Class Produce Grp., LLC v. Harleysville Worcester Ins. Co.

CLASS PRODUCE GROUP, LLC, Plaintiff, v. HARLEYSVILLE WORCESTER INSURANCE COMPANY, Defendant.

Civil Action No. ELH-16-3431

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

March 23, 2018

MEMORANDUM OPINION

Plaintiff 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). Id.¹

Two 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 ("Reply").

Thereafter, 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 forSurreply"), as well as the proposed surreply. See ECF 49-2. Harleysville opposes the Motion for Surreply. ECF 52. CPG replied. ECF 53.

No 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.

I. Factual and Procedural Background²

CPG and its corporate affiliate³ 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.

On 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 itssurrounding 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. ¶ 10.

In 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.

On 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").

In the 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.

Based 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' donot 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 inspection.

More 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).

Several 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.

Harleysville 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).

CPG 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 itdenied 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.

Harleysville 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.

II. Legal Standards

A. Rule 12(b)(1)

Defendant 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.

Failure 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 matterjurisdiction. 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).

A test 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.

In 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...