Scholastic Inc. v. St. Paul Fire and Marine Insurance Company

Background

Scholastic Inc. purchased an excess insurance policy from St. Paul Fire and Marine Insurance Company, which the opinion also calls Travelers. After Scholastic settled a lawsuit brought by Vanderbilt University in 2021, it sought reimbursement from Travelers for unpaid defense and settlement costs. Travelers denied the claim. Scholastic then brought this action seeking a declaration that Travelers had a duty to defend and indemnify it for losses from the Vanderbilt lawsuit, as well as damages for breach of contract.

Travelers’ motion

Travelers moved under Rule 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim, and Rule 12(f), which allows a court to strike certain material from a pleading. Travelers sought three forms of relief: dismissal of Scholastic’s claim for attorneys’ fees incurred in this lawsuit; dismissal of Scholastic’s claim for unpaid defense costs to the extent that claim sought consequential damages; and striking Scholastic’s allegations that Travelers breached the duty of good faith and fair dealing and violated representations to policyholders and the public.

Attorneys’ fees

The court granted the motion to the extent it sought dismissal of Scholastic’s claim for attorneys’ fees in this litigation. Applying the American Rule, under which each side ordinarily pays its own attorneys’ fees unless a statute or enforceable contract provides otherwise, the court considered a narrow exception recognized by New York law. That exception can allow an insured to recover fees when an insurer’s legal actions place the insured in a defensive position while the insurer attempts to avoid its policy obligations.

The court held that the exception did not apply because Scholastic, the insured, started this declaratory-judgment action to establish its rights under the policy. The court also rejected Scholastic’s reliance on a prior case involving unusual circumstances. According to the opinion, Scholastic did not identify comparable circumstances, such as an insurer filing a counterclaim denying its duty to defend or persistently refusing a duty that the policy clearly imposed.

Other requested relief

The court reserved judgment on Travelers’ request concerning unpaid defense costs and consequential damages, as well as its request to strike the challenged allegations. The court directed the parties to appear by telephone for an initial pretrial conference to discuss those matters, including whether there was a material difference between consequential damages and actual or general damages. The Clerk of Court was directed to terminate the docket entry for Travelers’ motion, ECF No. 29.