Gaines v. State Farm Fire & Cas. Co.

TROY GAINES, Husband and Wife; and KATHERINE CROUSE-DAZZO, Husband and Wife; Plaintiffs, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant.

No. 8:20CV385

United States District Court, D. Nebraska

August 27, 2021

MEMORANDUM AND ORDER

Cheryl R. Zwart United States Magistrate Judge.

This case is before the court on the Motion to Bifurcate and Stay Discovery (Filing No. 24) filed by Defendant State Farm Fire and Casualty Company (“State Farm”).

Plaintiffs Troy Gaines and Katherine Crouse-Dazzo (“Plaintiffs”) filed this lawsuit against State Farm alleging “claims under a policy of property insurance issued by State Farm arising from a fire at Plaintiffs' home occurring August 20, 2019.” (Filing No. 1 at CM/ECF p. 1, ¶ 3) (Notice of Removal). The Complaint alleges claims against State Farm for both breach of contract and bad faith. (Id.). State Farm now moves “to bifurcate the Plaintiffs' bad faith claim for a separate trial and to stay all discovery on the bad faith claim pending the resolution of the Plaintiffs' contract claim.” (Filing No. 24).

After consideration, State Farm's motion will be granted for the reasons set forth herein.

BACKGROUND

On August 20, 2019, a residential fire occurred at Plaintiffs' property at 3636 Edna Street in Bellevue Nebraska. (Filing No. 1-1). At all relevant times, State Farm provided property insurance on the residence. (Filing No. 1-1 at CM/ECF p. 4, ¶ 27) (“the Policy”). After the fire, State Farm conducted an extensive investigation beginning in August 2019 and culminating in a final report on April 3, 2020, a supplemental report on June 2, 2020, and a final determination on June 11, 2020. (Filing No. 1-1 at CM/ECF p. 16, ¶¶ 120, 126-127). After it completed its investigation and testing, State Farm denied coverage for Plaintiffs' fire loss, claiming that that certain policy exclusions applied. (Filing No. 1-1 at CM/ECF p. 128). Specifically, State Farm claims that the fire was intentionally caused or procured by Plaintiffs and that Plaintiffs intentionally concealed or mispresented material facts or circumstances related to their insurance claim. (Filing No. 41 at CM/ECF p. 3).

Plaintiffs assert that they have not misrepresented the facts and that the fire was accidental. (Filing No. 1-1 at CM/ECF p. 22 ¶ 157). They claim that State Farm did not have a sufficient basis for concluding the fire was intentional and that the denial of coverage breached the insurance contract. Plaintiffs further assert State Farm acted in bad faith, as it did not have any reasonable basis for denial of their claim. As a result of the insurance dispute, Plaintiffs filed a lawsuit against State Farm in District Court for Douglas County, Nebraska. It was removed to federal court on September 25, 2020.

Thereafter the court entered a progression schedule (Filing No. 11), and the parties exchanged written discovery. State Farm objected to several of Plaintiffs' discovery requests, claiming “the requested discovery was irrelevant to Plaintiffs' contract claim and, to the extent the requests were relevant to the bad faith claim, were premature and prejudicial to State Farm's defense of the contract claim.” (Filing No. 25 at CM/ECF p. 2). State Farm then filed the instant motion to bifurcate this case. (Filing No. 24). State Farm asks the court to order separate trials on the breach of contract and bad faith claims made by Plaintiff. See Fed.R.Civ.P. 42(b). State Farm further requests that the court stay discovery on the bad faith claim until the breach of contract claim is tried or otherwise resolved. (Filing No. 24).

ANALYSIS

“For convenience, to avoid prejudice, or to expedite and economize, the court may order a separate trial of one or more separate issues, claims, crossclaims, counterclaims, or third-party claims.” Fed.R.Civ.P. 42(b). The court has broad discretion when evaluating whether certain issues and/or claims should be separately tried. Panchal Enterprises v. State Farm Fire & Cas. Co., 2021 WL 1909897, at *1 (D. Neb. May 12, 2021). “In exercising discretion, district courts should consider the preservation of constitutional rights, clarity, judicial economy, the likelihood of inconsistent results and possibilities for confusion.” Id. (quoting O'Dell v. Hercules, 904 F.2d 1194, 1201-02 (8th Cir. 1990)). The burden is on the party seeking bifurcation to demonstrate it will be prejudiced if the claims are not bifurcated. See Athey v. Farmers Ins. Exchange, 234 F.3d 357, 362 (8th Cir.2000).

Courts are often faced with requests to bifurcate insurance litigation where both breach of contract and bad faith claims are raised. However, there is no rule or mandate that those issues be tried separately, and the “analysis must be performed on a case-by-case basis.” Kermeen v. State Farm Ins. Co., 2015 WL 4727646, at *2 (D. Neb. Aug. 10 2015).

Here, State Farm asserts that it will be prejudiced if the claims are not bifurcated, arguing that different evidence underpins each distinct claim. State Farm argues that information related to its claims handling processes, its loss reserve information, and other internal procedures has no bearing on whether it breached the Plaintiffs' insurance contract. Instead, evidence of internal policies and practices (and, by extension, any evidence of State Farm's motivation in denying the claim) is only relevant to Plaintiffs' bad faith claim. State Farm claims that

the jury does not need to know anything about State Farm's motivation, its internal procedures, or its internal evaluation of Plaintiffs' claim. If such evidence were presented at a trial on the breach of contract claim, unfair bias and confusion of the issues could result.

(Filing No. 44 at CM/ECF p. 4). State Farm further asserts that bifurcating Plaintiffs' claims supports judicial economy, arguing that if State Farm prevails on the breach of contract claim, the bad faith claim will likely also fail. (Filing No. 44 at CM/ECF p. 4) (citing Kermeen, 2015 WL 4727646, at *2). Thus, trying the contract claim first would potentially obviate the need for extensive discovery into State Farm's business practices and processes. And the possible elimination of that facet of this case would also, arguably, save judicial resources that would have been otherwise spent preparing jury instructions and other trial materials for the bad faith claim. (Filing No. 44 at CM/ECF p. 5).

Plaintiffs disagree. Plaintiffs argue that evidence supporting both the breach of contract and bad faith claims is synonymous. (Filing No. 41 at CM/ECF p. 9) (“This Court should deny State Farm's motion to bifurcate because the evidence required to prove Plaintiffs' breach of contract and bad faith claims are substantially the same.”). Specifically, Plaintiffs assert that “both claims rely upon the same issue.” (Filing No. 41 at CM/ECF p. 6). In their briefing, Plaintiffs concede that they “do not disagree” with the legal authorities cited by State Farm in support of bifurcation. (Filing No. 41 at CM/ECF p. 6). However, Plaintiffs argue that “[t]hose authorities are just simply not applicable” because “each case cited by State Farm in its brief concern cases where there are separate issues giving rise to the breach of contract claims and bad faith claims.” (Filing No. 41 at CM/ECF p. 6). Plaintiffs contend that the outcome of both causes of action here are premised on resolution of a single issue: was there a “reasonable basis” for denying Plaintiffs' claim? (Filing No. 41 at CM/ECF p. 8).

Under Nebraska law (which both parties appear to agree governs their dispute), a breach of contract claim requires that Plaintiffs prove: “(1) the parties entered into a contract; (2) the terms of the contract; (3) the defendant breached the contract in one or more of the ways alleged by the plaintiff; (4) the breach of contract was the proximate cause of some damage to the plaintiff; and (5) the nature and extent of the damage." Farm Credit Servs. of Am. v. Mens, 456 F.Supp.3d 1173, 1186 (D. Neb. April 21, 2020) (citation omitted). Whether State Farm had a reasonable basis to deny coverage goes to the third element - whether the insurer breached the insurance contract. If State Farm had a valid basis to deny the claim, they are not in breach. This will require evidence related to the nature and cause of Plaintiffs' loss, read in conjunction with State Farm's coverage obligations.

Liability for bad faith may be established where there is no reasonable basis for denial of a claim, and the insurer acted with knowledge or reckless disregard of the lack of reasonable basis for denial. Williams v. Allstate Indem. Co., 266 Neb. 794, 799, 669 N.W.2d 455, 460 (2003). Thus, the reasonableness of the denial is relevant to the bad faith issue, as well.

Therefore, Plaintiffs are correct that both the contract and bad faith claims will require evidence related to the basis (reasonable or otherwise) for the denial of their claim. They are incorrect, however, about the effect of that pronouncement. As noted, liability for bad faith requires a lack of reasonable basis and a showing of knowledge or reckless disregard for that lack of reasonable basis (i.e., the bad faith claim, as opposed to the breach of contract, requires proof of the insurer's motivation for the denial). Williams, 266 Neb. 794, 799, 669 N.W.2d 455, 460.

Stated in another way, for breach of contract, Plaintiffs must prove that State Farm incorrectly applied a policy exclusion to these facts. But, for bad faith, Plaintiffs must prove that State Farm incorrectly applied a policy exclusion on purpose and with reckless disregard or knowledge of the fact that it should not have been invoked in this case. Thus, the “reasonable basis” for the denial is not the sole issue to be litigated, contrary to Plaintiffs'...