United States District Court, D. Minnesota
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, Plaintiff/Counter-defendant,
AMIT SELA, Defendant/Counter-claimant.
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,
Patrick J. Schiltz United States District Judge
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.
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-
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?
Minnesota law, the implied covenant clearly imposes two
obligations on insurance contracts (and all other contracts,
save employment contracts):
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.
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.
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.
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).
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.
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.
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 ...