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
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
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.
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 ...