Stanton v. State Farm Fire and Cas. Co., Inc., No. Civ 99-1033.

• Court: U.S. District Court — District of South Dakota
• Writing for the Court: Kornmann
• Citation: 78 F.Supp.2d 1029
• Parties: Roger STANTON and Diane Stanton, Plaintiff, v. STATE FARM FIRE AND CASUALTY COMPANY, INC., Defendant.
• Decision Date: 27 December 1999
• Docket Number: No. Civ 99-1033.

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78 F.Supp.2d 1029 Roger STANTON and Diane Stanton, Plaintiff,
v.
STATE FARM FIRE AND CASUALTY COMPANY, INC., Defendant. No. Civ 99-1033. United States District Court, D. South Dakota, Northern Division. December 27, 1999.

Lee A. Schoenbeck, Schoenbeck Law, Watertown, SD, for plaintiff.

John E. Simko, Jr., Woods, Fuller, Shultz & Smith P.C., Sioux Falls, SD, for defendant.

ORDER DENYING MOTION TO DISMISS

KORNMANN, District Judge.

INTRODUCTION

[¶ 1] Roger and Diane Stanton ("Stantons"), residents of Watertown, Codington County, South Dakota, owned a building housing a restaurant which was insured by a standard flood insurance policy ("SFIP") issued by State Farm Fire and Casualty Company, Inc. ("State Farm") in its name. Stantons suffered damage to their building as a result of the substantial flooding which took place in Northeastern South Dakota in the spring of 1997. Dakota Claims Service¹ of Aberdeen, South Dakota, adjusted the Stantons' claims and State Farm offered Stantons a settlement of all their claims. Stantons were not satisfied

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with the settlement offer as to their claims and instituted an action in Circuit Court in Codington County, South Dakota, alleging that they were entitled to recover under the policy and that State Farm had breached its duty of good faith and fair dealing and intentionally inflicted emotional distress on Stantons.² Stantons seek as damages their claimed pecuniary loss plus interest, punitive damages, and attorney fees. State Farm removed this action to Federal Court, pursuant to 28 U.S.C. § 1446(a), and filed a motion to dismiss. The basis of the motion to dismiss is State Farm's assertion that Stantons' state law claims are preempted by the National Flood Insurance Act of 1968 ("NFIA"), 42 U.S.C. § 4001 et seq.

[¶ 2] It is appropriate at this juncture to examine what claims might be viable under South Dakota law, given the allegations of Stantons. The request for attorney fees would be governed by SDCL 58-12-3 but only to the extent that recovery for damages is sought under the policy. No fees could be allowed as to any cause of action sounding in tort. Stantons would have to prove that State Farm refused to pay the full amount of the loss and that such refusal was "vexatious or without reasonable cause." There is apparently no possibility that FEMA could be held liable for attorney fees.

[¶ 3] As to the claim for breach of contract, i.e. refusal to pay under the policy, SDCL 21-2-1 would govern. FEMA is apparently obligated to indemnify State Farm for what was due under the express terms of the policy. What is due under the policy itself is to be determined under federal common law principles. Stantons allege that the failure to properly adjust the claim and the failure of State Farm to pay under the policy caused them loss of business. Such a claim could, in the language of the statute, be used to compensate Stantons for "the amount which will compensate *** for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom." Again, there is apparently no possibility that FEMA could be held liable for such a claim since the SFIP does not cover business interruption losses.

[¶ 4] There is also apparently no possibility that FEMA could be liable for punitive damages. SDCL 21-3-2 tells us that only in an "action for the breach of an obligation not arising from contract" may punitive damages be awarded. An action for breach of the insurance policy obviously does not allow the recovery of punitive damages. Stoner v. State Farm Mut. Automobile Ins. Co., 780 F.2d 1414, 1419 (8th Cir.1986); Thu v. American Family Ins. Co., 292 N.W.2d 109, 110 (S.D.1980). Under the statute, it is also clear that, even in a cause of action arising in tort, punitive damages are not recoverable unless State Farm was "guilty of oppression, fraud, or malice, actual or presumed, *** committed intentionally or by willful and wanton misconduct, in disregard of humanity ***." Stantons have alleged breach of the implied covenant of good faith and fair dealing. The Court has read a number of cases, including Garrett v. BankWest, 459 N.W.2d 833 (S.D.1990), High Plains Genetics Research, Inc. v. JK Mill-Iron Ranch, 95 SDO 349, 535 N.W.2d 839, Swanson v. Sioux Valley Emp. Electric Ass'n., Inc., 95 SDO 447, 535 N.W.2d 755, Matter of Cert. of a Question of Law, 399 N.W.2d 320 (S.D.1987), Nelson v. WEB Water Dev. Assoc., 507 N.W.2d 691 (S.D. 1993), Isaac v. State Farm Auto. Ins. Co., 94 SDO 874, 522 N.W.2d 752, Grynberg v. Citation Oil & Gas Corp., 1997 SD 121, 573 N.W.2d 493, and Stene v. State Farm Mutual Auto. Ins. Co., 1998 SD 95, 583 N.W.2d 399. Stene tells us, relying in part on Matter of Cert. of a Question of Law, supra, that a violation of State Farm's "duty of good faith and fair dealing constitutes a tort, even though it is also a breach of contract." Id. at 322. For the tort to

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exist, there must be an absence of a reasonable basis for denial of the policy benefits or a failure to comply with a duty under the insurance contract. There must be knowledge on the part of State Farm or reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs submitted by Stantons. Obviously, State Farm has the right to challenge claims which are fairly debatable. They have no obligation to "roll over and play dead." Again, there appears to be no possibility that FEMA has any interest as to a claim that State Farm breached the its duty of good faith and fair dealing. The only significance of the claim for breach of the duty of good faith and fair dealing is that such tort claim may open the door for the recovery of punitive damages against State Farm under the limitations as explained above.

[¶ 5] Finally, Stantons have alleged a claim for intentional infliction of emotional distress. This claim and the requirements for a prima facie case are also discussed in Stene. FEMA would apparently have no interest as to this claim.

DECISION

[¶ 6] The District Court must accept the allegations of the complaint as true when considering a Rule 12(b) motion to dismiss. Hafley v. Lohman, 90 F.3d 264, 266 (8th Cir.1996). Dismissal under Rule 12(b)(6) is appropriate only when it appears beyond doubt that a plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Dover Elevator Co. v. Arkansas State Univ., 64 F.3d 442, 445 (8th Cir.1995). When considering a motion to dismiss, the district court must construe the complaint liberally and assume all factual allegations to be true. Whisman ex rel. Whisman v. Rinehart, 119 F.3d 1303, 1308 (8th Cir.1997).

[¶ 7] State Farm contends that Stantons' claims are preempted by the NFIA. Stantons assert their claims are not preempted, based upon a 1981 amendment to the NFIA found at 42 U.S.C. § 4081(c). The issue of federal preemption is one of law for the court to decide. This Court has previously discussed the standards in considering a claim of preemption in Symens v. Smithkline Beecham Corp., 1997 DSD 29, 19 F.Supp.2d 1062 (D.S.D.1997)³:

The United States Supreme Court has "recognized that the Supremacy Clause, U.S. Const., Art. VI, may entail preemption of state law either by express provision, by implication, or by a conflict between federal and state law." New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins., 514 U.S. 645, 654, 115 S.Ct. 1671, 1676, 131 L.Ed.2d 695 (1995); Freightliner Corp. v. Myrick, 514 U.S. 280, 287, 115 S.Ct. 1483, 1487, 131 L.Ed.2d 385 (1995). The Eighth Circuit recognizes an additional method of preemption where the subject matter of the legislation concerns "a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject." Heart of America Grain Inspection Service, Inc. v. Missouri Department of Agriculture, 123 F.3d 1098, 1101-04 (8th Cir. 1997) (citations omitted). The Eighth Circuit has characterized the exceptions as follows:

Preemption traditionally comes in four "flavors": (1) "express preemption," resulting from an express Congressional directive ousting state law (Morales v. Trans World Airlines, Inc., 504 U.S. 374, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992)); (2) "implied preemption," resulting from an inference that Congress intended to oust state law in order to achieve its objective (Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941)); (3) "conflict preemption," resulting from the operation of the Supremacy Clause when federal and state law actually conflict, even when Congress says nothing about it (Florida Lime & Avocado Growers, Inc. v. Paul, 373

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U.S. 132, 143, 83 S.Ct. 1210, 1218, 10 L.Ed.2d 248 (1963)); and (4) "field preemption," resulting from a determination that Congress intended to remove an entire area from state regulatory authority (Fidelity Fed. Sav[ing]s & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982)).

Kinley Corp. v. Iowa Utilities Bd., Utilities Div., Dept. of Commerce, 999 F.2d 354, 358 n. 3 (8th Cir.1993).

The ultimate touchstone of statutory preemption is congressional intent. Medtronic, Inc. v. Lohr, 518 U.S. 470, 483-84, 116 S.Ct. 2240, 2250, 135 L.Ed.2d 700 (1996); Kinley Corp. v. Iowa Utilities Bd., 999 F.2d 354, 357 (8th Cir.1993). "In all preemption cases ... we `start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.'" Medtronic v. Lohr, 518 U.S. at 484-85, 116 S.Ct. at 2250 (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947)). "The historic police powers of the State include the regulation of matters of health and safety." De Buono v. NYSA-ILA Medical and Clinical...