Abraham Linc Corporation v. Spinnaker Insurance Company

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

CLARKSBURG

ABRAHAM LINC CORPORATION,

Plaintiff,

v. CIVIL ACTION NO. 1:23-CV-98

(KLEEH)

SPINNAKER INSURANCE COMPANY and

COWBELL CYBER, INC.,

Defendants.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN

PART DEFENDANTS’ MOTION TO DISMISS [ECF NO. 9]

Pending before the Court is Defendants’ Motion to Dismiss

First Amended Complaint [ECF No. 9]. For the reasons discussed

herein, the Motion [ECF No. 9] is GRANTED IN PART and DENIED IN

PART.

I. PROCEDURAL HISTORY

On November 1, 2023, Plaintiff Abraham Linc Corporation

(“Plaintiff” or “Abraham Linc”) filed suit against Spinnaker

Insurance Company (“Spinnaker”) and Cowbell Cyber, Inc.

(“Cowbell”) (collectively “Defendants”) in the Circuit Court of

Harrison County, West Virginia. ECF No. 1-1. Plaintiff filed its

First Amended Complaint (“Amended Complaint”) on November 7, 2023.

ECF No. 1-7 at p. 126. The Amended Complaint alleges (1) Bad Faith

– Common Law and Statutory; (2) Breach of Contract; (3)

Constructive Fraud; (4) Reasonable Expectations; and (5) Vicarious

Liability, revolving around Defendants’ denial of insurance

coverage under a Social Engineering endorsement and a Computer and

Funds Transfer Fraud endorsement. ECF No. 1-7. On December 5, 2023,

Defendants removed the case to this Court pursuant to 28 U.S.C. §§

1332, 1441, and 1446. ECF No. 1.

On January 4, 2024, Defendants moved to dismiss Plaintiff’s

Amended Complaint. ECF No. 9. Plaintiff responded in opposition to

the Motion to Dismiss on January 26, 2024 [ECF No. 18] and

Defendants subsequently replied in support of dismissal on

February 9, 2024. ECF No. 26. The Court further took up oral

argument on the Motion on June 18, 2024. The Motion to Dismiss

[ECF No. 9] is thus fully briefed and ripe for review.

II. FACTUAL ALLEGATIONS

Through its insurance agent, Blue Ridge Risk Partners, and

its insurance broker, Burns & Wilcox, Abraham Linc procured a Cyber

Insurance Policy (“Policy”) from Defendant Spinnaker, effective

January 29, 2023. Am. Compl., ECF No. 1-7, at p. 128, ¶ 11. The

Policy included a Social Engineering Endorsement which provided

$100,000.00 in insurance coverage for social engineering losses.

Id. at ¶ 12. A social engineering loss means the loss of money as

a result of a social engineering incident. Policy, ECF No. 1-7, at

p. 53. Pursuant to the Social Engineering Endorsement, a “Social

Engineering Incident” means:

the intentional misleading of an Insured to

transfer Money to a person, place or account

beyond the Named Insured's control resulting

directly from the Named Insured's employee's

good faith reliance upon an instruction

transmitted via email, purporting to be from:

i. a natural person or entity who exchanges,

or is under contract to exchange, goods

or services with the Named Insured for a

fee (other than a financial institution,

asset manager, broker-dealer, armored

motor vehicle "named insured" or any

similar entity); or

ii. an employee of the Named Insured; but

which contained a fraudulent and material

misrepresentation and was sent by an

imposter. As a condition precedent to

coverage, the Insured's established and

documented verification procedure must

have been followed before acting upon

such instruction.

Id. at p. 52. Prior to issuing the Policy, Plaintiff alleges that

Spinnaker did not request it create formal written policies related

to social engineering incidents or complete additional training or

social engineering updates. Am. Compl., ECF No. 1-7, at p. 128, ¶¶

13-14. Abraham Linc’s established, documented and historic

protocol for verifying Automated Clearing House (“ACH”) fund

transfers was to email with known vendors and contacts. Id. at ¶

15. Spinnaker never questioned Plaintiff’s verification practice.

Id. at ¶ 16.

Additionally, Abraham Linc’s Policy included a Computer and

Funds Transfer Fraud (“CFTF”) Endorsement with $2,000,000.00 in

coverage. Id. at ¶. 41. The CFTF will pay for:

i. Loss resulting directly from a fraudulent:

1. Entry of Electronic Data or Computer

System into; or

2. Change of Electronic Data or Computer

System within

a Computer System, by a person or

organization without authorization to

access such Computer System, provided the

fraudulent entry or fraudulent change

causes, with regard to Paragraphs a.i.(1)

and a.i.(2):

a. Your money, securities or other

property to be transferred, paid or

delivered; or

b. Your account at a financial

institution to be debited or

deleted, or

ii. Loss resulting directly from a Fraudulent

Instruction directing a financial

institution to debit your Transfer

Account and transfer, pay or deliver

money or securities from that account .

. .

Policy, ECF No. 1-7, at p. 47.

On or about April 20, 2023, long-standing vendor BBL

Flooring’s email accounts were hacked by a third party. Am. Compl.

at ¶ 17. Abraham Linc had a long-standing and established

relationship with BBL Flooring, in which it purchased flooring

products. Id. at 18. As part of this relationship, Plaintiff

transacted business and emailed with BBL Flooring employee Kris

Yin from BBL Flooring’s Changzhou City, Jiangsu Province, China

office since at least 2017. Id. at ¶¶ 20-21. In late April or early

May of 2023, various Abraham Linc employees emailed with whom they

believed was Kris Yin regarding due and owing invoices. Id. at ¶

19. Plaintiff states its employees engaged in its “long-standing

vendor verification procedures” in which they emailed with “Kris

Yin” to discuss and verify outstanding bills. Id. at ¶ 23.

Ultimately, Abraham Linc sent, via ACH Transfer, a

“substantial sum of money” consistent with the directives it

received from BBL Flooring and “Kris Yin”. Id. Though the funds

transfer appeared to Plaintiff at the time to be an “ordinary

transaction in the context of Abraham Linc and BBL Flooring’s

working relationship,” it later learned that BBL Flooring’s

internal system had been hacked and that it had communicated with

a fictitious Kris Yin. Id. at ¶¶ 23-24. Further, on or about May

11, 2023, Plaintiff discovered that it had transferred its funds

to a scam/fake BBL Flooring account – not its long-standing vendor.

Id. at ¶ 25. Abraham Linc was unable to stop the ACH transfer or

otherwise recoup its funds. Id. at ¶¶ 26-27. Thus, Plaintiff put

its insurance agent/broker on notice of its loss under the Policy

on May 11, 2023. Id. at ¶ 27.

Upon giving notice of its loss, Plaintiff’s insurance

agent/broker advised Plaintiff that it would receive $100,000.00

in proceeds, pursuant to the Social Engineering Endorsement. Id.

at ¶ 29. However, the same day and without any investigation,

Defendants Spinnaker Insurance Company and Cowbell Cyber, Inc.

advised that Plaintiff’s claim would be denied due to a lack of

verification by the insured. Id. at ¶ 30. On and following May 11,

2023, Plaintiff provided Defendants with materials evidencing its

verification practices and verified transactions with BBL Flooring

over approximately seven years. Id. at ¶ 31. Additionally,

Plaintiff’s insurance agent/broker repeatedly told Defendants that

it disagreed with Defendants’ coverage position. Id. at ¶ 32. For

example, Sheri O’Donoghue, the Director of Claims at Blue Ridge

Risk Partners emailed Defendants at least twice supporting

Plaintiff’s verification process and reiterating that it expected

Defendants to release the $100,000.00 in social engineering

coverage to Abraham Linc. Id. at ¶ 33.

Though Plaintiff’s insurance agent and insurance broker

believed coverage was appropriate, Defendants upheld their

coverage denial. Id. at ¶ 34.

III. LEGAL STANDARD

Rule 12(b)(6) of the Federal Rules of Civil Procedure allows

a defendant to move for dismissal upon the ground that a Complaint

does not “state a claim upon which relief can be granted.” In

ruling on a motion to dismiss, a court “must accept as true all of

the factual allegations contained in the Complaint.” Anderson v.

Sara Lee Corp., 508 F.3d 181, 188 (4th Cir. 2007) (quoting Erickson

v. Pardus, 551 U.S. 89, 94 (2007)). A court is “not bound to accept

as true a legal conclusion couched as a factual allegation.”

Papasan v. Allain, 478 U.S. 265, 286 (1986).

A motion to dismiss under Rule 12(6)(b) tests the “legal

sufficiency of a Complaint.” Francis v. Giacomelli, 588 F.3d 186,

192 (4th Cir. 2009). A court should dismiss a Complaint if it does

not contain “enough facts to state a claim to relief that is

plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S.

544, 570 (2007). Plausibility exists “when the plaintiff pleads

factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The factual

allegations “must be enough to raise a right to relief above a

speculative level.” Twombly, 550 U.S. at 545. The facts must

constitute more than “a formulaic recitation of the elements of a

cause of action.” Id. at 555. A motion to dismiss “does not resolve

contests surrounding the facts, the merits of a claim, or the

applicability of defenses.” Republican Party of N.C. v. Martin,

980 F.2d 942, 952 (4th Cir. 1992).

IV. DISCUSSION

For the reasons that follow, Defendants’ Motion to Dismiss First

Amended Complaint [ECF No. 9] is GRANTED IN PART and DENIED IN

PART. The Motion is GRANTED as to Plaintiff’s Breach of Contract

claim under the Computer and Funds Transfer Fraud (“CFTF”)

Endorsement (Count II in part) and Count IV Reasonable

Expectations. Defendants’ Motion to Dismiss First Amended

Complaint [ECF No. 9] is DENIED as to Plaintiff’s Breach of

Contract claim under the Social Engineering Endorsement (Count II

in part); Count I Bad Faith; Count III Constructive Fraud, and

Count V Vicarious Liability.

A. BREACH OF CONTRACT

In West Virginia, the elements of breach of contract are (1)

a contract exists between the parties; (2) a defendant failed to

comply with a term in the contract, and (3) damage arose from the

breach. Patrick v. PHH Mortgage Corp., 937 F.Supp.2d 773, 792

(N.D.W. Va. 2013). “A valid written instrument which expresses the

intent of the parties in plain and unambiguous language is not

subject to judicial construction or interpretation but will be

applied and enforced according to such intent.” Wickland v. Am.

Mountaineer Energy, Inc., No. 1:17-CV-205, 2019 WL 1590590, at *6

(N.D.W. Va. Apr. 12, 2019) (quoting Syl. Pt. 2, Toppings v. Rainbow

Homes, Inc., 490 S.E.2d 817 (W. Va. 1997)). “The mere fact that

parties do not agree to the construction of a contract does not

render it ambiguous.” Id. (quoting syl. Pt. 2, CONSOL Energy, Inc.

v. Hummel, 792 S.E.2d 613 (W. Va. 2016)).

1. Defendants’ Motion to Dismiss the Claim for Breach of

Contract under the Computer and Funds Transfer Fraud

Endorsement is Granted.

Plaintiff’s breach of contract claim under the Computer and

Funds Transfer Fraud (“CFTF”) Endorsement is dismissed because

Plaintiff failed to plead facts that the subject loss resulted

from unauthorized access to Abraham Linc’s computer system. The

CFTF Endorsement provides in pertinent part that Spinnaker will

pay for a loss resulting directly from a fraudulent entry or change

of electronic data or computer system, within “a computer system,

by a person or organization without authorization to access such

computer system.” ECF No. 1-7 at p. 47 (emphasis added).

Courts have found that the “reasonable expectations of the

average insured upon reading [a CFTF] policy,” is “that the rider

applies to losses resulting directly from fraudulent access, not

to losses from the content submitted by authorized users.”

Universal Am. Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh,

Pa., 25 N.Y.3d 675, 683, 37 N.E.3d 78, 82 (2015).1 In analyzing a

similar CFTF endorsement, a Central District of California court

found that the policy was meant to cover fraudulent entries or

changes to a computer system but did not cover “an authorized entry

of fraudulent electronic data or computer program.” Cachet Fin.

Servs. v. Berkley Ins. Co., No. 222CV01157SPGJEM, 2023 WL 2558413,

at *5 (C.D. Cal. Jan. 20, 2023), aff'd in part, rev'd in part and

remanded, No. 23-55217, 2024 WL 1042985 (9th Cir. Mar. 11, 2024)

(noting “the fact that the data itself was fraudulent does not

1 “Courts consistently recognize this language requires unauthorized

access to, or hacking of, the insured's computer. For example, if an

employee had authorization to use the insured's computer but inputs

fraudulent data, there is no coverage because there was no unauthorized

access of the computer and there was not a fraudulent transfer.” C. Adam

Brinkley, Theresa A. Gooley, Trying to Fit a Round Peg in A Square Hole:

Computer Fraud Insuring Agreements Were Not Designed or Intended to Cover

Social Engineering Losses, 26 Fidelity L.J. 193, 195 (2020).

negate that the Clients' ‘entry’ into Plaintiff's computer system

was done pursuant to authorization.”). “Coverage under the

Computer Transfer Fraud provision is available only when a

computer-based fraud scheme causes a transfer of funds without the

Insured's knowledge or consent.” Mississippi Silicon Holdings,

L.L.C. v. Axis Ins. Co., 843 F. App'x 581, 585–86 (5th Cir. 2021)

(finding the Computer Transfer Fraud provision specifically

disclaims coverage for transfers made with the insured's

knowledge, and three employees affirmatively authorized the

transfer). See also, Taylor & Lieberman v. Fed. Ins. Co., 681 F.

App'x 627, 629 (9th Cir. 2017) (finding there was no computer fraud

or funds transfer fraud coverage because there was not an

unauthorized entry into the insured’s computer system, and it knew

about the wire transfers).

Reading a CFTF endorsement to “cover all transfers that

involved a computer and fraud would . . . turn[] it into a general

fraud policy.” Pestmaster Servs., Inc. v. Travelers Cas. & Sur.

Co. of Am., 656 F. App'x 332 (9th Cir. 2016) (affirming the

district court’s finding that the Computer Fraud provision did not

cover any transfers authorized by the insured). Furthermore,

sending emails, without more, does not “constitute[] an

unauthorized entry into the recipient's computer system.” Taylor

& Lieberman, 681 F. App'x at 629.

Defendants argue dismissal of the breach of contract claim,

as to the CFTF Endorsement, is warranted because it does not cover

losses resulting from authorized entries into Abraham Linc’s

computer system. ECF No. 10 at p. 9. According to Defendants, the

Amended Complaint alleges that Plaintiff’s authorized employees

input the fraudulent data into Abraham Linc’s computer system to

make the ACH transfers. Id. at p. 10. Because Abraham Linc

employees used information supplied by fraudsters, Defendants

contend the allegations do not fall within the CFTF Endorsement.

Id. Defendants further argue that Plaintiff’s mere receipt of an

email from a fraudster does not qualify as an unauthorized entry

or change of electronic data or computer system within a computer

system by a person or organization without authorization. Id. at

p. 11. Thus, Defendants claim that neither the receipt of an email

with fraudulent information nor the authorized input into

Plaintiff’s computer system of the fraudulent information

satisfies the terms of the CFTF Endorsement. Id. at p. 13.

In contrast, Plaintiff asserts that the allegations in the

Amended Complaint are sufficient and the CFTF Endorsement’s

applicability should be assessed on a more developed record

following discovery. ECF No. 18 at pp. 17-20. Additionally,

Plaintiff references a circuit split which it contends is relevant

to this Court’s interpretation of the CFTF Endorsement. Id.

Here, the Court agrees with Defendants that Plaintiff’s loss

is not covered by the CFTF Endorsement because the loss did not

result from unauthorized access to Abraham Linc’s computer system.

Courts interpreting similar endorsement language have found that

CFTF endorsements apply to losses resulting directly from

fraudulent access, not to losses from the content submitted by

authorized users. Universal Am. Corp., 25 N.Y.3d at 683, 37 N.E.3d

at 82; Cachet Fin. Servs., 2023 WL 2558413, at *5. Here, Plaintiff

does not dispute that its employees, with authorized access,

initiated the ACH transfers to the fraudsters. Abraham Linc’s

computer system was not hacked and there no unauthorized access to

its computer system to warrant coverage under the CFTF Endorsement.

Moreover, the mere receipt of an email is insufficient to qualify

as unauthorized access to Abraham Linc’s computer system; without

its employees inputting the fraudulent information and initiating

the transfer, there would not have been a loss.

Plaintiff’s arguments regarding the need for discovery and

the supposed circuit split are furthermore unavailing regarding

the CFTF Endorsement. First, the Amended Complaint does not allege

an unauthorized entry or change of electronic data or computer

system within a computer system by a person or organization without

authorization. Rather, the Amended Complaint plainly asserts that

“Abraham Linc ultimately sent, via ACH Transfer, a substantial sum

of money . . . consistent with the directives sent to Abraham Linc

by the fictious ‘Kris Yin’ on behalf of fake ‘BBL Flooring’

letterhead.” ECF No. 1-7 at pp. 130, ¶ 23. Thus, there is no

dispute, necessitating discovery, that the entry into Abraham

Linc’s computer system was authorized and initiated by Plaintiff’s

employees.

Second, the circuit split raised by Plaintiff is not relevant

to the language at issue in this case. While it is true that courts

have grappled with the phrase “resulting directly from” in CFTF

endorsements,2 that language is not the basis for Defendants’

denial of coverage. Here, the language at issue is “by a person or

organization without authorization to access such Computer

System.” See Policy, ECF No. 1-7, at p. 47. The Court does not

need to reach whether the loss was “resulting directly from” a

fraudulent entry because there was no unauthorized access. Thus,

the CFTF Endorsement does not apply to the subject loss and the

circuit split is irrelevant to this Court’s analysis. Accordingly,

Defendants’ Motion is GRANTED as to Plaintiff’s Breach of Contract

claim under the CFTF Endorsement and Count II of Plaintiff’s

Amended Complaint is DISMISSED IN PART.

2. Defendants’ Motion to Dismiss the Claim for Breach of

Contract under the Social Engineering Endorsement is

Denied.

Plaintiff’s breach of contract claim under the Social

Engineering Endorsement survives dismissal at the Rule 12(b)(6)

2 Compare Am. Tooling Ctr. v. Travelers Cas. & Sur. Co. of Am., 895 F.3d

455 (6th Cir. 2018) and Cincinnati Ins. Co. v. Norfolk Truck Ctr., Inc.,

430 F. Supp. 3d 116 (E.D. Va. 2019) with Interactive Communs. Int’l,

Inc. v. Great Am. Ins. Co., 731 Fed. Appx. 929 (11th Cit. 2018).

stage because Plaintiff sufficiently pled facts to support the

policy’s condition precedent was met. The Social Engineering

Endorsement provides in pertinent part that Spinnaker will pay up

to $100,000.00 for a social engineering loss which results directly

from a social engineering incident, as defined under the Policy.

ECF No. 1-7 at p. 52. “As a condition precedent to coverage, the

Insured’s established and documented procedure must have been

followed before acting upon such instruction.” Id.

“When a condition precedent is part of a cause of action,

Rule 9 of the Federal Rules of Civil Procedure requires a plaintiff

to plead compliance with that condition precedent.” Allen v. Antero

Res. Corp., No. 1:22-CV-56, 2024 WL 778396, at *4 (N.D.W. Va. Feb.

26, 2024). Further, a plaintiff's failure to comply with a

condition precedent requires dismissal of the cause of action. See

Stricklin v. Fortuna Energy, Inc., No. 5:12CV8, 2014 WL 2619587,

at *3 (N.D.W. Va. June 12, 2014) (dismissing claim “[d]ue to the

plaintiffs' failure to comply with ... a condition precedent to

bringing their action). However, Rule 9(c) only requires a pleading

party “to allege generally that all conditions precedent have

occurred or been performed.” Fed. R. Civ. P. 9(c).3

3 In contrast, a party “denying that a condition precedent has occurred

or been performed, [] must do so with particularity.” Fed. R. Civ. P.

9(c).

In support of dismissal of the breach of contract claim

regarding the Social Engineering Endorsement, Defendants argue

there is no coverage because Plaintiff did not comply with the

Policy’s condition precedent requirement. ECF No. 10 at p. 14.

Specifically, Defendants contend that Plaintiff did not plead that

it followed an “established and documented verification procedure”

before transferring the money to the fraudulent BBL account. Id.

In order to satisfy the condition precedent, Defendants contend

Abraham Linc must have had an “established” and “documented”

verification procedure and alleged in its Amended Complaint that

it followed that procedure before initiating the funds transfer to

the fraudster. Id. However, Defendants assert that Abraham Linc’s

verification procedure was an “unwritten protocol,” and that

Plaintiff did not follow its verification procedure here, even if

it did have one. Id. at p. 18. Thus, Defendants assert Plaintiff’s

loss is not covered under the Social Engineering Endorsement

because Abraham Linc’s “undocumented protocol of confirming ACH

information with customers” does not meet the condition precedent.

Id.

To the contrary, Plaintiff contends it set forth sufficient

allegations in its Amended Complaint to support a claim under the

Social Engineering Endorsement and that it satisfied the condition

precedent through its verification procedure of emailing with

known vendors and contacts. ECF No. 18 at p. 14. Plaintiff directs

the Court to paragraphs 16 through 24 of its Amended Complaint to

support its position. Id. at pp. 14-15. Moreover, Plaintiff argues

that whether the condition precedent was satisfied is a factual

issue which should not be decided at the motion to dismiss stage.

Id. at p. 15.

Here, the Court agrees with Plaintiff that it satisfied its

pleading requirements under Fed. R. Civ. P. 12(b)(6) and the Social

Engineering Endorsement breach of contract claim survives

dismissal at this stage. Plaintiff’s factual allegations regarding

the condition precedent were sufficiently pled under Fed. R. Civ.

P. 9(c). For example, Plaintiff’s Amended Complaint alleged “the

historic, documented and established protocol related to ACH

transfer verification(s) was to verify the transfer via email with

known vendors/contacts – as many of Abraham Linc's vendors were in

distant markets and time zones, such as China, and thus were

unavailable to verify transfers by way of phone.” Am. Compl., ECF

No. 1-7 at p. 128, ¶ 15.

Moreover, Plaintiff alleged “consistent with Abraham Linc's

practice and procedures, Abraham Linc followed its procedures and

engaged in numerous email confirmations/verifications with ‘Kris

Yin’, which spanned several weeks in April/May of 2023.” Id. at p.

129, ¶ 22. Plaintiff further set forth allegations that its

procedure was communicated to Defendants by the Director of Claims

at Blue Ridge Risk Partners. Id. at p. 131, ¶ 33 (“The method of

verification utilized by the insured is their continual

relationship they have with the vendor and communications

completed by email and specifically Kris Yin, the same individual

they have communicated with over the years.”).

There is clearly a dispute of fact as to whether the condition

precedent was satisfied, which cannot be determined at this stage

of the litigation. The parties should proceed with discovery.

Moreover, Defendants acknowledge that the “condition precedent

does not mandate a specific verification procedure.” ECF No. 10 at

p. 15. Thus, it would be improper for the Court to determine at

this stage that Abraham Linc’s verification process was

insufficient without discovery. Accordingly, Defendants’ Motion is

DENIED as to Plaintiff’s Breach of Contract claim under the Social

Engineering Endorsement.

B. BAD FAITH

Defendants’ motion to dismiss Plaintiff’s statutory and

common law bad faith claims are DENIED for the following reasons.

1. Defendants’ Motion to Dismiss Plaintiff’s Statutory Bad

Faith Claim is Denied.

The Unfair Trade Practices Act (“UTPA”), in W. Va. Code § 33-

11-4, sets forth a list of “unfair methods of competition and

unfair or deceptive acts or practices in the businesses of

insurance[.]” Specifically, W. Va. Code § 33-11-4(9) prohibits

unfair claim settlement practices. To establish a cause of action

under § 33–11–4(9), a plaintiff “must demonstrate that the insurer

(1) violated the UTPA in the handling of the claimant's claim and

(2) that the insurer committed violations of the UTPA with such

frequency as to indicate a general business practice.” Holloman v.

Nationwide Mut. Ins. Co., 617 S.E.2d 816, 823 (W. Va. 2005).

“[E]ven though W.Va. Code § 33–11–4(9) requires more than a

single isolated violation in order to show a general business

practice, a claimant may produce sufficient evidence of this in a

single claim.” Elmore v. State Farm Mut. Auto. Ins. Co., 504 S.E.2d

893, 902 (W. Va. 1998). See Dodrill v. Nationwide Mut. Ins. Co.,

491 S.E.2d 1, 12–13 (W. Va. 1997) (“separate, discrete acts or

omissions, each of which constitute violations of different sub-

paragraphs of W. Va. Code § 33–11–4(9), may indeed demonstrate a

‘general business practice’ in the handling of a single claim, the

focus of which would tend to show frequent and rather general

disregard for the several proscriptions separately set out in the

relevant statute.”). “The [West Virginia] Supreme Court of Appeals

has explained ‘that the reasonableness of an insurance company's

conduct [under the WVUTPA] “ordinarily is a question of fact for

the jury” that should not be determined as a matter of law by a

trial court.’” White v. Am. Gen. Life Ins. Co., 651 F. Supp. 2d

530, 547–48 (S.D.W. Va. 2009) (quoting Hicks ex rel. Saus v. Jones,

617 S.E.2d 457, 465 (W. Va. 2005)).

Defendants argue that the UTPA bad faith claim should be

dismissed because the Amended Complaint does not allege a pattern

or practice of violating the UTPA or separate and discrete

violations. ECF No. 10 at p. 22. Rather, Defendants claim that the

UTPA claim is “premised on – at most – one act or omission, namely,

the Defendants’ decision to deny coverage for the Loss under the

Spinnaker Policy.” Id. In response, Plaintiff asserts the Amended

Complaint alleges multiple violations of the UTPA and directs the

Court to Paragraphs 52 to 62. ECF No. 18 at pp. 20-21.

Here, the Court finds the Amended Complaint alleges multiple

violations of W. Va. Code § 33-11-4(9), which are sufficient to

survive dismissal. West Virginia law is clear that the handling of

a single claim can demonstrate “separate, discrete acts or

omissions, each of which constitute violations of different sub-

paragraphs of W. Va. Code § 33–11–4(9)” and support a “general

business practice.” Dodrill, 491 S.E.2d at 12–13. In this instance,

Plaintiff has set forth multiple violations in Defendants’

handling of its claim including: “Refusing to pay claims without

conducting a reasonable investigation based upon all available

information and known facts;” “Compelling Abraham Linc to

institute litigation to recover amounts due under an insurance

policy by making no offer or unfair offers of resolution or

compromise; and ”Failing to promptly provide a commercially

reasonable explanation of the basis for the insurer’s position in

relation to the facts where applicable law and facts support an

insured’s stated position.” ECF No. 18 at p. 21. Thus, the Amended

Complaint as to the UTPA claim is sufficient to survive dismissal.

The Court notes that the UTPA bad faith claim survives

regarding Plaintiff’s allegations of both the Social Engineering

Endorsement and the CFTF Endorsement. See Dow v. Liberty Ins. Co.,

2022 WL 17421055, at *3 (S.D.W. Va. Dec. 1, 2022) (“While a

Hayseeds common law bad faith claim requires the plaintiff to have

substantially prevailed in the underlying insurance dispute, a

Jenkins statutory-based claim is not dependent upon a positive

disposition of the underlying insurance claim.”). Thus, Plaintiff

can pursue its statutory bad faith claim regarding Defendants’

denial of coverage under the CFTF Endorsement, despite the Court

dismissing the underlying breach of contract claim. Accordingly,

Defendants’ Motion is DENIED as to Plaintiff’s UTPA bad faith

claim.

2. Defendants’ Motion to Dismiss Plaintiff’s Common Law Bad

Faith Claim is Denied.

Plaintiff’s common law bad faith claim survives dismissal

because the breach of contract claim under the Social Engineering

Endorsement was adequately pled. “There is undoubtedly ‘a common

law duty of good faith and fair dealing running from an insurer to

its insured.’” Shaffer v. Nat'l Health Ins. Co., 2018 WL 1995525,

at *2 (N.D.W. Va. Apr. 27, 2018) (quoting Elmore, 504 S.E.2d at

896 (citing Hayseeds, Inc. v. State Farm Fire & Cas., 352 S.E.2d

73 (W. Va. 1986))). “[T]he common law duty of good faith and fair

dealing in insurance cases under our law runs between insurers and

insureds and is based on the existence of a contractual

relationship.” Grubbs v. Westfield Ins. Co., 430 F. Supp. 2d 563,

567 (N.D.W. Va. 2006) (quoting Elmore, 504 S.E.2d at 897). “An

insurance carrier has a duty, once a first-party policyholder has

submitted proof of a loss, to promptly conduct a reasonable

investigation of the policyholder's loss based upon all available

information.” Sellman v. Safeco Ins. Co. of Am., 2022 WL 4598571,

at *5 (N.D.W. Va. July 25, 2022) (quoting Syl. Pt. 3., Miller v.

Fluharty, 500 S.E.2d 310 (W. Va. 1997)) (declining to grant summary

judgment on common law bad faith claim because genuine issues of

fact existed as to the reasonableness of defendant's offer of

settlement, investigation, negotiations, and general conduct

during the handling of plaintiffs' claim)).

“In order for a policyholder to bring a common law bad faith

claim against his insurer, . . . the policyholder must first

substantially prevail against his insurer on the underlying

contract action.” Jordache Enters., Inc. v. Nat'l Union Fire Ins.

Co. of Pittsburgh, Pa., 513 S.E.2d 692, 695 (W. Va. 1998). “The

term ‘substantially prevail’ necessarily refers to a verdict in

favor of the insured on the underlying [] claim.” Thomas v. State

Farm Mut. Auto. Ins. Co., 608, 383 S.E.2d 786, 790 (W. Va. 1989),

holding modified by Miller, 500 S.E.2d 310.

Defendants assert the common law bad faith claim should be

dismissed because Plaintiff failed to adequately plead that its

subject loss was covered under the CFTF or Social Engineering

Endorsements. ECF No. 10 at p. 21. Specifically, Defendants rely

upon Hayseeds, Inc. v. State Farm Fire & Cas for its position that

Plaintiff must first substantially prevail against Defendants on

the underlying contract action before bringing a common law bad

faith claim. Id. In contrast, Plaintiff argues that it sufficiently

pled the two breach of contract claims to survive dismissal of the

common law bad faith claim. ECF No. 18 at p. 20.

As explained above, Plaintiff’s breach of contract claim

under the CFTF Endorsement fails to state a claim for relief, but

the breach of contract claim under the Social Engineering

Endorsement survives dismissal under Fed. R. Civ. P. 12(b)(6).

Accordingly, dismissal of the common law bad faith claim – as to

the Social Engineering Endorsement – would be premature because

Plaintiff adequately pled breach of contract. Thus, Defendants’

Motion as to the common law bad faith claim is DENIED because it

remains possible for Plaintiff to substantially prevail on its

Social Engineering Endorsement breach of contract claim. As

Plaintiff’s breach of contract claim under the CFTF Endorsement is

dismissed, Plaintiff cannot pursue a common law bad faith claim

relying upon Defendants’ handling of the CFTF coverage.

C. CONSTRUCTIVE FRAUD

Defendants’ Motion to Dismiss Plaintiff’s constructive fraud

claim is denied because Plaintiff adequately alleges a claim of

public policy constructive fraud. Constructive fraud is defined as

“a breach of legal or equitable duty, which, irrespective of moral

guilt of fraud feasor, the law declares fraudulent, because of its

tendency to deceive others, to violate public or private

confidence, or to injure public interests.” Van Heyde v. Miller,

799 S.E.2d 133, 142 (W. Va. 2017) (citing Miller v. Huntington &

Ohio Bridge Co., 15 S.E.2d 687, 695 (W. Va. 1941)). “In other

words, constructive fraud ‘exists in cases in which conduct,

although not actually fraudulent, ought to be so treated’ because

that conduct ‘has all the actual consequences and legal effects of

actual fraud.’” Grimmett v. Sunlight Fin. LLC, 2023 WL 6449447, at

*7 (S.D.W. Va. Oct. 3, 2023) (quoting Horton v. Pro. Bureau of

Collections of Md., Inc., 794 S.E.2d 395, 399 (W. Va. 2016)).

“Actual and constructive fraud involve the same basic elements,

except that constructive fraud ‘does not require proof of

fraudulent intent.’” Id.

Importantly, “constructive fraud is generally reserved for

those cases where a fiduciary relationship exists between the

parties or the fraud violates an important public policy concern.”

White v. Nat'l Steel Corp., 938 F.2d 474, 489–90 (4th Cir. 1991)

(citing Miller, 15 S.E.2d at 695). See also State v. Morgan Stanley

& Co., 459 S.E.2d 906, 913 (W. Va. 1995) (“Constructive fraud

includes violations of public policy or public rights or

transactions affected by illegal conduct of any kind.”).

A fiduciary duty is the “duty to act for someone else's

benefit, while subordinating one's personal interest to that of

the other person.” Elmore, 504 S.E.2d at 898 (quoting Black's Law

Dictionary 625 (6th ed. 1990)). West Virginia law does not

recognize a fiduciary relationship between an insurer and its

insured. Id. at 900 (“the relation between the parties to a

contract of insurance is that of debtor and creditor; that is, of

one contracting party to another contracting party . . . The

relation is a legal one rather than an equitable one.”). See

Morrison v. Columbia Gas Transmission, LLC, 2021 WL 4975743, at *3

(S.D.W. Va. Oct. 26, 2021) (finding the plaintiffs could not prove

facts to support a claim for constructive fraud because entering

a contract did not establish a fiduciary duty).

Thus, for Plaintiff’s claim to survive dismissal, Plaintiff

must sufficiently plead that Defendants’ alleged fraud violated an

important public policy concern. Certain unfair settlement

practices prohibited by the UTPA regarding acts of

misrepresentation or deception can support a fraud claim. See Wilt

v. State Auto. Mut. Ins. Co., 506 S.E.2d 608, 611–12 (W. Va. 1998)

(noting that other conduct prohibited by the UTPA does not amount

to a fraud claim because said unfair settlement practices are

“geared more to the aspect of fostering claims processing in a

timely manner to ensure fairness to the insured, rather than being

aimed strictly at the elimination of conduct that is fraudulent in

character.”). The Northern District of West Virginia has

previously recognized that a constructive fraud claim could be

asserted based upon “West Virginia's public policy prohibiting

insurers from taking unfair advantage of policy holders.”

Artworks, LLC v. Hartford Cas. Ins. Co., 2020 WL 2754918, at *3

(N.D.W. Va. May 27, 2020) (finding plaintiffs could possibly

establish a cause of action for constructive fraud against insurer

defendant).

Defendants argue dismissal of the constructive fraud claim is

proper because Plaintiff’s Amended Complaint does not allege

Defendants made a false misrepresentation upon which Abraham Linc

detrimentally relied. ECF No. 10 at p. 23. Defendants further argue

that Plaintiffs failed to plead with particularity the time, place,

and contents of the alleged fraud, as required by Fed. R. Civ. P.

9(b). Id. In contrast, Plaintiff asserts it has met its pleading

burden for a constructive fraud claim. ECF No. 18 at p. 23.

Specifically, Plaintiff argues it pled that Defendants “engaged in

a scheme of bad acts/omissions in violation of substantial public

policies.” Id.

Here, Plaintiff’s Amended Complaint sufficiently alleges

constructive fraud. Plaintiff’s Amended Complaint alleges that

West Virginia has “a substantial public policy prohibiting

insurers from deceiving, oppressing, and/or taking unfair

advantage of policy holders.” Am. Compl., ECF No. 1-7, at p. 138,

¶ 71. According to Plaintiff, this public policy stems from West

Virginia case law, legislative enactments, and insurance

commissioner rules and regulations. Id. at ¶¶ 72-73. Furthermore,

Plaintiff set forth sufficient facts to support that Defendants’

acts or omissions constituted breaches of their legal or equitable

duties to Plaintiff. For example, Abraham Linc pled with

particularity the time, place, and contents of the alleged fraud

in the following:

30. Notwithstanding the clarity of the

insurance agent/broker's representations,

after the claim was tendered and without any

investigation, on May 11, 2023, Spinnaker and

Cowbell verbally advised that they were going

to deny Abraham Linc's social engineering

claim due to a lack of verification on the

part of the insured.

. . .

36. The Defendants' omissions and failures are

glaring, particularly as under West Virginia

law, it is clear that "[a]ny person who shall

solicit within this state an application for

insurance shall, in any controversy between

the insured or his or her beneficiary and the

insurer issuing any policy upon such

application, be regarded as the agent of the

insurer and not the agent of the insured."

W.Va. Code 33-12-22.

37. Thus here, in the context of the present

coverage dispute, the Defendants' agents have

plainly admitted that there is coverage such

that Abraham Linc's social engineering loss

claim is valid and should be paid.

Id. at ¶ ¶ 30, 36-37. Accordingly, Plaintiff’s Amended Complaint

sufficiently sets forth a claim for constructive fraud because

Abraham Linc alleges fraudulent acts or omissions involving

important public policy concerns. Thus, Defendants’ Motion is

DENIED as to Plaintiff’s constructive fraud claim.

D. REASONABLE EXPECTATION

Defendants’ Motion as to Count IV Reasonable Expectations is

granted because the doctrine of reasonable expectations is not a

stand-alone cause of action. “[T]he doctrine of reasonable

expectations is not a stand-alone cause of action but rather a

rule of construction applicable to insurance contracts.” State ex

rel. Erie Ins. Prop. & Cas. Co. v. Beane, 2016 WL 3392560, at *2,

n.2 (W. Va. June 13, 2016). See Robertson v. Cincinnati Life Ins.

Co., 2019 WL 441184, at *9 (S.D.W. Va. Feb. 4, 2019) (granting

summary judgment on reasonable expectation count); Sizemore v. Nw.

Mut. Life Ins. Co., 2017 WL 3528851, at *4 (S.D.W. Va. Aug. 16,

2017) (dismissing reasonable expectation count because defendant

rightly raised that it was not a stand-alone cause of action);

Gates v. Morris, 2018 WL 1582470, at *10 (S.D.W. Va. Mar. 29,

2018); Goff v. Frontier Commc'ns of Am., Inc., 2017 WL 440731, at

*5 (S.D.W. Va. Feb. 1, 2017).

Defendants rightly argue that Plaintiff cannot sustain a

separate claim for reasonable expectations. ECF No. 10. Thus,

Defendants’ Motion to Dismiss regarding Count IV Reasonable

Expectations is GRANTED because it is not a separate cause of

action and is duplicative of Plaintiff’s Breach of Contract claims.

Accordingly, Count IV of Plaintiff’s First Amended Complaint is

DISMISSED.

E. VICARIOUS LIABILITY

Defendants’ Motion as to Count V Vicarious Liability is

denied. “Vicarious liability is not a claim on which relief can be

granted, but is instead a theory of liability under which a proper

claim could be asserted.” Myers v. City of Charleston, 2020 WL

4195005, at *15–16 (S.D.W. Va. July 21, 2020). “Although vicarious

liability is not an independent cause of action, ‘West Virginia

courts recognize that [vicarious liability] may be asserted as

[an] independent claim[] as long as [it is] based on other

underlying claims.” Reid v. W. Virginia State Police, 2022 WL

732072, at *4 (S.D.W. Va. Mar. 10, 2022) (finding dismissal of the

vicarious liability claim inappropriate at the 12(b)(6) stage

because it could be read as extending liability of the state law

claims). See Penn v. Citizens Telecom Servs. Co., LLC, 999 F. Supp.

2d 888, 894 (S.D.W. Va. 2014) (construing the vicarious liability

count as a theory of liability to hold the defendant liable for

the actions of its employee in the plaintiff’s underlying hostile

work environment claim).

Plaintiff’s Amended Complaint alleges that Defendants should

be liable “upon theories of vicarious liability, respondeat

superior, master/servant, principle/agent and/or

employer/employee based upon the acts of, including, but not

limited to, Defendants' adjusters and agents/representatives.” Am.

Compl., ECF No. 1-7, at p. 140, ¶ 85. While Defendants are correct

that vicarious liability is not a separate cause of action,

Plaintiff brings claims of breach of contract and bad faith. At

this stage, Count V can be construed as a separate theory to extend

liability to the Defendants based upon the actions and statements

of its alleged agents Blue Ridge Risk Partners and Burns & Wilcox.4

The Court finds dismissal at this stage is not appropriate

because the vicarious liability claim is based upon other causes

of actions. Accordingly, Defendants’ Motion to Dismiss Count V is

DENIED.

V. CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss

First Amended Complaint [ECF No. 9] is GRANTED IN PART and DENIED

4 “West Virginia Code § 33-12-22 establishes that ‘[a]ny person who shall

solicit within this state an application for insurance shall, in any

controversy between the insured ... and the insurer issuing any policy

upon such application, be regarded as the agent of the insurer and not

the agent of the insured.’” GMC Real Est., LLC v. AmGUARD Ins. Co., 683

F. Supp. 3d 541, 545–46 (S.D.W. Va. 2023) finding that because the

insurance agent solicited an application for insurance, she was an agent

of the insurer issuing the policy in any controversy between the insured

and the insurer).

ABRAHAM LINC CORP. v. SPINNAKER INS. CO., et al. 1:23-CV-98

IN PART. The Motion is GRANTED as to Plaintiff’s Breach of Contract

claim under the Computer and Funds Transfer Fraud (‘“CFTF”)

Endorsement (Count II in part) and Count IV Reasonable

Expectations. Defendants’ Motion to Dismiss First Amended

Complaint [ECF No. 9] is DENIED as to Count I Bad Faith;

Plaintiff’s Breach of Contract claim under the Social Engineering

Endorsement (Count II in part); Count III Constructive Fraud; and

Count V Vicarious Liability®. Accordingly, Plaintiff’s First

Amended Complaint [ECF No. 1-7 at p. 126], is DISMISSED WITH

PREJUDICE as to Plaintiff’s Breach of Contract claim under the

Computer and Funds Transfer Fraud (“CFTF”) Endorsement (Count II

in part) and Count IV Reasonable Expectations.

It is so ORDERED.

The Clerk is directed to transmit copies of this Memorandum

Opinion and Order to counsel of record by the CM/ECF system.

DATED: July 16, 2024

Tom 8 Bla

THOMAS S. KLEEH, CHIEF JUDGE

NORTHERN DISTRICT OF WEST VIRGINIA

° While not dismissed at this stage, the Court only considers Count V as

an additional theory of extending liability on the underlying claims to

Defendants for the conduct of its agents.

30