1555 Jefferson Road LLC v. Travelers Property Casualty Company of America

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK

1555 JEFFERSON ROAD LLC,

Plaintiff, Case # 23-CV-6347-FPG

v. DECISION AND ORDER

TRAVELERS PROPERTY CASUALTY

COMPANY OF AMERICA,

Defendant.

INTRODUCTION

After this Court granted Defendant Travelers Property Casualty Company of America’s

(“Travelers”) partial motion to dismiss, Plaintiff 1555 Jefferson Road LLC (“Jefferson Road”)

filed an amended complaint seeking declaratory judgment and asserting a breach of contract claim

arising out of Travelers’ alleged failure to defend Jefferson Road in a state-court personal injury

action. ECF No. 12. Travelers has now filed a partial motion to dismiss and a motion to strike.

ECF No. 13. As explained below, Travelers’ motions are DENIED.

BACKGROUND

This action arises out of Travelers’ alleged failure to defend and indemnify Jefferson Road

as an additional insured under one or more insurance policies in connection with a state-court

personal injury action (the “Underlying Action”) against Jefferson Road, Sun Chemical

Corporation, Sun Environmental Corporation, and AmesburyTruth. See ECF No. 12 ¶¶ 2, 9.1 The

plaintiff in the Underlying Action claims that he sustained injuries in March 2019 while

performing work at 1555 Jefferson Road, Rochester, New York pursuant to an agreement between

1 Unless otherwise noted, all facts are taken from the amended complaint and the attached exhibits, ECF No. 12.

his employer and AmesburyTruth. Id. ¶ 19. Specifically, the plaintiff in the Underlying Action

claims that he was injured after being exposed to chemicals as a result of the negligence of

Jefferson Road, Sun Environmental Corporation, or AmesburyTruth in failing to provide a safe

place to work. Id. ¶ 20.

AmesburyTruth later commenced a third-party action (the “First Third-Party Action”)

against the personal injury plaintiff’s employer, alleging that the employer or its subcontractors

failed to perform the employer’s work in a reasonably safe manner. Id. ¶¶ 14, 21. Jefferson Road

also brought a third-party action (the “Second Third-Party Action”), alleging that Schlegel

Systems, Inc. (“Schlegel”) was leasing the premises from Jefferson Road on the date of the alleged

accident and owed Jefferson Road certain obligations under the lease agreement. Id. ¶¶ 16, 22.

One of those obligations was to obtain broad form comprehensive general liability

(“CGL”) insurance and to name Jefferson Road as an additional insured. ECF No. 12 ¶¶ 24, 26;

see ECF No. 12-1 at 12. In addition, if Schlegel subleased or permitted anyone else to occupy the

premises, its obligations under the lease agreement would continue, and the same obligation to

procure insurance coverage would apply to any subtenant, assignee, or occupant. ECF No. 12 ¶

27; see ECF No. 12-1 at 8. At the time of the personal injury plaintiff’s alleged accident,

AmesburyTruth occupied the premises “by virtue of a relationship or other agreement” between

Schlegel and AmesburyTruth. ECF No. 12 ¶ 28. Both Schlegel and AmesburyTruth obtained

CGL policies from Travelers which contained endorsements identifying Jefferson Road as an

additional insured. See ECF No. 12 ¶¶ 29–38; ECF Nos. 12-2–6.

After receiving the complaint in the Underlying Action, Jefferson Road notified Schlegel,

AmesburyTruth, and Travelers of the claims and “tendered its defense and indemnification by a

letter dated December 23, 2021.” ECF No. 12 ¶ 40; ECF No. 12-7. In that letter, Jefferson Road

requested that Schlegel and AmesburyTruth notify their insurance carriers of the action and take

steps to defend Jefferson Road. ECF No. 12-7 at 3. Although Travelers assigned one or more

insurance adjusters to Jefferson Road’s claim, it has “failed and refused to formally respond” to

Jefferson Road’s “numerous and specific tenders of defense and indemnification.” ECF No. 12 ¶

44. Since its first tender in December 2021, Jefferson Road “has tendered its defense and

indemnification to Travelers no less than fifteen (15) separate times, to no avail.” Id. ¶ 48.

One of those fifteen times was on March 22, 2023, after Schlegel and Amesbury Truth

produced the Travelers insurance policy documents in the Underlying Action. ECF No. 12 ¶ 51.

About two months later, Travelers responded, and “for the first time,” took the position “that

coverage may not be available to [Jefferson Road] under the policy, and merely offered to

‘participate’ in” Jefferson Road’s defense “under a complete reservation of rights.” Id. ¶ 52; ECF

No.12-8. Travelers has, however, continued to defend AmesburyTruth in the Underlying Action

and Schlegel in the Second Third-Party Action. ECF No. 12 ¶ 50, 55.

Jefferson Road alleges that, in doing so, Travelers has acted in bad faith and “gross

disregard for its obligations” to Jefferson Road under the policies. ECF No. 12 ¶ 71; see also id.

¶ 50 (“Travelers acted in bad faith by engaging in a pattern of avoiding, ignoring, and failing to

respond to [Jefferson Road’s] multiple tenders . . . all while continuing to defend [Amesbury Truth

and Schlegel]”).

LEGAL STANDARDS

I. Rule 12(b)(6)

To succeed on a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the

defendant must show that the complaint contains insufficient facts to state a claim for relief that is

plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007). A complaint is

plausible when the plaintiff pleads sufficient facts that allow the Court to draw reasonable

inferences that the defendant is liable for the alleged conduct. Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009). Plausibility “is not akin to a probability requirement.” Id. Instead, plausibility requires

“more than a sheer possibility that a defendant has acted unlawfully.” Id. “Where a complaint

pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between

possibility and plausibility of entitlement to relief.” Id. (quotation marks and citation omitted). A

pleading that consists of “labels and conclusions” or “a formulaic recitation of the elements of a

cause of action will not do.” Twombly, 550 U.S. at 555. Nor does a complaint suffice if it tenders

“naked assertion[s]” devoid of “further factual enhancement.” Id. at 557. In considering the

plausibility of a claim, the Court must accept factual allegations as true and draw all reasonable

inferences in the plaintiff’s favor. Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011).

At the same time, the Court is not required to accord “[l]egal conclusions, deductions, or opinions

couched as factual allegations . . . a presumption of truthfulness.” In re NYSE Specialists Sec.

Litig., 503 F.3d 89, 95 (2d Cir. 2007) (quotation marks omitted).

II. Rule 12(f)

Under Federal Rule of Civil Procedure 12(f), a court may strike from a pleading “any

redundant, immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P. 12(f). “Motions to

strike are generally disfavored,” Coach, Inc. v. Kmart Corps., 756 F. Supp. 2d 421, 425 (S.D.N.Y.

2010), and “the courts should not tamper with the pleadings unless there is a strong reason for

doing so.” Lipsky v. Commonwealth United Corp., 551 F.2d 887, 893 (2d Cir. 1976). Accordingly,

when “deciding whether to strike a Rule 12(f) motion on the ground that the matter is impertinent

and immaterial, it is settled that the motion will be denied, unless it can be shown that no evidence

in support of the allegation would be admissible.” Lipsky, 551 F.2d at 893. In other words,

[t]o prevail on a motion to strike, the [movant] must show that: (1) no evidence in support of the

allegations would be admissible; (2) the allegations have no bearing on the relevant issues; and (3)

permitting the allegations to stand would result in prejudice to the movant.” Hargett v. Metro.

Trans. Auth., 552 F. Supp. 2d 393, 404 (S.D.N.Y. 2008).

DISCUSSION

In its amended complaint, Jefferson Road brings two claims against Travelers. In its first

claim, Jefferson Road seeks a declaratory judgment that Travelers is obligated to defend and

indemnify Jefferson Road and that Travelers is obligated to reimburse it for any costs and

expenses, including attorneys’ fees, incurred in defending the Underlying Action and in bringing

the Second Third-Party Action. ECF No. 12 ¶¶ 57–60. In its second claim, Jefferson Road seeks

money damages for Travelers’ alleged breach of contract, including a breach of the implied

covenant of good faith and fair dealing. As relevant to Travelers’ motion, Jefferson Road seeks

consequential damages for Travelers’ alleged breach of contract in the form of attorneys’ fees and

costs incurred in bringing this action. Id. ¶ 73.

Travelers has moved to dismiss Jefferson Road’s request for attorneys’ fees and costs

incurred in this action and to strike Jefferson Road’s allegations of bad faith. ECF No. 13-1. As

explained below, Travelers’ motions are DENIED.

I. Motion to Dismiss Claim for Attorneys’ Fees and Costs

Travelers argues that attorneys’ fees and costs are not recoverable where, as here, the

insured has brought an action against the insurer—even if the insured shows that the insurer

wrongly denied a defense. Jefferson Road contends that the Court should not dismiss its claim for

attorneys’ fees and costs at this early stage of the litigation. The Court agrees with Jefferson Road.

As this Court has explained, in New York, every contract contains an implied covenant of

good faith and fair dealing. 1555 Jefferson Road LLC v. Travelers Prop. Casualty Co. of Am., No.

23-CV-6347, 2023 WL 6927205, at *3 (W.D.N.Y. Oct. 19, 2023) (citing Nat’l Mkt. Share, Inc. v.

Sterling Nat’l Bank, 392 F.3d 520, 525 (2d Cir. 2004)). This implied covenant “embraces a pledge

that neither party shall do anything which will have the effect of destroying or injuring the right of

the other party to receive the fruits of the contract.” Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d

Cir. 2011) (quoting 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153

(2002)). Such a covenant is implicit in contracts of insurance too, “such that a reasonable insured

would understand that the insurer promises to investigate in good faith and pay covered claims.”

Bi-Econ. Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 194 (2008); see also Satispie,

LLC v. Travelers Prop. Casualty Co. of Am., 448 F. Supp. 3d 287, 294 (W.D.N.Y. 2020).

A breach of this implied covenant constitutes “a breach of the underlying contract.” Nat’l

Mkt. Share, 392 F.3d at 525. Therefore, a breach of the implied covenant of good faith and fair

dealing does not usually provide an independent cause of action. See Goldmark, Inc. v. Catlin

Syndicate Ltd., 2011 WL 743568, at *4 (E.D.N.Y. Feb. 24, 2011) (citing Bi-Econ. Mkt., Inc., 10

N.Y.3d at 193–94). But, while “not an independent cause of action, a breach of the [implied

covenant] may justify the recovery of consequential damages in addition to the loss insured by the

policy at issue.” Id. As the New York Court of Appeals explained in Panasia Estates, Inc. v.

Hudson Insurance Co., a party may also seek consequential damages “in an insurance contract

context, so long as the damages were ‘within the contemplation of the parties as the probable result

of a breach at the time of or prior to contracting.’” Panasia Estates, Inc. v. Hudson Ins. Co., 10

N.Y.3d 200, 203 (2008) (quoting Bi-Econ. Mkt., 10 N.Y.3d at 192).

Relying on Court of Appeals cases predating both Panasia and Bi-Economy, Travelers

asserts that Jefferson Road cannot recover fees incurred in this action even if it shows that

Travelers wrongly denied a defense in the Underlying Action. ECF No. 13-1 at 8 (citing N.Y.

Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 325 (1995); Mighty Midgets, Inc. v. Centennial Ins. Co.,

47 N.Y.2d 12, 21 (1979)). After Panasia and Bi-Economy, however, courts in New York have

split “as to whether a plaintiff can seek attorneys’ fees as part of its consequential damages claim.”

H&H Env’tl Sys., Inc. v. Evanston Ins. Co., No. 18-CV-6315, 2019 WL 1129434, at *11

(W.D.N.Y. Mar. 12, 2019) (permitting request for attorneys’ fees to survive defendant insurance

companies’ Rule 12 motions), abrogated on other grounds by Admiral Ins. Co. v. Niagara

Transformer Corp., 57 F.4th 85 (2d Cir. 2023); compare Chernish v. Mass. Mut. Life. Ins. Co.,

No. 08-CV-0957, 2009 WL 385418, at *5 (N.D.N.Y. Feb. 10, 2009) (concluding that, after Bi-

Economy, pleading stage was too early in litigation to resolve entitlement to attorneys’ fees), with

Santoro v. GEICO, 986 N.Y.S.2d 572, 573–74 (2d Dep’t 2014) (citing Panasia but concluding

that attorneys’ fees and costs from affirmative litigation are not recoverable under New York

University and Centennial Insurance).

Although federal courts have been willing to permit claims for attorneys’ fees to proceed,

New York state courts have rejected the argument that Panasia and Bi-Economy allow an insured

to recover attorneys’ fees and costs incurred in affirmative litigation against an insurer. As the

Appellate Division, Second Department has put it, “nothing in Bi-Economy or Panasia alters the

common-law rule that, absent a contractual or policy provision permitting the recovery of an

attorney’s fee, ‘an insured may not recover the expenses incurred in bringing an affirmative action

against an insurer to settle its rights under the policy.’” Stein, LLC v. Lawyers Title Ins. Corp.,

953 N.Y.S.2d 303, 304 (2d Dep’t 2012); see Quick Response Commercial Div., LLC v. Cincinnati

Ins. Co., 2018 WL 2209203, at *2 (N.D.N.Y. May 14, 2018) (“In the face of this tension, courts

have decided that Panasia’s holding yields to the general rule, and attorney’s fees cannot be

recovered as consequential damages.”); Brown v. Gov’t Emps. Ins. Co., 66 N.Y.S.3d 733, 737 (3d

Dep’t 2017) (“We agree that nothing in Bi-Economy or Panasia implicitly altered or abrogated

previous rules limiting recovery of damages for breach of a contract-related duty.”). In fact, the

Second Department has characterized “the inability of plaintiffs to recover an attorney’s fee, costs,

and interest as consequential damages in [an] affirmative action against their insurer” as “clear and

free from doubt.” 30-40 E. Main St. Bayshore, Inc. v. Republic Franklin Ins. Co., 981 N.Y.S.2d

616, 617 (2d Dep’t 2014).

The Court is therefore persuaded that, even after Panasia and Bi-Economy, an insured

generally cannot recover attorneys’ fees and costs incurred in affirmative litigation against the

insurer as consequential damages. New York courts recognize an exception to the general rule,

however, “where there has been an unreasonable bad faith denial of coverage.” Quick Response,

2018 WL 2209203, at *2. To invoke this exception, a plaintiff must allege “such bad faith in

denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.”

Id. (quoting Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967)); see also Nazareth Coll. of

Rochester v. Harleysville Preferred Ins. Co., No. 16-CV-6418, 2017 WL 999214, at *3 (W.D.N.Y.

Mar. 15, 2017).2 To allege such bad faith, a plaintiff must allege that “(1) the insurer denied

coverage as a result of ‘gross negligence’[] and (2) the insurer lacked even an ‘arguable basis for

2 Although some courts have questioned the “continued vitality [of Sukup] in light of Bi-Economy and its progeny,”

Shapiro v. Liberty Specialty Mkts., Nos. 17-CV-2783, 17-CV-7045, 2018 WL 10582979, at *2 n.2 (S.D.N.Y. July 24,

2018), because the Court of Appeals has not expressly overruled Sukup, this Court—like many other courts in this

Circuit—will continue to rely on it in assessing Jefferson Road’s attorneys’ fee claim. See e.g., CBKZZ Investment,

LLC v. Renaissance Re Syndicate 1458 Lloyds, No. 22-CV-10672, 2024 WL 728890 at *3 (S.D.N.Y. Feb. 22, 2024)

(applying Sukup to deny summary judgment on attorneys’ fees claim); Zicherman v. State Farm Fire & Casualty Co.,

No. 23-CV-2725, 2023 WL 6675327, at *3–4 (E.D.N.Y. Oct. 12, 2023) (applying Sukup to deny motion to dismiss

attorneys’ fees claim).

denying coverage under the standards of a reasonable insurer.” Nazareth Coll., 2017 WL 999214,

at *3 (quoting Kurzdorfer v. GEICO Gen. Ins. Co., No. 12-CV-781, 2013 WL 434186, at *2

(W.D.N.Y. Feb. 4, 2013)).

Jefferson Road’s allegations that it was an additional insured under the CGL policies and

that, beginning with the December 2021 tender, Travelers has ignored its repeated tenders despite

defending AmesburyTruth in the Underlying Action and Schlegel in the Second Third-Party

Action are enough, at this stage of the proceedings, to allow its request for attorneys’ fees and

costs. Cf. H&H Env’tl Sys., 2019 WL 1129434, at *11–12 (acknowledging ability to recover

attorneys’ fees under Sukup and declining to dismiss request for attorneys’ fees on motion to

dismiss in light of uncertain legal landscape surrounding the issue); Nazareth Coll., 2017 WL

99214, at *3 (dismissing claim for attorneys’ fees where only factual allegation to support claim

was that insurer refused to defend and indemnify in face of cases decided after insurer denied

coverage).

The Court therefore declines to dismiss Jefferson Road’s request for attorneys’ fees and

costs at this stage of the proceedings. Travelers’ partial motion to dismiss is denied.

II. Motion to Strike References to “Bad Faith” in the Amended Complaint

Travelers asserts that Jefferson Road’s references to bad faith are immaterial and

impertinent because the Court dismissed Jefferson Road’s bad faith claim with prejudice. In

response, Jefferson Road argues that the allegations of bad faith are relevant to its allegations that

Travelers breached the implied covenant of good faith and fair dealing and to its request for

consequential damages. The Court agrees with Jefferson Road.

Jefferson Road refers to Travelers’ alleged bad faith five times in the amended complaint.

See ECF No. 12 ¶¶ 43, 50, 56, 71, 72. Each allegation of bad faith relates to Travelers’ alleged

failure to defend and indemnify Jefferson Road in the Underlying Action, as well as Travelers’

alleged failure to respond to Jefferson Road’s multiple tenders. See id. At the very least, these

allegations of bad faith are relevant to Jefferson Road’s request for attorneys’ fees and costs as

consequential damages, which, as the Court noted above, requires a showing of bad faith to

succeed. See e.g., Goldmark, Inc., 2011 WL 743568, at *3 (“This Circuit has consistently held

that Bi-Economy stands for the proposition that consequential damages are permitted when they

derive from an insurer’s bad faith refusal to pay an insured’s claim. . .”).

Because Jefferson Road’s allegations of bad faith are relevant to its request for

consequential damages, Travelers has failed to show that: (1) no evidence in support of the

references to bad faith would be admissible; (2) the references to bad faith have no bearing on the

relevant issues; and (3) permitting the references to bad faith to stand would result in prejudice to

the it. See Hargett, 552 F. Supp. 2d at 404. Accordingly, the Court sees no reason, let alone a

“strong reason,” to strike Jefferson Road’s allegations of bad faith. Lipsky, 551 F.2d at 893.

The Court therefore declines to strike Jefferson Road’s allegations of bad faith from the

amended complaint. Travelers’ motion to strike 1s denied.

CONCLUSION

For the foregoing reasons, Defendant’s partial motion to dismiss and motion to strike, ECF

No. 13, are DENIED. Defendant shall answer the amended complaint no later than May 28, 2024.

IT IS SO ORDERED.

Dated: May 7, 2024

Rochester, New York f! □

United States District Judge

Western District of New York

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