Johnson v. Arch Specialty Insurance Company

IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF TENNESSEE

WESTERN DIVISION

)

LAWRENCE D. JOHNSON, as )

trustee of The SJ Trust, )

and WILLIAM P. JOHNSON, )

as trustee of The DJ Trust, )

)

Plaintiffs, )

)

v. ) No. 2:19-cv-02217

)

ARCH SPECIALTY INSURANCE )

CO., )

)

Defendant. )

)

ORDER

Before the Court is Defendant Arch Specialty Insurance

Company’s (“Arch”) October 28, 2019 Motion to Dismiss. (ECF

No. 38.) Plaintiffs Lawrence D. Johnson, as trustee of The SJ

Trust, and William P. Johnson, as trustee of The DJ Trust,

responded on November 25, 2019. (ECF No. 41.) Arch replied on

December 9, 2019. (ECF No. 42.)

For the following reasons, the Motion to Dismiss is

DENIED.

I. Background

For purposes of the Motion to Dismiss, the facts are taken

from the Amended Complaint.

Plaintiffs own two commercial buildings in Memphis,

Tennessee, that they rent to retail tenants (the “Properties”).

(See ECF No. 37 ¶¶ 3, 11.) In January 2017, Plaintiffs insured

the Properties under a commercial liability policy issued by

Arch (the “Policy”). (Id. ¶¶ 7-8; see also Policy, ECF No. 37-

2.) The Policy covers direct physical losses or damages to the

Properties. (ECF No. 37 ¶ 15.) The Policy is an “all risk”

policy, which means that it covers all direct physical losses

or damages to the Properties unless the losses or damages are

specifically excluded or limited by the Policy. (Id. ¶ 16.)

In January 2018, while the Policy was in effect, a winter

storm caused substantial exterior and interior damage to the

Properties. (Id. ¶ 19.) Before the storm, the roofs of the

Properties had no defects and were well-maintained. (Id.

¶ 20.) On February 16, 2018, Plaintiffs reported the damage to

the Properties to Arch. (Id. ¶ 22.) In May 2018, Arch hired a

structural engineer from Rimkus Consulting to inspect the

Properties. (Id. ¶ 26.) On July 17, 2018, Arch gave

Plaintiffs a copy of the structural engineer’s report (the

“Rimkus Report”). (Id. ¶ 27.) The Rimkus Report concluded,

inter alia, that “issues associated with the roof membrane [of

the Properties] were characterized by roof leaks through

deteriorated openings,” that “the roof membranes of the

buildings were not damaged by the weight of ice and snow,” and

that the “accumulation of freezing precipitation that later

thawed contributed to the leakage into the facility through

previous deteriorated roof areas . . . .” (Id. ¶ 28.)

On July 17, 2018, Arch informed Plaintiffs that it had

“not made an official written coverage decision yet, but it

appears the loss would be limited by the [P]olicy, based on the

Rimkus [R]eport, as water did not enter the buildings through

openings on the roof from a covered cause of loss.” (Id.

¶ 30.) On November 16, 2018, Arch denied Plaintiffs’ claim.

(Id. ¶ 38.)

On April 8, 2019, Plaintiffs filed a Complaint against

Arch in this Court asserting claims for breach of contract and

reformation and seeking compensatory and punitive damages.

(See ECF No. 1 ¶¶ 43-53.) On October 8, 2019, Plaintiffs filed

the Amended Complaint, which added a statutory bad-faith claim

under Tenn. Code Ann. § 56-7-105. (See ECF No. 37 ¶¶ 54-59.)

On October 28, 2019, Arch filed the Motion to Dismiss

under Federal Rule of Civil Procedure 12(b)(6), asserting that

Plaintiffs had failed to state a claim upon which relief can be

granted. (ECF No. 38.)

II. Jurisdiction and Choice of Law

The Court has diversity jurisdiction under 28 U.S.C.

§ 1332. Plaintiff Lawrence D. Johnson, as trustee of The SJ

Trust, is a resident citizen of Mississippi. (ECF No. 37 ¶ 1.)

Plaintiff William P. Johnson, as trustee of The DJ Trust, is a

resident citizen of Mississippi. (Id. ¶ 2.) “[W]hen a trustee

files a lawsuit in her name, her jurisdictional citizenship is

the State to which she belongs -- as is true of any natural

person.” Americold Realty Tr. v. Conagra Foods, Inc., 136 S.

Ct. 1012, 1016 (2016) (emphasis omitted) (citing Navarro

Savings Ass’n v. Lee, 446 U.S. 458, 465 (1980)). Arch is a

Missouri corporation with its principal place of business in

Kansas City, Missouri. (ECF No. 37 ¶ 4.) The parties are

completely diverse.

The amount-in-controversy requirement is satisfied.

Plaintiffs allege that the amount in controversy exceeds

$75,000. (Id. ¶ 6.) “[T]he sum claimed by the plaintiff

controls if the claim is apparently made in good faith.” St.

Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288

(1938).

State substantive law applies to state law claims in

federal court. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-

80 (1938). When there is no dispute that a certain state’s

substantive law applies, the court need not conduct a choice-

of-law analysis sua sponte. See GBJ Corp. v. E. Ohio Paving

Co., 139 F.3d 1080, 1085 (6th Cir. 1998). The parties assume

that Tennessee substantive law governs Plaintiffs’ claims.

(See ECF No. 39 at 9-14; ECF No. 41 at 4-15.) The Court

applies Tennessee substantive law to Plaintiffs’ claims.

III. Standard of Review

Rule 12(b)(6) allows dismissal of a complaint that

“fail[s] to state a claim upon which relief can be granted.” A

Rule 12(b)(6) motion permits the “defendant to test whether, as

a matter of law, the plaintiff is entitled to legal relief even

if everything alleged in the complaint is true.” Mayer v.

Mylod, 988 F.2d 635, 638 (6th Cir. 1993) (citing Nishiyama v.

Dickson Cty., 814 F.2d 277, 279 (6th Cir. 1987)). A motion to

dismiss tests only whether the plaintiff has pled a cognizable

claim and allows the court to dismiss meritless cases that

would waste judicial resources and result in unnecessary

discovery. See Brown v. City of Memphis, 440 F. Supp. 2d 868,

872 (W.D. Tenn. 2006).

When evaluating a motion to dismiss for failure to state a

claim, the Court must determine whether the complaint alleges

“sufficient factual matter, accepted as true, to ‘state a claim

to relief that is plausible on its face.’” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007)). The “[f]actual allegations must be

enough to raise a right to relief above [a] speculative level.”

Ass’n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d

545, 548 (6th Cir. 2007) (quoting Twombly, 550 U.S. at 555).

A claim is plausible on its face if “the plaintiff pleads

factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct

alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at

556). A complaint need not contain detailed factual

allegations. However, a plaintiff’s “[t]hreadbare recitals of

the elements of a cause of action, supported by mere conclusory

statements, do not suffice.” Id.

“When reviewing a motion to dismiss, the district court

may not consider matters beyond the complaint.” Hensley Mfg.

v. ProPride, Inc., 579 F.3d 603, 613 (6th Cir. 2009). “If the

district court does consider evidence outside the complaint, it

effectively converts the motion to dismiss to a motion for

summary judgment.” Id. (quotation marks and citation omitted).

The Sixth Circuit generally takes “a liberal view of what

matters fall within the pleadings for purposes of” a motion to

dismiss. Armengau v. Cline, 7 F. App’x 336, 344 (6th Cir.

2001). Documents attached to a motion to dismiss may be

considered part of the pleadings if they are “referred to in a

complaint and central to the claim.” Id. (citing Jackson v.

City of Columbus, 194 F.3d 737, 745 (6th Cir. 1999)); see also

Bassett v. NCAA, 528 F.3d 426, 430 (6th Cir. 2008) (“When a

court is presented with a Rule 12(b)(6) motion, it may consider

the Complaint and any exhibits attached thereto, public

records, items appearing in the record of the case and exhibits

attached to defendant’s motion to dismiss so long as they are

referred to in the Complaint and are central to the claims

contained therein.”).

IV. Analysis

Arch moves to dismiss Plaintiffs’ breach of contract

claim, Plaintiffs’ statutory bad-faith claim, and Plaintiffs’

request for punitive damages. (ECF No. 38.)

In general, the arguments Arch asserts in the Motion to

Dismiss are better suited to summary judgment. Arch relies on

matters outside the pleadings or otherwise addresses the

factual allegations of the Amended Complaint. At this stage,

the Court relies only on the pleadings and accepts the Amended

Complaint’s factual allegations as true. See Armengau, 7 F.

App’x at 343-44 (citing Sims v. Mercy Hosp. of Monroe, 451 F.2d

171, 173 (6th Cir. 1971)). Absent heightened pleading

standards, which are not asserted here, the Court decides only

whether the Amended Complaint pleads “enough facts to state a

claim to relief that is plausible on its face.” Twombly, 550

U.S. at 570.

A. The Rimkus Report

Arch’s Motion to Dismiss relies heavily on the Rimkus

Report, a structural engineering report on the Properties that

Arch commissioned during its investigation of Plaintiffs’

insurance claim. (See ECF No. 39 at 6-8, 9-13.) The Rimkus

Report concludes, inter alia, that the Properties had

“deficient roof conditions” that “pre-dated the January 2018[]

weather events” and that “[t]he roof membranes of the buildings

were not damaged by the weight of ice and snow” from the

January 2018 winter storm. (Id. at 7; ECF No. 39-3 at 2 ¶¶ 4,

6.) Arch has attached a copy of the Rimkus Report to its

Motion to Dismiss. (See ECF No. 39-3.)

Arch argues that “[t]his Court may consider the full text

of documents, such as the Rimkus Report, quoted in and relied

upon by Plaintiffs in their Amended Complaint.” (ECF No. 39 at

7 n.1.) Plaintiffs respond that the Court should not consider

the Rimkus Report in evaluating the Motion to Dismiss because,

although the Amended Complaint briefly references it, “the

Rimkus Report is not central to Plaintiffs’ claim.” (ECF No.

41 at 15-17.)

Documents attached to a motion to dismiss may be

considered part of the pleadings if they are “referred to in a

complaint and central to the claim.” Armengau, 7 F. App’x at

344. Although central to Arch’s defenses, the Rimkus Report is

not central to Plaintiffs’ claims. Plaintiffs did not attach

the Rimkus Report to the Amended Complaint. The Amended

Complaint describes the report and quotes several of its

findings. (ECF No. 37 ¶¶ 27-28.) The Amended Complaint

asserts that the quoted findings, “even if true, result in full

coverage for the entirety of [Plaintiffs’ loss].” (Id. ¶ 29.)

Plaintiffs argue that “[t]he Rimkus Report is merely mentioned

in the Amended Complaint to lay out the facts of Plaintiffs’

case with regard to Arch’s defense to demonstrate that

Plaintiffs’ claim is compensable even if the conclusions

reached in the Rimkus Report were accurate.” (ECF No. 41 at

16.) Plaintiffs assert that they will rely on their own expert

proof at trial. (Id.) Plaintiffs’ arguments are well-taken.

The Rimkus Report is mentioned in the Amended Complaint only

briefly. Many of its findings are adverse to Plaintiffs’

factual allegations. Plaintiffs nowhere rely on it as central

to their claims. The Rimkus Report is not part of Plaintiffs’

pleadings. The Court will not consider it in evaluating the

Motion to Dismiss.

B. Breach of Contract

Arch asserts that Plaintiffs fail to state a breach of

contract claim for which relief can be granted “because lack of

proper maintenance caused the alleged damage to the premises

and Arch fully performed its obligations under the [Policy].”

(ECF No. 39 at 9-11.) Relying on the Rimkus Report, Arch

argues that the losses to the Properties resulted from

deteriorated roofing and not from the January 2018 winter

storm. (Id.) Arch argues that the losses are excluded from

coverage under the Policy. (Id.)

Arch’s arguments are unpersuasive. Plaintiffs plead

“sufficient factual matter, accepted as true, to state” a

plausible breach of contract claim. Iqbal, 556 U.S. at 678.

In Tennessee, the elements of a breach of contract claim are:

(1) the existence of a valid and enforceable contract; (2) a

deficiency in performance amounting to a breach; and (3)

damages caused by the breach. Fed. Ins. Co. v. Winters, 354

S.W.3d 287, 291 (Tenn. 2011) (citing ARC LifeMed, Inc. v. AMC-

Tenn., Inc., 183 S.W.3d 1, 26 (Tenn. Ct. App. 2005)).

Plaintiffs plead the existence of a valid and enforceable

contract, the Policy, which they attach to the Amended

Complaint. (ECF No. 37 ¶¶ 7-9, 44; ECF No. 37-2.)

Plaintiffs plead numerous facts to support their theory of

breach. They allege that the Policy is an “all risk” policy,

that the losses to the Properties in January 2018 resulted from

the winter storm, that the roofs of the Properties were well-

maintained prior to the storm, that they promptly reported the

losses to Arch, and that Arch refused to pay any portion of

their insurance claim. (ECF No. 37 ¶¶ 16, 19-20, 22, 38, 45.)

Plaintiffs plead that they have sustained damages as a

result of Arch’s alleged breach, “including but not limited to

the replacement cost of the damage to the [Properties] and

temporary repairs, as well as consequential damages, plus

interest thereon.” (Id. ¶¶ 42, 46.) Plaintiffs plead a

cognizable breach of contract claim.

C. Statutory Bad Faith

Arch asserts that Plaintiffs fail to state a statutory

bad-faith claim for which relief can be granted because “no

coverage exists [under the Policy] and Arch acted in good faith

when it denied coverage of Plaintiffs’ claimed loss.” (ECF No.

39 at 11-13.) Relying on the Rimkus Report, Arch reiterates

its argument that the losses to the Properties resulted from

deteriorated roofing and are excluded from coverage under the

Policy. (Id.) Arch argues that it “acted reasonably in

investigating [Plaintiffs’ insurance] claim and subsequently

denying coverage.” (Id.)

Arch’s arguments are unpersuasive. Plaintiffs plead

“sufficient factual matter, accepted as true, to state” a

plausible statutory bad-faith claim. Iqbal, 556 U.S. at 678.

In Tennessee, the elements of a statutory bad-faith claim are:

(1) the policy of insurance, by its terms, has become due and

payable; (2) a formal demand for payment has been made; (3) the

insured party has waited 60 days after making a demand before

filing suit; and (4) the refusal to pay was not in good faith.

Minton v. Tenn. Farmers Mut. Ins. Co., 832 S.W.2d 35, 38 (Tenn.

Ct. App. 1992) (referencing Tenn. Code Ann. § 56-7-105). “[A]n

insurer’s refusal to pay is in good faith . . . if the refusal

to pay ‘rests on legitimate and substantial legal grounds.’”

Kizer v. Progressive Cas. Ins. Co., No. 3:06-cv-1109, 2008 WL

2048274, at *5 (M.D. Tenn. May 12, 2008) (quoting Williamson v.

Aetna Life Ins. Co., 481 F.3d 369, 378 (6th Cir. 2007)). An

insurer’s refusal to pay is not in good faith if “the ultimate

purpose of the insurance company was . . . to minimize its own

liability at the expense and inconvenience of the insured.”

Mann v. Grange Mut. Ins. Co., No. 86-155-II, 1986 WL 14223, at

*3 (Tenn. Ct. App. Dec. 17, 1986).

Plaintiffs plead that the Policy, by its terms, became due

and payable after the Properties were damaged by the January

2018 winter storm and that Plaintiffs filed an insurance claim

with Arch. (ECF No. 37 ¶¶ 22-23.)

Plaintiffs plead that they made a formal demand for

payment of their insurance claim. (Id. ¶ 55.)

Plaintiffs plead that more than 60 days passed after their

formal demand before they filed their statutory bad-faith

claim. (Id.)

Plaintiffs plead that Arch refused their insurance claim

in bad faith. They allege, inter alia, that the losses to the

Properties are clearly compensable under the Policy, that

“[t]here is no reasonable coverage dispute or other justifiable

reason for [Arch’s] refusal,” that Arch “refus[ed] to pay

Plaintiffs’ claim without conducting a reasonable investigation

based on all available information,” and that Arch failed to

“promptly provide Plaintiffs with a reasonable and accurate

explanation for its refusal to pay their claim in full.” (Id.

¶¶ 23, 39, 58.) Plaintiffs plead a cognizable statutory bad-

faith claim.

D. Punitive Damages

Arch asserts that Plaintiffs fail to state a basis for

punitive damages for which relief can be granted because

“Plaintiffs’ Amended Complaint lacks any factual pleading that

would support a finding that Arch acted intentionally,

fraudulently, maliciously, or recklessly” in refusing to pay

Plaintiffs’ insurance claim. (ECF No. 39 at 14-15.) Arch

argues that it “had a reasonabl[e] basis for denying coverage”

and that “Plaintiffs[] have not demonstrated in their pleadings

how any alleged actions on behalf of Arch can be considered

[sufficiently] egregious as to warrant the imposition of

punitive damages.” (Id. (quotation marks and citation

omitted).)

Arch’s arguments are unpersuasive. Plaintiffs plead

“sufficient factual matter, accepted as true, to state” a

plausible basis for punitive damages. Iqbal, 556 U.S. at 678.

In Tennessee, punitive damages in a breach of contract case are

“limited to ‘the most egregious cases’ and [are] proper only

where there is clear and convincing proof that the defendant

has acted either ‘intentionally, fraudulently, maliciously, or

recklessly.’” Rogers v. Louisville Land Co., 367 S.W.3d 196,

211 n.14 (Tenn. 2012) (quoting Goff v. Elmo Greer & Sons

Constr. Co., 297 S.W.3d 175, 187 (Tenn. 2009)).

Plaintiffs plead facts indicating that Arch acted either

recklessly or intentionally in denying Plaintiffs’ insurance

claim. As discussed supra, Plaintiffs sufficiently plead that

Arch breached the Policy. They allege that Arch “refused and

failed to conduct a reasonable investigation of Plaintiffs’

claim based on all available information,” “unjustly refused to

pay Plaintiffs’ claim for its own financial preservation with

no reasonable or justifiable basis,” and “delayed the handling

of the claim for no justifiable reason.” (ECF No. 37 ¶ 50.)

Plaintiffs plead a cognizable basis for punitive damages.

V. Conclusion

For the foregoing reasons, the Motion to Dismiss is

DENIED.

So ordered this 13th day of April, 2020.

/s/ Samuel H. Mays, Jr.

Samuel H. Mays, Jr.

UNITED STATES DISTRICT JUDGE