Opinion
PC-2022-06487
05-03-2023
STATE OF RHODE ISLAND and the RHODE ISLAND DEPARTMENT OF LABOR AND TRAINING, Plaintiffs, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.
For Plaintiff: John A. Tarantino, Esq. For Defendant: Michael P. Duffy, Esq.
For Plaintiff: John A. Tarantino, Esq.
For Defendant: Michael P. Duffy, Esq.
DECISION
STERN, J.
Before this Court is Defendant Fidelity & Deposit Company of Maryland's (Defendant) Motion to Dismiss Counts I, II, III, and V of Plaintiffs State of Rhode Island and Rhode Island Department of Labor and Training's (collectively, Plaintiffs) Complaint pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure for failure to state a claim upon which relief can be granted. (Def.'s Mem. in Supp. of Def.'s Mot. to Dismiss (Def.'s Mem.) 1.) In addition, Defendant also moves to sever and stay Counts IV, VI, VII, and VIII of Plaintiffs' Complaint. Id. Plaintiffs filed a timely objection on February 24, 2023. See Docket. Jurisdiction is pursuant to Rule 12(b)(6). This Decision follows.
I
In accordance with Rule 12(b)(6), the Facts and Travel section of this Decision will be based upon the facts as alleged in Plaintiffs' Complaint.
A
The Parties
Plaintiff State of Rhode Island (the State) is a body politic and the named insured. (Compl. ¶ 1.) Plaintiff Department of Labor and Training (DLT) is a department established within the State's Executive Branch. Id. ¶ 2. DLT is responsible for activities assigned by law, including payment of benefits under the Unemployment and Temporary Disability Insurance Programs. Id. Defendant is an Illinois corporation with its principal place of business in Schaumburg, Illinois. Id. ¶ 3.
B
The Insurance Policies
For valuable premium, Defendant issued a Government Crime/Crime and Fidelity insurance policy (First Policy Agreement) to the State with a policy period of July 1, 2019 through July 1, 2020. (Compl. ¶ 7; Compl. Ex. 1 (First Policy Agreement) at 6, 9.) The First Policy Agreement also included a limit of insurance per occurrence in the amount of $25 million. (Compl. ¶ 7; First Policy Agreement at 12.) After expiration of the First Policy Agreement, Defendant issued a second insurance policy (Second Policy Agreement) to the State for valuable premium with a policy period from August 1, 2020 through August 1, 2021. (Compl. ¶ 8; Compl. Ex. 2 (Second Policy Agreement) at 6, 9.) The second insurance policy carried a limit of insurance per occurrence in the amount of $15 million. (Compl. ¶ 8; Second Policy Agreement at 12.) Under Section A.3.a of both the first and second policies (collectively, the Policies), insurance coverage included "loss resulting directly from 'forgery' or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in 'money' that are: (1) [m]ade or drawn by or drawn upon you . . ." (First Policy Agreement § A.3.a; Second Policy Agreement § 3.A.a; Compl. ¶ 9.) Additionally, under Section A.7.a of the Policies, coverage included "[l]oss resulting directly from a fraudulent: (a) [e]ntry of 'electronic data' or . . . 'computer system' owned, leased or operated by you, provided the fraudulent entry or fraudulent change causes . . . '(i) [m]oney . . . to be transferred, paid or delivered; or (ii) [y]our account at a 'financial institution' to be debited or deleted." Compl. ¶ 10 (quoting First Policy Agreement at 15; Second Policy Agreement at 15).
C
The Unemployment Benefits Program and CARES Act
DLT administers the Unemployment Insurance Program to provide benefits to persons out of work through no fault of their own. Id. ¶ 12; see also Def.'s Mem. 2. On March 27, 2020, in response to the recent outbreak of the COVID-19 pandemic, the federal government provided additional assistance, passing the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) to provide funding to states. Id. ¶ 13. The State received CARES Act funds and used those funds to pay Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Federal Pandemic Unemployment Compensation (FPUC) claims. Id. ¶¶ 13-14. Each of these assistance programs provided benefits and relief to individuals who had exhausted their benefits or would not normally receive such benefits. Id. ¶¶ 13-15.
The Court takes judicial notice of the COVID-19 pandemic in the United States pursuant to Rule 201 of the Rhode Island Rules of Evidence. R.I. R. Evid. 201.
As a part of the application process for these program benefits, applicants submitted their claims through DLT's website, inputting "certain information (social security number, name, address, date of birth, driver's license or state identification number and issuing state, telephone number and employment history) to enter and gain access [to] DLT's UI Claims System." Id. ¶ 18. Applicants had to undergo a similar process to receive DLT's PUA claims as well. Id. ¶ 19. The system required an applicant to complete a weekly certification in order to continue receiving benefits through the programs. Id. ¶ 21.
D
The Fraudulent Activity
Around early May 2020, DLT received reports that imposters applied for benefits they were not entitled to receive, and DLT was also informed that certain banking information had been hijacked to bank accounts not associated with actual applicants. Id. ¶ 25. Imposters would submit fraudulent claims for Unemployed Insurance (UI), PUA, PEUC, and/or FPUC into the DLT Claims Systems and directed payments to themselves or other bank accounts using previously stolen "personally identifiable information." Id. ¶ 26. Hijackers also gained unauthorized access to pin numbers by reopening or refiling a claim through the use of the claimant's date of birth and social security number, allowing imposters/hijackers to "hijack" funds to a bank account not associated with the actual applicant. Id. ¶ 28. The fraudulent entry of personal data, as well as the fraudulent instruction to debit the State's account and transfer funds directly, caused losses incurred by the State. Id. ¶¶ 29-30.
After an investigation, "DLT acquired sufficient information about the manner in which the fraud was perpetrated to implement certain processes that enabled DLT to confirm that certain claims were fraudulent" . . . and to "prevent an estimated $3.2 billion in fraudulent unemployment benefits from being paid out over the course of the COVID-19 pandemic." Id. ¶ 35. On March 23, 2021, the State claimed "a loss of employment security benefits payments valued in excess of $25 million due to fraud on diverse dates in 2020 and 2021" and advised Defendant that it engaged in efforts to mitigate its losses. Id. ¶ 38. On February 18, 2022, after compiling a second set of proof of loss, the State submitted a report with losses totaling in excess of $15 million from fraud in 2020 and 2021. See id. ¶ 40.
On June 16, 2022, the State provided Defendant with more requested information regarding the State's losses. Id. ¶ 43. Several weeks later, on July 8, 2022, Defendant denied Plaintiffs' claims. Id. ¶ 44. Plaintiffs filed this lawsuit in Superior Court on November 14, 2022, asserting declaratory judgment on both Policies (Counts I & II), breach of the First Policy (Count III), breach of the implied covenant of good faith and fair dealing with respect to the First Policy (Count IV), breach of the Second Policy (Count V), breach of the implied covenant of good faith and fair dealing with respect to the Second Policy (Count VI), and bad faith refusal to pay claims under First and Second Policies in violation of G.L. 1956 § 9-1-33 (Counts VII & VIII). See Compl.
II
Motion to Dismiss
A
The Parties' Arguments
On January 10, 2023, Defendant filed its Motion to Dismiss Plaintiffs' Complaint with respect to Counts I, II, III, and V for failure to state a claim upon which relief can be granted. See Docket; Def.'s Mem. 1.
In support of its motion, Defendant asserts that there is no provable set of facts under which Plaintiffs would be able to establish that their claims are covered under the Policies. (Def.'s Mem. 4.) Specifically, Defendant avers that the language contained in the Policies is dispositive as to potential coverage, and the losses resulted from alleged use of "another person's . . . confidential or personal information." Id. at 5 (emphasis added). Furthermore, Defendant maintains that there is no doubt that the fraud resulted from the use of confidential or personal information, which is expressly excluded by the insurance policy. Id. at 6.
As additional support, Defendant contends that the exclusion provision under § D.d.1-2 specifically precludes coverage from loss resulting from use of "confidential or personal" information, which is the exact situation here. Id. at 7 (emphasis added). "[C]overage is precluded if the information used was either confidential or personal." Id. Defendant maintains that the information used in the fraudulent applications was confidential information and it was not in the public domain. Id. In the alternative, if it is not confidential, then Defendant further avers that the information is personal information. Id. at 8. As a final argument, Defendant argues that even if the information that was used was not included in the list under § D.d.1-2, the list is not exhaustive and can include other information. The other information (social security number, date of birth, etc.) still fits under the catch-all exclusion, and therefore, Plaintiffs cannot seek recovery of their losses through the Policies. Id. at 8-9.
Defendant uses the definition of personal information as defined under the Rhode Island Identity Theft Protection Act, G.L. 1956 § 11-49.3-3.
Plaintiffs object, first asserting that the exclusion in the Policies applies only to unauthorized disclosure or use of confidential information that is "held by the insured." (Pls.' Obj. to Def.'s Mot. to Dismiss (Pls.' Obj. Mem.) 11.) Plaintiffs continue their viewpoint, stating that the exclusion is "first-party coverage covering the insured's property and not coverage for the insured's liability . . ." Id. at 11-12 (quoting Katherine Musbach & Reina Dorvilier, Apportioning the Loss: A Liability and Recovery Analysis for Email-Based Claims, 25 Fid. L.J. 1, 23 (2019)). However, Plaintiffs argue the current situation is not one where the exclusion is applicable. See id. at 12. In contrast, the insured property is actually "the money that DLT had available to pay claims." Id. (emphasis added). As additional support, Plaintiffs also attached two affidavits for arrest warrants in two criminal prosecutions in the United States District Court for the District of Rhode Island. See Pls.' Obj. Mem. Exs. 1, 2; Pls.' Obj. Mem. 13. Plaintiffs assert that the inclusion of the affidavits lends further evidence that the imposters used stolen data of third parties and not any information held by the Plaintiffs. Id. at 14.
Next, Plaintiffs argue that if the Court finds that the exclusion is applicable here, the information here does not fall within the definition of the exclusion provision. Id. at 16. Plaintiffs raise the doctrine of noscitur a sociis ("it is known by its associates") to support its contention that "the meaning of a contested word in an insurance policy must be determined by reference to the terms accompanying the word and, 'more specifically, 'that general and specific words are associated with and take color from each other.'" Id. at 17 (quoting Allstate Insurance Co. v. Russo, 641 A.2d 1304, 1307 (R.I. 1994)) (internal citations omitted). Plaintiffs object that, at a minimum, some of the information utilized by the imposters do not share the attributes of privacy or sensitivity as the information listed as examples under the provision. See id. at 18; First Policy Agreement § D.d.1-2; Second Policy Agreement § D.d.1-2. Plaintiffs argue that certain information-name, address, date of birth, telephone number, and employment history-can be found through a public records or Internet search, making it neither confidential nor personal. Id. at 18. In addition, the other information that may share attributes with the listed examples in the Policies, such as social security numbers and driver's license numbers, had to be stolen from others and then had to be combined with the other publicly accessible information to complete the submission of the fraudulent claims. Id. at 19. Under this context, Plaintiffs contend that because there can be more than one reasonable interpretation as to whether the information used falls within the "catch-all" provision, the exclusion should be construed against Defendant. Id.
Lastly, Plaintiffs assert that the State's losses are actually covered under the Concurrent Causation Doctrine. Id. at 20. Here, the imposters entered the Claims Systems with fraudulent information, and the submission of the claims were efficient and proximate causes of the State's losses. Id. at 21. But for the imposters' entry into the Claims Systems, the State would not have suffered any losses. Id.
In their Reply Memorandum, Defendant maintains that "Coverage is Precluded by the Plain Language of the F&D Policies." (Def.'s Reply Mem. in Supp. of Def.'s Mot. to Dismiss (Def.'s Reply Mem.) 2.) Because Defendant maintains that the language of the exclusion provision is unambiguous, it avers that it must be enforced and applied as written. Id. at 3. Defendant further asserts that the language that Plaintiffs wish to read into the policies was included in prior versions and then deleted, citing to the 2005 and 2015 versions of the ISO Government Crime Policy forms (Nos. CR 00 26 1115, CR 00 26 05 06, respectively). Id. at 4-5 (emphasis added). In the alternative, Defendant argues that even if the language were to be read into the Policies, it would not change the result because once the imposters/hijackers entered others' information, it was held by Plaintiff DLT and the exclusion provision prevents coverage. Id. at 5. Defendant also argues that the catch-all phrase is just one in a series of "non-exclusive examples of the types of confidential or personal information whose use will implicate the exclusion." Id. at 8. Therefore, the reference to the specific information used by the imposters in the catch-all provision is irrelevant. Id. Lastly, Defendant avers that there are no concurrent causes of the Plaintiffs' loss. Id. Defendant argues that the doctrine is not relevant because "in this case there is no evidence of any concurrent, covered cause of the Plaintiffs' loss." Id. at 9.
B
Standard of Review
A motion to dismiss under Rule 12(b)(6) "has a narrow and specific purpose." Mokwenyei v. Rhode Island Hospital, 198 A.3d 17, 21 (R.I. 2018). "'The sole function of a motion to dismiss is to test the sufficiency of the complaint.'" Narragansett Electric Co. v. Minardi, 21 A.3d 274, 277 (R.I. 2011) (quoting Laurence v. Sollitto, 788 A.2d 455, 456 (R.I. 2002)). The Court must "assume[] the allegations contained in the complaint to be true and view[] the facts in the light most favorable to the plaintiffs." Giuliano v. Pastina, 793 A.2d 1035, 1036-37 (R.I. 2002) (internal quotation omitted). A motion to dismiss may only be granted if it "'appears beyond a reasonable doubt that a plaintiff would not be entitled to relief under any conceivable set of facts.'" DiLibero v. Mortgage Electronic Registration Systems, Inc., 108 A.3d 1013, 1015 (R.I. 2015) (quoting Minardi, 21 A.3d at 277).
"Ordinarily, when ruling on a motion to dismiss brought under Rule 12(b)(6) or Rule 12(c), 'a court may not consider any documents that are outside of the complaint, or not expressly incorporated therein, unless the motion is converted into one for summary judgment.'" Chase v. Nationwide Mutual Fire Insurance Co., 160 A.3d 970, 973 (R.I. 2017) (quoting Alternative Energy, Inc. v. St. Paul Fire & Marine Insurance Co., 267 F.3d 30, 33 (1st Cir. 2001)). "However, 'when the motion justice receives evidentiary matters outside the complaint and does not expressly exclude them in passing on the motion, then Rule 12(b)(6) specifically requires the motion to be considered as one for summary judgment.'" See Super. R. Civ. P. 12(b)(6); see also EDC Investment, LLC v. UTGR, Inc., 275 A.3d 537, 542 (R.I. 2022) (quoting Pontarelli v. Rhode Island Department of Elementary and Secondary Education, 176 A.3d 472, 476 (R.I. 2018)). Notwithstanding the general rule that "when a motion to dismiss includes documents not expressly incorporated in a complaint, it automatically converts to one for summary judgment, we have acknowledged a narrow exception for 'documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiffs' claim; or for documents sufficiently referred to in the complaint." EDC Investment, LLC, 275 A.3d at 542-43 (internal quotation omitted). More specifically, "if 'a complaint's factual allegations are expressly linked to-and admittedly dependent upon-a document (the authenticity of which is not challenged), [then] that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).'" Mokwenyei, 198 A.3d at 22 (quoting Jorge v. Rumsfeld, 404 F.3d 556, 559 (1st Cir. 2005)).
C
Analysis
1
Consideration of Attached Documents
The Court first notes that it will consider the Policies, as they are attached to the Complaint. See First Policy Agreement; Second Policy Agreement; EDC Investment, LLC, 275 A.3d at 537. These documents are effectively merged into the Complaint, and the Court will consider them without converting the instant motion to one for summary judgment. See Mokwenyei, 198 A.3d at 22; see also Goodrow v. Bank of America, N.A., 184 A.3d 1121, 1126 (R.I. 2018).
a
Consideration of Plaintiffs' Two Affidavits and ISO Crime Policy
Plaintiffs also attached two affidavits to its objection papers. See Pls.' Obj. Mem. Exs. 1-2. The first affidavit was made in support of an application for an arrest warrant and search warrant for Irvin Vilneus, charging him in violation of 18 U.S.C. § 1344 (Bank Fraud); 18 U.S.C. § 1343 (Fraud by Wire); 18 U.S.C. § 1029 (Access Device Fraud); 18 U.S.C. § 1956 (Money Laundering); 18 U.S.C. § 1028A (Aggravated Identity Theft); and 18 U.S.C. § 641 (Specified Federal Offenses). (Pls.' Obj. Mem. Ex. 1, Affidavit of Quoc Tuan Nguyen (Nguyen Aff.) ¶ 1.) The second affidavit-submitted by Special Agent of the Federal Bureau of Investigation (FBI) Matthew J. Riportella-was in support of an application for an arrest warrant for four Florida residents for substantially the same or similar offenses as detailed for Mr. Vilneus. (Pls.' Obj. Mem. Ex. 2, Affidavit Matthew J. Riportella (Riportella Aff.) ¶¶ 1-2.)
Here, Plaintiffs argue that the affidavits should be considered because they are publicly available records. (Pls.' Obj. Mem. 13-14.) Plaintiffs further assert that these public documents are consistent with their allegations that "the imposters fraudulently entered and gained access to the Claims Systems through the submission of 'previously stolen (but accurate) personally identifiable information of others.'" Id. at 14. The Court determines that these factual allegations are not expressly linked to or dependent upon the affidavits attached to Plaintiffs' objection papers. EDC Investment, LLC, 275 A.3d at 542-43. Plaintiffs made no express reference to these affidavits in their Complaint. See Compl. While these affidavits do concern the criminal background surrounding the fraudulent activity that allegedly led to Plaintiffs' losses, the factual allegations before us in the Complaint concern the coverage of the State's insurance policies with Defendant and less to do with the criminal nature of the fraudulent activity. As such, the Court expressly excludes the two affidavits from consideration in Defendant's Motion to Dismiss.
Plaintiffs do not provide a closed quote to this cited material, and therefore the Court is not aware of what Plaintiffs are citing to.
In its Reply Memorandum, Defendant drew this Court's attention to the 2005 and 2015 versions of the ISO Government Crime Policy forms (Nos. CR 00 26 1115, CR 00 26 05 06, respectively), which is relevant because it is the language used for the exclusion provision at issue. See Def.'s Reply Mem. 4-5; First Policy Agreement § D.1.d; Second Policy Agreement § D.1.d.
The Court also excludes these documents in its determination of the instant motion to dismiss. As stated above, it is a general rule when ruling on a motion to dismiss that "a court may not consider any documents that are outside of the complaint, or not expressly incorporated therein, unless the motion is converted into one for summary judgment." Chase, 160 A.3d at 973 (internal citations omitted). These forms do not fall into any of the narrow exceptions outlined in our Supreme Court's decision in EDC Investment and Goodrow, and therefore, this Court excludes their consideration in its Decision on Defendant's Motion to Dismiss. See EDC Investment, 275 A.3d at 537; Goodrow, 184 A.3d at 1126.
2
Exclusion of Coverage under the Policies and Breach of Contract (Counts III and V)
When interpreting an insurance policy, the Court is "'bound by the rules established for the construction of contracts[.]'" Koziol v. Peerless Insurance, Co., 41 A.3d 647, 650 (R.I. 2012) (quoting Malo v. Aetna Casualty and Surety Co., 459 A.2d 954, 956 (R.I. 1983)). Furthermore, the Court "shall not depart from the literal language of the policy absent a finding that the policy is ambiguous." Lynch v. Spirit Rent-A-Car, Inc., 965 A.2d 417, 425 (R.I. 2009) (internal citations omitted).
"'The determination of whether a contract's terms are ambiguous is a question of law[.]'" Chariho Regional School District by and through Chariho Regional School Committee v. State, 207 A.3d 1007, 1015 (R.I. 2019) (quoting Botelho v. City of Pawtucket School Department, 130 A.3d 172, 176 (R.I. 2016)) (internal citations omitted). A term of a policy is ambiguous when it is "'reasonably susceptible of different constructions.'" Koziol, 41 A.3d at 651 (quoting Bliss Mine Road Condominium Association v. Nationwide Property and Casualty Insurance Co., 11 A.3d 1078, 1084 (R.I. 2010)). In determining whether an insurance policy is ambiguous in nature, the words of the contract or agreement must be given their plain, ordinary, and usual meaning. See Bliss Mine Road Condominium, 11 A.3d at 1083. The Court will consider the policy in its entirety and will not establish an ambiguity in isolation or taking a single phrase out of context. Id. Our Supreme Court has articulated that courts should "refrain from engaging in mental gymnastics or from stretching the imagination to read ambiguity into a policy where none is present." Mallane v. Holyoke Mutual Insurance Co. in Salem, 658 A.2d 18, 20 (R.I. 1995)). If the Court does determine that an ambiguity exists in an agreement, then the construction of that provision is a question of fact. Haviland v. Simmons, 45 A.3d 1246, 1258-59 (R.I. 2012) (internal citations omitted). Moreover, if the Court does determine there is an ambiguity, the policy will be construed in favor of the insured and against the insurer. Mallane, 658 A.2d at 20 (citing Sullivan, 633 A.2d at 686).
Turning to the case at hand, the parties dispute whether Plaintiffs are excluded from coverage under § D.1.d. See Def.'s Mem. 4; Pls.' Obj. Mem. 10-16; see also First Policy Agreement; Second Policy Agreement. Defendant argues that assessing whether an ambiguity exists in an insurance policy is a question of law for the court to decide. See Def.'s Mem. 6 (citing Merrimack Mutual Fire Insurance Company v. Dufault, 958 A.2d 620, 625 (R.I. 2008)). Defendant argues there is "no doubt that the alleged fraud resulted from use of other persons' confidential or personal information, which is broadly defined for purposes of the exclusion to include 'any . . . type of nonpublic information.'" Id. (emphasis added). Therefore, because the information used was confidential or personal, the exclusion provision of each Policy is implicated and Plaintiffs cannot access coverage. Id. at 7-9. Plaintiffs aver that the policy concerning the disclosure or use of another person's or organization's confidential or personal information (§ D.1.d.1) applies only to that information that is held by the insured. Pls.' Obj. Mem. 10-11. However, Plaintiffs assert that the confidential or personal information was already previously stolen and then used in their Claims Systems in the fraudulent activity. Id. at 12. The exclusion, according to Plaintiffs, would certainly apply where there was disclosure of information held by the State. Id. However, as supported by the accompanying affidavits, Plaintiffs urge that this information was previously stolen and therefore neither held, disclosed, nor used by the State. Id. Plaintiffs conclude that the exclusion under § D.1.d.1 therefore does not apply.
The relevant exclusion of each policy states,
"D. Exclusions
"1. This Policy does not cover:
". . .
"d. Confidential Or Personal Information
"Loss resulting from:
"(1) The disclosure or use of another person's or organization's confidential or personal information;
". . .
"For the purposes of this exclusion, confidential or personal information includes, but is not limited to, patents, trade secrets, processing methods, customer lists, financial information, credit
card information, health information or any other type of nonpublic information." First Policy Agreement § D.1.d.1-2; Second Policy Agreement § D.1.d.1-2.
The Court determines that, pursuant to the applicable standard of review for a motion to dismiss, Defendant has not shown beyond a reasonable doubt that Plaintiffs are not entitled to relief. Looking at the plain and ordinary language of the Policies, without further discovery or information, the Court finds that the language is ambiguous as to whether the exclusion applies. Plaintiffs assert that the confidential or personal information was already previously stolen and then used in their Claims Systems in the fraudulent activity, pushing it outside the scope of the exclusion provision because, according to Plaintiffs, only information that is held by the insured is expressly excluded. Pls.' Obj. Mem. 12.
It is a reasonable interpretation of the insurance policy exclusion that only information held by the insured is expressly excluded. See Sullivan, 633 A.2d at 686. The vital provision states, "The disclosure or use of another person's or organization's confidential or personal information is excluded." First Policy Agreement § D.1.d. (1); Second Policy Agreement § D.1.d. (1). It is reasonable that Plaintiffs did not use or hold the confidential information, but reviewed claims submitted to their system in distributing CARES Act funds. Therefore, as Plaintiffs assert, it is a reasonable construction that the exclusion does not apply here because Plaintiffs never held another person's confidential or personal information in their data system, but were only deceived through false claims submitted by outsider imposters and hijackers. On the other hand, it is also reasonable to read this provision in the light urged by Defendant: the loss resulted from confidential or personal information that belonged to another person and was then used by the imposters/hijackers to secure CARES Act funds. (Def.'s Mem. 6-7.) Because there is more than one reasonable interpretation that can be read from this provision, the Court finds that § D.1.d. (1) is ambiguous. As such, the Court cannot determine, at this stage of litigation, whether the exclusion provision is meant to be limited to confidential or personal information that is held by the insured. Therefore, Defendant has not shown that Plaintiffs are not entitled to relief beyond a reasonable doubt. Defendant's Motion to Dismiss is denied with respect to Counts III and V.
The Court need not reach Plaintiffs' further arguments in support of their Objection because it has found the provision ambiguous. However, the Court does not find Plaintiffs' remaining arguments have merit here.
3
Motion to Dismiss Counts I & II of Complaint
Defendant also moves this Court to dismiss Plaintiffs' Counts I and II, which request declaratory relief on each Policy. See Def.'s Mem. 1; Compl. ¶¶ 45-50. The Uniform Declaratory Judgments Act (UDJA) gives the Superior Court broad jurisdiction to "declare rights, status, and other legal relations whether or not further relief is or could be claimed." G.L. 1956 § 9-30-1. The Superior Court has original jurisdiction when acting under the authority of UDJA. Tucker Estates Charlestown, LLC v. Town of Charlestown, 964 A.2d 1138, 1140 (R.I. 2009) (citing Bradford Associates v. Rhode Island Division of Purchases, 772 A.2d 485, 489 (R.I. 2001)).
"It is . . . well settled that the Superior Court has broad discretion to grant or deny declaratory relief under the UDJA." Tucker Estates Charlestown, LLC, 964 A.2d at 1140 (citing Rhode Island Orthopedic Society v. Blue Cross & Blue Shield of Rhode Island, 748 A.2d 1287, 1289 (R.I. 2000)). However, a court's discretion concerning whether to entertain the action itself, however, is more limited. See Perron v. Treasurer of City of Woonsocket, 121 R.I. 781, 786, 403 A.2d 252, 255 (1979). "A dismissal of a declaratory-judgment action before a hearing on the merits, under Rule 12(b)(6), is proper only when the pleadings demonstrate that, beyond a reasonable doubt, the declaration prayed for is an impossibility." Tucker Estates Charlestown, LLC, 964 A.2d at 1140 (emphasis added) (citing Perron, 121 R.I. at 786, 403 A.2d at 255); see also Redmond v. Rhode Island Hospital Trust National Bank, 120 R.I. 182, 187, 386 A.2d 1090, 1092 (1978).
Having denied Defendant's Motion to Dismiss with respect to Counts III and V, and determining that it is not beyond a reasonable doubt that Plaintiffs are not entitled to relief, the Court similarly finds that it is not impossible for Plaintiffs to recover in the present action. Here, granting Defendant's motion to dismiss on Counts I and II would be improper before holding a hearing on the merits. See Tucker Estates Charlestown, LLC, 964 A.2d at 1140. Therefore, the Court denies Defendant's Motion to Dismiss for Failure to State a Claim with respect to Counts I and II.
III
Motion to Stay and Sever Counts IV, VI, VII, and VIII
A
The Parties' Arguments
On January 10, 2023, in addition to filing its Motion to Dismiss, Defendant also filed its Motion to Sever and Stay Counts IV, VI, VII, and VIII of Plaintiffs' Complaint.
Defendant argues that it is longstanding practice in this jurisdiction to "sever and stay bad faith claims until the existence of coverage has been determined." (Def.'s Mot. to Sever and Stay (Def.'s Mot.) 2.)
In response to Defendant, Plaintiffs first argue that there is no basis for severing the State's claims for Defendant's breaches of implied covenant of good faith and fair dealing because they are intertwined with the State's breach of contract claims. (Pls.' Obj. to Def.'s Mot. to Sever and Stay (Pls.' Obj. to Sever) 1.) The claims for breach of implied covenant of good faith and fair dealing are incorrectly characterized as "bad faith" claims. Id. at 4. Plaintiffs continue that "breach of the duty of good faith and fair dealing gives rise only to a breach of contract claim, not to a tortious cause of action." Id. at 5 (emphasis added) (quoting Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 66 F.Supp.2d 317, 329 (D.R.I. 1999) (citing A.A.A. Pool Service & Supply, Inc. v. Aetna Casualty & Surety Co., 121 R.I. 96, 97, 395 A.2d 724, 725 (1978)). In summation, Plaintiffs assert that their breach of the implied covenant of good faith and fair dealing is not an independent cause of action that must be pled separate and apart from a breach of contract claim. Id. (citing Houle v. Liberty Insurance Corp., 271 A.3d 591, 595 (R.I. 2022)) (internal citation omitted). Moreover, Plaintiffs maintain their breach of implied covenant is distinct and unique from their insurer bad faith claim under § 9-1-33. Id. at 6.
Second, Plaintiffs argue that there is no basis for severing the State's claims for Defendant's bad faith because the Rhode Island Supreme Court has concluded that it is not always preferable to sever bad faith claims. Id. at 6 (citing Skaling v. Aetna Insurance Co., 799 A.2d 997, 1010 (R.I. 2002)). Here, Plaintiffs aver, there has been no discovery. Id. at 2. Because the State has not yet propounded any discovery, Plaintiffs assert there is no basis for the Court to conclude that severance is warranted and that there are adequate alternatives to severance. Id. at 10. Plaintiffs then draw this Court's attention further into the Supreme Court's ruling in Skaling: before Skaling, practice in Rhode Island was to bifurcate claims of insurer bad faith. Id. at 8. However, the Rhode Island Supreme Court has since found that mandating severance of bad faith claims may be abrogated. Id. at 9 (citing Weeks v. Progressive Insurance Co., No. W.C. 04-744, 2005 WL 1792115, at *1 (R.I. Super. June 23, 2005)).
Next, Plaintiffs maintain that joint discovery promotes principles of judicial economy and efficiency. Id. at 2, 10. Plaintiffs claim that there are significant overlaps between subject matters of discovery about the contractual breach and bad faith claims and that separating discovery would prolong the action. Id. at 2, 14. As support, Plaintiffs aver that numerous federal courts have found that authorizing joint discovery is valid. Id. at 10 (citing Wolf v. Geico Insurance Co., 682 F.Supp.2d 197, 199 (D.R.I. 2010)).
B
Standard of Review
1
Bifurcate or Sever as Proper Measure
In objecting to Defendant's Motion to Sever and Stay, Plaintiffs highlight an important distinction between bifurcation under Rule 42 of the Superior Court Rules of Civil Procedure and severance as administered under Rule 21 of the Superior Court Rules of Civil Procedure. See Pls.' Obj. to Sever 7-9.
In Berrios v. Jevic Transportation, Inc., No. PC-2004-2390, 2012 WL 4040225 (R.I. Super. June 8, 2012), our Superior Court clarified the distinction between bifurcation and severance. Berrios, 2012 WL 4040225, at *2-3. There, the court stated that bifurcation "authorizes courts to divide a single action into separate trials that remain under the umbrella of the original solitary action." Id. at *2. In the alternative, the court explained that a severance is used to "divid[e] a case into separate actions[.]" Id. (citing 88 C.J.S. Trial § 17 ("A severance occurs when a lawsuit is divided into two or more separate and independent distinct causes.")). Furthermore, the decision to bifurcate or sever is a determination left with this Court's broad discretion. Mello v. DaLomba, 798 A.2d 405, 408 (R.I. 2002).
Here, Defendant does not object or argue over the distinction, only requesting a stay of all proceedings until the breach of contract counts are resolved. (Def.'s Reply Mem. in Supp. of Mot. to Sever and Stay Bad Faith Claims 3.) In the interests of judicial economy, the Court determines the proper request is a bifurcation and stay of the bad faith claims. This will ensure judicial efficiency and administration of the matter. Berrios, 2012 WL 4040225, at *3 (citing Mello, 798 A.2d at 408).
2 Bifurcation
"'Rule 42(b) of the Superior Court Rules of Civil Procedure grants a trial justice broad discretion to separate the issues at trial.'" Mello, 798 A.2d at 408 (quoting DiLuglio v. Providence Auto Body, Inc., 755 A.2d 757, 776 (R.I. 2000)). Moreover, the Superior Court and trial justices have broad discretion in regulating how and when discovery occurs. See Giuliano, 793 A.2d at 1037.
C
Analysis
1
Counts VII and VIII (Bad Faith)
It is a long-established principle in our jurisdiction to sever bad faith claims from a breach of contract claim in an insurance dispute. Summit Insurance Company v. Stricklett, 199 A.3d 523, 530 n.15 (R.I. 2019) (internal citations omitted). In this Court's decision in Clutch City Sports Entertainment, L.P. v. Affiliated FM Insurance Co., No. PC-2020-05137, 2021 WL 1097930 (R.I. Super. March 17, 2021, we grappled with the modified rule articulated in Skaling, where our Supreme Court noted that '"in an appropriate case, a bifurcated trial may be a useful alternative approach."' Clutch City Sports Entertainment, L.P., 2021 WL 1097930, at *3 (quoting Skaling, 799 A.2d at 1010 n.7). The Court finds Clutch instructive here. Notably, in Clutch, this court articulated that, although our sister federal court found that a stay and sever on bad faith claims is not automatic-see Wolf, 682 F.Supp.2d at 199-our Supreme Court has yet to define a standard that wavers from the long-established sever and stay principle. Clutch, 2021 WL 1097930, at *3. Keeping with this Court's determination in Clutch-although persuasive-the Court here determines to bifurcate and stay discovery, despite the risk of some duplicative discovery. There are valid concerns of potential prejudice raised by Defendant; in keeping with our Supreme Court's longstanding practice to bifurcate and stay the bad faith claims, there is no need to depart from that practice in the case at bar. Therefore, the Court grants Defendant's Motion to Sever and Stay with respect to Counts VII and VIII of Plaintiffs' Complaint until the existence of coverage has been determined.
2
Counts IV and VI (Breach of Implied Covenant of Good Faith and Fair Dealing)
Importantly, however, there is a distinction between a breach of duty of good faith and fair dealing and an insurer bad faith claim under § 9-1-33. Zarrella v. Minnesota Mutual Life Insurance Co., 824 A.2d 1249, 1261 (R.I. 2003) (explaining that, in relation to a claim for breach of good faith and fair dealing, "a plaintiff first must show that he or she is entitled to recover on the contract before he or she can prove that the insurer dealt with him or her in bad faith"). "This Court has explained that '[v]irtually every contract contains an implied covenant of good faith and fair dealing between the parties.'" McNulty v. Chip, 116 A.3d 173, 185 (R.I. 2015) (quoting Dovenmuehle Mortgage, Inc. v. Antonelli, 790 A.2d 1113, 1115 (R.I. 2002)). Furthermore, it is well-established Rhode Island law that a claim for breach of the implied covenant of good faith and fair dealing does not create an independent cause of action separate and apart from a claim for breach of contract. Id. It is intertwined with a party's breach of contract claim, for a party cannot recover on its breach of implied covenant of good faith and fair dealing without first establishing that there was a breach of contract. See id. It is in the Court's best interest in the name of clarity and judicial efficiency to have Plaintiffs' breach of contract and breach of implied covenant of good faith and fair dealing tried together. Therefore, the Court denies Defendant's Motion to Sever and Stay with respect to Counts IV and VI of Plaintiffs' Complaint.
IV
Conclusion
Based on the above discussion, the Court reaches the following conclusions: the Court denies Defendant's Motion to Dismiss for Failure to State a Claim pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure with respect to Counts I, II, III, and V because, at this stage of litigation, the exclusion provisions under § D.1.d in both Policies are ambiguous. Thus, it is possible that Plaintiffs are entitled to relief, and Defendant has not shown that Plaintiffs are not entitled to such relief beyond a reasonable doubt. Furthermore, the Court grants Defendant's Motion to Stay and Sever Bad Faith Claims with respect to Counts VII and VIII, and those counts will be bifurcated. However, the Court denies the Motion to Stay and Sever Bad Faith Claims with respect to Counts IV and VI.