Breach of Reinsurance Contract and Bad Faith Claims Survive Dismissal, District Court Rules

In Old Republic National Title Insurance Co. v. First American Title Insurance Co., 2015 U.S. Dist. LEXIS 44693, the U.S. District Court for the Middle District of Florida refused to dismiss portions of a cedent’s breach of contract claim, bad faith claim, and demand for declaratory judgment against a reinsurer. The reinsurance dispute arose when a cedent negotiated a $41 million settlement with the underlying insured, and the reinsurer paid its portion of the claim under a reservation of rights. After making its payment, the reinsurer filed suit against the cedent, asserting claims for breach of contract, rescission, negligence, unjust enrichment, and declaratory judgment. The instant action dealt with the cedent’s counterclaims for breach of contract, breach of utmost good faith, and declaratory judgment under West Virginia law.

In connection with the breach of contract claim, the cedent argued that the reinsurer breached the contract by: (1) paying the claim under a reservation of rights to assert claims against the cedent, (2) disputing its obligation to pay, (3) improperly trying to claw back its portion of the settlement, and (4) refusing to pay its portion of the defense fees and costs. Despite pointing out that the cedent failed to allege which specific contractual provisions were breached for the first three allegations, the court “read in” additional facts raised by the cedent in response a motion to dismiss. Specifically, the court stated that to the extent the claim was based on a breach of the timeliness provision, the claim was adequately stated. The court further held that the allegations sufficiently established that the reinsurer failed to pay defense costs, even if the reinsurer disagreed that it had such a responsibility.

From there, the court discussed the breach of utmost good faith claim. The cedent contended that by (1) refusing to pay except under a reservation of rights, (2) using documents provided by the cedent in good faith to “trump up false tort allegations,” and (3) “filing suit within days of its payments to preempt [the cedent] from suing [the reinsurer] in another venue,” the reinsurer acted in bad faith. The court noted that West Virginia law “implies a covenant of good faith and fair dealing in every contract for the purpose of evaluating a party’s performance of that contract” and “does not recognize an independent claim for a breach of the common law duty of good faith.” Thus, only those claims that are not “coextensive” with contractual obligations are viable bad faith claims. Interestingly, however, the court held that the cedent sufficiently pleaded facts for a bad faith claim related to the failure to pay defense costs, the very same claim giving rise to the breach of contract action.

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