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August 21, 1991


The opinion of the court was delivered by: Leisure, District Judge.


This is an action arising out of an insurance claim for costs allegedly incurred by plaintiffs in defending a libel suit. The original complaint in this matter asserted a breach of contract claim. Plaintiffs Journal Publishing Company ("Journal") and Albuquerque Publishing Company (NSL) ("Albuquerque") now move the Court, pursuant to Fed.R.Civ.P. 15(a), for leave to amend the complaint to add claims for: (1) a violation of the New Mexico Unfair Claims Practices Act, N.M.Stat.Ann. § 59A-16-20 et seq. (1984) ("unfair practices claim"); (2) the tort of bad faith refusal to pay a claim under an insurance policy ("tort claim"); and (3) punitive damages.

Defendants American Home Assurance Company ("American Home") and National Union Fire Insurance Company ("National Union") oppose the amendment of the complaint. In the event that plaintiffs' motion is granted, defendants request that the Court reopen discovery pursuant to Fed. R.Civ.P. 16. For the reasons set forth below, plaintiffs' motion to amend the complaint is granted and defendants' cross-motion is granted in part.


For purposes of the instant motion, the Court assumes the truth of plaintiffs' allegations; accordingly, this statement of the factual background of this action is taken largely from plaintiffs' proposed amended complaint (the "Proposed Amended Complaint").

Plaintiffs are New Mexico corporations with their principal places of business in New Mexico. Defendant American Home, a New York corporation with its principal place of business in New York, issued a policy of insurance, entitled "Umbrella Liability Policy," to plaintiffs for the policy period January 28, 1974, to January 28, 1977. American Home, through its affiliate company, National Union, a Pennsylvania corporation with its principal place of business in New York, subsequently issued a renewal policy of insurance to plaintiffs for the policy period January 28, 1977, to January 28, 1978. The policies will be referred to hereinafter as the "Umbrella Policies." Among the items covered by the Umbrella Policies were the costs of defense. The stated policy limits of the Umbrella Policies are $5,000,000 each less the "retained limit" of $10,000 per occurrence.

On June 13, 1975, William Marchiondo ("Marchiondo") brought a libel suit against plaintiffs (the "Marchiondo Action"), which was based on an advertisement in the Albuquerque Journal. Employers Reinsurance Corporation ("Employers"), which is not a party to this action, had issued an insurance policy to plaintiffs that required Employers to indemnify plaintiffs against settlements and judgments arising out of libel claims. The policy required plaintiffs to pay the costs of defending such suits. Plaintiffs allege that defendants had actual or constructive knowledge of the provisions of the policy issued by Employers to plaintiffs. Proposed Amended Complaint ¶ 11.

Plaintiffs paid all the costs of defending the Marchiondo Action, and ultimately prevailed both at trial and on appeal. Proposed Amended Complaint ¶ 13. On March 8, 1984, plaintiffs gave notice to Home Assurance of the claim for reimbursement of their defense costs, and, on August 1, 1984, supplied Home Assurance with an itemization of their costs for the sum of $2,584,863.66. Proposed Amended Complaint ¶ 14. By letter dated January 24, 1985, defendants rejected the claim for plaintiffs' defense costs, setting forth the alleged reasons for their rejection. Proposed Amended Complaint ¶ 16.

Plaintiffs commenced this action on June 15, 1987. This matter was referred for general pretrial purposes to Magistrate Judge Michael H. Dolinger of this Court. Finding that defendants had "utterly failed to comply with their discovery obligations" in this matter, Plaintiffs' Exhibit F, Judge Dolinger imposed a $19,000 sanction on defendants. Discovery was completed on February 28, 1989. Thereafter, the parties cross-moved for summary judgment. This Court denied both motions on July 2, 1990. Motions for reargument were subsequently denied by this Court on September 5, 1991. The parties were then ordered to prepare and submit a pretrial order. During the preparation of the pretrial order, plaintiffs attempted to gain the consent of defendants to the inclusion of additional claims based on actions taken and facts that had come to light during the discovery process. Defendants refused consent, and this motion followed.

Plaintiffs allege that defendants' refusal to reimburse plaintiffs under the Umbrella Policies was committed in bad faith in that it was frivolous and unfounded, and that defendants breached the policies willfully, wantonly, recklessly or with gross negligence. Proposed Amended Complaint ¶ 17. Among the facts alleged by plaintiffs in the Proposed Amended Complaint are the defendants' willful failure to comply with their discovery obligations in this action, as well as defendants' raising of an additional ground for the denial of coverage for the first time in defendants' motion for summary judgment in this action. Proposed Amended Complaint ¶ 22. Plaintiffs allege that they have incurred $2,544,863.66 in damages, plus interest and the costs of suit. Plaintiffs also seek $25,000,000 in punitive and exemplary damages. Proposed Amended Complaint ¶ 19.


I. Standard of Review

Federal Rule of Civil Procedure 15(a) "provides that leave to amend `shall be freely given.' Reasons for a proper denial of leave to amend include undue delay, bad faith, futility of the amendment, and perhaps most important, the resulting prejudice to the opposing party." State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981); see also Richardson Greenshields Securities, Inc. v. Lau, 825 F.2d 647, 653 n. 6 (2d Cir. 1987); Tokio Marine & Fire Ins. Co. v. Employers Ins. of Wausau, 786 F.2d 101, 103 (2d Cir. 1986). Defendants ...

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