Rose v. Hartford Underwriter

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0053P (6th Cir.)
File Name: 00a0053p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
;

ALLEN W. ROSE,

Plaintiff-Appellant,


No. 98-4286
v.

>
HARTFORD UNDERWRITERS 

Defendant-Appellee. 
INSURANCE COMPANY,

1
Appeal from the United States District Court
for the Northern District of Ohio at Akron.
No. 98-00600—James S. Gwin, District Judge.
Argued and Submitted: December 7, 1999
Decided and Filed: February 14, 2000
Before: JONES, BATCHELDER, and MOORE, Circuit
Judges.
_________________
COUNSEL
ARGUED: Robert Chudakoff, ULMER & BERNE,
Cleveland, Ohio, for Appellee. ON BRIEF: Edward C.
Pullekins, GENOVESE & PULLEKINS, Akron, Ohio, for
1
2 Rose v. Hartford Underwriters Ins. Co. No. 98-4286
Appellant. Robert Chudakoff, ULMER & BERNE,
Cleveland, Ohio, for Appellee.
_________________
OPINION
_________________
KAREN NELSON MOORE, Circuit Judge. Plaintiff Allen
Rose appeals the district court’s denial of his motion to
amend his original complaint in this insurance coverage
dispute. The district court issued a marginal entry order
denying Rose’s motion to amend his complaint, but the
district court failed to provide any explanation for its
decision. Because the district court’s denial of the motion to
amend without explanation qualifies as an abuse of discretion,
and because this abuse of discretion does not amount to a
harmless error, we REVERSE the district court’s denial of
the motion to amend, and REMAND the case to the district
court for further proceedings consistent with this opinion.
I. BACKGROUND
This case involves a dispute between the parties over
Hartford Underwriters Insurance Company’s financial
responsibility for a February 14, 1997 fire that destroyed
Rose’s home in Akron, Ohio. Hartford acknowledges that it
had provided Rose with a policy that was effective at the time
of the fire, but the insurance company refused to honor its
policy after the company’s investigators determined that the
fire had been set intentionally. Hartford’s investigation
revealed that the fire had been started in four separate areas of
the home, and two samples of debris taken from Rose’s home
tested positive for the presence of a flammable liquid
substance. On October 24, 1997, Hartford informed Rose that
it had decided to deny payment of his claims on grounds that
Rose had engaged in arson and had made material
misrepresentations regarding the policy. According to the
parties, Rose was later indicted and arrested for arson related
to the fire in January of 1998, but was subsequently acquitted
of the arson charges. Rose’s Br. at 6; Hartford’s Br. at 4.
No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 3
On February 18, 1998, Rose filed a complaint in Summit
County Common Pleas Court in which he alleged that
Hartford breached the insurance contract when the company
denied his claim. Hartford subsequently removed the case to
federal district court on grounds that the district court had
diversity jurisdiction over the case pursuant to 28 U.S.C.
§ 1332. On May 13, 1998, Rose filed a motion to amend his
original complaint and sought leave to include additional
allegations that charged Hartford with acting in bad faith
when it denied him coverage under the fire insurance policy.
Rose asserted that the bad faith claim had been “inadvertently
omitted” from the original complaint, and he claimed that he
had discovered “additional information” that supported the
bad faith claim. Hartford responded by filing a brief in
opposition to Rose’s motion to amend in which it argued that
the addition of Rose’s bad faith claim would be futile because
Rose had been indicted on arson charges. Hartford did not,
however, attach any evidentiary material to its response, such
as the actual indictment that charged Rose with arson. On
June 18, 1998, the district court issued a marginal entry order
and denied without explanation Rose’s motion to amend his
complaint.
On August 4, 1998, Hartford filed a motion for summary
judgment in which it argued that Rose’s remaining breach of
contract claim was barred as a matter of law by the one-year
statute of limitations set forth in the fire insurance policy.
The fire insurance policy stated that “[n]o action can be
brought unless the policy provisions have been complied with
and the action is started within one year after the date of
loss.” J.A. at 124 (Hartford Ins. Policy) (emphasis added).
Hartford argued that this language barred Rose’s breach of
contract claim because the fire destroyed Rose’s home on
February 14, 1997, and he did not file his complaint against
Hartford until February 18, 1998. The district court agreed
that Rose’s failure to file his complaint within the one-year
period in the policy barred his breach of contract claim, and,
as a result, the district court granted summary judgment in
favor of Hartford on September 18, 1998.
4 Rose v. Hartford Underwriters Ins. Co. No. 98-4286 No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 9
Rose now appeals the district court’s decision to deny his reasonable justification therefor.”) (quoting Staff Builders,
motion to amend his original complaint. Because Rose’s Inc. v. Armstrong, 525 N.E.2d 783, 788 (Ohio 1988)).
initial appellate brief does not address the district court’s
grant of summary judgment on his breach of contract claim, If an insured is indicted before an insurance company
we limit our review to the district court’s decision to deny refuses to honor its policy, by contrast, then an indictment on
Rose’s motion to amend his original complaint. Indeed, Rose arson charges certainly would be strong evidence that shows
abandoned any argument relating to the district court’s grant that the insurance company had a reasonable justification for
of summary judgment on the breach of contract claim when the denial of a fire insurance claim, assuming that the
he failed to raise this issue on appeal. See McMurphy v. City insurance company knew about the indictment at the time it
of Flushing, 802 F.2d 191, 198-99 (6th Cir. 1986). refused to honor the claim. Nevertheless, a per se rule or
conclusive presumption is not appropriate because cases
II. ANALYSIS could exist in which a prosecutor has maliciously pursued
arson charges against an individual, or an insurance company
A. Rose’s Motion to Amend His Original Complaint has tampered with a grand jury. We believe that the better
approach is to apply ordinary summary judgment principles,
Rose contends that the district court erred when it denied even in cases where a criminal indictment on arson charges
his motion to amend his original complaint, which prevented has led an insurance company to refuse to honor a fire
him from adding a claim of bad faith against Hartford in this insurance claim. Thus, upon a summary judgment motion or
insurance dispute. Rule 15(a) of the Federal Rules of Civil a conversion of a Rule 12(b)(6) motion with the requisite
Procedure provides that leave to amend “shall be freely given notice to the parties, a court should consider the indictment –
when justice so requires.” We review a district court’s order along with all the other evidence in the record – in the light
denying a Rule 15(a) motion to amend for an abuse of most favorable to the non-moving party when deciding
discretion. General Elec. Co. v. Sargent & Lundy, 916 F.2d whether a reasonable juror could conclude that an insurance
1119, 1130 (6th Cir. 1990). company had a reasonable justification for refusing to provide
coverage under an insurance policy.
Although a district court has discretion to deny a motion to
amend a complaint after an answer has been filed, we have Here, however, Rose filed a motion for leave to amend the
held on several occasions that a district court abuses its complaint, which was opposed by Hartford and summarily
discretion when it fails to state a basis for its decision to deny denied by the district court. Under these circumstances, it is
a motion to amend. Jet, Inc. v. Sewage Aeration Sys., 165 premature to undertake a summary judgment evaluation.
F.3d 419, 425 (6th Cir. 1999); Moore v. City of Paducah, 790
F.2d 557, 559 (6th Cir. 1986); see also Foman v. Davis, 371 III. CONCLUSION
U.S. 178, 182 (1962) (“[An] outright refusal to grant the leave
without any justifying reason appearing for the denial is not The district court clearly abused its discretion when it
an exercise of discretion; it is merely abuse of that discretion denied Rose’s motion to amend without providing an
and inconsistent with the spirit of the Federal Rules.”). In the explanation for its decision. Because the district court’s
present case, the district court issued a marginal entry order abuse of discretion does not amount to a harmless error, we
denying Rose’s motion for leave to amend his complaint, but REVERSE the district court’s denial of the motion to amend,
it did not provide a justification or explanation for its denial. and REMAND the case to the district court for further
Because the district court denied Rose’s motion without proceedings consistent with this opinion.
explanation, it has clearly abused its discretion in this case.
8 Rose v. Hartford Underwriters Ins. Co. No. 98-4286 No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 5
plaintiff who had been indicted on arson charges could not Nevertheless, the district court’s abuse of its discretion
assert a bad faith claim against his insurance company. As could amount to a harmless error if adding Rose’s proposed
the district court explained, “The law appears well-settled that amendment would have been futile. See, e.g., Jet, Inc., 165
‘where an insured is indicted for arson in connection with a F.3d at 425 (holding that magistrate judge’s denial of motion
fire loss, the insurer’s conclusion that the insured was to amend without providing an explanation was harmless
responsible for the loss is reasonably justified, and he is because “[t]he futility of amending [the plaintiff’s] complaint
precluded from recovery of ‘bad faith’ damages.’” Koenig, would have been appropriate grounds on which to deny the
3:94-CV-7201 at 6 (quoting Southern Fire & Cas. Ins. Co. v. motion to amend.”). A proposed amendment is futile if the
Northwest Georgia Bank, 434 S.E.2d 729, 730-32 (Ga. Ct. amendment could not withstand a Rule 12(b)(6) motion to
App. 1993)). dismiss. Thiokol Corp. v. Department of Treasury, State of
Michigan, Revenue Div., 987 F.2d 376, 382-83 (6th Cir.
Both Koenig and Thomas can be distinguished from the 1993).
present case, however, because these cases involved a bad
faith claim that was dismissed on a motion for summary In this case, Hartford argues that the district court’s
judgment, whereas the dispositive issue in the present case decision should be affirmed because there is evidence in the
turns on whether Rose’s proposed bad faith claim could record, i.e., Rose’s criminal indictment on arson charges, that
survive a Rule 12(b)(6) motion to dismiss. As we discussed shows that adding Rose’s bad faith claim would have been
above, the addition of a bad faith claim to a complaint is not futile. The district court, however, could not have properly
necessarily futile even if the claim may ultimately be considered Rose’s indictment on criminal charges on a Rule
dismissed on a motion for summary judgment. Furthermore, 12(b)(6) motion to dismiss. Because the criminal indictment
we do not believe that the Ohio Supreme Court, if given the qualifies as a “matter[ ] outside the pleading,” the district
opportunity to address the issue, would follow Koenig and court would have had to treat a Rule 12(b)(6) motion and
Thomas and hold that a criminal indictment automatically accompanying indictment as a motion for summary judgment.
precludes a plaintiff from pursuing a bad faith claim against See FED. R. CIV. P. 12(b)(6) (stating that if “matters outside
an insurance company – particularly in cases like this one the pleading are presented to and not excluded by the court,
where an insured is indicted after an insurance company the motion shall be treated as one for summary judgment and
decides not to honor its policy.1 Indeed, if an insured is disposed of as provided in Rule 56, and all parties shall be
indicted after an insurance company has already refused to given reasonable opportunity to present all material made
honor a claim, then the indictment is of little, if any, value in pertinent to such a motion by Rule 56.”). Hartford claims that
determining whether the insurance company had reasonable Rose’s proposed amendment is futile because the district
justification for the denial because, under Ohio law, an court would have eventually granted summary judgment in
insurance company must have a reasonable justification at the the insurance company’s favor once the district court
time it refuses to honor its policy. See Zoppo, 644 N.E.2d at considered the criminal indictment. The test for futility,
400 (“[A]n insurer fails to exercise good faith in the however, does not depend on whether the proposed
processing of a claim of its insured where its refusal to pay amendment could potentially be dismissed on a motion for
the claim is not predicated upon circumstances that furnish summary judgment; instead, a proposed amendment is futile
only if it could not withstand a Rule 12(b)(6) motion to
dismiss. Because the proposed bad faith claim could
1
On October 24, 1997, Hartford notified Rose that it would not honor withstand a Rule 12(b)(6) motion to dismiss, Rose’s proposed
its insurance policy. Rose was indicted on the arson charges in January
of 1998.
6 Rose v. Hartford Underwriters Ins. Co. No. 98-4286 No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 7
amendment was not futile. Thus, the district court’s abuse of opportunity to be heard if judicial notice is taken. See, e.g.,
discretion in this case does not amount to a harmless error. Lussier v. Runyon, 50 F.3d 1103, 1114 (1st Cir.) (holding that
district court erred when it took judicial notice without giving
Hartford also argues that the district court’s dismissal of parties an opportunity to be heard), cert. denied, 516 U.S. 815
Rose’s motion to amend should be affirmed because the (1995). Because Rose was not given an opportunity to
district court could have taken judicial notice of the criminal address the judicial notice issue either before or after the
indictment pursuant to Federal Rule of Evidence 201. Rule district court denied his motion to amend, and because the
201 states in part that: district court did not necessarily take judicial notice of the
criminal indictment in this case, the district court’s decision
(a) Scope of rule. This rule governs only judicial notice to deny the motion to amend without any explanation does
of adjudicative facts. not amount to a harmless error.
(b) Kinds of Facts. A judicially noticed fact must be B. Rose’s Indictment and His Bad Faith Claim
one not subject to reasonable dispute in that it is either
(1) generally known within the territorial jurisdiction of We also disagree with Hartford’s claim that Ohio courts
the trial court or (2) capable of accurate and ready have created a per se rule that precludes a plaintiff who has
determination by resort to sources whose accuracy cannot been indicted on arson charges from bringing a bad faith
reasonably be questioned. claim against an insurance company when the company
refuses to honor its fire insurance policy. The Ohio Supreme
(c) When discretionary. A court may take judicial Court has held that an insurance company does not act in bad
notice, whether requested or not. faith when it refuses to honor an insurance policy as long as
the company has a reasonable justification for refusing to
* * * honor a claim. Zoppo v. Homestead Ins. Co., 644 N.E.2d
397, 399-400 (Ohio 1994); see also Thomas v. Allstate Ins.
(e) Opportunity to be heard. A party is entitled upon Co., 974 F.2d 706, 711 (6th Cir. 1992) (“The test, therefore,
timely request to an opportunity to be heard as to the is not whether the defendant’s conclusion to deny benefits
propriety of taking judicial notice and the tenor of the was correct, but whether the decision to deny benefits was
matter noticed. In the absence of prior notification, the arbitrary or capricious, and there existed a reasonable
request may be made after judicial notice has been taken. justification for the denial.”). Hartford claims that a grand
* * * jury indictment on arson charges is irrefutable proof that an
insurance company had a reasonable justification for denying
FED. R. EVID. 201. Although a district court has discretion to a fire insurance claim.
take judicial notice of adjudicative facts pursuant to Rule 201, Although Hartford fails to cite any Ohio cases directly on
the district court in this case did not necessarily take judicial point, it does rely on two unreported cases from the U.S.
notice of Rose’s criminal indictment. Because the district District Court for the Northern District of Ohio. See Thomas
court did not set forth an explanation for its decision to deny v. Allstate Ins. Co., 1:96-CV-1529, slip op. at 3-8 (N.D. Ohio
Rose’s motion to amend his complaint, it is impossible to tell Aug. 15, 1997); Auto-Owners Mut. Ins. Co. v. Koenig, 3:94-
on appeal whether the district court properly took judicial CV-7201, slip op. at 3-6 (N.D. Ohio Aug. 31, 1995). In
notice of the indictment pursuant to Rule 201. Furthermore, Koenig, for instance, the district court concluded that a
Rule 201(e) requires the district court to give a party an