Sustainable Sea Prods. Int'l v. Am. Empire Surplus Lines Ins. Co.
| Docket Number | Civil Action 3:21cv697 |
| Decision Date | 19 August 2022 |
| Parties | SUSTAINABLE SEA PRODUCTS INTERNATIONAL, LLC, et al., Plaintiffs, v. AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY & GREAT AMERICAN INSURANCE COMPANY, Defendants. |
| Court | U.S. District Court — Eastern District of Virginia |
Sustainable Sea Products International, LLC ("SSPI"),[1] operates a seafood processing plant in Richmond, Virginia. To protect its business, SSPI entered a contract for property insurance (the "Contract") with American Empire Surplus Lines Insurance jCompany ("AESLIC"), effective April 10, 2020. On June 5 2020, a fire destroyed the Richmond plant, SSPFs only facility. A protracted dispute over the extent of AESLIC's contractual liability followed and forms the basis for this suit.
SSPFs amended complaint contains four counts: breach! of contract by AESLIC (Count I); "additional consequential contract damages against AESLIC resulting from [AESLIC's and its corporate sibling Great American Insurance Company's ("GA") ("the defendants")] contractual breaches which also constitute unfair claim settlement practices pursuant to Virginia Code §38.2-510" (Count II); "material misrepresentations amounting to fraud" against GA (Count III); and declaratory judgment (Count IV). (ECF No. 9, at 23-27.) In Count IV, SSPI seeks two things: (1) a declaration that AESLIC has waived or is estopped from requiring SSPI to engage in appraisal under the Contract and (2) a declaration that SSPI may recover in full all uninsured losses before AESLIC may recover any amount in subrogation. SSPI also requests attorneys' fees based on the bad faith of the defendants.
The defendants each move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF Nos. 11, 16.) AESLIC asks the Court to dismiss Counts. II, III, IV, and SSPI's request for attorneys' fees. AESLIC also asks the Court to compel the parties to participate in appraisal. GA asks the Court to dismiss Count III, the only count that SSPI brings against GA.
The Court will grant in part and deny in part AESLIC's motion. Specifically, the Court will dismiss Count II against AESLIC because Virginia Code § 38.2-510 does not create a private right of action. The Court will also dismiss Count III as against AESLIC because SSPI asserts Count III only against GA. Because the Court will direct AESLIC and SSPI to participate in the appraisal process and stay the case pending completion of the appraisal,[2] the Court will deny the portion of Count IV that requests a declaration prohibiting compelled appraisal. The Court will allow the remainder of Count IV to proceed against AESLIC because Virginia law permits the requested relief should SSPI prevail on the merits of Count I. Finally, the Court will allow SSPI's request for attorneys' fees to survive but will stay discovery regarding the defendants' bad faith in handling SSPI's claim until after a determination has been made on the issue of AESLIC's breach of contract.
As for GA's motion to dismiss, the Court will deny the motion because SSPI sufficiently pleads a claim for fraud against GA.
SSPI operates a seafood processing plant at 1508 Brook Road in Richmond, Virginia.[4](ECF No. 9 ¶ 4.) This Richmond facility is SSPI's only location. In late 2017, SSPI "purchased and subsequently had professionally installed a self-contained fry line" in its Richmond plant. (Id. ¶ 11.) The installation cost nearly $1 million.
The defendants are both subsidiaries of American Financial Group ("AFG"). AESLIC is a surplus lines insurance company.[5] GA provides claim handling services to AESLIC.
SSPI and AESLIC entered the Contract for SSPI's Richmond facility, effective April 10, 2020. The Contract contains a provision allowing either party to demand an appraisal in the event of a dispute over the value of a covered loss. The Contract also contains a protective safeguards provision that requires SSPI to install and maintain automatic fire extinguishing equipment as a condition to coverage.
A fire ravaged SSPI's Richmond facility on June 5, 2020. SSPI reported the fire and resulting losses to AESLIC and GA the very next day. In the property insurance industry, it is customary "for the insurer to provide the insured with periodic substantial financial 'advances'... long before the fire related damage to the building and equipment and loss of income is complete, or even fully assessed." (ECF No. 9 ¶ 40.) "On or about June 7, 2020, GA adjuster Mark Miller contacted SSPI and offered SSPI an advance[,] asking [SSPI] to simply identify how much was initially needed and to provide SSPI's wiring instructions for the payment." (Id. ¶ 42.) "GA confirmed the offer of an advance in writing on June 8,2020." (Id.)
In the days following the promise of an advance payment, the defendants requested extensive documentation from SSPI. SSPI began providing the requested documents to the defendants on June 10,2020. By June 16,2020, the promised advance had not arrived, and SSPI grew worried about the claim. That same day, SSPI contacted its insurance broker. The broker "advised [SSPI] that representatives of GA and AESLIC were now refusing to provide any advance and would pay nothing until after SSPI submitted its claim." (Id. ¶ 48.) SSPI responded by "retaining] coverage counsel and advis[ing] GA and AESLIC to direct all further contact to such counsel." (Id. ¶50.)
Eventually, "SSPI. .. learned that AESLIC and GA had decided to deny any advances to [SSPI] within a week of the June 5 loss, and without any independent representation." (Id. ¶ 51.) (Id. ¶ 52.) SSPI responded through counsel that same day, "noting [its] prior production of. . . the information requested" and requesting "that the parties agree to confidentiality regarding SSPI's submissions." (Id. ¶54.) GA used information gained through SSPI's cooperation to identify and pursue third parties GA suspected to have caused or contributed to the fire.
On June 23, 2020, SSPI again requested confidentiality and indicated its willingness to transfer additional documents. The defendants responded after business hours, quoting without any context the Contract's protective safeguards and cooperation provisions, but failing to "address SSPI's repeated [re]quests for confidentiality." (Id. ¶ 59.) Later that same evening, the defendants' outside counsel Robert Reverski "sent a second correspondence to SSPI's counsel[,] again quoting policy provisions and falsely accusing SSPI of failing to cooperate with the [pending] site inspection by misrepresenting SSPI's position." (Id. ¶60.) At this point, SSPI had not received an explanation for why the defendants had cited the protective safeguard provision, leading SSPI to believe the defendants accused SSPI of bearing some responsibility for the June 5 fire.
SSPI responded through counsel on June 24, 2020, reiterating its ongoing efforts to fully cooperate and challenging the defendants' assertion that SSPI failed to cooperate with the defendants' subrogation counsel, Matthew McLean. "McLean never disputed that SSPI had cooperated, and [the defendants] never acknowledged [their] error or corrected [their] misrepresentation." (Id. ¶ 62.)
A joint investigation of the fire site took place on June 24-25,2020. The defendants invited third parties with potential liability to participate in the inspection. "[C]ounsel for both SSPI and [the defendants] jointly prepar[ed] a protocol for the inspection . . . and the June 24-25, 2020[] site inspection proceeded without incident." (Id. ¶ 56.) Thirty-One people, including fire consultants, forensic engineers, electricians, attorneys, and adjusters attended the joint inspection. The inspection suggested that "the fire may [have been] linked to the installation of the vent system by one or more of the contractors who performed the install." (Id. ¶ 69.)
(Id. ¶ 64.) Indeed, subrogation counsel for the defendants indicated to SSPI's insurance broker that the defendants had obtained evidence "to exculpate [SSPI] from liability."[6] (Id. ¶ 64)
"But [the defendants] continued to assert a coverage defense based on the Protective Safeguards Endorsement until at least August 25,2020." (Id. ¶ 67.) They did so even while conducting a subrogation investigation into third party liability. Between June 29 and August 20, 2020, SSPI incurred "tens of thousands of dollars in legal fees and other response costs and additional insured and uninsured losses" while addressing the protective safeguards defense. (Id. ¶ 108.) "During this time and as a result of [the defendants'] conduct, SSPI lost key employees, and was forced to lay off others, and did not know whether [the business] would be able to survive." (Id. ¶ 44.)
AESLIC moves to dismiss Counts II—IV of SSPI's amended complaint, as well as SSPI's request for attorneys' fees under Virginia law for bad faith claims handling. For the reasons set forth below, the Court will grant AESLIC's motion to dismiss Counts II and III. The Court will grant in part and deny in part AESLIC's motion as to Count IV. The Court will allow SSPI's request for attorneys' fees to survive but will stay discovery regarding the defendants' bad faith in handling SSPI's claim. Finally, the Court will direct AESLIC and SSPI to participate in the appraisal process.
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