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Empire Lumber Co., A Washington v. Indiana Lumbermens Mutual Punitive Damages and Other Insurance

September 27, 2012

EMPIRE LUMBER CO., A WASHINGTON
CORPORATION D/B/A KAMIAH MILLS, PLAINTIFF,
v.
INDIANA LUMBERMENS MUTUAL PUNITIVE DAMAGES AND OTHER INSURANCE COMPANY, AN INDIANA CORPORATION AND A DIVISION OF THE ILM GROUP, THE ILM
GROUP, AND JOHN DOES I TO V, DEFENDANTS.



The opinion of the court was delivered by: Honorable Ronald E. Bush U. S. Magistrate Judge

MEMORANDUM DECISION AND ORDER RE: PLAINTIFF'S MOTION FOR LEAVE TO AMEND COMPLAINT FOR ALLEGATIONS DEFENDANT'S MOTION TO STRIKE ALL, OR IN THE (Docket No. 21) ALTERNATIVE PORTIONS, OF THE AFFIDAVIT OF JEFFREY O'NEILL (Docket No. 47) DEFENDANT'S MOTION TO STRIKE ¶ 11 OF THE AFFIDAVIT OF DAVID KLAUE (Docket No. 48) DEFENDANT'S MOTION TO STRIKE EXPERT REPORT OF GARY REIMER (Docket No. 64)

Currently pending before the Court are: (1) Plaintiff's Motion for Leave to Amend Complaint for Punitive Damages and Other Allegations (Docket No. 21); (2) Defendant's Motion to Strike All, or in the Alternative Portions, of the Affidavit of Jeffrey O'Neill (Docket No. 47); (3) Defendant's Motion to Strike ¶ 11 of the Affidavit of David Klaue (Docket No. 48); and (4) Defendant's Motion to Strike Expert Report of Gary Reimer (Docket No. 64). Having carefully considered the record, participated in oral argument, and otherwise being fully advised, the Court enters the following Memorandum Decision and Order:

I. GENERAL BACKGROUND

On November 4, 2008, a catastrophic fire destroyed buildings, equipment, and machinery at Plaintiff Empire Lumber Company's ("Empire Lumber") sawmill in Weippe, Idaho. Defendant Indiana Lumbermens Mutual Insurance Company ("ILM") had issued a policy to Empire Lumber to cover such losses. This is a bad faith lawsuit, which primarily concerns the valuation of certain property destroyed in the fire. However, Empire Lumber also contends that ILM's alleged mishandling of its loss claim was so egregious as to justify a claim for punitive damages, and Empire Lumber asks the Court to allow an amendment of its pleadings to add such a claim. ILM opposes that request, and seeks to strike two affidavits offered in support of Empire Lumber's amendment efforts. Additionally (and independent of the parties' arguments relative to the punitive damages issue), ILM argues that Empire Lumber's expert, Gary Reimer, failed to comply with FRCP 26's reporting requirements and, therefore, his expert report should be stricken.

II. DISCUSSION

A. Plaintiff's Motion for Leave to Amend Complaint for Punitive Damages and Other Allegations (Docket No. 21) "A prayer for punitive damages is not a stand-alone cause of action, but flows from an underlying cause of action, such as a breach of contract or a tort, when the conduct of a party meets the threshold level of being oppressive and outrageous." See Boise Tower Associates LLC v. Washington Capital Joint Master Trust, 2006 WL 1749656 at *12 (D. Idaho 2006). Conduct justifying punitive damages requires "an intersection of two factors: a bad act and a bad state of mind." See Linscott v. Rainier Nat. Life Ins. Co., 606 P.2d 958, 962 (Idaho 1980). The defendant must (1) act in a manner that was an extreme deviation from reasonable standards of conduct with an understanding of - or disregard for - its likely consequences, and must (2) act with an extremely harmful state of mind, described variously as with malice, oppression, fraud, gross negligence, wantonness, deliberately, or willfully. See Myers v. Workmen's Auto Ins. Co., 95 P.3d 977, 983 (Idaho 2004). A party seeking to add a claim for punitive damages must show "a reasonable likelihood of proving facts at trial sufficient to support an award of punitive damages." See I.C. § 6-1604(2).

Much of the parties' extensive briefing to date highlights the very real controversy that exists over the cash value of the fire loss. The Court does not take up that dispute here, except insofar as it is implicated by Empire Lumber's request to add a punitive damages claim against ILM -- the focus of this Memorandum Decision and Order. Anchoring its argument in this second respect, Empire Lumber contends that, within two months after the fire, ILM determined on its own that Empire Lumber had suffered $9,429,000 in covered losses. Empire Lumber further contends that (other than an up-front $200,000 payment to Empire Lumber in November 2008 to cover miscellaneous expenses), ILM unnecessarily delayed making further payments to Empire Lumber while at the same time obtaining payments from its own reinsurers on the false representation to such reinsurers that ILM had paid Empire Lumber, and that ILM then used those monies for its own use in the interim. See generally Pl.'s Mem. in Supp. of Mot. to Am., pp. 3-11 (Docket No. 21, Att. 2).

Of particular significance to the pending motion, Empire Lumber more specifically alleges:

* As of December 2, 2008, Cunningham Lindsey (a professional appraisal firm hired by ILM) recommended payment in the amount of the appraised actual cash value amount. See Ex. 11 to Thompson Dep., attached as Ex. A to Brown Aff. (submitted via CD) ("We recommend issuing payment to the insured for the [actual cash value] amount of the building [$9,429,000] less any advances and deductible to be applied to this loss.").

* On or around April 1, 2009, ILM's Randy Thompson (ILM's claims adjuster with primary responsibility for adjusting Empire Lumber's claim) made note that the market value appraisals put the claim value at $9,429,070. See Ex. G to Mandt Aff. (Docket No. 21, Att. 9). That same day, Mr. Thompson requested, and appears to have received, authorization from ILM management to pay $7,500,000 on Empire Lumber's claim. See id.

* On or around April 9, 2009, ILM's Randy Thompson submitted a reinsurance proof of loss to Arch Reinsurance, one of ILM's reinsurers, representing that ILM had paid $7,700,000 on the loss against a reserve retention of $6,000,000, making a reinsurance recovery of $1,700,000 due to ILM from Arch Reinsurance.*fn1 See id. Up to that point, however, ILM had paid only $200,000 to Empire Lumber.

* Accompanying the reinsurance proof of loss to Arch Reinsurance were copies of two consecutively-numbered checks -- 741297 and 741298 -- dated April 1, 2009, drawn by ILM, and made payable to Empire Lumber in the amounts of $2,500,000 and $5,000,000 respectively. See Ex. H to Mandt Aff. (Docket No. 21, Att. 9). Such checks appeared to evidence payment to Empire Lumber in those amounts, but the checks were never delivered to Empire Lumber. ILM had only paid Empire Lumber $200,000 as of April 1, 2009.

* Adding to the original $200,000 payment, on or around April 24, 2009, ILM paid Empire Lumber $5 million on its loss. See Pl.'s Mem. in Supp. of Mot. to Am., p. 9 (Docket No. 21, Att. 2).

* On May 14, 2009, Holborn Corporation e-mailed ILM's Randy Thompson, inquiring whether "Indiana Lumbermens claim on the Empire Lumber loss [is] concluded" and "[i]f it's still open, what's been paid so far and how much reserve do you still have on it? See Ex. 36 to Thompson Dep., attached as Ex. A to Brown Aff. (submitted via CD). The next day, Mr. Thompson replied that the file was still open and that "[w]e have paid $7,700,000 to date" and that "[t]he outstanding reserve is $1,300,000. See id. Up to that point, however, ILM had paid only $5,200,000 to Empire Lumber.

* In November/December 2009, ILM paid Empire Lumber $2,500,000 on its loss. See Pl.'s Mem. in supp. of Mot. to Am., ...


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