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Blue Cross of Idaho Health Service, Inc. v. Atlantic Mutual Insurance Co.

August 23, 2010

BLUE CROSS OF IDAHO HEALTH SERVICE, INC., AN IDAHO CORPORATION, PLAINTIFF,
v.
ATLANTIC MUTUAL INSURANCE COMPANY, A NEW YORK CORPORATION; ATLANTIC SPECIALTY INSURANCE COMPANY, A NEW YORK CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Honorable Candy W. Dale Chief United States Magistrate Judge

MEMORANDUM DECISION AND ORDER

INTRODUCTION

Blue Cross of Idaho ("Blue Cross") filed this action against Atlantic Mutual Insurance Company and Atlantic Specialty Insurance Company (collectively, "Atlantic") seeking a declaratory judgment that one or both defendants owe an indemnity obligation under certain commercial general liability policies and umbrella policies for a settlement and attorneys fees that Blue Cross paid to resolve the lawsuit Verska, et. al. v. Blue Cross of Idaho, Inc., (the "Verska lawsuit"). Blue Cross filed its Second Amended Complaint on March 12, 2010, (Dkt. 41), which in addition to the declaratory judgment claim seeks damages for breach of contract for failure to honor obligations and policy terms, untimely payment of attorney fees and settlement amounts, and a claim for bad faith.

Atlantic filed its Answer and Counterclaim on April 2, 2010, (Dkt. 47), denying that either defendant is liable for sums Blue Cross claims Atlantic owes, and seeking its own declaratory judgment that Blue Cross forfeited any coverage that it might have had under any Atlantic Policy because Blue Cross failed to comply with the policy provisions. Atlantic seeks reimbursement of the $600,000 it paid to Blue Cross for Blue Cross's defense costs under a reservation of rights and under a theory of unjust enrichment.

In response to the Counterclaim, Blue Cross filed a Motion to Dismiss (Dkt. 48) pursuant to Fed. R. Civ. P. 12(b)(6), seeking to dismiss Atlantic's counterclaim for declaratory judgment and reimbursement on the grounds that there is no insurer right of reimbursement under the terms of Atlantic's policies.

The Court conducted a hearing on the Motion to Dismiss on August 12, 2010, and at its conclusion, took the matters under advisement. (Dkt. 71.) Thereafter, on August 18, 2010, Blue Cross filed a Notice of Supplemental Authority in further support of its motion. (Dkt. 18.) The matter is ripe for review. After carefully considering the pleadings, the party's briefs, oral argument, and the relevant authorities, the Court will grant Blue Cross's Motion and dismiss Atlantic's counterclaims, granting leave to Atlantic to refile a counterclaim for declaratory judgment.

DISCUSSION

1. Motion to Dismiss Standards

A motion to dismiss under Rule 12(b)(6) will be granted when the complaint, or in this case, the counterclaim, fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). When reviewing a complaint under this Rule, all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Thompson v. Davis, 295 F.3d 890, 895 (9th Cir. 2002). However, a complaint, or portions thereof, will be dismissed if the plaintiff cannot establish "any set of facts consistent with the allegations in the complaint." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 546 (2007); see also Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (citing Twombly with approval).

A complaint attacked by a Rule 12(b)(6) motion to dismiss "does not need detailed factual allegations . . . but requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp., 550 U.S. at 555 (internal citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id. The complaint must plead "enough facts to state a claim of relief that is plausible on its face." Id. at 570. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 129 S.Ct. at 1949.

If the complaint "lacks a cognizable legal theory" or "sufficient facts alleged under a cognizable legal theory," it must be dismissed. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). Dismissal without leave to amend is appropriate only when the Court is satisfied that the deficiencies in the complaint could not possibly be cured by amendment. Jackson v. Carey, 353 F.3d 750, 758 (9th Cir. 2003).*fn1

2. Background and Arguments of the Parties

Blue Cross procured several different insurance policies with Atlantic Mutual and Atlantic Specialty covering different time periods. From July 2004 to July 2005, Blue Cross was covered by an Atlantic Mutual commercial general liability (CGL) policy for up to $1 million per occurrence and an Atlantic Mutual umbrella policy for up to $15 million in excess coverage. (Second Am. Compl. ¶. ¶. Exs. A, B, Dkt. 41).*fn2 Blue Cross was covered by similar Atlantic Specialty CGL and umbrella policies for the periods July 2005 to July 2006, and July 2006 to July 2007. (Second Am. Compl. ¶. ¶. Exs. C, D, Dkt. 41).*fn3

Certain physicians brought a lawsuit (the Verska lawsuit) against Blue Cross in or about April of 2008, alleging that Blue Cross tortiously interfered with their business relationships and caused them to lose business. The Verska plaintiffs alleged Blue Cross improperly leaked purportedly damaging information about them and their medical practice to others. Blue Cross notified Atlantic about the lawsuit under the terms of the Atlantic Policies, and claims Atlantic delayed providing Blue Cross with its coverage position until six months after Atlantic was notified. Once Atlantic issued its coverage position, Atlantic denied having any defense obligation to Blue Cross under the bodily injury coverage, but acknowledged it could have a defense obligation under its advertising liability coverage. (Ans. ¶32, Dkt. 47.) Subject to a reservation of rights, Atlantic acknowledged a potential defense obligation for the Verska lawsuit under the personal and advertising injury coverage while reserving the right to deny any obligation to indemnify Blue Cross because the policies at issue contained exclusions for professional liability, for knowing violations of the rights of another, and for breach of contract. (Atlantic's Response at 2, Dkt. 49).

Blue Cross alleges that, after Atlantic became involved in the litigation, Atlantic engaged in inappropriate conduct designed to frustrate the litigation, such as disputing Blue Cross's choice of counsel, imposing litigation management guidelines allegedly not in the policy, and so forth when trial was less than six months away. Atlantic admits that it consented to Blue Cross's chosen defense counsel to continue to defend the Verska lawsuit and to Blue Cross's control of the defense, while it continued to reserve its rights under the Policies. (Ans. ¶ 36, Dkt. 47.) Sixty days prior to trial, after mounting a vigorous defense, Blue Cross agreed to participate in mediation. Blue Cross purportedly informed Atlantic, and alleges that Atlantic refused to provide any settlement authority or contribute to any settlement. Atlantic, on the other hand, admits that it knew of the mediation, denies that it was asked to contribute to the potential settlement, but admits that it agreed it would be detrimental for Atlantic to participate in the mediation. (Ans. ¶ 47, Dkt. 47.) Atlantic agreed to waive the "consent to settle" provision contained in the Policies. (Ans. ¶ 47, Dkt. 47.) The mediation was conducted on April 20, 2009, and Blue Cross reached a settlement with the Verska plaintiffs.

From the lawsuit's inception to mediation, Blue Cross incurred approximately $1 million in defense costs, and sought reimbursement of those costs plus indemnification of the Settlement Amount from Atlantic. Atlantic continued to refuse to indemnify Blue Cross or pay its defense fees. (Ans. ¶¶ 50--51, Dkt. 47.) However, on July 22, 2009, pursuant to a reservation of rights, Atlantic paid Blue Cross "$600,000 representing the reasonable and necessary defense costs and expenses incurred by Blue Cross," equivalent to 60% of Blue Cross's defense costs. (Ans. ¶ 52; Countercl. ¶ 19, Dkt. 47.) Blue Cross contends that Atlantic has ...


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