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Columbia Casualty Co. v. Ironshore Specialty Insurance Co.

United States District Court, D. Rhode Island

May 19, 2016



          MARY M. LISI, Senior District Judge.

         Columbia Casualty Company ("Columbia"), the plaintiff in this declaratory judgment action related to insurance coverage, has filed an objection to the Report and Recommendation (the "R&R") issued by Magistrate Judge Almond (Dkt. No. 22), in which he recommends that this Court grant, in part, and deny, in part, Columbia's motion to dismiss (Dkt. No. 16) four counterclaims (Dkt. No. 14) brought against it by defendant Ironshore Specialty Insurance Company ("Ironshore").

         I. Factual Background and Procedural Posture

         The relevant facts leading to Columbia's declaratory judgment action and Ironshore's corresponding counterclaims are set forth in detail in the R&R. Pursuant to the standard of review for motions to dismiss under Rule 12(b)(6) of the Federal Rules of Procedure, the facts are based on the assertions made in Ironshore's counterclaims.

         In June 2012, a medical malpractice action was filed against Rhode Island Hospital ("RIH") by Mr. and Mrs. Beauchamp after Mr. Beauchamp suffered a severe and permanent brain injury (the "Beauchamp Action"). At that time, RIH, as a member of the Lifespan network of non-profit hospitals, was the named insured under three insurance policies totaling $32 million in coverage. The first $6 million was self-insured by Lifespan; Columbia provided the first excess layer of up to $15 million; and Ironshore provided a second excess layer of up to $11 million. Demand in the Beauchamp Action was for the full policy limits of $32 million.

         There were some unsuccessful attempts at settling the case and, at some point, Columbia directed defense counsel to concede liability and causation, leaving only a determination of damages for trial. Although RIH's defense counsel advised that the case could be settled for approximately $15 million, Columbia refused to authorize more than $500, 000 of its $15 million limit. After the damage estimate (including prejudgment interest) was raised to between $19.1 million and $27.9 million, Columbia declined to offer more than $1.25 million.

         According to Ironshore's counterclaims, it repeatedly demanded in writing that Columbia satisfy its duty of good faith by settling the Beauchamp Action within its policy limits, but Columbia refused and the case proceeded to trial. On the second day of trial, Columbia offered to settle the case for a total of $15 million (including the self-insured layer and approximately $9.5 million of the Columbia policy, which would have resulted in a potential $5.5 million savings to Columbia). Columbia also requested that Ironshore "drop down" to make a payment towards settlement that would otherwise be part of Columbia's policy coverage. Ironshore further alleges that, rather than seeking to negotiate a full settlement with the Beauchamps that would avoid a jury verdict against RIH, Columbia pursued a "high-low" agreement with the plaintiffs that guaranteed a minimum recovery of $15 million and a maximum recovery of $31.5 million (potentially resulting in a $6 million savings to Columbia). According to Ironshore, it continued its own efforts to pursue a $25 million settlement with the Beauchamps, but Columbia refused to contribute its $15 million policy limit, notwithstanding Ironshore's expressed concerns that a higher jury verdict would create bad publicity for RIH and would unnecessarily exhaust Ironshore's entire liability limits for that account year.

         Eventually, the case proceeded to a verdict and the jury awarded the Beauchamps $25.59 million plus prejudgment interest, exceeding the $31.5 million maximum under the "high-low" agreement. At that time, Lifespan's $6 million self-insured coverage had been eroded by defense costs, and payment of the verdict exhausted Ironshore's second excess policy for the account year. Columbia was liable for $15, 022, 423 and Ironshore was liable for $11, 011, 044 of the $31.5 million due to the Beauchamps.

         According to Columbia's complaint, Columbia commenced this declaratory judgment action after Ironshore demanded reimbursement of the $11 million Ironshore had paid toward the judgment, on the basis of breach of fiduciary duty. Specifically, Columbia sought a declaration that it had no obligation to pay Ironshore's share of the "high-low" settlement. Ironshore responded with counterclaims against Columbia, asserting (Count I) common law bad faith, (Count II) bad faith under R.I. Gen. Laws §9-1-33, (Count III) breach of fiduciary obligation, and (Count IV) breach of duty of good faith and fair dealing owed to Ironshore.

         In the R&R, Magistrate Judge Almond recommended that Columbia's motion to dismiss Ironshore's counterclaims be granted as to Counts III and IV and that those claims be dismissed; neither party has raised an objection to that recommendation. With respect to Counts I and II, the R&R recommended that this Court deny Columbia's motion, to which recommendation Columbia has raised an objection (Dkt. No. 25). Specifically, the Magistrate Judge rejected Columbia's contentions that (1) the "high-low" settlement barred all bad faith claims; (2) Ironshore's statutory bad-faith claim supplanted its common law bad-faith claim, and (3) Ironshore lacked standing to bring a statutory bad faith claim because it was not Columbia's "insured." On its part, Ironshore filed a response to Columbia's objection (Dkt. No. 27), to which Columbia filed a further reply (Dkt. No. 29).

         II. Standard of Review

         In considering objections to a Magistrate Judge's determination of a dispositive pretrial motion, the Court must "make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." 28 U.S.C. § 636(b)(1). The Court "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." Id . Because a grant of Columbia's Rule 12(b)(6) motion would extinguish Ironshore's counterclaims, it qualifies as a dispositive motion.

         The dismissal of a complaint for failure to state a claim is governed by Rule 12(b)(6) of the Federal Rules of Civil Procedure. Courts apply the same standard to motions to dismiss a counterclaim pursuant to Fed.R.Civ.P. 12(b)(6) as they do when reviewing motions to dismiss a complaint. Clark Capital Management v. Navigator Investments, LLC, 2014 WL 6977601, at *1 (D.R.I. Dec. 9, 2014) (citing Lexington Luminance LLC v. Osram Sylvania Inc., 972 F.Supp.2d 88 (D.Mass. 2013)). A dismissal is indicated "if the complaint does not set forth factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under some actionable legal theory.'" Lemelson v. U.S. Bank Nat. Ass'n, 721 F.3d 18, 21 (1st Cir. 2013) (citations omitted). In determining whether a motion to dismiss should be granted, the Court considers whether, "construing ...

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