In PNC Bank, N.A. v. Republic Mortg. Ins. Co., the court considered whether pleadings alleging bad faith conduct in the handling of claims arising from the mortgage crisis were legally sufficient. Plaintiff is a bank that provided home mortgage loans to individual consumers. These loans were insured by defendant (“the carrier”) through “flow” policies, intended to insure against the risk a borrower will default on a particular, individual loan, even if that loan is sold in the secondary market. The loans were also insured through a “pool” policy, which provides coverage to a group of loans, and is intended to protect the lender against the risk of exposure to investors in the event of adverse economic conditions or increased borrower defaults.
Plaintiff claimed to have paid all premiums and complied or substantially complied with all of its duties under the policies, entitling it to coverage for 248 defaulted loans. Therefore, the carrier’s rescission and/or cancellation of the policies constituted a breach of contract and bad faith conduct. In its complaint, plaintiff used five loans which were denied coverage as “example loans” to demonstrate the breach of contract and bad faith conduct of the carrier. Plaintiff sought declaratory judgment as to how the policies should be interpreted and applied to the various disputed loans; money damages for breach of contract; and compensatory and punitive damages for bad faith pursuant to Pennsylvania and Ohio law.
The carrier filed a motion to dismiss pursuant to Rule 12(b)(6), alleging plaintiff misrepresented material information, making the cancellation or rescission of its policies appropriate. The carrier also argued each loan should be considered separately, and that broad declaratory relief would be inappropriate. Furthermore, the complaint only made conclusory statements as to the 243 loans not used as “example loans” in the complaint. The carrier also argued the loans were governed by Minnesota and Indiana law pursuant to the choice of law provision in the insurance contracts, preventing a claim of bad faith.
The Third Circuit instructs district courts to apply a three step test in assessing the legal sufficiency of a complaint. First, the court must “take notes of the elements a plaintiff must plead to state a claim.” Second, the court should identify allegations that are not entitled to the assumption of truth because they are not more than conclusions. Finally, where there are well-pleaded factual allegations, a court should consider the veracity of the allegations and “whether they plausibly give rise to an entitlement for relief.” In performing the final step, the court must determine whether a complaint does more than just allege an entitlement to relief, requiring the court “to draw on its judicial experience and common sense.”
The Court found the complaint complied with the Federal Rules of Civil Procedure, and that interpretation of the rights and duties of the parties under an insurance contract is an appropriate scenario for declaratory relief to be provided. The court declined to dismiss any counts of the complaint, believing the declaratory relief issues would be better resolved on a more developed record. Furthermore, the bad faith claim was properly pled as it provided a “short and plain statement” as required by Fed. R. Civ. P. 8, and gave the carrier fair notice of the conduct which plaintiff alleged was in bad faith. Furthermore, to dismiss those claims based on the choice of law provision defense before those defenses were fully developed would be premature.
Date of Decision: May 23, 2013
PNC Bank, N.A. v. Republic Mortg. Ins. Co., Civil Case No. 2:12-cv-1470, 2013 U.S. Dist. LEXIS 72872 (May 23, 2013 W.D. Pa.) (McVerry, J.).