New You Spa v. Citizen's Insurance Group

Background

New You Spa and Emilia Khajavi sued The Hanover Insurance Group, Citizens Insurance Company of America (referred to as “Citizens”), and Does 1–50. They alleged breach of contract and breach of the covenant of good faith and fair dealing. The allegations concerned a March 2016 water intrusion that harmed the plaintiffs’ business. The insured entities tendered the claim to Citizens, which allegedly asked for additional information without denying or acknowledging coverage.

Citizens later asserted that the plaintiffs’ legal claims against the insured were time-barred. In August 2020, the plaintiffs and the insured entered a “Confession of Judgment,” under which the insured agreed to pay $318,982.60. The insured also assigned its rights under the insurance policy to the plaintiffs.

Court’s Analysis

The court granted Citizens’ motion to dismiss for two independent reasons. First, it held that Citizens did not breach the policy’s general provision requiring it to pay sums that the insured became legally obligated to pay as damages and requiring it to defend the insured against a qualifying lawsuit. The court noted that the plaintiffs had not brought a lawsuit against the insured seeking damages, and that the allegations showed only that the insured volunteered to pay through the confession of judgment. They did not show that the insured was legally obligated to pay damages.

Second, the policy prohibited an insured from voluntarily making a payment, assuming an obligation, or incurring an expense without Citizens’ consent. The policy also provided that no person or organization could sue Citizens unless all policy terms had been fully complied with. Because the insured assumed the obligation to pay through the confession of judgment without Citizens’ consent, the court held that neither the insured nor the plaintiffs, after receiving the assignment of rights, could sue Citizens under the policy.

The plaintiffs argued that Citizens could not rely on the no-voluntary-payments provision because it had effectively declined to defend and abandoned the insured. The court rejected that argument based on the complaint’s allegations, noting that Citizens had asserted that the plaintiffs’ claims were time-barred before the insured entered the confession of judgment.

Disposition

The court held that the plaintiffs failed to state a breach-of-contract claim for which relief could be granted. It also held that, without a breach of contract, there could be no breach of the covenant of good faith and fair dealing. Judge Charles R. Breyer granted Citizens’ motion to dismiss with prejudice because the complaint’s allegations and the policy’s language showed that amendment would be futile.