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Judge Davis Dismisses Implied Covenant Claim, but Allows Contract Claims to Proceed Despite the Contract's Purported Limitation on Damages

August 7, 2019

In WSFS Financial Corporation and Wilmington Savings Fund Society, FSB v. Great American Insurance Company, C.A. No. N18C-09-088 EMD [CCLD], Judge Davis granted in part and denied in part the defendant’s partial motion to dismiss the plaintiffs’ breach of contract and implied covenant of good faith and fair dealing claims.

The action arose from an insurance agreement between the parties. Under the agreement, Great American was obligated to reimburse WSFS for all losses resulting “directly” from dishonest and fraudulent actions committed by an employee. WSFS employee Tae Kim had pled guilty to bank fraud charges after engaging in a fraudulent loan scheme. Great American agreed that WSFS’s losses from Kim’s fraudulent loans here covered by the agreement and paid over $1.6 million to WSFS.

WSFS later submitted an amended proof of loss to recover six additional categories of damages allegedly reimbursable under the agreement: (1) funds incurred in establishing the existence and the amount of its loan losses and in mitigating those losses, (2) employee benefits paid to Kim, (3) costs WSFS incurred to fund and carry Kim’s fraudulent loans, (4) auditors’ fees in connection with WSFS’s Form 10-K filings, (5) attorneys’ fees related to WSFS’s public disclosure obligations, and (6) compensation for the time that WSFS spent addressing the implications and costs of the fraud.

In response, Great American requested more information regarding category 1 and denied the remaining claims. After the denial, WSFS filed the instant complaint alleging that Great American breached the parties’ insurance agreement and the implied covenant of good faith and fair dealing by failing to indemnify WSFS for its losses. In its motion to dismiss, Great American argued that it was not obligated to pay for the damages claimed in categories 2-6 because they were consequential damages and the parties’ agreement covered only direct losses resulting from an employee’s dishonest or fraudulent acts.

In deciding the motion, Judge Davis found dismissal of WSFS’s category 3-5 claims premature, explaining that WSFS could demonstrate that these categories were direct losses on a more developed record. With respect to the category 2 claim, however, the court concluded that Kim’s employee benefits were consequential damages and, therefore, not covered by the parties’ agreement. Additionally, the court found that the insurance agreement expressly barred the category 6 claims.

Finally, Judge Davis dismissed WSFS’s claim for breach of implied covenant of good faith and fair dealing. The court reasoned that Great American acted, in part, with reasonable justification in denying WSFS’s claims because two of WSFS’s claims were dismissed and the rest were litigable.

Analysis: The CCLD has become a popular venue for resolving insurance coverage disputes. In connection with this motion, Judge Davis scrutinized the insurance agreement at issue and allowed certain of the claims to proceed after finding that it was conceivable the plaintiffs could recover on a more developed record. Here, Judge Davis refused to dismiss the plaintiffs’ claims to recover the cost to fund and carry the fraudulent loans, noting that whether the costs were foreseeable was a fact-based inquiry, which should not be resolved at the motion to dismiss stage. Frank Investments Ranson, LLC v. Ranson Gateway, LLC, 2016 WL 769996 (Del. Ch. Feb. 26, 2016). While allowing the contract claims to proceed, however, Judge Davis dismissed the implied covenant of good faith and fair dealing claim. Dismissal of this claim highlights that the court is closely scrutinizing implied covenant claims and may dismiss such claims while allowing express contract claims to proceed.

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