Federal and State Court Split on Procedure for Alleging Bad Faith

Minnesota Statute section 604.18, commonly known as Minnesota’s Bad Faith Law, permits an insured to add a claim to recover taxable costs based on an insurance company’s bad faith denial of policy benefits. The procedure for bringing a claim under section 604.18 differs from most states. Generally, an insured is strictly prohibited from including a claim for bad faith in its initial pleading. Rather, the insured must seek leave to amend the complaint, supported with affidavits, showing the factual basis for the motion. The insurer may then submit evidence to show there is no factual basis for the motion. Section 604.18 requires that the moving party (the insured) establish, by prima facie evidence, that the nonmoving party (the insurer) is liable under the statute. If the court finds such prima facie evidence, it may grant the insured leave to amend their pleading.

However, the question was recently raised in Minnesota Federal District Court as to whether the procedure in section 604.18 conflicted with the Federal Rules of Civil Procedure for amendments to pleadings.¹ The court in Selective Insurance Company of South Carolina v. Sela,² concluded that subdivision 4(a) of section 604.18 conflicted with Fed. R. Civ. P. 8. Rule 8(a) authorizes a plaintiff to “request any and all of the relief sought…in all pleadings that state a claim.”³ The court concluded that the restriction in subdivision 4(a) of section 604.18 which prohibits an insured from including a bad-faith claim in its initial complaint was in direct conflict with Rule 8, which permits a plaintiff to include a state law request for relief.

The court also concluded that section 604.18 conflicted with Rule 15, which permits a plaintiff to amend its complaint within 21 days after service, or within 21 days after service of the answer, or upon motion where leave is to be “freely given.” In that regard, the standard under Rule 15(a)(2), is that the proposed amendment plead “enough facts to state a claim to relief that is plausible on its face.”⁴ In other words, under Rule 15, the insured would not have to submit any affidavits or evidence in support of an amendment, because the four corners of the proposed pleading would govern the amendment.

Based on Sela, there is a split between state and federal trial courts in Minnesota on when an insured can allege a claim for bad faith. In that regard, Sela seems to suggest that an insured can initially allege a claim under section 604.18 in federal court if the requirements of Rule 8 are met. And if leave to amend is sought, the insured must comply with Rule 15, and not the requirements of section 604.18. Note, however, that the Sela decision does not alter or amend the objective and subjective standards an insured is required to establish under section 604.18.
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¹ Fed. R. Civ. P. 8 and 15.
² Selective Ins. Co. of South Carolina v. Sela, 353 F.Supp.3d 847 (D. Minn. 2018).
³ Id. at 857.
⁴ Id. at 866.