Can an insurer be potentially liable for breach of contract or bad faith where the insured can only plead a plausible claim of damages? The Ninth Circuit has answered “yes” in a recent decision in the case of Beverly Burton v. The Prudential Insurance Company of America, No. 14-56721, 2016 U.S. App. LEXIS 18617 (9th Cir. October 18, 2016). The Court held that the lower district court erred in dismissing a claim for breach of the covenant of good faith and fair dealing where the Plaintiff has plausibly alleged that she incurred an economic loss, but where the relevant facts are known only to the carrier.

In Burton, the Plaintiff asserted that Prudential failed to calculate interest on her son’s unclaimed life insurance benefits in accordance with the Court’s interpretation of California Insurance Code Section 10172.5 and that Prudential “prevented… [her] from knowing” whether Prudential paid her the full coverage amount of the life insurance policy at issue.

In 1958, Plaintiff’s husband purchased from Prudential a $1,000 insurance policy on the life of Plaintiff’s son, Roderick Burton, who died in 1981. Plaintiff was the named beneficiary under the policy but she did not make a claim until 32 years later. In July 2013, Prudential paid Plaintiff $5,040.11: the $1,000 death benefit due under the policy, plus interest. Plaintiff alleged that Prudential misrepresented that it paid a 2.5% interest rate; that Prudential only paid interest rate at the fixed rate in effect in 2013, and that it refused to answer follow-up questions regarding its interest calculations. Id. *4. Prudential filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). While courts do not require “heightened fact pleading of specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 544, 555.

In ruling on the motion to dismiss in the Burton case, the lower district court interpreted California Insurance Code Section 10172.5 as “requiring insurers to pay at least the same interest rate that they paid to their depositors during the period in which the life insurance benefits were due.” Id. at *1. However, the lower court granted Plaintiff’s motion to dismiss, finding that Plaintiff did not “plausibly” allege a violation of Section 10172.5. The Ninth Circuit reversed, finding that Plaintiff’s “allegations plausibly state a claim that Prudential did not pay a rate at least equal to that paid to depositors from 1981 to 2013.” Id.

The Burton case continues to reinforce the reality that “plausibility” has replaced the liberal standards of notice pleading in all federal cases. The Twombly and Iqbal decisions are required reading for anyone filing or defending a motion to dismiss in federal court, but defense counsel have a greater arsenal in challenging plaintiff’s pleadings either through a motion to dismiss or a motion requesting a more definitive statement. Fed. Rule of Civ. Proc. 12(b) and (e).