Scottsdale Insurance Company v. Fineman

Background

Scottsdale Insurance Company sued David Fineman seeking reimbursement under a directors-and-officers insurance policy. Scottsdale had defended Fineman and paid to resolve an underlying arbitration and related dispute under a reservation of rights, meaning Scottsdale stated that it was providing a defense while preserving its ability to later contest coverage.

The underlying dispute involved allegations that Fineman breached fiduciary duties and made negligent misrepresentations to investors in KineMed, Inc. An arbitrator found that Daniel and Patrick Haffner prevailed on breach-of-fiduciary-duty and negligent-misrepresentation claims, but not fraud claims. The arbitrator awarded compensatory damages, prejudgment interest, emotional-distress damages, and attorneys’ fees. The parties later settled the matter. There was no final court judgment, no court order confirming the arbitration award, and no finding that Fineman acted dishonestly, intentionally, fraudulently, or criminally.

Scottsdale asserted three claims for declaratory relief: that the policy’s Conduct Exclusion applied, that its Bodily Injury Exclusion applied, and that some or all of the settlement payment was not covered loss. Fineman asserted counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing.

Fineman’s Motion to Dismiss Scottsdale’s Complaint

The court granted in part and denied in part Fineman’s motion under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim based on the facts alleged.

Reservation of rights. Fineman argued that Scottsdale had not properly preserved its ability to deny coverage or seek reimbursement. The court granted the motion on this ground but gave Scottsdale leave to amend its complaint to allege that it sent additional reservation-of-rights letters after the arbitration began and after the Haffners asserted their claims. The court stated that waiver and estoppel issues—whether Scottsdale gave up a coverage defense or led Fineman reasonably to rely on that—are generally better addressed at summary judgment than on a motion to dismiss.

Count One—Conduct Exclusion. The court granted the motion to dismiss this claim. The policy required a “final judgment” before the Conduct Exclusion could apply. The court held that the arbitration award did not satisfy that requirement because the matter settled and the award was never confirmed by a court. The court also alternatively held that the claim failed because the arbitrator did not find that Fineman engaged in dishonest conduct. The arbitrator found negligent misrepresentation and stated that Fineman honestly believed in KineMed, although he lacked reasonable grounds for some statements. The court explained that negligent misrepresentation is not necessarily based on dishonesty.

Count Two—Bodily Injury Exclusion. The court denied the motion to dismiss this claim. It held that Scottsdale’s general reservation of rights was sufficient at the pleading stage, even though the letter did not specifically identify every possible coverage defense. The court also noted that waiver and estoppel ordinarily involve factual questions.

Count Three—Uncovered Loss. The court denied the motion to dismiss this claim. Because Count Two remained pending, the court held that the scope of any uncovered loss could not yet be resolved. The court also addressed attorneys’ fees awarded in the arbitration and concluded that Scottsdale had plausibly alleged that those fees were excluded from “Loss” because the arbitrator awarded them under a separate subscription agreement. The court therefore rejected Fineman’s argument that the fees necessarily were covered merely because the policy did not expressly exclude attorneys’ fees by name.

Scottsdale’s Motion to Dismiss the Counterclaims

The court granted Scottsdale’s motion to dismiss both of Fineman’s counterclaims and gave Fineman leave to amend.

Breach of contract. The court held that Fineman had not identified a specific policy provision that Scottsdale breached. His allegations concerned Scottsdale’s timing in paying the arbitration award, alleged misrepresentations about the policy, settlement conduct, and notice of his right to separate counsel under California law. But the counterclaim did not identify the contractual provisions creating the obligations Scottsdale allegedly violated. The court also rejected the damages allegations as pleaded, including emotional-distress damages and attorneys’ fees for litigating the coverage dispute. The court granted dismissal with leave to amend, directing Fineman to identify the precise policy provisions allegedly breached and the damages resulting from each breach.

Breach of the implied covenant of good faith and fair dealing. The court also granted dismissal of this counterclaim with leave to amend. Under California law, this claim requires an allegation that the insurer withheld benefits due under the policy unreasonably or without proper cause. The court held that Fineman had not identified an actual policy benefit that Scottsdale withheld. It directed him, if he amended, to identify the benefit allegedly due and explain how it was unreasonably withheld.

Disposition

In Scottsdale Insurance Company v. Fineman, Judge Yvonne Gonzalez Rogers ordered that Fineman’s motion to dismiss was granted in part and denied in part, and Scottsdale’s motion to dismiss was granted. Scottsdale was given 21 days to file an amended complaint. Fineman then had 21 days to respond and file any amended counterclaim, and Scottsdale would have 14 days to respond to any counterclaim. The court also set a case-management conference for April 19, 2021, and terminated Docket Numbers 21 and 24.