Insured Fails to State a Claim for Bad Faith and Cannot Pursue Extra-Contractual Damages Without Independent Tort

Applying Minnesota law, the United States District Court for the District of Minnesota has held that, while an insured’s breach of contract claim was adequately pled, the insured could not pursue a cause of action for bad faith or seek relief in the form of extra-contractual damages.  Lunde v. Cincinnati Ins. Co., 2018 WL 1972475 (D. Minn. Apr. 26, 2018).

The insurer issued a D&O policy to a bank.  On April 3, 2009, an attorney representing the bank’s directors and officers notified the insurer of potential claims of possible wrongful acts involving a $228 million loan for a condominium development.  The directors and officers then received a demand letter on March 26, 2010 for damages for alleged “wrongful acts” in connection with various loans.  The insurer received notice of the demand letter.  On December 21, 2016, an officer of the insured was indicted for conspiracy and bank fraud in connection with the loan for the condominium development.  The officer tendered the defense of the indictment to the insurer on May 22, 2017.  The insurer denied coverage, and the officer filed suit against the insurer.  The insurer filed a motion to dismiss.

The court first determined that the officer’s breach of contract claim withstood the motion to dismiss standard because the officer had stated a plausible claim for breach.  However, the court dismissed the officer’s cause of action for breach of the implied covenant of good faith and fair dealing.  The court noted that the facts supporting the bad faith cause of action in the complaint turned on honest disagreements about the meaning of the policy’s terms, which are not sufficient to state a claim for breach of the implied covenant.

The court further concluded that the officer could not pursue extra-contractual damages, as such damages are not recoverable unless the breach of contract is accompanied by an independent tort.  Because the officer had failed to adequately allege a tort independent of the breach of contract claim or a duty independent of the contract, the court dismissed her claim for additional damages.