United States District Court, D. Maryland
Lipton Hollander, United States District Judge
Class Produce Group, LLC (“CPG”) has sued
Harleysville Worcester Insurance Company
(“Harleysville”), its insurer. The Amended
Complaint (ECF 38) contains two counts: breach of the
parties' insurance contract (Count 1) and “Bad
Faith Refusal to Pay Insurance Claim” (Count 2).
motions are currently pending. The first is
Harleysville's motion to dismiss the Amended Complaint,
pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). ECF 39. The
motion to dismiss is supported by a memorandum of law (ECF
39-1) (collectively, the “Motion”) and one
242-page exhibit. CPG opposes the Motion. ECF 42
(“Opposition”). Harleysville has replied. ECF 45
CPG moved for leave to file a surreply to Harleysville's
Reply. ECF 49. That motion is supported by a memorandum of
law (ECF 49-1) (collectively, “Motion for
Surreply”), as well as the proposed surreply.
See ECF 49-2. Harleysville opposes the Motion for
Surreply. ECF 52. CPG replied. ECF 53.
hearing is necessary to resolve the motions. See
Local Rule 105.6. For the reasons that follow, I shall grant
the Motion for Surreply, and I shall grant the Motion in part
and deny it in part.
Factual and Procedural Background
its corporate affiliate operate a business that processes
produce and resells the produce to customers and “end
users.” ECF 38, ¶ 7. Harleysville sold CPG a
Commercial Lines Insurance Policy, #MPA00000016598E (the
“Policy”), which indemnifies CPG against loss
“for various covered perils occurring at its
facilities.” Id. ¶ 6. CPG alleges that
the “limit of insurance for property coverage under the
Policy exceeds $1 million.” Id. Portions of
the Policy were included with the original Complaint.
See ECF 2-1. Harleysville has also included portions
of the Policy with the Motion. See ECF 39-2.
September 14, 2012, CPG leased warehouse space located at
8441 Dorsey Run Road in Jessup, Maryland (the
“Warehouse”). ECF 38, ¶ 8. About a year
later, on September 23, 2013, CPG and a neighboring tenant in
the Warehouse experienced flooding in their premises when
waste water backed up in the Warehouse's sewer system
(“Sewer Line Back-Up”). Id. ¶ 14.
CPG claims the flood was due to preexisting and latent
defects in the drainage system, causing waste water to back
up “in the Warehouse Sewer System and into the
Warehouse and its surrounding areas, ” resulting in
“damage and loss” to CPG. Id. ¶ 11.
According to CPG, the pipes were the wrong diameter, the
pumps were “old, undersized, dilapidated and worn out,
” and grease traps were clogged. Id. ¶
order to investigate and repair damage from the Sewer Line
Back-Up, CPG maintains that it had to install temporary water
drainage facilities while it repaired the latent defects in
the Warehouse's sewer system. Id. ¶¶
12-14. CPG alleges that it spent a total of $338, 475.42 on
the temporary facilities, investigation, and repairs.
Id. ¶¶ 12-13. CPG also claims that it
spent $7, 800 to clean up and restore the space. Id.
¶ 14. CPG does not explain why it, rather than its
landlord, was required to pay for the repairs.
October 11, 2013, CPG sought indemnification from
Harleysville under the Policy for losses stemming from the
Sewer Line Back-Up. Id. ¶ 15. However,
Harleysville denied coverage by letter of October 23, 2013.
Id. ¶ 16; see also ECF 2-1
Denial Letter, Harleysville recounted that it had retained an
inspector, Dave Blanch, to inspect the Warehouse. ECF 2-1 at
1. Blanch “walked the property with [plaintiff] in
order to better understand the way the waste drainage system
works.” Id. It appears from the Denial Letter
that Blanch observed that “the waste water enters [an
underground storage] tank through a three inch drain line,
[but] the waste water exits this tank through a one and one
half inch line, which is of inadequate size to drain the
volume of waste water that [CPG's] business operations
require.” Id. at 1-2.
on Blanch's report, Harleysville determined that it would
“be unable to make any payment for costs that may be
incurred to permanently fix the inadequate waste line
drainage issue” because “the [P]olicy excludes
loss or damage caused by . . . defects, errors, or omissions
in property.” Id. at 3-4. Harleysville cited a
portion of the Policy that states, id. at 3:
“‘We' do not pay for loss or damage caused by
or resulting from a defect, weakness, inadequacy, fault, or
unsoundness in materials.” Defendant cited similar
provisions in the “Commercial Output Program Property
Coverage Part” of the Policy. Id. at 4-5.
Notably, CPG does not appear to have responded to the Denial
Letter, and it does not dispute the facts of Blanch's
than two years later, on December 7, 2015, CPG asked
Harleysville to reconsider its denial of coverage. ECF 38,
¶ 18; see ECF 2-2 (letter of December 7, 2015,
from CPG to Harleysville). Ten days later, Harleysville
replied, denying reconsideration but requesting additional
information about certain elements of the claim. ECF 38,
¶ 19; see ECF 2-3 (letter from Harleysville to
CPG, dated December 17, 2015).
months thereafter, on May 20, 2016, CPG responded to the
letter of December 17, 2015, with additional information, and
citing specific provisions of the Policy which, according to
CPG, supported its claim for indemnification. ECF 38, ¶
20; see ECF 2-4 (letter dated May 20, 2016, from CPG
to Harleysville). In July 2016, Harleysville replied, again
denying coverage. ECF 38, ¶ 21; see ECF 2-5
(letter from Harleysville to CPG, dated July 8, 2016). This
suit followed. ECF 2.
moved to dismiss the Complaint. ECF 7. In a cross-motion, CPG
moved for summary judgment as to the breach of contract claim
and opposed the motion to dismiss. ECF 24. Once the motions
were fully briefed, CPG moved to file its Amended Complaint,
adding several factual allegations but leaving Count 1 and
Count 2 unaltered. ECF 32. I granted the motion to amend,
which rendered moot both Harleysville's motion to dismiss
and CPG's motion for summary judgment. ECF 36 (Memorandum
Opinion); ECF 37 (Order).
asserts two claims against Harleysville in the Amended
Complaint. The first, for breach of contract, alleges that
Harleysville failed to abide by the terms of the Policy when
it denied coverage for the Sewer Line Back-Up. ECF 38,
¶¶ 22-25. Count 2 is titled as a claim for
“Bad Faith Refusal to Pay Insurance Claim.” CPG
alleges that Harleysville breached its statutory duty under
Md. Code (2013 Repl. Vol., 2017 Supp.), § 3-1701 of the
Courts & Judicial Proceedings Article
(“C.J.”), “to investigate in good
faith.” ECF 38, ¶ 27. Further, it claims that
defendant acted in “bad faith, refused to honor its
insurance contract obligation by failing to properly
investigate CPG's claim, by failing to reconsider its
blanket coverage denial when presented with additional
information, and by consistently relying on an improper and
incomplete coverage denial.” Id. ¶ 28.
subsequently renewed its Motion. ECF 39. In particular,
pursuant to Fed.R.Civ.P. 12(b)(6), Harleysville claims that
both Count 1 and Count 2 fail to state a claim (id.
at 17-18; 18-23). In addition, under Rule 12(b)(1), it
contends that Count 2 is subject to dismissal for failure to
exhaust administrative remedies. Id. at 20-26.
asserts that under the applicable Maryland statutes, C.J.
§ 3-1701 and Md. Code (2017 Repl. Vol.), § 27-1001
of the Insurance Article (“Ins.”), CPG was
required to exhaust administrative remedies as to Count 2, by
first presenting its claim of lack of good faith to the
Maryland Insurance Administration (“MIA”). ECF 39
at 23-24. In its view, CPG's claim does not fall under
one of the three exceptions to this requirement. Id.
As a result, Harleysville maintains that this Court lacks
subject matter jurisdiction over Count 2. Id. at 23.
to exhaust administrative remedies may give rise to a
challenge to a federal court's subject matter
jurisdiction. Under Fed.R.Civ.P. 12(b)(1), the plaintiff
bears the burden of proving, by a preponderance of evidence,
the existence of subject matter jurisdiction. See
Demetres v. East West Const., Inc., 776 F.3d 271, 272
(4th Cir. 2015); see also Evans v. B.F. Perkins Co.,
166 F.3d 642, 647 (4th Cir. 1999).
of subject matter jurisdiction under Rule 12(b)(1) may
proceed “in one of two ways”: either a facial
challenge, asserting that the allegations pleaded in the
complaint are insufficient to establish subject matter
jurisdiction, or a factual challenge, asserting
“‘that the jurisdictional allegations of the
complaint [are] not true.'” Kerns v. United
States, 585 F.3d 187, 192 (4th Cir. 2009) (citation
omitted); accord Durden v. United States, 736 F.3d
296, 300 (4th Cir. 2013). A factual challenge can also assert
that facts outside the four corners of the complaint preclude
the exercise of subject matter jurisdiction. Id.
Harleysville brings a factual challenge because it argues
that CPG failed to exhaust its administrative remedies with
regard to Count 2. ECF 39 at 23-24.
considering a factual challenge, “the district court is
entitled to decide disputed issues of fact with respect to
subject matter jurisdiction.” Kerns, 585 F.3d
at 192. In that circumstance, the court “may regard the
pleadings as mere evidence on the issue and may consider
evidence outside the pleadings without converting the
proceeding to one for summary judgment.” Velasco v.
Gov't of Indonesia, 370 F.3d 392, 398 (4th Cir.
2004); see also United States ex rel. Vuyyuru v.
Jadhav, 555 F.3d 337, 347-48 (4th Cir. 2009)
(“Unless ‘the jurisdictional facts are
intertwined with the facts central to the merits of the
dispute, ' the district court may . . . resolve the
jurisdictional facts in dispute by considering evidence . . .
such as affidavits.”) (Citation omitted).
defendant may test the legal sufficiency of a complaint by
way of a motion to dismiss under Rule 12(b)(6). In re
Birmingham, 846 F.3d 88, 92 (4th Cir. 2017); Goines
v. Valley Cmty. Servs. Bd, 822 F.3d 159, 165-66 (4th
Cir. 2016); McBurney v. Cuccinelli, 616 F.3d 393,
408 (4th Cir. 2010), aff'd sub nom. McBurney v.
Young, 569 U.S. 221 (2013); Edwards v. City of
Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). A Rule
12(b)(6) motion constitutes an assertion by a defendant that,
even if the facts alleged by a plaintiff are true, the
complaint fails as a matter of law “to state a claim
upon which relief can be granted.” Whether a complaint
states a claim for relief is assessed by reference to the
pleading requirements of Fed.R.Civ.P. 8(a)(2). That rule
provides that a complaint must contain a “short and
plain statement of the claim showing that the pleader is
entitled to relief.” The purpose of the rule is to
provide the defendants with “fair notice” of the
claims and the “grounds” for entitlement to
relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544,
survive a motion under Fed.R.Civ.P. 12(b)(6), a complaint
must contain facts sufficient to “state a claim to
relief that is plausible on its face.”
Twombly, 550 U.S. at 570; see Ashcroft v.
Iqbal, 556 U.S. 662, 684 (2009) (“Our decision in
Twombly expounded the pleading standard for
‘all civil actions' ..... (citation omitted));
see also Willner v. Dimon, 849 F.3d 93, 112 (4th
Cir. 2017). But, a plaintiff need not include “detailed
factual allegations” in order to satisfy Rule 8(a)(2).
Twombly, 550 U.S. at 555. Moreover, federal pleading
rules “do not countenance dismissal of a complaint for
imperfect statement of the legal theory supporting the claim
asserted.” Johnson v. City of Shelby, __ U.S.
__, 135 S.Ct. 346, 346 (2014) (per curiam).
the rule demands more than bald accusations or mere
speculation. Twombly, 550 U.S. at 555; see
Painter's Mill Grille, LLC v. Brown, 716 F.3d 342,
350 (4th Cir. 2013). If a complaint provides no more than
“labels and conclusions” or “a formulaic
recitation of the elements of a cause of action, ” it
is insufficient. Twombly, 550 U.S. at 555. Rather,
to satisfy the minimal requirements of Rule 8(a)(2), the
complaint must set forth “enough factual matter (taken
as true) to suggest” a cognizable cause of action,
“even if . . . [the] actual proof of those facts is
improbable and . . . recovery is very remote and
unlikely.” Twombly, 550 U.S. at 556 (internal
reviewing a Rule 12(b)(6) motion, a court “must accept
as true all of the factual allegations contained in the
complaint” and must “draw all reasonable
inferences [from those facts] in favor of the
plaintiff.” E.I. du Pont de Nemours & Co. v.
Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011)
(citations omitted); see Semenova v. Maryland Transit
Admin., 845 F.3d 564, 567 (4th Cir. 2017); Houck v.
Substitute Tr. Servs., Inc., 791 F.3d 473, 484 (4th Cir.
2015); Kendall v. Balcerzak, 650 F.3d 515, 522 (4th
Cir. 2011), cert. denied, 565 U.S. 943 (2011). But,
a court is not required to accept legal conclusions drawn
from the facts. See Papasan v. Allain, 478 U.S. 265,
286 (1986). “A court decides whether [the pleading]
standard is met by separating the legal conclusions from the
factual allegations, assuming the truth of only the factual
allegations, and then determining whether those allegations
allow the court to reasonably infer” that the plaintiff
is entitled to the legal remedy sought. A Society Without
a Name v. Virginia, 655 F.3d 342, 346 (4th. Cir. 2011),
cert. denied, 566 U.S. 937 (2012).
general, courts do not “resolve contests surrounding
the facts, the merits of a claim, or the applicability of
defenses” through a Rule 12(b)(6) motion. Edwards
v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999).
The purpose of the rule is to ensure that defendants are
“given adequate notice of the nature of a claim”
made against them. Twombly, 550 U.S. at 555-56
(2007). But, “in the relatively rare circumstances
where facts sufficient to rule on an affirmative defense are
alleged in the complaint, the defense may be reached by a
motion to dismiss filed under Rule 12(b)(6).”
Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th
Cir. 2007) (en banc); accord Pressley v. Tupperware Long
Term Disability Plan, 533 F.3d 334, 336 (4th Cir. 2009);
see also U.S. ex rel. Oberg v. Penn. Higher Educ.
Assistance Agency, 745 F.3d 131, 148 (4th Cir. 2014).
However, because Rule 12(b)(6) “is intended [only] to
test the legal adequacy of the complaint, ”
Richmond, Fredericksburg & Potomac R.R. Co. v.
Forst, 4 F.3d 244, 250 (4th Cir. 1993), “[t]his
principle only applies . . . if all facts necessary to the
affirmative defense ‘clearly appear[ ] on the face
of the complaint:” Goodman, 494 F.3d at 464
(quoting Forst, 4 F.3d at 250) (emphasis added in
limited circumstances, when resolving a Rule 12(b)(6) motion,
a court may consider documents beyond the complaint without
converting the motion to dismiss to one for summary judgment.
Goldfarb v. Mayor & City Council of Baltimore,791 F.3d 500, 508 (4th Cir. 2015). In particular, a court may
properly consider documents that are “explicitly
incorporated into the complaint by reference and those
attached to the complaint as exhibits.”
Goines, 822 F.3d at 166 (citations omitted); see
also U.S. ex rel. Oberg v. Pennsylvania Higher Educ.
Assistance Agency,745 F.3d 131, 136 (4th Cir. 2014);
Anand v. Ocwen Loan Servicing, LLC,754 F.3d 195,
198 (4th Cir. 2014); Am. Chiropractic Ass ...