Argonaut Insurance Company v. City of Troy, New York, 1:19-cv-01247

Background

Argonaut insured the City of Troy under a policy with a $500,000 self‑insured retained limit that included "loss adjustment expenses" (including defense costs).
Victoria Brothers sued Troy; Troy initially retained the Ginsberg firm, then Argonaut assumed the defense and retained the Bailey firm and paid Bailey's invoices (about $100,000).
A dispute arose over whether fees paid by (1) Argonaut to Bailey and (2) Troy to Ginsberg should reduce the City’s $500,000 retained limit; parties settled the underlying suit with Argonaut and the City contributing to the settlement.
Argonaut sued Troy seeking recovery for amounts it alleges Troy should have funded under the retained limit; Troy counterclaimed six causes of action (attorneys’ fees, breach of good faith/fair dealing, breach relating to payment crediting, breach of contract for transferring defense, breach of duty of loyalty, and bad faith).
Argonaut moved to dismiss all counterclaims under Rule 12(b)(6); the Court granted the motion in part and denied in part, allowing only the breach of the duty of good faith and fair dealing counterclaim to proceed and dismissing the rest.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
1) Counterclaim for attorneys' fees	No independent cause of action pleaded; fees are relief not a standalone claim	Seeks fees if it prevails on plaintiff's claims	Dismissed: fees are relief, not a separate cause of action
2) Breach of duty of good faith & fair dealing (hiring Bailey)	City failed to plead insurer's knowledge of conflict, notice, or damages; claims rest on mere conflict theory	Argues insurer hired conflicted counsel, breached implied covenant, injured City's contractual benefits	Survived: pleadings sufficiently allege insurer hired counsel with a conflict that could impair City's receipt of contract benefits
3) Whether fees paid by Argonaut to Bailey reduce the retained limit ("incurred")	Argonaut paid Bailey; City did not "incur" those fees, so they should not reduce retained limit	City alleges policy required Argonaut to assume defense but still credit those defense costs against the retained limit	Dismissed: under NY law "incur" means become liable for; City never became liable for Bailey fees, so no breach alleged
4) Breach of contract for Argonaut's transfer of defense to Bailey	Argonaut had an express contractual right to assume and pay for the defense	City contends hiring conflicted counsel breached the contract	Dismissed: policy expressly allows insurer to assume defense at its expense, so no contractual breach shown
5) Breach of duty of loyalty	No basis that insurance contract creates employee‑type duty of loyalty	City claims insurer owed loyalty by not hiring conflicted counsel	Dismissed: no recognized insurer‑insured duty of loyalty distinct from good faith covenant
6) Independent tort claim for insurer bad faith	Insurer's request for billing/support and argument about coverage not egregious; not an independent tort	City alleges Argonaut knowingly mischaracterized City’s submissions and acted in bad faith denying coverage	Dismissed: New York does not recognize a separate tort for insurer bad faith apart from breach of contract

Key Cases Cited

Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard: plausibility required)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must allege enough facts to state a plausible claim)
Holmes v. Grubman, 568 F.3d 329 (2d Cir. 2009) (accept factual allegations as true at motion to dismiss)
Chambers v. Time Warner, 282 F.3d 147 (2d Cir. 2002) (documents integral to complaint may be considered on 12(b)(6) motions)
Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (N.Y. 1995) (scope of implied covenant of good faith and fair dealing)
Greenfield v. Philles Records, 98 N.Y.2d 562 (N.Y. 2002) (contract interpretation: enforce plain meaning of unambiguous writing)
Rubin v. Empire Mut. Ins. Co., 25 N.Y.2d 426 (N.Y. 1969) (definition of "incur" for insurance purposes: to become liable for)
Royal Indem. Co. v. Salomon Smith Barney, Inc., 308 A.D.2d 349 (1st Dep't 2003) (no independent tort for insurer's lack of good‑faith coverage basis)
Continental Cas. Co. v. Nationwide Idem. Co., 16 A.D.3d 353 (1st Dep't 2005) (rejection of standalone tort for insurer bad faith)