One Counterclaim, Two Counterclaim
Great Lakes Reinsurance (UK) SE v. Herzig, 2019 WL 4600939; 2019 U.S. Dist. LEXIS 162257 (S.D.N.Y. 2019).
By: Ava Maria Wolf
In the aftermathof Hurricane Matthew, Peter Herzig filed a claim with his insurance company,Great Lakes Reinsurance, alleging $450,000.00 in damage to “Crescendo,”Herzig’s 62-foot yacht. After examining the damage to his beloved yacht, GreatLakes “concluded that the maximum cost of repairs would be $175,000.00.”[1] Becausethe parties disagreed about the cost to repair, Great Lakes filed a declaratoryjudgment claim. Great Lakes then unilaterally amended Herzig’s policy, reducingthe amount of coverage to only $300,000.00.[2]While Great Lakes and Herzig would go on to settle for $175,000.00, Herzigremained dissatisfied. He demanded full payment of his filed claim of$450,000.00. The spotlight on the case at hand would not involve thedisagreement in payment. Rather, this case focuses on the policy itself, whichGreat Lakes believed to be void ab initio.[3]
Upon the filingof Great Lakes’s second amended complaint, Herzig filed an answer andcounterclaim, alleging fraudulent inducement, “rescission of the settlementagreement,” and breach of contract for both “Great Lake’s unilateral reductionin the Policy’s value” and Great Lakes’s “refusal to pay the cost of reasonablerepairs.”[4] Herzigmoved to “amend his counterclaims to add a claim for breach of the covenant ofgood faith and fair dealing” and “for his counterclaims to be heard by a jury,”which sparked this decision.[5]The United States District Court for the Southern District of New York(“S.D.N.Y.”) applied New York law to hold that unless a claim for breach ofcontract and a claim for breach of the covenant of good faith and fair dealingcould survive a motion to dismiss, the claims are redundant and must be dismissed.[6]
Herzig arguedthat his good faith and fair dealing counterclaim could survive a motion todismiss, as his breach of contract counterclaim regards “Great Lakes’s refusalto pay the reasonable cost of repairing” and “its unilateral reduction of thePolicy’s value,” while his good faith and fair dealing counterclaim regards theway Great Lakes handled his claim.[7]The court, however, was unconvinced. It held that Herzig’s good faith and fairdealing counterclaim was directly related to both of his breach of contractclaims; therefore, “Herzig’s proposed good faith and fair dealing counterclaimwould not survive a motion to dismiss.”[8] Indeciding Herzig’s jury trial counterclaim, the district court recognized Sphere Drake Ins. PLC v. J. Shree Corp.
, which broke with Second Circuit precedentby allowing a jury trial in federal court.[9]While the court found Sphere Drake’sholding persuasive, the court ultimately held that Herzig’s jury trial“counterclaim would be inefficient and a waste of judicial resources.”[10]
Overall, the S.D.N.Yreestablished the long-standing notion that in determining whether a breach ofcontract has occurred, a court must determine whether a breach the covenant ofgood faith and fair dealing occurred. Additionally, by ignoring the holding in Sphere Drake, the district court stressedthe need for uniformity in admiralty amongst the circuits.
Moreover, thedistrict court held that Herzig was not entitled to a jury trial on thecounterclaim. Herzig cited Sphere Drake assupport for a jury. However, as no other court in the S.D.N.Y followed thatdecision, the court followed overwhelming precedent and denied his claim totrial by jury.
[1]Great Lakes Reinsurance (UK) SE v. Herzig,No. 16 Civ. 9848 (PGG), 2019 WL 4600939, at *1 (S.D.N.Y. Sept. 23, 2019)
[2]Herzig, 2019 WL 4600939, at *1. GreatLakes believed that Herzing misrepresented the value of “Crescendo,” and bydoing so, Great Lakes supplied a policy that was beyond the vessel’s worth.
[3]Id.
[4]Id. at *2.
[5]Id. at *3.
[6]Id. at *5. When a party raises issuesof both breach of contract and breach of the covenant of good faith and fair dealing,New York courts regularly dismiss the breach of good faith and fair dealingclaims;[6]however, courts will not dismiss the good faith and fair dealing claims if theallegations are different distinct from the breach of contract claim. Id. at *5 (citing Grand Heritage Mgmt., LLC v. Murphy, No. 06 Civ. 5977 (NRB), 2007WL 3355380, at *6 (S.D.N.Y. Nov. 7, 2007))
[7]Id. at *5.
[8]Id. at *6.
[9]Id. at *7. A compulsory counterclaimsounding in law permits a jury trial to “preserve a litigant’s ‘inviolate’ rightto a trial by jury.” Sphere Drake Ins.PLC v. J. Shree Corp., 184 F.R.D. 258, 261 (S.D.N.Y. 1999).
[10]Id. at *7 (citing Markel American Ins. Co. v. Linhart, No.11-CV-5094, 2012 WL 2930207, at *4 (E.D.N.Y. July 11, 2012)
