Deiter v. XL Specialty Insurance Co.

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
CENTRAL DIVISION
LARRY DEITER,DIRECTOR OF
E^SURANCE OF THE STATE OF SOUTH
DAKOTA,AS LIQUIDATOR OF RELIAMAX
SURETY COMPANY IN LIQUIDATION;
Plaintiff,
vs.
XL SPECIALTY INSURANCE CO.,
Defendant.
3:20-CV-03009-RAL
OPINION AND ORDER
DENYING ABSTENTION AND
GRANTING IN PART DISMISSAL
PlaintiffLany Dieter, Director ofInsurance for the State of South Dakota,and as Liquidator
of Reliamax Surety Company in Liquidation (the Liquidator), filed a complaint against Defendant
XL Specialty Insurance Company(XL Specialty) in state court. Doc. 1-1. Based on the existence
of federal diversity jurisdiction under 28 U.S.C. § 1332, XL Specialty removed the action to this
Court. Doc. I. XL Specialty then filed a motion to dismiss under Rule 12(b)(6) of the Federal
Rules of Civil Procedure, contending that the complaint failed to state a claim upon which relief
may be granted. Doc. 7. The Liquidator opposed dismissal and filed a motion to remand on the
basis of Burford abstention. Docs. 9,10. This Court held a hearing on both pending motions. For
the reasons explained below, this Court denies the motion to remand based on Burford abstention
and grants in part the motion to dismiss.
I. Facts Alleged in Complaint and from Materials Attached to Complaint
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In ruling on a Rule 12(b)(6) motion to dismiss, courts are to "accept the plaintiffs specific
factual allegations as true but are not required to accept a plaintiffs legal conclusions." Brown v.
Medtronic.Inc.. 628 F.3d 451,459(8th Cir. 2010). "Further, documents attached to or incorporated
within a complaint are considered part of the pleadings, and courts may look to such documents
'for all purposes,' Fed. R. Civ. P. 10(c), including to determine whether a plaintiff has stated a
plausible claim." Id. See also Dittmer Props.. L.P. v. FDIC. 708 F.3d 1011, 1021 (8th Cir. 2013)
(noting that "courts are not strictly limited to the four comers of a complaint" and may consider
"exhibits attached to the complaint whose authenticity is unquestioned" (internal quotation marks
and citations omitted)). Thus, this Court draws the facts' from the Liquidator's complaint, which is
quite terse, and fi-om the attached exhibits to the Liquidator's complaint, which are extensive. Doc.
1-1 at 2-109.
The Liquidator is court appointed pursuant to S.D.C.L. § 58-29B-42 under an order of
liquidation of Reliamax Surety Company(RSC). Doc. 1-1 at 1-2. Under S.D.C.L. § 58-29B-
42, the Liquidator "shall be vested by operation oflaw with the title to all property, contracts, and
rights of action...of the insurer ordered liquidated [here RSC]...as of the entry of the final order of
liquidation." Doc. 1-1 at T| 3; S.D.C.L. § 58-29B-42. Another statute lists the powers of the
Liquidator, which includes the powers to:"(13)Prosecute any action which may exist on behalf of
the creditors, members, policyholders, or shareholders of the insurer against any officer of the
insurer, or any other person;...(19) Exercise and enforce all the rights, remedies, and powers ofany
creditor, shareholder, policyholder, or member...." S.D.C.L. § 58-29B-49. Doc. 1-1 at^] 4.
'In mling on a Rule 12(b)(6) motion to dismiss, this Court of course is not making any factual
findings.
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The insolvent insurer RSC is and was a wholly-owned subsidiary of ReliaMax Holding
Company(RHC),a Delaware corporation; RSC has several other sister companies that likewise are
subsidiaries ofRHC. Doc. 1-1 at 5. Before entry ofthe liquidation order, RHC procured and was
party to, for itself and for the benefit of its subsidiaries including RSC, two insurance policies
providing directors and officers liability insurance coverage. Doc. 1-1 atT|]| 6, 13-71, 73-96. The
primary policy for directors and officers liability insurance coverage for the policy period of July
1, 2017 through July 1, 2018 was with Pioneer Special Risk Insurance Services, Inc. (Pioneer).
Doc. 1-1 at 7,13-72. Defendant XL Specialty issued a policy for excess insurance coverage for
directors and officers with the policy period of July 1,2017 through July 1,2018. Doc. 1-1 at ]ni 8,
73-93. The Liquidator's petition for liquidation of RSC was filed in the final month ofthe policy
period on or about June 12, 2018. Doc. 1-1 at Tf 11. The order of liquidation entered on June 27,
2018,just days before the end of the policy period in the XL Specialty policy. Doc. 1-1 at 8-11.
The XL Specialty policy provides a $2 million limit of liability above the $3 million
underlying insurance coverage with Pioneer. The XL Specialty policy is clear that it is a claims-
made policy and only applies to claims first made during the policy period. Doc. 1-1 at 73,91. The
XL Specialty policy incorporates the terms and conditions of the underlying Pioneer policy and
defines the "Insured" as "those persons or organizations designated as insureds in the Underlying
Insurance." Doc. 1-1 at 91. The imderlying Pioneer policy in turn is issued to RHC, Doc. 1-1 at
13, and defines the insured "Company" to include "the Parent Company" and "any Subsidiary."
Doc. 1-1 at 17. "Insureds" in the Pioneer policy is defined to mean the Company and the Insured
Persons. Doc. 1-1 at 20. In turn,"Insured Persons" are defined in the underlying Pioneer policy to
include "all persons who were, now, are, or shall be directors, officers, or the risk managers of the
Company." Doc. 1-1 at 19. Finally, with regard to pertinent definitional provisions in the
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underlying Pioneer policy, "Wrongful Act" is defined to mean "any actual or alleged act, error,
omission, misstatement, misleading statement, neglect or breach of duty...by any of the Insured
Persons, while acting in their capacity as such, or any matter claimed against any of the Insured
Persons solely by reason of serving in such capacity." Doc. 1-1 at 24. The underlying Pioneer
policy does exclude any claim "by, on behalf of, or at the direction of the Company, an Insured
Person in any capacity, or by past, present, or future security holder, partner, or member of the
Company, except and to the extent that:...2. Such Claim is brought in the event ofthe appointment
of a trustee, examiner, receiver, liquidator, conservator, rehabilitator, or similar official." Doc. 1-1
at 25(emphasis added).
On November 1,2018,the Liquidator sent to XL Specialty and Pioneer a letter characterized
as a notice of claim. In the letter, the Liquidator stated:
Numerous Wrongful Acts by the Officers and Directors of [RHC] are being
investigated. The most significant Wrongful Act of the Officers and Directors of
[RHC]was their continuous advances from[RSC]of more than $21 million, without
the means of repayment.
Doc. 1-1 at 98. The Liquidator's letter continued:
This immediate claim is to recover these Wrongful advances paid in an amount in
excess of $21 million. A claim has been filed under the Primary Policy, and given
the size of the claim, it will exhaust the $3 million available policy limit.
Doc. 1-1 at 98-99.
XL Specialty's policy was a claims-made policy through July 1, 2018, but the Liquidator in
the complaint cites S.D.C.L. § 58-29B-56, which provides in relevant part:
If by any agreement, a period of limitation is fixed...for filing any claim, proof of a
claim, proof of loss, demand, notice, or the like..., and where in any case the period
had not expired at the date of the filing of the petition, the liquidator may, for the
benefit ofthe estate, take any such action or do any such act, required ofor permitted
to the insurer, within a period of one-hundred-eighty days subsequent to the entry of
any order for liquidation, or within such further period as is shown to the satisfaction
of the court not to be unduly prejudicial to the other party.
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Doc. 1-1 at ^ 10 (quoting S.D.C.L. § 58-29B-56). The November 1, 2018 letter was within 180
days of both the Liquidator's petition of June 12, 2018, and the order for liquidation of June 27,
2018. Doc. 1-1 at tH 11-12.
The Liquidator's complaint neither references nor attaches any response from XL Specialty,
but the Liquidator's next letter(dated October 21, 2019)to XL Specialty implies that XL Specialty
took issue with the timeliness of the November of 2018 notice and whether the coverage period of
the XL Specialty policy had lapsed. That subsequent letter from the Liquidator is dated October
21, 2019. Doc. 1-1 at 101-109. In that October of 2019 letter, the Liquidator asserts that the
timeliness ofits initial notice of claim from November of2018 references certain policy provisions
and South Dakota statutes under which the Liquidator believed there should be coverage, and
provided a more involved summary of what the Liquidator claimed to be wrongful conduct of
directors and officers of RHC and RSC. Doc. 1-1 at 101-109. The wrongful conduct alleged in
the Liquidator's October of 2019 letter included bonus compensation authorized by the board of
directors of RHC to RSC's chief executive officer of$540,674 during a time of RSC's insolvency;
using fiinds of RSC to finance startup ventures by officers of RHC and thereby robbing RSC of
cash; concealment by RSC's chief executive officer of certain business opportunities to protect his
ownership stake from dilution thereby frustrating critical efforts to raise capital to replace monies
wrongfully taken from RSC; misleading and erroneous accounting management resulting in a later
adjustment of RSC's financial statements by a negative $38 million; abuse of intra-organization
borrowing power, relating to the prior notice of some $20 million borrowed from RSC by RHC
without the capability to repay; and a claimed manipulation of certain loan servicing, among other
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possible claims.^ Doc. 1-1 at 101-109. No response from XL Specialty appears in any attachment
to the complaint.
The Liquidator claims that XL Specialty "has wrongfully denied coverage under the XL
policy and has refused to pay any portion of the policy limits towards such claims." Doc. 1-1 at ^
16. The complaint seeks a declaratory judgment in general terms. Doc. 1-1 at T[ 17, and the prayer
seeks declarations "that XL is liable under the XL policy for the claims asserted in the notiees
attached as exhibits to this complaint"[and]"that the liquidator is the sole proper claimant under
the XL policy and S.D.C.L. Chapter 58-29B." Doc. 1-1 at 6. The Liquidator also claims that the
conduct ofXL Specialty constitutes bad faith, entitling the Liquidator to compensatory and punitive
damages,as well as attorney's fees for XL Specialty's allegedly vexatious and unreasonable refusal
to pay. Doc. 1-1 at 5-6.
n. Motion to Abstain
The Liquidator filed a motion to remand on the basis of abstention,invoking Burford v. Sun
Oil. Co.. 319U.S. 315(1943). The Liquidator argues that the South Dakota statutes for liquidating
insurers are a comprehensive state law scheme and indeed require suit to be brought in state coiut
for a particular South Dakota county. S.D.C.L. § 58-29B-7; see generallv S.D.C.L. § 58-29B. The
Liquidator argues that an exercise offederal jurisdiction here will disrupt South Dakota's efforts to
establish a coherent and consistent policy applicable to liquidation of insolvent insurers. Doc. 11
at 14. The Liquidator contends that this case is not a "run of the mill" declaratory judgment action
involving contract interpretation, but involves a "need to interpret the South Dakota liquidation acts
^ During oral argument, the parties informed this Court that the Liquidator had served a summons
and complaint in a state court proceeding against directors and officers asserting such claims.
Pioneer, from which RHC reportedly had purchased tail coverage beyond the policy period, is
defending the action.
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statutes as well." Doc. 11 at 16-17. XL Specialty opposes the motion to remand based on
abstention, arguing among other things that Burford abstention does not apply to actions such as
this for legal relief and that the requisites of Burford abstention are not met. Doc. 13.
Federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given
them." Colorado River Water Conservation Dist. v. U.S.. 424 U.S. 800, 817 (1976). "[Fjederal
courts may decline to exercise their jurisdiction, in otherwise exceptional circumstances, where
denying a federal forum would clearly serve an important countervailing interest." Ouackenbush
V. All State Ins. Co.. 517 U.S. 706, 716 (1996) (internal quotations omitted). However,
"[ajbstention from the exercise of federal jurisdiction is the exception, not the rule." Colorado
River Water. 424 U.S. at 813. That is, abstention "is an extraordinary and narrow exception to the
duty of a District Court to adjudicate a controversy properly before it." Id
In Burford.the Supreme Court ofthe United States recognized federal court abstention from
exercising jurisdiction when necessary to avoid impermissibly disruptive effects on state policy.
Burford. 319 U.S. at 332-34. In Burford. the plaintiff was challenging the reasonableness of a
Texas state commission's permit to drill oil wells, which the Supreme Court viewed as involving a
complex state regulatory scheme related to the conservation of oil and gas properly left for the state
of Texas. Id at 317-20. Because the plaintiffs challenge involved "basic problems of Texas
policy," the Supreme Court held that it was best for Texas state courts to handle the case and that
the district court should have abstained from exercising federal jurisdiction. Id at 332-34.
The Supreme Court has issued two subsequent decisions on Burford abstention that refine
the doctrine. In New Orleans Public Service. Inc. v. Council of New Orleans. 491 U.S. 350(1989)
(known as "NOPSI""). the Supreme Court stated:
Where timely and adequate state-court review is available, a federal court sitting in
equity must decline to interfere with the proceedings or orders ofstate administrative
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agencies: (1) when there are "difficult questions of state law bearing on policy
problems of substantial public import whose importance transcends the result in the
case at bar"; or(2) where the "exercise offederal review of the question in the case
and in similar cases would be disruptive ofstate efforts to establish a coherent policy
with respect to a matter of substantial public concern."
Id at 361 (quoting from Colorado River Water, 424 U.S. at 814). The Supreme Court in NOPSI.
reaffirmed that abstention is "the exception, not the rule," and observed that Burford "does not
require abstention whenever there exists [a complex state process], or even in all cases where there
is a 'potential for conflict' with state regulatory law or policy." Id. at 359, 362 (citing Colorado
River Water. 424 U.S. at 815-16).
More recently, the Supreme Court in Ouackenbush clarified that the purpose of Burford
abstention is to ensure that when complex state regulations exist to regulate an "essentially local
problem," states are protected from federal court review. Ouackenbush. 517 U.S. at 728. The
Supreme Court in Ouackenbush characterized Burford abstention as an "extraordinary and narrow
exception to the duty of the District Court to adjudicate a controversy properly before it." Id at
728 (citation omitted). The Supreme Court in Ouackenbush also made clear that only when the
federal court is sitting in equity, as opposed to a suit involving a claim for damages, can it decline
to exercise jurisdiction, dismiss a suit, or remand the case to a state forum. Id at 731; ("[fjederal
courts have the power to dismiss or remand cases based on abstention principles only where the
relief being sought is equitable or otherwise discretionary."). That is, Burford abstention is not an
option when the suit is an action at law for damages. Id at 718-20.
The Liquidator's complaint seeks not only a declaratory judgment but also legal damages
in the form of compensatory and punitive damages as well as attorney's fees under a claim alleging
bad faith through a wrongful denial of coverage and an alleged vexatious refusal to pay. Doc. 1-1
at TITI 16-19. To the extent the complaint is seeking compensatory and punitive damages, Burford
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abstention simply cannot apply. Ouackenbush,517 U.S. at 731; Casey v. FDIC,583 F.3d 586, 592
(8tli Cir. 2009) C'Burford abstention is appropriate only with respect to equitable claims.")
Realizing this problem with its Burford abstention request, the Liquidator in briefing characterizes
the complaint as "primarily" seeking discretionary or declaratory relief. Doc. 14 at 2-3.
The United States Court of Appeals for the Eighth Circuit has limited Burford abstention to
when "a state has established a complex regulatory scheme supervised by state courts and serving
important state interests, and when resolution of the case demands specialized knowledge in the
application ofcomplicated state laws." Melahn v.Pennock Ins.. Inc.. 965 F.2d 1497,1506(8th Cir.
1992)(quoting Bilden v. United Equitable Ins. Co.. 921 F.2d 822,825 (8th Cir. 1990)). In Melahn.
the Eighth Circuit noted that its own precedent demanded a narrow view ofBurford abstention. Id.
at 1505. Indeed, the Eighth Circuit had previously stated in Bilden that "federal courts are not
required to abstain when the criteria for abstention are met." 921 F.2d at 826. The Eighth Circuit
in Melahn noted the holding in Bilden and reversed a district court's Burford abstention order in a
case removed from state court filed by an insolvent insurer's receiver against an agent to recover
allegedly uneamed commissions and unearned premium payments. Melahn. 965 F.2d at 1499-
1500, 1507. In Melahn. the Eighth Circuit specifically distinguished and declined to follow a case
the Liquidator relies heavily upon—Grimes v. Crown Life Ins. Co.. 857F.2d699(10th Cir. 1988)—
because the Grimes decision preceded NOPSI and adopts a much broader view of abstention than
existing Eighth Circuit caselaw.^ Melahn. 965 F.2d at 1505, 1507.
^ Although the Liquidator seems to at least acknowledge that the Eighth Circuit was dismissive of
Grimes. Doc. 11 at 11, it still contends that Grimes is helpful caselaw because the Eighth Circuit
analyzed the Grimes factors as they applied to the facts in Melahn. Doc. 11 at 11. But notably, the
Eighth Circuit found that three of the four Grimes factors warranted abstention and nonetheless
held that the district court abused its discretion by abstaining in that case. Melahn.965 F.3d at 1504,
1507. Thus, while the Eighth Circuit may have applied the Grimes factors, that exercise did little
to influence its decision.
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The question then is whether4his Court should abstain from the portion of the complaint
seeking a declaratory judgment action involving the coverage or lack of coverage of XL Specialty
over claims pressed by the Liquidator. To justify Burford abstention, the declaratory judgment
action imder Eighth Circuit precedent must involve "a complex regulatory scheme supervised by
state courts and serving important state interests," and be such that "resolution ofthe case demands
specialized knowledge in the application ofcomplicated state laws." See Melahn.965 F.2d at 1506.
Determining whether the Liquidator gave timely notice imder the policy might involve application
of a South Dakota statute enlarging the time in a policy for a Liquidator to do so, but does not
implicate a complex state regulatory scheme. S^ S.D.C.L. § 58-29B-56. A declaratory judgment
on a coverage question is not somehow unique to the state's regulatory scheme, but a familiar
dispute arising within a federal district court's diversity jurisdiction. See Emn. Mut. Cas. Co. v.
Bryant Lake Sanitarv Dist.. 446 F. Supp. 3d 557,559(D.S.D.2020)(deciding whether an insurance
company was entitled to a declaratory judgment that coverage did not apply); Midland Nat'l Life
Ins. Co. V. Morrison. No. 3:16-cv-03002-RAL, 2017 WL 3534995 (D.S.D. Aug. 16, 2017)
(determining whether an insurance company could rescind the insurance policy and obtain a
declaratory judgment that it had no obligations under the policy other than to refund premiums
paid); Dziadek v. Charter Oak Fire Ins. Co.. 213 F. Supp. 3d 1150 (D.S.D. 2016). Moreover,
resolution ofsuch an issue does not demand some sort of specialized knowledge and application of
complicated state laws. Accordingly, the motion to remand based on Burford abstention is denied,
in. Motion to Dismiss
XL Specialty has filed a motion to dismiss under Rule 12(b)(6)ofthe Federal Rules ofCivil
Procedure. To survive a motion to dismiss for failure to state a claim, a complaint must contain "a
short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P.
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8(a)(2). Although detailed factual allegations are unnecessary, the plaintiff must plead enough facts
to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal. 556 U.S. 662,678(2009)
(quoting Bell Atlantic Corp. v. Twomblv. 550 U.S. 544, 570 (2007)). "A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged." Iqbal. 556 U.S. at 678. "Factual
allegations must be enough to raise a right to relief above the speculative level." Twomblv. 550
U.S. at 556. "[CJonclusory statements" and "naked assertion[s] devoid of further factual
enhancement" do not satisfy the plausibility standard. Iqbal. 556 U.S. at 678 (alteration in the
original) (citation and internal quotation marks omitted). Whether a complaint states a plausible
claim for relief is "a context-specific task that requires the reviewing court to draw on its judicial
experience and commonsense." Iqbal. 556 U.S. at 679. As stated earlier in this decision, in ruling
on a Rule 12(b)(6) motion to dismiss, the court must accept the plaintiffs factual allegations as
true, thought it need not accept the legal conclusions. Brown.628 F.3d at 459. Documents attached
to or incorporated within the complaint are considered as part of the pleadings and may be used in
determining whether a plaintiff has stated a plausible claim. Id.
The Liquidator's complaint does not separately enumerate causes of action. The complaint,
however,contains a claim for declaratoryjudgment against XL Specialty regarding wrongful denial
of coverage. Doc. 1-1 at ^ 16, as well as legal claims for bad faith, compensatory and punitive
damages, and attorney's fees for vexatious refusal to pay under the insurance policy. Doc. 1-1 at
16-19. In briefing, the Liquidator seems to recognize that the claims alleging bad faith and
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vexatious failure to pay are premature, explaining that they were joined with the declaratory
judgment claim out offear of a later bar of res judicata."^ Doc. 14 at 5.
In this diversity jurisdiction action, no party contests that South Dakota law governs. The
Liquidator cites to South Dakota statutes for its authority and argues from South Dakota caselaw,
and XL Specialty likewise invokes the substantive law of South Dakota in arguing that the
Liquidator has stated no viable claim. Under South Dakota law,the Liquidator at this time can state
no viable claim for bad faith or vexatious refusal to pay.
The controlling case in South Dakota is Trouten v. Heritage Mutual Ins. Co.. 632 N.W.2d
856(S.D. 2001). In Trouten. a plaintiff slipped and fell on a sidewalk abutting a business insured
by the defendant insurer and incurred medical and hospital expenses due to injuries from the fall.
The insurer had issued a policy to the business providing medical expense coverage for bodily
injury caused by an accident "next to the premises you own or rent...regardless of fault." Id at
857. The plaintiff made a claim to the insurer for medical and hospital expenses, which was denied.
The plaintiff then sued the insurer directly, both for the contract benefits and under a bad faith
theory. Id
Res judicata "serves as claim preclusion to prevent relitigation of an issue actually litigated or
which could have been properly raised and determined in a prior action." Mack v. Trautner, 763
N.W.2d 121, 123 (S.D. 2009)("quoting Barnes v. Matzner. 661 N.W.2d 372, 377-78(S.D. 2003)).
See also Lawrence Ctv. v. Miller. 786 N.W.2d 360, 369-70 (S.D. 2010) (noting that "[t]he
preclusive effect of res judicata extends to 'an issue actually litigated or which could have been
properly raised and determined in a prior action.'") (emphasis in the original). Necessarily the
claim must be ripe for res judicata or its companion doctrine collateral estoppel to apply. Danforth
V. Citv of Yanktnn. 25 N.W.2d 406, 412 (S.D. 1946)(providing that res judicata will not apply
when there is not a justiciable controversy between the parties before the court); Rawe v. Libertv
Milt. Fire Ins. Co..462 F.3d 521, 529-30 (6th Cir. 2006)(noting that res judicata does not apply to
claims not yet ripe at the time the first suit is filed). The Liquidator did not need to join claims that,
as explained herein, were not ripe for adjudication under South Dakota law to avoid res judicata or
collateral estoppel. Further, nothing in this Opinion and Order bars the Liquidator from pursuing
those legal claims if the Liquidator obtains judgment against the directors and officers exceeding
the Pioneer policy limit of liability.
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The Supreme Court of South Dakota in Trouten split 3-2 in deciding that the case as a whole
should be dismissed; the Supreme Court was unanimous in concluding that the plaintiff had no
cause of action for bad faith against the insurer. The majority opinion in Trouten noted that "no
statute in South Dakota...allows a direct action by an injured person against another's liability
insurer absent a judgment having been first obtained against the tortfeasor." Id at 858. The
majority in Trouten referred to S.D.C.L. § 58-23-1 for the proposition that a "direct action [is]
allowed when an execution on a judgment against the insurer is returned unsatisfied." Id;
S.D.C.L. § 58-23-1. The majority opinion then noted:
As a general rule there is no privity between an injured person and a tortfeasor's
liability insurer, and the injured person has no right of action at law against the
insurer[.] 44 Am.Jur.2d Ins. § 1445 (1982). However, there are exceptions to this
rule where a statute authorizes such suits or where the injured person is considered
to be a third-party beneficiary of the contract.
Id at 858. The majority opinion hi Trouten discussed a split in state court cases outside of South
Dakota on whether a plaintiff can be a third-party beneficiary under medical payments provisions
that do not require a showing offault. Id at 860-61. However, based on S.D.C.L. § 58-23-1, the
majority followed the rationale in Zegar v. Sears Robuck & Co.. 570 N.E.2d 1176 (111. App. Ct.
1991), that "absent an express or clearly implied right to sue [an insurer] directly for the medical
expenses,[an injured person] cannot maintain an action to recover medical expenses directly from
the [insurer], at least imtil after settlement, adjudication, or release ofclaim." Trouten. 632 N.W.2d
at 861 (quoting Zegar. 570 N.E.2d at 1180). Although two ofthe justices in Trouten dissented firom
that conclusion, the Supreme Court of South Dakota was unanimous in directing dismissal of the
bad faith claim. The court restated the longstanding rule in South Dakota that "conduct that is
merely a breach of contract is not a tort." Trouten. 632 N.W.2d at 864 (cleaned up and quoting
Weeg V.Iowa Mutual Ins. Co.. 141 N.W.2d913,916(1966)). Rather,there must exist a relationship
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akin to a fiduciary one between the insured and the insurer. Trouten. 632 N.W.2d at 864. In
Trouten. the injured person did not have a relationship with the insurer of a fiduciary nature, and
the insurer's first duty was to its own insured and not the injured person. Id. The court in Trouten
unanimously rejected any sort ofbad faith claim in a situation where the insurance company would
be required to serve masters with antagonistic interests. Id The Trouten unanimous decision
concluded "we decline to place the insurer in the impossible position of having to choose its loyalty
since the insured can always be sued by the injured party for any and all damages flowing from his
actions." Id.
Under Trouten. the Liquidator can state no claim for bad faith and vexatious refiisal to pay
before obtaining a judgment that remains unsatisfied. Allowing any bad faith action at this time by
the Liquidator against XL Specialty could put XL Specialty in the predicament of having to serve
two masters with antagonistic interests—defending the directors and officers to whom XL Specialty
has a direct contractual relationship against the Liquidator's claims^ and, in the Liquidator's view,
treating the Liquidator as XL Specialty's fiduciary as well under the policy. Nothing in the
liquidation statutes of S.D.C.L. § 58-29B displaces S.D.C.L. § 58-23-1 or Trouten. The
Liquidator's claim for bad faith and vexatious refusal to pay must be dismissed because it is not
viable at this time under South Dakota law.
XL Specialty relies upon Trouten to argue for dismissal of all of the Liquidator's claims.
Indeed, as quoted above,Trouten recognized the general rule "there is no privity between an injured
person and the tortfeasor's liability insurer, and the injured person has no right of action at law
against the insurer." Id at 858 (quoting 44 Am.Jur.2d Ins. § 1445 (1982)). The exception to the
^ This Court realizes that XL Specialty may have disclaimed coverage for any claim, but it would
be the directors and officers, and not the claimant Liquidator, who might have a claim for bad faith
, and vexatious denial of coverage.
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rule exists when the allegedly injured claimant is considered a third-party beneficiary of the
contract. Trouten. 632 N.W.2d at 858; see also S.D.C.L. § 53-2-6. The Liquidator is in a different
position than the plaintiff in Trouten who simply fell outside of an insured business. The
Liquidator, rather, by operation of South Dakota statute is vested "with the title to all property,
contracts, and rights of action...of the insurer [here RSC]ordered liquidated." S.D.C.L. § 58-29B-
42. The Liquidator not only may prosecute any action of "creditors, members, policyholders, or
shareholders of the insurer against any officer of the insurer or any other person;" but also can
"exercise and enforce all the rights, remedies, and powers of any creditor, shareholder,
policyholder, or member." S.D.C.L. § 58-29B-49.
The XL Specialty policy incorporates the terms of the underlying directors and officers
policy of Pioneer, and under those terms, as explained above, RSC is an Insured. Doc. 1-1 at 13,
17, 19, 20, 91. The imderlying Pioneer insurance policy excludes coverage for any claim made on
behalfof or at the direction ofan insured, but has an exception to that exclusion for claims "brought
in the event of the appointment of a...liquidator...or similar official." Doc. 1-1 at 25. Thus, it is
at least plausible under the allegations of the complaint and the attachments thereto that the
Liquidator has a viable declaratory judgment action that excess insurance coverage exists under the
XL Specialty policy if and when the Liquidator obtainsjudgment on a covered claim exceeding the
limits in the underlying Pioneer directors and officers policy. In short, the Liquidator at least
plausibly is a third-party beneficiary, and indeed seemingly in the position ofbeing an Insured itself
as successor to RSC,under the XL Specialty policy.
Yet the Liquidator's complaint is less than entirely clear on what it is seeking as a
declaratoryjudgment. Paragraph 16 ofthe complaint alleges"XL has wrongfully denied coverage
under the XL policy and has refused to pay any portion of the policy limits towards such claims."
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Doc. 1-1 at T[ 16. Paragraph 17 then generally avers a legal conclusion that there is "an actual,
genuine controversy and dispute resolvable by declaratory judgment of this court." Doc. 1-1 at
17. The prayer ofthe complaint specifies two requests for declaratory judgment:
1. Determining and declaring that XL is liable under the XL policy for the
claims asserted in the notices attached as exhibits to this complaint.
2. Determining and declaring that the Liquidator is a sole proper claimant
under the XL policy and S.D.C.L. Chapter 58-29B.
Doc. 1-1 at 6. It is at least plausible that part of what the Liquidator seeks is a declaratoryjudgment
that the notiees given by the Liquidator were sufficient in combination with S.D.C.L. § 58-29B (and
particularly § 58-29B-56) to be a timely claim under the XL Specialty claims-made excess policy
or that whatever ground XL Specialty gave for disclaiming coverage was improper. There could
be a case and controversy concerning those matters, but no letter from XL Specialty disclaiming
coverage is attached to the complaint or made part of the record at this time. The complaint frames
such issues at best poorly and by inference. There are no other viable or plausible ripe claims
pleaded in the complaint and attachments thereto.
Because there is a plausible claim for declaratory judgment that seems to exist based on the
complaint and materials attached and because the complaint itself at best poorly frames the issue,
this Court grants the motion to dismiss only in part at this time. This Court grants the Liquidator
leave for a period of twenty-one days to file an amended complaint better framing any issue
plausibly ripe for declaratory judgment, if the Liquidator wishes to do so. If the Liquidator does
not wish to seek a declaratory judgment at this time, the Liquidator should so notify the Court
through a filing in the CM/ECF system. This Court then will grant dismissal of the case without
prejudice to refiling at a later time a declaratory judgment on those issues or any other claim that
the Liquidator might later have against XL Specialty.
IV. Conclusion
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For the reasons explained above, it is hereby
ORDERED that Plaintiffs motion to remand based on Burford abstention, Doc. 10, is
denied. It is further
ORDERED that Defendant's Motion to Dismiss, Doc. 7, is granted with regard to the bad
faith and vexatious refusal to pay claims and granted with regard to the claim for declaratory
judgment that the Liquidator's assertions are covered claims that must be paid now by XL Specialty.
If the Liquidator wishes to seek a declaratory judgment on whether the notice provided by the
Liquidator to XL Specialty was sufficient under the claims-made policy or whether any denial of
coverage by XL Specialty was or was not appropriate, the Liquidator has leave for a period of
twenty-one days to file an amended complaint to frame those issues. If the Liquidator does not
wish to proceed to seek a declaratory judgment on those questions, the complaint then will be
dismissed without prejudice to the Liquidator later filing such a declaratory judgment action or
making other claims it might have against XL Specialty at a later time.
DATED this Jll day of September, 2020.
BY THE COURT:
ROBERTO A. LANGE
CHIEF JUDGE
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