In State Farm Mut. Auto Ins. Co. v. Ritchie, et al., 3:10-CV-00352 (AVC), the United States District Court for the District of Connecticut (Covello, J.), recently granted State Farm’s motion to dismiss counterclaims alleging breach of contract and bad faith in a declaratory judgment action arising out of an insurance coverage dispute. Halloran & Sage attorney Daniel P. Scapellati represented State Farm in the District Court proceedings. The underlying action alleged that the defendant, Peter J. Gould, repeatedly assaulted a state marshal and a process server with his pick-up truck when they attempted to serve him with divorce papers at his Greenwich, Connecticut residence. State Farm insured the pick-up truck under an automobile policy of insurance. The state marshal died shortly after the incident. His estate, along with the process server, brought suit against Gould in Connecticut Superior Court alleging assault, battery and negligence. State Farm subsequently brought a declaratory judgment action in the District Court seeking a determination that the auto policy it issued to Gould did not provide coverage for the claims asserted against him in the underlying action. Specifically, State Farm alleged that it did not owe a duty to defend or indemnify Gould because the underlying action failed to allege a covered “occurrence”; that coverage was excluded pursuant to the policy’s intentional injury exclusion; and that Gould forfeited coverage by failing to provide timely notice of the incident. Nevertheless, State Farm provided a defense to Gould in the underlying action under a full reservation of rights. In response, Gould (pro se) filed counterclaims against State Farm alleging breach of contract and bad faith and seeking punitive damages in the amount of $10,000,000, as well as the revocation of State Farm’s insurance license for a period of at least ten years. Specifically, Gould alleged that State Farm breached the terms of the auto policy and acted in bad faith by providing him with a defense in the underlying action while at the same time prosecuting a declaratory judgment action against him seeking a judgement of no coverage. State Farm moved to dismiss the counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. On July 27, 2011, State Farm’s motion was granted. As to the breach of contract claim, the Court held that Gould failed to allege the necessary elements of breach and damages. The Court reasoned as follows: “If State Farm prevails on its declaratory judgment action, then Gould would not be entitled to the benefits he alleges that he is entitled to receive [indemnity]. If State Farm does not prevail, then Gould would have received the defense to which he was entitled throughout the period. Therefore, in either case, there is no breach. Gould did not make any plausible allegation which would amount to a breach.” State Farm, at p. 10. In support of his bad faith claim, Gould alleged that by filing the declaratory judgment action, State Farm was attempting to make an “end run” to avoid paying him. Id. at p. 11. However, like the breach of contract claim, the District Court held “there are no plausible allegations of facts sufficient to amount to a proper breach of the covenant of good faith and fair dealing.” Id. Specifically, the Court held that “[e]ven if it is true that State Farm is trying to make an ‘end run’ to avoid paying Gould, as Gould alleges, this does not necessarily show a ‘wanton and malicious injury, evil motive and violence’”, which is necessary to state a bad faith claim. Id. In the Court’s view, it simply showed that the parties had adverse legal interests warranting the issuance of a declaratory judgment. Moreover, resolution of State Farm’s claims would clarify and settle the legal issues involved and finalize the insurance coverage dispute. Accordingly, the Court concluded that Gould had “not established any plausible basis for the counterclaim beyond conclusory allegations and bald assertions” and dismissed Gould’s counterclaims. Id. The District Court’s ruling reaffirms the principle that it is appropriate for an insurer faced with a questionable third-party liability claim to file a declaratory judgment action seeking a coverage determination while at the same time providing a defense to it’s insured in the underlying action under a reservation of rights. Such conduct does not breach the terms of the insurance contract, nor does it constitute bad faith.