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Selective Insurance Co. of South Carolina v. Sela

United States District Court, D. Minnesota

August 16, 2019

SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, Plaintiff/Counter-defendant,
v.
AMIT SELA, Defendant/Counter-claimant.

          Kristi K. Brownson, Joseph F. Lulic, and Olivia Moreland Cooper, BROWNSON NORBY, PLLC, for plaintiff/counter-defendant.

          Christopher H. Yetka, LARKIN HOFFMAN DALY & LINDGREN, LTD., and Christopher J. Knapp, BARNES & THORNBURG LLP, for defendant/counter-claimant.

          MEMORANDUM

          Patrick J. Schiltz United States District Judge

         Defendant Amit Sela (“Sela”) owned a home that was insured by plaintiff Selective Insurance Company of South Carolina (“Selective”). Sela submitted a property-loss claim to Selective after his home was damaged by hail. Selective investigated the claim and then filed this action, alleging that Sela made fraudulent misrepresentations during its investigation and thus was not entitled to indemnification. Sela counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad-faith denial of insurance benefits in violation of Minn. Stat. § 604.18.

         The case was tried to a jury during the week of July 22, 2019. Prior to trial, Selective filed a motion in limine asking, in essence, that Sela's claim for breach of the implied covenant be dismissed. ECF No. 159 at 9-10. The Court granted Selective's motion from the bench at the final pretrial conference. See ECF No. 170. Because Minnesota law regarding the implied covenant of good faith and fair dealing has recently been muddled by a decision of the Minnesota Court of Appeals, this Court issues this written memorandum explaining the basis for its dismissal of Sela's implied- covenant claim.

         There is no doubt that, under Minnesota law, every contract of insurance contains an implied covenant of good faith and fair dealing. See In re Hennepin Cty. 1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995) (“Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing . . . .”). The crucial question, though, is what does that mean? Exactly what obligations are imposed by the implied covenant?

         Under Minnesota law, the implied covenant clearly imposes two obligations on insurance contracts (and all other contracts, save employment contracts[1]):

         First, it is clear that the implied covenant is breached when a party to a contract “‘unjustifiably hinder[s]'” the other party's performance of the contract. In re Hennepin Cty., 540 N.W.2d at 502 (quoting Zobel & Dahl Constr. v. Crotty, 356 N.W.2d 42, 45 (Minn. 1984)). But this obligation is essentially irrelevant in a case involving the denial of insurance benefits. Selective's failure to pay benefits to Sela did not “unjustifiably hinder” Sela's performance of his obligations under the insurance contract.

         Second, it is clear that the implied covenant is breached when a party to a contract acts “dishonestly, maliciously, or otherwise in subjective bad faith” in exercising unqualified discretion that is given to that party in the contract. BP Prods. N. Am., Inc. v. Twin Cities Stores, Inc., 534 F.Supp.2d 959, 968 (D. Minn. 2007). In other words, when a contract explicitly gives one party discretion over some aspect of the contracting parties' relationship, and the contract does not place any restriction or qualification on that discretion, then the implied covenant prevents the party who has the unqualified discretion from using it “dishonestly, maliciously, or otherwise in subjective bad faith.” In the BP Products case, for example, the contract gave BP the sole, unqualified discretion to establish the price of gasoline sold at TCS stores. Id. at 960. This Court found that, under the implied covenant, BP could not act “dishonestly, maliciously, or otherwise in subjective bad faith” in exercising that pricing discretion. Id. at 968.

         This obligation, too, is irrelevant in a case involving the denial of insurance benefits. Obviously, an insurance contract does not give the insurer discretion to decide whether to pay benefits; such a contract would be of little use to the policyholder. Instead, the contract obligates the insurer to pay benefits under specified circumstances. The central question in a denial-of-benefits case is whether the insurer has breached that explicit contractual obligation.

         Because neither of these two obligations imposed by the implied covenant of good faith and fair dealing do policyholders any good in denial-of-benefits cases, Sela argues that the implied covenant in insurance contracts should be deemed to include an additional, broader obligation-in the words of Sela's trial brief, an obligation on the part of the insurer to act “reasonabl[y]” and “properly” in making a decision about whether to pay benefits. ECF No. 150 at 4, 5. In support of his argument, Sela does not rely primarily on Minnesota law. Instead, Sela relies primarily on comment d to § 205 of the Restatement (Second) of Contracts. That comment reports that some courts in some states have construed the implied covenant to prohibit various types of wrongful conduct, including conduct that amounts to “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance.” Restatement (Second) of Contracts § 205 cmt. d (1981).

         For a number of reasons, the Court does not believe that the Minnesota Supreme Court would hold that every contract of insurance contains an implied covenant that imposes a broad duty on insurers to act “reasonably” or “properly” in handling claims.

         Policyholders have been making claims-and insurers have been denying claims-since Minnesota became a state in 1858. The Minnesota Supreme Court and the Minnesota Court of Appeals have issued hundreds of decisions in denial-of-benefits cases. And yet, with one arguable exception (discussed below), neither the Minnesota Supreme Court nor the Minnesota Court of Appeals has ever suggested that the implied covenant of good faith and fair dealing imposes on insurers a broad obligation to act “reasonably” in handling claims. Indeed, the very reason why the Minnesota Legislature enacted Minn. Stat. § 604.18 in 2008 was because the common law did not provide a cause of action against insurers who acted unreasonably in handling claims.

         Minnesota courts have held, time and again, that the only question in a denial-of- benefits case is whether the insurance contract requires the insurer to pay the claim. It does not matter why the insurer denied the claim, and it does not matter whether the insurer's investigation was reasonable or unreasonable. See Saltou v. Dependable Ins. Co., 394 N.W.2d 629, 633 (Minn.Ct.App. 1986) (“The failure to pay an insurance claim in itself, no matter how malicious, does not constitute a tort; it constitutes a breach of ...


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