Opinion
CIVIL ACTION NO. 3:18-cv-153
11-14-2019
IRONSHORE SPECIALTY INSURANCE COMPANY, Plaintiff, v. CONEMAUGH HEALTH SYSTEM, INC. and John O. Chan, M.D., Defendants.
Ronald P. Schiller, Michael R. Carlson, Pro Hac Vice; Hangley Aronchick Segal Pudlin & Schiller, Philadelphia, PA, for Plaintiff. H. M. Tepper, Kira N. Lum, Pro Hac Vice; Buchanan Ingersoll & Rooney PC, Philadelphia, PA, for Defendants.
Ronald P. Schiller, Michael R. Carlson, Pro Hac Vice; Hangley Aronchick Segal Pudlin & Schiller, Philadelphia, PA, for Plaintiff.
H. M. Tepper, Kira N. Lum, Pro Hac Vice; Buchanan Ingersoll & Rooney PC, Philadelphia, PA, for Defendants.
MEMORANDUM OPINION
KIM R. GIBSON, UNITED STATES DISTRICT JUDGE
I. Introduction
This lawsuit arises out of a dispute over the extent of the coverage of a professional liability insurance policy (the "Ironshore Policy"). Before the Court is Plaintiff Ironshore Specialty Insurance Company's ("Ironshore") Motion to Dismiss (ECF No. 47) Defendants Conemaugh Health System, Inc., and Dr. John O. Chan, M.D.'s (collectively, "Conemaugh") Counterclaim. (ECF No. 40.) This Motion is fully briefed (see ECF Nos. 48, 60, 64, 67, 68-1) and ripe for disposition. For the reasons that follow, the Court DENIES Ironshore's Motion.
II. Jurisdiction and Venue
This Court has jurisdiction over the action because the parties are diverse and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332.
Venue is proper in the Western District of Pennsylvania because a substantial part of the events giving rise to this action occurred in the Western District of Pennsylvania. 28 U.S.C. § 1391.
III. Factual and Procedural Background
The Court draws the following facts, which the Court accepts as true for purposes of deciding this Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6), from Conemaugh's Answer and Counterclaim (ECF No. 40) as well as Plaintiff's First Amended Complaint. (ECF No. 12.)
Ironshore's First Amended Complaint (ECF No. 12) and a number of other documents, including filings related to the instant Motion to Dismiss, were filed under seal because they reference a settlement agreement involving a minor. (See ECF Nos. 16, 18, 19, 22, 23, 25, 26, 28, 29, 40, 60.)
The factual and procedural background of this case is complex and extensive, and the Court recounts it in significant depth in order to provide necessary background. Ironshore issued the Ironshore Policy to Conemaugh Health System, Inc. and, through Conemaugh, one of its physicians, Dr. Chan. (Id. ¶ 1.) Ironshore filed the Complaint in this case after a jury returned a verdict of $47,033,579—which this Court subsequently remitted to roughly $19,000,000—in another lawsuit against Conemaugh.
Conemaugh's Counterclaim and Answer do not provide all necessary context, so the Court draws facts from the Complaint as needed to illustrate the dispute. Where the two conflict, the Court assumes that the allegations contained in the Answer and Counterclaim are true. See Gen. Motors Corp. v. New A.C. Chevrolet, Inc. , 263 F.3d 296, 324–25 (3d Cir. 2001). The Court will also draw from the insurance policy at issue as needed, as the pleadings embrace it and it is "integral to [and] explicitly relied upon in the [Counterclaim.]" See Wolfington v. Reconstructive Orthopaedic Assocs. II, P.C. , 935 F.3d 187, 195 (3d Cir. 2019).
That case is Harker v. Chan , No. 3:15-cv-277, 2015 WL 13801325 (W.D. Pa. filed Oct. 29, 2015)
A. The Ironshore Insurance Policy and Conemaugh's Other Insurance Policies
At the times relevant to this lawsuit, Conemaugh possessed several separate levels of liability insurance. (ECF No. 40 ¶69. ) Conemaugh purchased the following insurance policies from Coverys Specialty Insurance Company and ProSelect Insurance Company (collectively, "Coverys"): (1) ProSelect Primary HPL, Policy No. 2-25167HPL, with limits of $500,000 per claim and $2,500,000 in the aggregate; (2) ProSelect Primary Practitioners (MD), Policy No. 2-25167MD, with limits of $500,000 per claim and $1,500,000 in the aggregate; and (3) ProSelect First-Layer Excess Policy, with limits of $10,000,000 per claim and in the aggregate (collectively, the "Primary Policy"). (Id. ) The Primary Policy, which contained a first-layer excess policy, had a total coverage limit of $11,000,000 for medical malpractice liability coverage. (Id. )
Conemaugh's Answer and Counterclaim are contained within the same document and are not separately numbered. The first 62 paragraphs of Conemaugh's Answer and Counterclaim (ECF No. 40) are the Answer. The succeeding paragraphs supply the Counterclaim.
Excess insurance policies provide insurance coverage for claims that stretch above what is covered in a primary insurance policy, but are only activated once the primary policy has paid its coverage limits. For an overview of the differences between these types of insurance, see Insurance, Excess Insurance, and Reinsurance , Investopedia, https://www.investopedia.com/articles/personal-finance/081116/insurance-excess-insurance-and-reinsurance-whats-difference-all.asp (last updated Oct. 15, 2018).
The Primary Policy was effective for claims made against Conemaugh between January 1, 2014, and January 1, 2015. (Id. ¶ 70.) Conemaugh had an additional $1,000,000 in coverage under the Medical Care Availability and Reduction of Error Act ("MCare"), for a total Primary Policy limit of $12,000,000. (Id. ¶ 71.) In addition to the Primary Policy and MCare, Conemaugh also purchased the Ironshore Policy, a further excess insurance policy that covered claims that exceeded Conemaugh's underlying $12,000,000 coverage. (Id. ¶ 72.) Ironshore issued the Ironshore Policy to Conemaugh, and it was effective for claims made between January 1, 2014, and September 1, 2014. (ECF No. 40 ¶ 73.)
While the lawsuit was filed On October 29, 2015, the parties have not disputed that the Primary Policy would cover the claim at issue if Conemaugh met its terms and conditions. Accordingly, for purposes of this Motion, the Court will assume that the Primary Policy was in effect as of the filing of Harker .
The Court will similarly assume that the Ironshore Policy was in effect as of the filing of Harker , as no party has disputed this assumption. See note 6, supra .
The Ironshore Policy contained several provisions relevant to this lawsuit. First, the Ironshore Policy stated that Ironshore would pay claims in excess of the $12,000,000 threshold so long as Conemaugh followed the necessary conditions (the "Activation Clause"):
[Ironshore] shall pay on behalf of [Conemaugh] for loss, damages, settlements and defense expenses by reason of exhaustion of the limits of liability of the [Primary Policy] by the issuers of such [Primary Policy] and/or [Conemaugh], subject to: (1) the terms and conditions
of the Primary Policy (as submitted to [Ironshore] ), (2) the Limit of Liability stated in ITEM 3 of the Declarations, and (3) the terms and conditions of, and all endorsements attached to, this Policy
(Id. ¶ 74.) Second, the Ironshore Policy also contained a provision requiring Conemaugh to notify Ironshore of claims as a precondition to triggering the obligation to pay the claim (the "Notification Clause"):
As a condition precedent to any right to payment of [Conemaugh] under this Policy, [Conemaugh] shall give [Ironshore] written notice of: (1) any claim under the Underlying Insurance as soon as possible, but in no event later than required for reporting of claims under the Primary Policy; provided, that [Conemaugh] shall give [Ironshore] notice of any claim involving professional liability coverage as soon as practicable, but in no event later than ninety (90) days after the expiration of the Policy Period ...
(Id. ¶ 75.). The Ironshore Policy does not define the word "claim," but the Ironshore Policy allegedly followed the form of the Primary Policy, and the Primary Policy defines "claim" as "a written demand made or SUIT brought against an INSURED for DAMAGES." (Id. ¶ 76.)
A Follow Form Policy is an excess insurance policy that "follows," or incorporates, the same conditions and terms as the underlying primary policy. See Excess Liability "Follow Form" Policy , IRMI Glossary, https://www.irmi.com/term/insurance-definitions/excess-liability-follow-form-policy (last visited Oct. 16, 2019).
Finally, the Ironshore Policy required Conemaugh to allow Ironshore to participate in defending any claim against Conemaugh that might implicate the Ironshore Policy, even if the underlying insurance is not exhausted (the "Cooperation Clause"); if Ironshore elected to participate in defending a claim, Conemaugh was obliged to cooperate with Ironshore and "make available all such information and records" as Ironshore "may reasonably require." (ECF No. 2 at 7, Ironshore Policy § VII(B).)
The Court notes that Ironshore's recitation of the factual background of Harker , contained in its brief in support of its Motion to Dismiss (ECF No. 48), while drawn from Conemaugh's Counterclaim, neglects to mention any part of significant portions of the Counterclaim, apparently in an effort to marshal the facts to Ironshore's best advantage. Given that the Court must accept all well-pleaded factual allegations in the Counterclaim as true, the Court looks beyond Ironshore's selective recitation of the facts at all allegations provided in the Counterclaim. While the Court recognizes that counsel may present the facts in the light most favorable to clients, the Court disfavors incomplete and potentially misleading recitations of the facts that confuse the issues.
On October 29, 2015, Conemaugh and Dr. Chan, among others, were named as defendants in Harker v. Chan , No. 3:15-cv-00277, before this Court; the obligation to pay the verdict against Conemaugh and Dr. Chan in Harker provides the basis for the dispute in this case. (ECF No. 40 ¶¶ 78, 80.) The case was one that potentially triggered the Ironshore Policy, as Conemaugh believed that Harker involved a covered claim under the Ironshore Policy. (Id. ¶ 79.) The Harker Complaint pleaded that Conemaugh and Dr. Chan were responsible, as a result of negligent medical treatment, for the permanent disfigurement of a premature infant, GH, born on December 27, 2012. (Id. ¶ 80; see Harker , ECF No. 96 at 1.) 1. The Underlying Facts
At the time that Harker was filed, GH was a minor and so is referred to solely by her initials.
Any references to the record in Harker , the underlying case, will be to "Harker , ECF No. [X] at [Y]."
Harker arose from the allegation that Conemaugh, through Dr. Chan, had negligently treated GH, a prematurely born girl, by wrapping her head with an ACE bandage shortly after birth, causing permanent disfigurement to her face and scalp. ( Harker , ECF No. 96 at 1.) GH was born at Conemaugh Memorial Medical Center, one of Conemaugh's facilities, on December 27, 2012, and due to her premature birth status, physicians at Conemaugh placed her in the neonatal intensive care unit, under the care of Dr. Chan. (Id. at 2.)
While GH was under Dr. Chan's care, he observed swelling on her head, an apparently not uncommon finding for newborn babies; the standard treatment for the condition is generally either monitoring and observing the child, or a blood transfusion, depending on the cause of the swelling. (Id. at 3.) Dr. Chan, however, based upon his medical education, instructed a nurse to wrap GH's head with an ACE bandage, which remained on GH's head for almost two days. (Id. ) When a nurse removed the bandage, her head was bruised and swollen and had abrasions that oozed blood and serum. (Id. ) In addition, GH's head had necrotic tissue where the bandage had been wrapped. (Id. )
As a result, GH was transferred to Texas Children's Hospital in Houston, where her doctors noted that GH had lost "significant soft tissue," and had suffered "substantial hair loss." (Id. at 4.) GH's scalp was also oozing fat, and her skull was compromised; as a result, she has undergone several painful procedures and physical therapy, and will require multiple further surgeries and years of treatment, none of which will ever fully remedy the damage caused by the ACE bandage. (Id. at 4–5.)
2. Pre-Trial Communications Between Conemaugh and Ironshore
Less than a week after Harker 's filing, on November 5, 2015, Conemaugh gave Ironshore a copy of the Complaint, which Ironshore acknowledged the following day, noting that Conemaugh had "reported" the matter. (ECF No. 40 ¶¶ 81–82.) At the time Conemaugh reported Harker to Ironshore, Conemaugh expected that Coverys and Conemaugh's excess carriers, including Ironshore, would cover any verdict against Conemaugh in full. (Id. ¶ 83.)
On January 29, 2018, Conemaugh's Director of Clinical Risk Management, Denise Weinzierl, contacted Ironshore Claim Technical Analyst Cheryl Scott, who Ironshore had previously assigned to the Harker case, and notified Scott that Harker could potentially implicate the Ironshore Policy. (Id. ¶ 84.) Weinzierl suggested that Conemaugh could prepare a status report on Harker to more fully update Ironshore on the status of the case, as well as how a resolution might impact the Ironshore Policy. (Id. ¶ 85.) Either that day or the next, Weinzierl requested that Conemaugh's counsel, Michael Sosnowski, prepare a status report on the case for Ironshore (the " Harker Report"). (Id. ¶ 86.) The Harker Report, dated February 5, 2018, indicated that Conemaugh was likely to receive an unfavorable verdict, and estimated that liability would likely top out at or near Ironshore's coverage threshold of $12,000,000. (Id. ¶¶ 86, 94, 98, 99.) Conemaugh emailed the Harker Report to Scott on February 6, 2018, and stated that, due to Weinzierl's conversation with Scott, Conemaugh had prepared the Harker Report and was providing it to Ironshore. (Id. ¶ 89.)
However, on February 2, 2018, before Sosnowski completed the Harker Report, a second Claims Analyst at Ironshore, Connor Niessing, contacted Conemaugh, stated that he was in the process of completing a six-month review of "claims that have been reported to Conemaugh," acknowledged Weinzierl's contact to Scott regarding Harker , and told Conemaugh that Ironshore would be "opening a new file to follow future developments of [ Harker .]" (Id. ¶ 87.) On February 6, 2018, Conemaugh also provided Niessing with an update on previously reported cases that Conemaugh believed might implicate the Ironshore Policy, and attached a copy of the Harker Report. (Id. ¶ 90.) The Harker Report was a five-page, single-spaced letter that contained the following subsections: "Factual overview and plaintiffs' contentions," "Assessment of liability," "Damages at issue," "Valuation—estimated settlement and verdict ranges," and "Concluding assessment." (Id. ¶ 92.) Although Ironshore had previously worked with Coverys, Conemaugh's primary insurer, in settling claims, upon receiving the Harker report, Ironshore did not respond to the Harker report by contacting either Coverys or Sosnowski. (Id. ¶ 97.)
Sosnowski requested that Ironshore follow up with him after receiving the Harker Report, but Ironshore apparently failed to do so, though Conemaugh believed that Ironshore had followed up with Sosnowski and Coverys. (Id. ¶¶ 101–03.) On February 13, 2018, Ironshore contacted Conemaugh and informed Conemaugh that it had assigned a third claims professional, Richard Tatlock, to Harker . (Id. ¶ 104.) It is unclear whether Ironshore ever provided the Harker Report to Tatlock. (Id. ¶ 105.) The same day, Tatlock contacted Conemaugh stating that he had "set up a file" for Harker , the third time Ironshore had told Conemaugh that it was creating a file for Harker . (Id. ¶¶ 106–07.) After Tatlock contacted Conemaugh, Conemaugh instructed Sosnowski to copy Tatlock on correspondence related to Harker . (Id. ¶ 108.) Conemaugh then informed Tatlock that it had directed Sosnowski to copy Ironshore on Harker correspondence, and Conemaugh provided Tatlock with Sosnowski's contact information. (Id. ¶ 109.) Sosnowski acknowledged Conemaugh's direction to copy Tatlock on Harker correspondence. (Id. ¶ 110.)
On March 6, 2018, three weeks after Conemaugh provided Ironshore with Sosnowski's contact information, Tatlock again contacted Conemaugh stating that he had "set up a separate file for [ Harker ]" at Ironshore. (Id. ¶ 111.) On that day, Conemaugh forwarded Tatlock's email to Sosnowski, and told Ironshore that it had notified Sosnowski of Tatlock's correspondence. (Id. ¶ 112.)
3. The Trial, Verdict, and Communications Between Conemaugh and Ironshore During Trial
The Harker trial began on March 19, 2018, and ran for four days. ( Harker , ECF Nos. 65–72.) Having heard little or nothing from Ironshore regarding Harker , Conemaugh again sent the Harker Report to Tatlock and Ironshore on March 21, 2018, the third day of trial, and noted that it was the same report that Conemaugh had sent to Scott on February 6, 2018. (Id. ¶ 117.) Later that day, Conemaugh contacted Coverys, copying Tatlock, and requesting that Coverys settle Harker within the Primary Policy's limits; Conemaugh was concerned that further delay in settling the case might lead to a settlement exceeding the limits of the Primary Policy:
[ Harker ] presents significant risk of a verdict in excess of [the Primary Policy's] limits, and the time to negotiate a settlement within [the Primary Policy's] limit of liability is dwindling as trial moves towards a conclusion. The facts and injuries to the plaintiff involved in the matter are potentially inflammatory, there is significant risk of liability, and
the court has now entered a finding against [Dr. Chan.] If the case is not settled immediately, a jury verdict could easily exceed the [Primary Policy's] limit. The time for action is now. Delay plainly risks liability in excess of the [Primary Policy's] Limit.
(Id. ¶ 118.) Coverys replied the following day, March 22, the last day of trial, that Harker's counsel had refused to settle at an amount that would not exceed the Primary Policy's limits, stating that:
Plaintiffs' counsel has refused to negotiate until this morning when he advised [that] his clients' rock bottom, non-negotiable demand is $15M, no confidentiality agreement and a guarantee by the hospital and the doctor providing treatment that a similar type of treatment would not be used on an infant. [Sosnowski] has advised us, he believes the value of the injury to be $6M. We have asked [Sosnowski] to extend a formal offer of $5M from the [Primary Policy] which when combined with the $1M already offered by Mcare will bring the full settlement offer to $6M. We will keep you advised.
(Id. ¶ 119.) Conemaugh then provided Coverys' reply to both Tatlock and Sosnowski. (Id. ¶ 120.) Later on March 22, 2018, the jury returned a verdict of $43,033,579, which this Court subsequently remitted on July 27, 2018 to $19,283,579. ( Harker , ECF Nos. 72, 96.)
4. Settlement Negotiations
On August 1, 2018, less than a week after this Court remitted the verdict, Ironshore filed the instant action. (See ECF No. 1.) Ironshore sought a declaratory judgment that it was not obligated to pay any portion of the settlement exceeding the limits of the Primary Policy (the "Ironshore Excess"), based on Conemaugh's failure to timely notify Ironshore of Harker 's pendency and status. (ECF No. 2.) Two weeks later, on August 15, 2018, Harker settled for $18,011,836.10, with Ironshore paying the Ironshore Excess in an amount of $6,011,836.10, the amount above the Primary Policy's limit of $12,000,000. (ECF No. 40 ¶ 126.) Ironshore's agreement to pay the Ironshore Excess was apparently contingent upon its right to recoup payment, though Conemaugh objected to this reservation of rights. (Id. ¶ 127.)
C. Procedural History
Ironshore filed the Complaint in this case on August 1, 2018. (ECF Nos. 1, 2.) Conemaugh filed a Motion to Dismiss on October 15, 2018, which this Court denied on March 1, 2019. (ECF Nos. 18, 33.) Following the denial of its Motion to Dismiss, Conemaugh filed an Answer and Counterclaim on April 10, 2019. (ECF No. 40.) Ironshore then moved to dismiss Conemaugh's Counterclaim on April 26, 2019. (ECF Nos. 47, 48.) Conemaugh filed its Opposition to Ironshore's Motion to Dismiss on May 22, 2019, followed by Ironshore's Reply on June 3, 2019. (ECF Nos. 60, 64.) This Court granted Conemaugh and Ironshore leave to file a Sur-Reply and Sur-Sur-Reply, respectively. (ECF Nos. 67, 68-1.)
In addition, on April 19, 2019, Conemaugh filed a Third-Party Complaint against Coverys, bringing claims for breach of contract, insurance bad faith under 42 Pa. C.S.A. § 8371, and contribution. (ECF No. 43.) Coverys answered the Third-Party Complaint on July 15, 2019. (ECF No. 76.) Conemaugh brings several claims for relief in its Counterclaim, namely that: (1) Ironshore breached the contract embodied in the Ironshore Policy by bringing suit and denying Conemaugh the "complete and unconditional benefit" of the Ironshore Policy ("Count One") (ECF No. 40 at ¶¶ 130–42); (2) Ironshore breached the implied duty of good faith and fair dealing inherent in the Ironshore Policy by its negligent participation (or lack thereof) in the Harker litigation ("Count Two") (Id. ¶¶ 143–59); (3) Ironshore is liable for insurance bad faith based on its handling of Harker in violation of 42 Pa. C.S.A. § 8371 ("Count Three") (Id. ¶¶ 160–86); as well as a claim for declaratory judgment as to the rights and obligations of both parties under the Ironshore Policy ("Count Four"). (Id. ¶¶ 187–93.)
The resolution of the claims in the Third-Party Complaint is not presently before the Court—their existence is noted solely to provide context to the issues before the Court in the instant motion.
IV. Legal Standard
The Court may dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6) where the complaint fails "to state a claim upon which relief can be granted." Connelly v. Lane Const. Corp. , 809 F.3d 780, 786 (3d Cir. 2016). But detailed pleading is not generally required. Id. The Rules demand only "a short and plain statement of the claim showing that the pleader is entitled to relief" to give the defendant fair notice of what the claims are and the grounds upon which they rest. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting FED. R. CIV. P. 8(a)(2) ).
Under the pleading regime established by Twombly and Iqbal , a court reviewing the sufficiency of a complaint must take three steps. See Ashcroft v. Iqbal , 556 U.S. 662, 675, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). First, the court must "tak[e] note of the elements [the] plaintiff must plead to state a claim." Id. Second, the court should identify allegations that, "because they are no more than conclusions, are not entitled to the assumption of truth." Id. at 679, 129 S.Ct. 1937 ; see also Burtch v. Milberg Factors, Inc. , 662 F.3d 212, 224 (3d Cir. 2011) ("Mere restatements of the elements of a claim are not entitled to the assumption of truth.") (citation omitted). Finally, "[w]hen there are well-pleaded factual allegations, [the] court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. ; see also Connelly , 809 F.3d at 786. Ultimately, the plausibility determination is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.
Although Iqbal described the process as a "two-pronged approach," Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), the Supreme Court noted the elements of the pertinent claim before proceeding with that approach, see id. at 675–79, 129 S.Ct. 1937. Thus, the Third Circuit has described the process as a three-step approach. See Connelly , 809 F.3d at 787 ; Burtch v. Milberg Factors, Inc. , 662 F.3d 212, 221 n.4 (3d Cir. 2011) (citing Santiago v. Warminster Twp. , 629 F.3d 121, 130 (3d Cir. 2010) ).
V. Discussion
Each of Conemaugh's claims is brought in diversity, under Pennsylvania state law, so Pennsylvania law governs this Court's analysis. See Erie RR. Co. v. Tompkins , 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). A. The Parties' Arguments
Ironshore argues that Counts One and Two, Conemaugh's claims for breach of contract and breach of the implied duty of good faith and fair dealing, must be dismissed because they do not allege "any non-speculative compensatory damages." (ECF No. 48 at 7.) Ironshore argues that such allegations are required to state claims for breach of contract and breach of the implied duty; because Counts One and Two acknowledge that Ironshore paid the portion of the settlement for which it was responsible, there can be no damages. (Id. ) Ironshore then contends that Conemaugh's bad faith claim under § 8371 fails because Ironshore did not deny coverage—an essential element of a § 8371 claim—as Ironshore promptly paid the Ironshore Excess as the Ironshore Policy required, and because Conemaugh cannot prove that Ironshore had, and wasted, a pre-verdict opportunity to settle Harker for a lower amount. (Id. at 7–8.) Finally, Ironshore maintains that this Court should dismiss Conemaugh's claim for declaratory judgment because it is duplicative, and essentially the mirror image, of Ironshore's own claim for declaratory relief; Ironshore further asserts that Count Four is also duplicative in light of Conemaugh's Third-Party Complaint against Coverys. (Id. at 8.)
Conemaugh responds that it has properly pleaded its damages, and that its damages are not speculative—at a minimum, legal fees incurred in defending this action, and potentially the Ironshore Excess. (ECF No. 60 at 10–11.) Conemaugh further replies that Ironshore breached the implied duty of good faith by omitting material facts in the Complaint and misrepresenting the Ironshore Policy. (Id. at 11–15.) Conemaugh argues that Ironshore's payment of the settlement is not dispositive of the insurance bad faith claim, and that this Court should look to Ironshore's conduct throughout the Harker litigation, as well as its conduct in the instant suit, to determine whether Ironshore acted in bad faith. (Id. at 15–21.) Finally, Conemaugh contends that Ironshore's claim for declaratory relief as to the parties' rights and obligations under the Ironshore Policy does not preclude it from seeking its own declaratory relief because the relief Conemaugh seeks is different and broader from the relief that Ironshore seeks. (Id. at 21–22.)
B. The Court Will Not Dismiss Conemaugh's Claims for Breach of Contract and Breach of the Implied Duty of Good Faith and Fair Dealing Because Conemaugh Has Adequately Pleaded Damages
Ironshore's arguments in support of dismissing Conemaugh's claims of breach of contract and breach of the implied duty of good faith and fair dealing are essentially identical as they relate to Conemaugh's failure to allege damages, so the Court will address Ironshore's arguments on the issue of damages collectively.
Ironshore also argues that Conemaugh's claim of breach of the implied duty of good faith and fair dealing is duplicative. The Court will address that argument separately, infra Section V.C.
To properly plead a breach of contract claim, Conemaugh must show the following elements: (1) that Ironshore and Conemaugh had a valid contract, as well as the terms of that contract; (2) that Ironshore breached the contract; and (3) that Ironshore's breach damaged Conemaugh. Meyer, Darragh, Buckler, Bebenek & Eck, P.L.L.C. v. Law Firm of Malone Middleman, P.C. , 635 Pa. 427, 137 A.3d 1247, 1258 (2016). Similarly, Conemaugh must plead the following elements to make out a claim for breach of the implied covenant of good faith and fair dealing: (1) that Ironshore and Conemaugh had a valid contract, as well as its terms; (2) that Ironshore breached the implied covenant of good faith and fair dealing; and (3) damages caused by Ironshore's breach. Higman v. State Farm Mut. Auto. Ins. Co. , No. 2:18-cv-00662, 2018 WL 5255221, at *8 (W.D. Pa. Oct. 22, 2018) (applying Pennsylvania law). Contract damages must be proved "with reasonable certainty," which means that the damages cannot be "too speculative, vague, or contingent upon some unknown factor." Ware v. Rodale Press, Inc. , 322 F.3d 218, 226 (3d Cir. 2003) (applying Pennsylvania law).
The parties do not dispute that they had a valid contract, and Ironshore makes no argument that Conemaugh has not established breach —Ironshore's argument is simple: Conemaugh has alleged no non-speculative or non-prospective damages, so Counts One and Two must fail. (ECF No. 48 at 13–15.)
The Court accordingly deems Conemaugh's allegations contained in the Counterclaim to have established the element of breach, and that Ironshore has waived any objection to the establishment of this element for purposes of this motion. (See ECF No. 60 at 10 (noting that Ironshore does not dispute either the existence of a contract or its breach, only a failure to properly allege damages).)
With respect to the issue of damages, Conemaugh argues that it met all the terms of the Ironshore Policy required to trigger the "unencumbered overage called for in the [Ironshore] Policy," and that Ironshore's attachment of strings to the Ironshore Excess constituted a breach of that contract, causing damages in the amount of the Ironshore Excess. (ECF No. 60 at 10–11.) Conemaugh also argues that it has been damaged by the expenses and costs of defending this action. (ECF No. 67 at 2.) Conemaugh finally contends that Pennsylvania law permits an award of nominal damages for breach of contract, which Conemaugh is entitled to prove. (Id. ) See Power Restor'n Int'l, Inc. v. PepsiCo , No. 12-CV-1922, 2015 WL 1208128, at *9 (E.D. Pa. Mar. 17, 2015). Conemaugh's argument, simply stated, is that Ironshore cannot pay the Ironshore Excess voluntarily, claim that coverage is denied or not required, and seek return of the money, and then argue that Ironshore has not actually denied coverage. (ECF No. 67 at 2.)
The Court agrees with Conemaugh that it has adequately pleaded damages. Accordingly, the Court will not dismiss Count One, and will not dismiss Count Two for failure to allege damages. Ironshore argues that Conemaugh's damages are speculative because they are uncertain and formulaic recitations on the elements of damages. (ECF No. 48 at 13–15.) However, the issue of whether damages are speculative does not relate to any difficulty in calculating the amount of damages, but rather with the fundamental question of whether identifiable damages exist at all. Printed Image of York, Inc. v. Mifflin Press, LTD. , 133 A.3d 55, 60 (Pa. Super. 2016) (quoting Newman Dev. Grp. of Pottstown, LLC v. Genuardi's Family Mkt., Inc. , 98 A.3d 645, 661 (Pa. Super. Ct. 2014) ).
Here, Conemaugh's damages, regardless of whether Conemaugh will be able to prove them, are identifiable. For instance, Conemaugh may have suffered damages from being forced to obtain additional insurance to cover other prospective liabilities when it became unsure of Ironshore's willingness to cover claims. Conemaugh has also incurred legal fees in defending this action. Conemaugh has stated a claim because its damages are identifiable, not speculative. Conemaugh's damages do not hinge upon future events; they rest upon past occurrences. Because Ironshore's past actions may have caused Conemaugh's alleged damages, the Court denies Ironshore's Motion to Dismiss.
Even if Conemaugh cannot prove quantifiable damages, any breach of contract, which Ironshore has conceded occurred in this case, entitles the nonbreaching party to an award of nominal damages. Scobell, Inc. v. Schade , 455 Pa.Super. 414, 688 A.2d 715, 719 (1997). The amount of damages that Conemaugh has suffered is an issue that requires factual development through the discovery process. Conemaugh has appropriately pleaded damages for breach of contract and breach of the implied duty of good faith. Accordingly, the Court will not dismiss those claims for failure to allege damages.
C. The Court Will Not Dismiss Conemaugh's Breach of the Implied Duty of Good Faith and Fair Dealing Claim Because It Is Not Duplicative of Conemaugh's Breach of Contract Claim
Ironshore also contends that this Court should dismiss Conemaugh's claim for breach of the implied duty of good faith and fair dealing because it is duplicative of Conemaugh's breach of contract claim. (ECF No. 48 at 24.) Ironshore argues that Pennsylvania law does not recognize claims for breach of the implied duty that sound in tort; rather Pennsylvania statutory law provides the exclusive remedy for such a violation. (Id. ) Ironshore recognizes that each and every insurance contract contains the implied duty as a term of the contract but argues that Conemaugh cannot maintain the claim where Conemaugh has pleaded a separate breach of contract claim that subsumes the claim for breach of the implied duty. (Id. ) Ironshore further argues that the "gist of the action" doctrine bars Conemaugh from "re-casting" its breach of contract claim as a tort claim for breach of the implied duty. (Id. at 25.)
Ironshore asserts that Conemaugh alleged that Ironshore breached the Ironshore Policy in three ways: (1) negligently participating in defense and settlement of Harker ; (2) seeking to recoup the Ironshore Excess; and (3) failing to follow "everyday standards" of claims-handling for the insurance industry. (Id. at 26.) Ironshore argues that the implied duty claim is duplicative because the first alleged breach can only come from the insurance contract, and therefore the breach of contract claim subsumes the implied duty claim. (Id. ) Ironshore also asserts that seeking to recoup the Ironshore Excess cannot be a breach of the implied duty in the Ironshore Policy. (Id. ) Finally, Ironshore argues that Conemaugh has not identified "everyday standards" of the insurance industry that Ironshore failed to follow with respect to Harker and has also failed to allege how failure to follow those standards is a breach of the implied duty.
Conemaugh responds that it has pleaded that Ironshore breached the implied duty and that the breach of contract claim does not subsume the claim for breach of the implied duty. (ECF No. 60 at 12.) Conemaugh argues that its allegations concerning Ironshore's recitation of the facts in its Complaint, selectively omitting material facts in order to make out its claim against Conemaugh, are sufficient to state a claim for breach of the implied duty. (Id. at 12–13.) Conemaugh also contends that Ironshore's allegations that Conemaugh failed to cooperate with Ironshore in defending the Harker action also support its claims for breach of the implied duty, as well as Ironshore's suit to recover the Ironshore Excess, arguing that Ironshore acted to deprive Conemaugh of the benefit of the bargain contained in the Ironshore Policy. (Id. at 13–15.) Finally, Conemaugh argues that its claim for breach of the implied duty is contractual in nature, not tortious, and that the Ironshore Policy does not govern, and did not give rise to, Ironshore's conduct. (ECF No. 60 at 12–15.)
To begin, Pennsylvania recognizes claims for breach of the implied duty of good faith. Benevento v. Life USA Holding, Inc. , 61 F. Supp. 2d 407, 425 (E.D. Pa. 1999) (applying Pennsylvania law). Pennsylvania law imposes a duty on an insurer to deal with its insured fairly, honestly, and objectively, and to act in good faith at all times, giving the interests of the insured the same consideration it gives its own. Dercoli v. Pa. Nat'l Mut. Ins. Co. , 520 Pa. 471, 554 A.2d 906, 909 (1989) ; Cowden v. Aetna Cas. & Sur. Co. , 389 Pa. 459, 134 A.2d 223, 228 (1957). The insurer must compensate its insured as the policy requires; it cannot look to its own bottom line and seek to limit its own exposure. Bonenberger v. Nationwide Mut. Ins. Co. , 791 A.2d 378, 382 (Pa. Super. Ct. 2002). While a party may plead a claim for breach of the implied duty where one party to a contract has engaged in conduct that is similar to tortious conduct, claims for breach of the implied duty are contractual in nature, not tortious. See Creeger Brick & Bldg. Supply Inc. v. Mid-State Bank & Tr. Co. , 385 Pa.Super. 30, 560 A.2d 151, 154 (1989).
Where the breach of contract claim subsumes the breach of the implied duty claim, however, a court may dismiss the implied duty claim as duplicative of the breach of contract claim. For instance, a breach of the implied duty claim is duplicative of a breach of contract claim where the implied duty claim depends upon a finding that one party breached the contract. See Ross v. Metro. Life Ins. Co. , 411 F. Supp. 2d 571, 583–84 (W.D. Pa. 2006) (applying Pennsylvania law) Similarly, Pennsylvania courts apply a doctrine known as the "gist of the action" doctrine, which bars claimants from bringing what are, essentially, contract claims as tort claims. Bruno v. Erie Ins. Co. , 630 Pa. 79, 106 A.3d 48, 60–70 (2014) (discussing the development of the doctrine under Pennsylvania law). Pennsylvania courts apply the doctrine in several circumstances: (1) where the claim arises solely from the contract of the parties; (2) where the alleged breach was of a duty created and grounded in the contract itself; (3) where liability on the claim stems from the contract; or (4) where the tort claim is duplicative of a contract claim and its success depends on the success of the contract claim. eToll, Inc. v. Elias/Savion Advertising, Inc. , 811 A.2d 10, 19 (Pa. Super. Ct. 2002).
Conemaugh pleaded that Ironshore has acted outside the contract in commencing this litigation: no right to recoup payment by Ironshore exists under the Ironshore Policy and Ironshore sought to recoup that payment by filing this lawsuit. (See ECF No. 40 ¶¶ 153–157; ECF No. 2-3 § II.) The parties have pointed to no language in the Ironshore Policy or the Primary Policy which provides Ironshore the right to recoup payment. Because of the absence of a provision regarding a right to recoup payment in the Ironshore Policy, a valid contract between Ironshore and Conemaugh, none of the circumstances under which the gist of the action doctrine is applicable exist in this case. The claim for breach of the implied duty does not arise solely from the contract and is not of a duty created by, and grounded in, the contract. Neither does liability for breach of the implied duty stem from the contract nor is the claim duplicative of the breach of contract claim—Ironshore's filing this lawsuit to recoup, because the contract makes no provision for it, cannot form the basis of a breach of the Ironshore Policy—and its success does not depend on the success of the breach of contract claim—it may stand on its own. See eToll, Inc. , 811 A.2d at 19. Conemaugh has adequately pleaded that Ironshore failed to treat Conemaugh's interests as its own, thereby breaching the implied duty, and because the implied duty claim is not duplicative of the breach of contract claim, the Court denies Ironshore's Motion to Dismiss.
Conemaugh raised this argument in its Response, and Ironshore failed to point this Court to language that might counter Conemaugh's assertion in either its Reply or Sur-Sur-Reply.
D. The Court Will Not Dismiss Conemaugh's Claim for Insurance Bad Faith Because Conemaugh Has Pleaded Conduct Supporting a Claim of Bad Faith
When an insurer acts in bad faith towards its insured, Pennsylvania law provides a cause of action for interest, punitive damages, and courts costs and attorney fees. See 42 Pa. C.S.A. § 8371 (" Section 8371" or " § 8371"). In order to plead a claim for bad faith under § 8371, an insured must show that: (1) the insurer had no "reasonable basis" for its actions; and (2) that the insurer "knew of or recklessly disregarded" the fact that it lacked that reasonable basis. Rancosky v. Wash. Nat'l Ins. Co. , 642 Pa. 153, 170 A.3d 364, 365 (2017) ; see Merrone v. Allstate Vehicle & Prop. Ins. Co. , No. 3:18-cv-193, 2019 WL 5310576, at *5 (W.D. Pa. Oct. 21, 2019). If Conemaugh fails to show either element, its bad faith claim must fail.
Ironshore's argument in support of its Motion to Dismiss Conemaugh's bad faith is three-pronged: (1) Conemaugh has not alleged a denial of benefits, a precondition of a § 8371 claim; (2) Conemaugh has not alleged any cognizable economic harm; and (3) Ironshore's filing of the instant lawsuit does not constitute bad faith. (ECF No. 48 at 15–24.) In response, Conemaugh replies that: (1) a refusal to pay benefits is not a precondition of a § 8371 claim and that other conduct can form the basis of a § 8371 claim; (2) Ironshore's actions in bad faith during the Harker litigation and the instant lawsuit have caused Conemaugh cognizable economic harm; and (3) that Ironshore has acted in bad faith both by its conduct before the instant lawsuit and within it. (ECF No. 60 at 15–21.) The Court will address each argument in turn.
1. A Denial of Payment of an Insurance Claim Is Not Required to State a Claim for Bad Faith Under § 8371
Ironshore argues that the Pennsylvania Supreme Court has definitively foreclosed Conemaugh's claim because Ironshore has not denied coverage and that § 8371 claims are limited to "an unreasonable refusal to pay a valid claim under an insurance policy ." (ECF No. 48 at 15–16 (citing Toy v. Metro. Life Ins. Co. , 593 Pa. 20, 928 A.2d 186, 195–201 (2007) ) (emphasis original).) Ironshore quotes Toy 's language to the effect that "bad faith," as used in § 8371, is limited to "those actions an insurer took when called upon to perform its contractual obligations of defense and indemnification or payment of a loss," to mean that only a denial of benefits can give rise to a claim. (Id. at 16 (citing 928 A.2d at 199 ).) While Ironshore correctly quotes Toy , it misses the other cases that do not require a denial of benefits to give rise to a claim for bad faith under § 8371.
Contrary to Ironshore's assertion, actions constituting bad faith are not limited solely to a denial of coverage—bad faith may also include a lack of investigation, unnecessary or unfounded investigation, failure to communicate with the insured, or failure to promptly acknowledge or act on claims. Frog, Switch & Mfg. Co. v. Travelers Ins. Co. , 193 F.3d 742, 751 n.9 (3d Cir. 1999). Bad faith can also include poor claims-handling, the insurer's failure to act with diligence or respond to the insured, scattershot investigation, and similar conduct. Rancosky , 170 A.3d at 379 (Wecht, J., concurring). Failure to properly defend litigation against an insured may also give rise to bad faith liability. See Hollock v. Erie Ins. Exch. , 54 Pa. D & C 4th 449, 508 (Pa. C.P. 2002). Payment of the claim does not grant immunity from liability for bad faith. Barry v. Ohio Cas. Grp. , No. 3:04-cv-188, 2007 WL 128878, at *11 (W.D. Pa Jan. 12, 2007). Bad faith claims may arise from conduct before, during, or after litigation. O'Donnell v. Allstate Ins. Co. , 734 A.2d 901, 906 (Pa. Super. Ct. 1999). Further, the use of litigation in bad faith to evade a duty that a policy requires can give rise to a claim under § 8371. W.V. Realty, Inc. v. N. Ins. Co. , 334 F.3d 306, 313 (3d Cir. 2003).
Rancosky contains the most recent and comprehensive discussion of § 8371, where the Pennsylvania Supreme Court addressed the elements required to establish a bad faith claim under § 8371. 170 A.3d at 370–77. Although the court stated that one of the elements was "that the insurer did not have a reasonable basis for denying benefits under the [insurance] policy," the issue of whether an outright refusal to pay a claim was required was not before the court because, in Rancosky , the parties agreed that the insurer had denied the claim. See id. at 367–68. The parties did not dispute the first element required for a § 8371 claim, only what mental state was required for bad faith. Id. at 374. Accordingly, the Court did not address the issue, but Justice Wecht, in his concurrence, stated his conclusion that a refusal to pay a claim was not a precondition of a successful § 8371 claim, only actions that show bad faith on the part of the insurer, even if the insurer ultimately pays the claim. Id. at 379 (Wecht, J., concurring). The majority did not dispute Justice Wecht's conclusion, and in fact specifically declined to delineate the contours of conduct giving rise to bad faith. See Rancosky , 170 A.3d at 373.
When confronted by an issue that the Pennsylvania Supreme Court has not yet definitively ruled on, the Third Circuit has instructed district courts to predict how that court would rule, if confronted with the same issue. Berrier v. Simplicity Mfg., Inc. , 563 F.3d 38, 45–46 (3d Cir. 2009). In making that prediction, this Court must consider relevant state court decisions, similar cases, "considered dicta," works of scholarship, and "any other reliable data" that indicates which way the Pennsylvania Supreme Court would rule. Id. at 46. This Court, based on Justice Wecht's concurring opinion in Rancosky , the majority's failure to dispute Justice Wecht's conclusions, and the majority's explicit disavowal of delineating the contours of the conduct constituting bad faith, believes that the Pennsylvania Supreme Court would permit a claim under § 8371 to go forward even when the insurer pays the benefits, if the insured properly pleads acts of the insurer evidencing bad faith. At least one post- Rancosky Pennsylvania state court has come to the same conclusion. See Reinhart v. Erie Ins. Exch. , No. CI-12-04806, slip op., Conclusions of Law ¶¶ 20, 22, 23 (Pa. Ct. C.P. Oct. 30, 2018).
The Court also notes that it recently decided another § 8371 claim where the insurance company ultimately paid the benefits. See Merrone , 2019 WL 5310576. In that case, the Plaintiff's home burned down and the insurer took several months to investigate the cause of the fire before ultimately paying the Plaintiff's claim. This Court granted summary judgment to the insurer on the bad faith claim, but the insurer never moved to dismiss the case, nor did it argue it was entitled to judgment on the ground that paying the claim granted it immunity from suit for bad faith. (See Merrone , ECF No. 37 (granting summary judgment); Merrone , ECF No. 3 (Answer); Merrone , ECF No. 23 at 9–15 (arguing that Plaintiff's bad faith claim should be dismissed, but not on grounds that payment of benefits foreclosed a bad faith action under § 8371 ).)
The Court views Rancosky as the present definitive pronouncement on the scope and type of claims available under § 8371. Since the majority never disputed Justice Wecht's conclusions in his concurring opinion as to the type of conduct that may give rise to liability under § 8371, the Court adopts those same conclusions. See Rancosky , 170 A.3d at 379 (Wecht, J., concurring).
Having established that Conemaugh may maintain a § 8371 claim for Ironshore's actions that do not amount to an absolute denial of coverage under the Ironshore Policy, the Court proceeds to address Ironshore's further arguments in support of its Motion to Dismiss Conemaugh's § 8371 claim.
The Court notes that Conemaugh has pleaded that Ironshore's conduct, attaching strings to the payment of the Ironshore excess, deprived Conemaugh of the benefit of an absolute right to coverage under the Ironshore Policy, to which Conemaugh is entitled, so long as Conemaugh meets all the conditions of the Policy. (ECF No. 40 ¶¶ 160–186.) These pleadings alone are sufficient, for the purposes of this Motion, to establish a denial of benefits under the Policy, if Conemaugh were required to allege an outright denial of benefits as a precondition to stating a § 8371 claim.
Ironshore argues that Conemaugh has not alleged that Ironshore acted in bad faith in investigating a valid claim under the Ironshore Policy, and that Conemaugh has not alleged that Ironshore made any effort to delay payment of a valid claim. (ECF No. 64 at 3.) Ironshore maintains that there is not even a disagreement that Ironshore "promptly" paid the Ironshore Excess to settle Harker . Ironshore further buttresses its position by arguing that all of the conduct that Conemaugh alleges amounts to bad faith ("loose claims handling, etc.") occurred before Harker implicated the Ironshore Policy. (Id. at 4.) Ironshore maintains that even if that conduct amounted to bad faith—which Ironshore denies—none of the conduct was related to a denial of benefits, and therefore cannot form the basis of a § 8371 claim. (Id. )
Ironshore finally contends that the Ironshore Policy was not implicated until the jury verdict that exceeded the $12,000,000 coverage limit of the Primary Policy. (Id. at 5.) Ironshore argues that because the maximum settlement Coverys offered, at approximately $6,000,000, a fraction of the $12,000,000 threshold of the Ironshore Policy, and the Activation Clause requires that, for the Ironshore Policy to be triggered, liability must exceed the limits of the Primary Policy, the Activation Clause never came into effect. (Id. ) Ironshore contends that because that threshold was not reached until the verdict in excess of $47,000,000, and Ironshore acted promptly to pay the Ironshore Excess following the verdict, Ironshore has not acted in bad faith with respect to Conemaugh's claim for coverage. (Id. )
These arguments are unpersuasive. Conemaugh informed Ironshore of the existence of the Harker action on November 5, 2015, approximately a week after it was filed and nearly two-and-a-half years before verdict at trial. (ECF No. 40 ¶ 81.) Ironshore responded, acknowledging the notification, on November 6, 2015. (Id. ¶ 82.) Ironshore was therefore aware of Harker well before trial. Conemaugh contacted Ironshore on January 29, 2018, informing Ironshore that Harker potentially implicated the Ironshore Policy, and sent the Harker Report to Ironshore on February 6, 2018. (Id. ¶¶ 84–89.) The Harker Report contained enough information, according to Conemaugh's pleadings, to give Ironshore notice that a judgment could implicate the Ironshore Policy. (See id. ¶¶ 92–93.) Conemaugh alleges that Ironshore passed responsibility for the Harker claim among at least three separate claims adjusters, who apparently set up at least four separate files on the Harker action. (Id. ¶¶ 84–115.) Conemaugh asserts that a reasonable claims professional, based on the Harker Report, and the other information Conemaugh provided to Ironshore, would have recognized that Harker potentially implicated the Ironshore Policy, and sought further information from Conemaugh on the status of the case and its schedule or likely outcome, or raised the issue with management who could contact Conemaugh and demand further information. Per Conemaugh's Counterclaim, no such contact ever occurred. Accordingly, the fact that Coverys' settlement offer had not reached the limits of the Primary Policy does not mean that Ironshore is immune from bad faith in abstaining from participating in settlement negotiations. An unreasonable delay in investigation or participation in settling or defending a lawsuit against an insured, in an effort motivated by the insurer's own self-interest can subject an insurer to bad faith liability. Cf. Hollock , 54 Pa. D & C 4th at 515 (concluding that an insurer's delay in investigating a claim was motivated by a desire to avoid having to pay benefits). Conemaugh has pleaded that Ironshore delayed investigating and participating in Harker to increase its advantage and limit its obligations under the Ironshore Policy. At this early stage in the case, Conemaugh has sufficiently stated a claim. The Court will not dismiss Conemaugh's bad faith claim on the grounds that Conemaugh did not have a claim for coverage against Ironshore, or on the grounds that Ironshore failed to deny the claim.
2. The Court Will Not Dismiss Conemaugh's § 8371 Claim Because Conemaugh Has Pleaded Cognizable Economic Harm
Ironshore argues that this Court must dismiss Conemaugh's § 8371 claim because Conemaugh has failed to allege a cognizable economic harm, a requirement to state a § 8371 claim. (ECF No. 48 at 17.) Ironshore asserts that although § 8371 does not permit compensatory damages, only permitting punitive damages, attorney's fees, courts costs, and interest, Conemaugh must allege some cognizable economic harm to sustain its claim. (Id. ) Ironshore also argues that to maintain a § 8371 claim, Conemaugh must have a "predicate action" to enforce a right under the Ironshore Policy and that, since no such right exists in the policy, the Court must dismiss Conemaugh's claim. (ECF No. 48 at 17–18.) This is so, Ironshore argues, because any injury that Conemaugh may suffer is predicated upon losing this lawsuit, which would require a ruling by this Court that Ironshore did not engage in bad faith, thus negating Conemaugh's claim. (Id. at 18.) Ironshore's arguments are unavailing. Although Polselli v. Nationwide Mutual Fire Insurance Co. , 126 F.3d 524, 530 (3d Cir. 1997), stated that a § 8371 claim cannot stand alone in an insurance action, the "predicate action" Polselli referred to is some other claim against the insurer by its insured. See id. at 530. Here, Conemaugh has other claims against Ironshore that permit the § 8371 claim to continue. If the court had dismissed Conemaugh's other claims, however, this argument might be persuasive.
Conemaugh disputes this, arguing that § 8371 claims are independent claims that do not rise of fall with a breach of contract action on the insurance policy. (ECF No. 60 at 16.) however, the dispute is immaterial, as Conemaugh has a predicate action, as described infra .
In support of its argument that Conemaugh has alleged no cognizable economic harm, Ironshore cites Birth Center v. St. Paul Cos. 727 A.2d 1144, 1158 (Pa. Super. Ct. 1999). Ironshore maintains that Birth Center requires "some showing that the insurer's bad faith conduct caused cognizable harm." (ECF No. 48 at 11.) However, Birth Center explicitly states that when an insurer's actions leave its insured open to a verdict above the policy limits, the insurer cannot avoid liability for bad faith under § 8371 simply by paying the excess. 727 A.2d at 1158. Birth Center continues that if the insured "can prove it has suffered other legally cognizable damages" due to the insurer's breach of the contract, the insured may maintain the § 8371 claim. Id. At this early stage in the proceedings, the Court cannot say that Conemaugh has failed to state a plausible claim that it has suffered damages as a result of Ironshore's conduct. See Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. Conemaugh has pleaded that Ironshore has acted in bad faith, breached the insurance contract, and damaged Conemaugh as a result of its actions through, at a minimum, Conemaugh being forced to defend the action. (See ECF No. 40 ¶¶160–186.) This is sufficient to defeat a Motion to Dismiss, and the Court accordingly denies Ironshore's Motion to Dismiss Conemaugh's § 8371 claim for failure to plead cognizable economic harm.
3. The Court Will Not Dismiss Conemaugh's Bad Faith Claim Under § 8371 Because Conemaugh Has Pleaded Conduct That States a Claim for Ironshore's Bad Faith
In its final argument against Conemaugh's § 8371 claim, Ironshore argues that its filing of the initial lawsuit does not constitute bad faith. (ECF No. 48 at 18.) Ironshore asserts that the filing of a declaratory judgment action to determine the rights and obligations of the parties to an insurance contract does not, alone, amount to bad faith. (Id. at 18–21.) Ironshore further contends that Conemaugh's claims that Ironshore omitted communications between it and Conemaugh about the Harker action are insufficient because § 8371 does not cover "allegations of improper conduct by attorneys during the course of litigation." (Id. at 21–22.) Ironshore asserts that § 8371's purpose is to remedy conduct by the insurer as an insurer, not as an adversary in a lawsuit, and that, since Conemaugh's only damages are legal fees incurred in defending this lawsuit, Ironshore is not subject to bad faith liability for filing it. (Id. at 22–23.) Finally, Ironshore argues that Rules of Civil Procedure and Rules of Disciplinary Conduct provide appropriate (and exclusive) sanctions for improper conduct of attorneys, not § 8371. (Id. at 23.)
Conemaugh replies that conduct during litigation, alone, can support a bad faith claim, and that conduct that occurs before and during litigation can also give rise to liability for bad faith under § 8371. (ECF No. 60 at 18–19.) Conemaugh also argues that § 8371 can redress misconduct of attorneys, not just Rules of Civil Procedure or Rules of Disciplinary Conduct. (Id. at 19.) Conemaugh finally maintains that it has properly pleaded that Ironshore engaged in bad faith through Ironshore's reckless claim handling, denial of coverage through filing this lawsuit, and improper use of litigation. (Id. at 19–21.)
Ironshore's first contention, that Conemaugh has failed to state a claim because it "merely" alleges that Ironshore's bad faith is solely filing the declaratory judgment action, is based on an unduly narrow reading of both Pennsylvania cases and Conemaugh's Counterclaim. Federal district courts across Pennsylvania have held that filing a declaratory judgment action does not, without more, give rise to a claim under § 8371. See, e.g., Employers Mut. Cas. Co. v. Loos , 476 F. Supp. 2d 478, 494 (W.D. Pa. 2007) ; Principal Life Ins. Co. v. DeRose , No. 1:08-CV-2294, 2009 WL 4061366, at *5 (M.D. Pa. Nov. 23, 2009) (adopting Report & Recommendation); Principal Life Ins. Co. v. Minder , No. 08-cv-5899, 2009 WL 1917096, at *3 (E.D. Pa. July 1, 2009) ; Victoria Ins. Co. v. Ren , No. 08-cv-517, 2008 WL 2371850, at *2 (E.D. Pa. June 9, 2008). However, in citing these cases, Ironshore fails to recognize that Conemaugh's § 8371 claim rests on more than just Ironshore's filing the declaratory judgment action.
While a part of Conemaugh's § 8371 claim does rest upon Ironshore's filing of the declaratory judgment action, it is not the only basis. (See ECF No. 40 ¶ 171.) Conemaugh includes in its Counterclaim, as conduct supporting its claim several actions (or omissions) of Ironshore: (1) Ironshore's failure to "quantify or calculate" Conemaugh's liability in the Harker action (Id. ¶ 162); failure to investigate the Harker action further upon receipt of the Harker report and other information regarding the case (Id. ¶ 164); (3) failure to follow Ironshore's own internal policies for evaluating litigation risk (Id. ¶ 166); (4) "loose claims-handling, lack of diligence, non-responsiveness and/or haphazard investigation" that unreasonably disregarded Conemaugh's interests (Id. ¶ 168); (5) failure to engage in settlement of the Harker action (Id. at ¶¶ 174–179); and (6) settling Harker for its own benefit. (Id. ¶ 184.)
Each of the cases that Ironshore cites does not support dismissing Conemaugh's claim when Conemaugh's claim rests upon allegations of more than just the filing of a declaratory judgment action. Loos stated that when an insurer's construction of an insurance policy turns out to be erroneous, that construction does not "automatically" mean that the insurer has engaged in bad faith. 476 F. Supp. 2d at 494–95. Here, Conemaugh has provided factual allegations that go well beyond Ironshore filing the action. The other cases Ironshore cites follow the same reasoning, address the same issue, and are likewise inapplicable. See DeRose , 2009 WL 4061366, at *5 ; Minder , 2009 WL 1917096, at *4 ; Ren , 2008 WL 2371850, at *2.
Ironshore further relies on Toy and the cases that cite it as authoritative in both the Pennsylvania federal district courts and the Third Circuit. (See ECF No. 48 at 18–22.) Ironshore asserts that Toy stands for the proposition that filing a declaratory judgment action does not give rise to bad faith liability under § 8371 and limits the conduct that § 8371 covers. (Id. ) However, even if this were the case—and, as discussed above, the cases Ironshore cites hold only that the filing of a declaratory judgment, alone, is insufficient to support a § 8371 claim—Ironshore misreads Toy . Toy only confronted the issue of whether § 8371 covered conduct where the insurer engaged in "deceptive or unfair conduct" in selling or soliciting an insurance policy. 928 A.2d at 195. Toy did not speak to the conduct Conemaugh has alleged Ironshore engaged in, and therefore is not dispositive here.
The Court also notes that the Pennsylvania Supreme Court decided Toy in 2007, a full decade before it decided Rancosky in 2017. As noted before, this Court considers Rancosky to be the Pennsylvania Supreme Court's definitive word on § 8371.
Ironshore's argument that Conemaugh's claim must fail because Conemaugh's claim rests upon allegations of improper conduct in the instant litigation similarly fails, as Conemaugh has pleaded that Ironshore's bad faith conduct included actions or omissions made by its claims professionals, not solely conduct arising from this lawsuit. Indeed, the case law that Ironshore cites in support of its position actually favors Conemaugh. Ironshore cites O'Donnell ex rel Mitro v. Allstate Insurance Co. to support its contention that bad faith does not arise from conduct in litigation. (ECF No. 48 at 22.) See 734 A.2d 901, 908 (Pa. Super Ct. 1999). However, O'Donnell also states that § 8371 "was designed to remedy all instances of bad faith conduct by an insurer, whether occurring before, during, or after litigation." Id. at 906. Further, conduct during litigation can give rise to liability under § 8371 under certain circumstances. See Hollock v. Erie Ins. Co. , 842 A.2d 409, 414–416 (Pa. Super Ct. 2004). While filing alone does not prove bad faith by the insurer, the filing, when combined with other evidence may prove it. Little Souls, Inc. v. State Auto Mut. Ins. Co. , No. 03-cv-5722, 2004 WL 503538, at *4 (E.D. Pa. Mar. 15, 2004) (applying Pennsylvania law).
Conemaugh has pleaded that Ironshore engaged in: (1) reckless claims-handling (ECF No. 40 ¶ 168); (2) denial of coverage through selective omissions of Conemaugh's conduct during Harker 's pendency before this Court (Id. ¶¶ 154, 158); (3) reneging on its accountability under the Ironshore Policy (Id. ¶¶ 140, 165, 166); and (4) filing this lawsuit to cover up poor claims-handling and undo a payment which the Ironshore Policy requires (Id. ¶¶ 121, 127, 154, 157, 158, 178, 185). Conemaugh has also pleaded that this conduct included: (1) assigning multiple claims adjusters to Harker , who were apparently unfamiliar with Conemaugh's prior communications regarding Harker (Id. ¶¶ 84, 87–89, 104–07, 111); (2) willfully and recklessly disregarding Conemaugh's communications regarding the status of Harker (Id. ¶ 121); (3) entering settlement negotiations only when it was to Ironshore's best advantage, then suing Conemaugh and denying any obligation to pay the Ironshore Excess (Id. ¶¶ 139–40); and (4) wrongfully omitting from its pleadings settlement correspondence between Ironshore and Conemaugh in an effort to make out its own claims (Id. ¶¶ 154, 157, 172, 185).
Conemaugh need not plead an outright denial of coverage, or refusal to settle a claim. Conemaugh has pleaded cognizable economic harm and conduct on Ironshore's part that could give rise to liability under § 8371. At this stage in the lawsuit, Conemaugh has stated a claim that Ironshore engaged in bad faith, and this Court accordingly denies Ironshore's Motion to Dismiss Conemaugh's § 8371 claim.
E. The Court Will Not Dismiss Conemaugh's Claim for Declaratory Relief Because Conemaugh's Claim Seeks Different, Broader Relief than Ironshore's Claim
Finally, Ironshore argues that this Court should dismiss Conemaugh's claim for declaratory relief because it is the mirror image of the declaratory judgment claim Ironshore brought in the Complaint. (ECF No. 48 at 27; see ECF No. 2-1 at 12–13.) Conemaugh responds that it seeks relief that, while related to the relief Ironshore seeks, is broader, and Count Four should therefore remain. (ECF No. 60 at 21.) Conemaugh also argues that the Court should not dismiss its declaratory judgment claim because Ironshore may dismiss one or more of its claims for declaratory relief, and the continued existence of Conemaugh's claim will permit the Court to rule on the declaratory judgment issue, should such a dismissal occur. (Id. )
Ironshore argues that the claim it brings in Count One of its Complaint seeks a declaration that Ironshore has no duty to indemnify Conemaugh because Conemaugh failed to keep Ironshore notified as to the status of the Harker action and Conemaugh's failure to cooperate with Ironshore. (ECF No. 48 at 27–28; see ECF No. 12 ¶¶ 47–48.) Similarly, Ironshore asserts that Conemaugh's claim seeks a determination from this Court that Ironshore has a duty to indemnify Conemaugh because Conemaugh timely notified Ironshore, which, in Ironshore's view, is the mirror image of its own claim. (ECF No. 48 at 28.)
In response, Conemaugh contends that Ironshore's first count of declaratory relief seeks a ruling that Conemaugh failed to cooperate, thus negating Ironshore's duty to indemnify, and that Ironshore's second count seeks a declaration that Ironshore had no duty to cover the Harker claim because Conemaugh failed to disclose it to Ironshore in applying for the Ironshore Policy. (ECF No. 60 at 22.) Conemaugh maintains, in contrast, that their declaratory judgment claim requests the Court to declare that Ironshore has no right to deny coverage under the Ironshore Policy, assuming that Conemaugh met the requisite terms and conditions, and that Conemaugh is entitled to full coverage. (Id. ) Conemaugh's pleadings establish that they have complied with their obligations under the Ironshore Policy, and they seek a declaration of the parties' rights in that situation. Ironshore, on the other hand, has pleaded that Conemaugh violated the Ironshore Policy, and seeks a judgment of the parties' rights in that situation.
The Third Circuit has held that this Court may dismiss a counterclaim for declaratory judgment when it is clear that the factual and legal issues in the complaint and counterclaim are completely identical. Aldens, Inc. v. Packel , 524 F.2d 38, 51–52 (3d Cir. 1975). However, where a district court holds some doubt as to the redundancy of the counterclaim, the safer course is to deny a motion to dismiss without prejudice, so that the parties can further develop the facts, and rule either at summary judgment or after trial. See Barnett v. Platinum Equity Capital Partners, II, L.P. , No. 2:16-cv-1668, 2017 WL 3190654, at *4 (W.D. Pa. July 27, 2017). Further, a court may often be reluctant to dismiss a counterclaim for declaratory judgment where the determination involves interpreting a contract, even where the issues are identical, because rulings for a plaintiff on its claim does not necessarily mean that the defendant would be entitled to judgment on its claim. Id. at *5 (quoting Iron Mtn. Sec. Storage Corp. v. Am. Specialty Foods, Inc. , 457 F. Supp. 1158 (E.D. Pa. 1978) ). As described below, the parties are seeking different relief, so the Court will deny the Motion.
The Court agrees with Conemaugh that Ironshore and Conemaugh are seeking different relief in their various claims for declaratory judgment. Ironshore seeks a declaration that Conemaugh breached the terms of the contract requiring notification of potential claims and cooperation in litigating those claims. This would require the Court to find that Conemaugh failed to comply with the terms and conditions of the Ironshore Policy. In contrast, Conemaugh seeks a declaration that, assuming Conemaugh complied with all terms and conditions of the Ironshore Policy, Ironshore was obligated to indemnify Conemaugh for covered claims. In short, Ironshore requests that this Court declare that Conemaugh failed to do something that the Ironshore Policy required Conemaugh to do (cooperate with, and notify, Ironshore), and Conemaugh requests that this Court declare that Ironshore did something the contract barred it from doing (fail to give Conemaugh the benefit of the Ironshore Policy). Because the parties seek different relief, the Court denies Ironshore's Motion to Dismiss.
VI. Conclusion
For the foregoing reasons, the Court holds that Conemaugh has pleaded plausible claims against Ironshore for breach of contract, breach of the implied covenant of good faith and fair dealing, insurance bad faith under § 8371, and declaratory judgment in its Counterclaim. Accordingly, Ironshore's Motion to Dismiss Counterclaim (ECF No. 47) is DENIED .
A corresponding order follows.
FILED UNDER SEAL
ORDER
AND NOW , this 14th day of November, 2019, upon consideration of Ironshore's Motion to Dismiss Conemaugh's Counterclaims (ECF No. 47), IT IS HEREBY ORDERED that the Motion is DENIED. The Clerk of Court is directed to seal the attached memorandum opinion. IT IS FURTHER ORDERED that the parties shall jointly file proposed redactions with the Court within fourteen (14) days of the filing of this Order.