or the Federal Rules, Sela should not have been given leave to amend.
The standard by which this Court should review Judge Rau's order is unclear. A motion for leave to amend a pleading is a nondispositive motion, and typically, a magistrate judge's ruling on a nondispositive motion will be reversed only if it is "clearly erroneous or contrary to law." 28 U.S.C. § 636(b)(1)(A) ; Fed. R. Civ. P. 72(a). But district judges in this District have held that, when a magistrate judge denies leave to amend a pleading because the proposed amendment would be futile, the magistrate judge's ruling is reviewed de novo. See, e.g., Magee v. Trs. of Hamline Univ. , 957 F.Supp.2d 1047, 1062 (D. Minn. 2013). The basis for this exception is not entirely clear, however, and thus it is difficult to know whether this exception is also meant to apply to a decision of a magistrate judge to grant leave to amend because the proposed amendment would not be futile. The Court will err on the side of caution and conduct a de novo review.1
Based on that de novo review, the Court overrules Selective's objection and grants Sela leave to amend his counterclaim. The Court agrees with Judge Rau that the pleading requirements imposed by § 604.18 do not apply in federal court. The Court does not agree with the reasons given by Judge Rau for permitting Sela to amend his counterclaim under the Federal Rules. But given the unusual posture of this case, the Court will nevertheless permit Sela to bring his bad-faith claim, and the Court will address any problems with that claim on motion for summary judgment.
Sela owns a large house and other property in Minnetonka, Minnesota. Am. Ans. ¶¶ 3, 8.2 Sela's property was damaged by a hailstorm in June 2010. Am. Ans. ¶ 12(a); ECF No. 92-4 at 49. At the time, Sela's property was insured by Lexington Insurance Company ("Lexington"). ECF 92-4 at 49-50. Sela filed a claim with Lexington, and Lexington indemnified Sela and his then-wife in the amount of $510,797.23. See ECF No. 26-4 at 18-19. Sela used part of the money to repair or replace some—but not all—of the damaged property. Am. Ans. ¶ 12. Sela apparently pocketed the remaining part of the money.
Sela later switched insurance providers, and from July 2014 to July 2015, Sela was insured under a homeowner's policy issued by Selective. Am. Ans. ¶ 51; ECF No. 17-1 at 2-3. That policy covered the house, garage, and other structures, as well as personal property. Am. Ans. ¶ 52; ECF No. 17-1 at 3, 11-14. The policy also contained two provisions that are particularly relevant to Sela's motion for leave to amend his counterclaim:
First, the Selective policy contained an Anti-Fraud Provision, which essentially eliminates coverage when any insured has engaged in any act of fraud. Specifically, the Anti-Fraud Provision provides as follows:
Second, the Selective policy contains an Appraisal Provision that applies when the parties agree that a loss is covered, but disagree about the amount that Selective must pay in connection with the loss. ECF No. 17-1 at 24. The Appraisal Provision provides as follows:
If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire .... The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of the loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss.
On June 29, 2015, Minnetonka was hit with another hailstorm, and once again Sela's property was damaged. Am. Ans. ¶ 53; ECF No. 73-5 at 3. Sela submitted a claim to Selective on July 8, 2015. Am. Ans. ¶ 55; ECF No. 73-5 at 3. In response, Selective promptly sent an independent claims adjuster to inspect the damage. ECF No. 73-5 at 3, 6-7. The adjuster spoke with Sela, took dozens of photos, and wrote a report, which he submitted to Selective's staff adjuster, Dave Clark. ECF No. 73-5 at 6-7, 8-79.
Several days later, Selective received an anonymous letter that accused Sela of submitting a fraudulent insurance claim. The letter also accused Sela of submitting fraudulent insurance claims in the past, and the letter provided information about the claim that Sela had submitted to Lexington following the 2010 hailstorm. ECF No. 26-6 at 3. After receiving the letter, Selective referred the matter to its Special Investigative Unit ("SIU"), which began an investigation. See ECF No. 92-2 at 9; ECF No. 92-4 at 2. Charlene Pack (one of Selective's fraud investigators) and Clark (the staff adjuster) spoke about Sela's claim and determined they needed more information from Sela and Lexington before they could make a decision about coverage. See ECF No. 92-4 at 16. Clark then personally inspected Sela's property on August 5, 2015. ECF No. 92-4 at 19.
Over the next several months, the SIU continued its fraud investigation and continued gathering information from and about Sela. ECF No. 92-4 at 21-25. In December 2015, Sela submitted a sworn proof of loss and supporting documentation. ECF No. 92-4 at 30. Sela claimed that he had suffered nearly $750,000 in losses as a result of the hailstorm. ECF No. 16-3 at 5. Selective reviewed the proof of loss and noted that some of the supporting documentation was "very questionable" and that the paperwork was missing "vital information" needed to resolve the claim. ECF No. 92-4 at 34. In January 2016, Pack and Clark agreed to request an examination of Sela under oath because of uncertainty surrounding Sela's prior hail-damage claim, the SIU's inability to verify what Lexington had paid to Sela, and the lack of confirmation about what Sela repaired or replaced after the 2010 storm. ECF No. 92-4 at 35-36. Selective continued to request (and receive) more information regarding Sela's claim. ECF No. 92-4 at 35-44.
On February 4, 2016, Selective notified Sela that it would not accept his proof of loss because Sela had not provided all of the requested documentation. ECF No. 26-2 at 2. Sela disputed that his proof of loss was inadequate. ECF No. 26-2 at 2. While the parties argued about the adequacy of Sela's documentation, Selective took further steps to investigate Sela's claim. In April 2016, Selective examined Sela under oath. ECF No. 92-4 at 58. Selective also retained an independent expert (Collins Ofori-Amanf) to inspect Sela's home and aid in the fraud investigation. See ECF No. 74-1 at 312-30. Ofori-Amanf inspected Sela's home, conducted an...
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