In Delalla v. Hanover Insurance, there was an underlying action between the insureds and a company concerning trademark infringement, unjust enrichment, and unfair competition. The insureds’ insurer appointed an attorney to represent them, and he reached settlement with the company. The insureds then filed a complaint in the current case, asserting a breach of the insurer’s obligation to the insurer by entering into an agreement to settle the underlying action.
Among the claims was a bad faith allegation against the insurer. The insureds claimed that the insurer acted in bad faith by “(1) issuing an equivocal reservation of rights letter rather than full and unequivocal coverage and defense; (2) by using its reservation as an instrumentality of coercion and duress against plaintiffs; and (3) placing its profit motivation exclusively and blindly ahead of its insureds’ business rights and benefit.” However, the court determined that the insureds needed to file an amended complaint in order for the allegation to survive because the original Complaint did not comply with pleading standards. Many of the allegations were implausible, and there were multiple procedural and substantive defects.
The insureds had refused to file an amended complaint, so in this opinion the court decided to require them to show cause as to why it should not dismiss the Complaint. It could have dismissed the case at this time, but it instead gave the insureds ten days to file a memorandum to show cause why the Complaint should not be dismissed without prejudice.
Date of Decision: August 17, 2010