Allen W. Rose v. Hartford Underwriters Insurance Company

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0053P (6th Cir.)
File Name: 00a0053p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
ALLEN W. R OSE ,
Plaintiff-Appellant,
v.
HARTFORD UNDERWRITERS
INSURANCE C OMPANY ,
Defendant-Appellee.
;>

1
No. 98-4286
Appeal from the United States District Court
for the Northern District of Ohio at Akron.
No. 98-00600—James S. Gwin, District Judge.
Argued and Submitted: December 7, 1999
Decided and Filed: February 14, 2000
Before: JONES, BATCHELDER, and MOORE, Circuit
Judges.
_________________
COUNSEL
ARGUED: Robert Chudakoff, ULMER & BERNE,
Cleveland, Ohio, for Appellee. ON BRIEF: Edward C.
Pullekins, GENOVESE & PULLEKINS, Akron, Ohio, for

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2 Rose v. Hartford Underwriters Ins. Co. No. 98-4286
Appellant. Robert Chudakoff, ULMER & BERNE,
Cleveland, Ohio, for Appellee.
_________________
OPINION
_________________
KAREN NELSON MOORE, Circuit Judge. Plaintiff Allen
Rose appeals the district court’s denial of his motion to
amend his original complaint in this insurance coverage
dispute. The district court issued a marginal entry order
denying Rose’s motion to amend his complaint, but the
district court failed to provide any explanation for its
decision. Because the district court’s denial of the motion to
amend without explanation qualifies as an abuse of discretion,
and because this abuse of discretion does not amount to a
harmless error, we REVERSE the district court’s denial of
the motion to amend, and REMAND the case to the district
court for further proceedings consistent with this opinion.
I. BACKGROUND
This case involves a dispute between the parties over
Hartford Underwriters Insurance Company’s financial
responsibility for a February 14, 1997 fire that destroyed
Rose’s home in Akron, Ohio. Hartford acknowledges that it
had provided Rose with a policy that was effective at the time
of the fire, but the insurance company refused to honor its
policy after the company’s investigators determined that the
fire had been set intentionally. Hartford’s investigation
revealed that the fire had been started in four separate areas of
the home, and two samples of debris taken from Rose’s home
tested positive for the presence of a flammable liquid
substance. On October 24, 1997, Hartford informed Rose that
it had decided to deny payment of his claims on grounds that
Rose had engaged in arson and had made material
misrepresentations regarding the policy. According to the
parties, Rose was later indicted and arrested for arson related
to the fire in January of 1998, but was subsequently acquitted
of the arson charges. Rose’s Br. at 6; Hartford’s Br. at 4.

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No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 3
On February 18, 1998, Rose filed a complaint in Summit
County Common Pleas Court in which he alleged that
Hartford breached the insurance contract when the company
denied his claim. Hartford subsequently removed the case to
federal district court on grounds that the district court had
diversity jurisdiction over the case pursuant to 28 U.S.C.
§ 1332. On May 13, 1998, Rose filed a motion to amend his
original complaint and sought leave to include additional
allegations that charged Hartford with acting in bad faith
when it denied him coverage under the fire insurance policy.
Rose asserted that the bad faith claim had been “inadvertently
omitted” from the original complaint, and he claimed that he
had discovered “additional information” that supported the
bad faith claim. Hartford responded by filing a brief in
opposition to Rose’s motion to amend in which it argued that
the addition of Rose’s bad faith claim would be futile because
Rose had been indicted on arson charges. Hartford did not,
however, attach any evidentiary material to its response, such
as the actual indictment that charged Rose with arson. On
June 18, 1998, the district court issued a marginal entry order
and denied without explanation Rose’s motion to amend his
complaint.
On August 4, 1998, Hartford filed a motion for summary
judgment in which it argued that Rose’s remaining breach of
contract claim was barred as a matter of law by the one-year
statute of limitations set forth in the fire insurance policy.
The fire insurance policy stated that “[n]o action can be
brought unless the policy provisions have been complied with
and the action is started within one year after the date of
loss.” J.A. at 124 (Hartford Ins. Policy) (emphasis added).
Hartford argued that this language barred Rose’s breach of
contract claim because the fire destroyed Rose’s home on
February 14, 1997, and he did not file his complaint against
Hartford until February 18, 1998. The district court agreed
that Rose’s failure to file his complaint within the one-year
period in the policy barred his breach of contract claim, and,
as a result, the district court granted summary judgment in
favor of Hartford on September 18, 1998.

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4 Rose v. Hartford Underwriters Ins. Co. No. 98-4286
Rose now appeals the district court’s decision to deny his
motion to amend his original complaint. Because Rose’s
initial appellate brief does not address the district court’s
grant of summary judgment on his breach of contract claim,
we limit our review to the district court’s decision to deny
Rose’s motion to amend his original complaint. Indeed, Rose
abandoned any argument relating to the district court’s grant
of summary judgment on the breach of contract claim when
he failed to raise this issue on appeal. See McMurphy v. City
of Flushing, 802 F.2d 191, 198-99 (6th Cir. 1986).
II. ANALYSIS
A. Rose’s Motion to Amend His Original Complaint
Rose contends that the district court erred when it denied
his motion to amend his original complaint, which prevented
him from adding a claim of bad faith against Hartford in this
insurance dispute. Rule 15(a) of the Federal Rules of Civil
Procedure provides that leave to amend “shall be freely given
when justice so requires.” We review a district court’s order
denying a Rule 15(a) motion to amend for an abuse of
discretion. General Elec. Co. v. Sargent & Lundy, 916 F.2d
1119, 1130 (6th Cir. 1990).
Although a district court has discretion to deny a motion to
amend a complaint after an answer has been filed, we have
held on several occasions that a district court abuses its
discretion when it fails to state a basis for its decision to deny
a motion to amend. Jet, Inc. v. Sewage Aeration Sys., 165
F.3d 419, 425 (6th Cir. 1999); Moore v. City of Paducah, 790
F.2d 557, 559 (6th Cir. 1986); see also Foman v. Davis, 371
U.S. 178, 182 (1962) (“[An] outright refusal to grant the leave
without any justifying reason appearing for the denial is not
an exercise of discretion; it is merely abuse of that discretion
and inconsistent with the spirit of the Federal Rules.”). In the
present case, the district court issued a marginal entry order
denying Rose’s motion for leave to amend his complaint, but
it did not provide a justification or explanation for its denial.
Because the district court denied Rose’s motion without
explanation, it has clearly abused its discretion in this case.
No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 9
reasonable justification therefor.”) (quoting Staff Builders,
Inc. v. Armstrong, 525 N.E.2d 783, 788 (Ohio 1988)).
If an insured is indicted before an insurance company
refuses to honor its policy, by contrast, then an indictment on
arson charges certainly would be strong evidence that shows
that the insurance company had a reasonable justification for
the denial of a fire insurance claim, assuming that the
insurance company knew about the indictment at the time it
refused to honor the claim. Nevertheless, a per se rule or
conclusive presumption is not appropriate because cases
could exist in which a prosecutor has maliciously pursued
arson charges against an individual, or an insurance company
has tampered with a grand jury. We believe that the better
approach is to apply ordinary summary judgment principles,
even in cases where a criminal indictment on arson charges
has led an insurance company to refuse to honor a fire
insurance claim. Thus, upon a summary judgment motion or
a conversion of a Rule 12(b)(6) motion with the requisite
notice to the parties, a court should consider the indictment –
along with all the other evidence in the record – in the light
most favorable to the non-moving party when deciding
whether a reasonable juror could conclude that an insurance
company had a reasonable justification for refusing to provide
coverage under an insurance policy.
Here, however, Rose filed a motion for leave to amend the
complaint, which was opposed by Hartford and summarily
denied by the district court. Under these circumstances, it is
premature to undertake a summary judgment evaluation.
III. CONCLUSION
The district court clearly abused its discretion when it
denied Rose’s motion to amend without providing an
explanation for its decision. Because the district court’s
abuse of discretion does not amount to a harmless error, we
REVERSE the district court’s denial of the motion to amend,
and REMAND the case to the district court for further
proceedings consistent with this opinion.

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8 Rose v. Hartford Underwriters Ins. Co. No. 98-4286
1On October 24, 1997, Hartford notified Rose that it would not honor
its insurance policy. Rose was indicted on the arson charges in January
of 1998.
plaintiff who had been indicted on arson charges could not
assert a bad faith claim against his insurance company. As
the district court explained, “The law appears well-settled that
‘where an insured is indicted for arson in connection with a
fire loss, the insurer’s conclusion that the insured was
responsible for the loss is reasonably justified, and he is
precluded from recovery of ‘bad faith’ damages.’” Koenig,
3:94-CV-7201 at 6 (quoting Southern Fire & Cas. Ins. Co. v.
Northwest Georgia Bank, 434 S.E.2d 729, 730-32 (Ga. Ct.
App. 1993)).
Both Koenig and Thomas can be distinguished from the
present case, however, because these cases involved a bad
faith claim that was dismissed on a motion for summary
judgment, whereas the dispositive issue in the present case
turns on whether Rose’s proposed bad faith claim could
survive a Rule 12(b)(6) motion to dismiss. As we discussed
above, the addition of a bad faith claim to a complaint is not
necessarily futile even if the claim may ultimately be
dismissed on a motion for summary judgment. Furthermore,
we do not believe that the Ohio Supreme Court, if given the
opportunity to address the issue, would follow Koenig and
Thomas and hold that a criminal indictment automatically
precludes a plaintiff from pursuing a bad faith claim against
an insurance company – particularly in cases like this one
where an insured is indicted after an insurance company
decides not to honor its policy.1 Indeed, if an insured is
indicted after an insurance company has already refused to
honor a claim, then the indictment is of little, if any, value in
determining whether the insurance company had reasonable
justification for the denial because, under Ohio law, an
insurance company must have a reasonable justification at the
time it refuses to honor its policy. See Zoppo, 644 N.E.2d at
400 (“[A]n insurer fails to exercise good faith in the
processing of a claim of its insured where its refusal to pay
the claim is not predicated upon circumstances that furnish
No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 5
Nevertheless, the district court’s abuse of its discretion
could amount to a harmless error if adding Rose’s proposed
amendment would have been futile. See, e.g., Jet, Inc., 165
F.3d at 425 (holding that magistrate judge’s denial of motion
to amend without providing an explanation was harmless
because “[t]he futility of amending [the plaintiff’s] complaint
would have been appropriate grounds on which to deny the
motion to amend.”). A proposed amendment is futile if the
amendment could not withstand a Rule 12(b)(6) motion to
dismiss. Thiokol Corp. v. Department of Treasury, State of
Michigan, Revenue Div., 987 F.2d 376, 382-83 (6th Cir.
1993).
In this case, Hartford argues that the district court’s
decision should be affirmed because there is evidence in the
record, i.e., Rose’s criminal indictment on arson charges, that
shows that adding Rose’s bad faith claim would have been
futile. The district court, however, could not have properly
considered Rose’s indictment on criminal charges on a Rule
12(b)(6) motion to dismiss. Because the criminal indictment
qualifies as a “matter[ ] outside the pleading,” the district
court would have had to treat a Rule 12(b)(6) motion and
accompanying indictment as a motion for summary judgment.
See FED . R. C IV . P. 12(b)(6) (stating that if “matters outside
the pleading are presented to and not excluded by the court,
the motion shall be treated as one for summary judgment and
disposed of as provided in Rule 56, and all parties shall be
given reasonable opportunity to present all material made
pertinent to such a motion by Rule 56.”). Hartford claims that
Rose’s proposed amendment is futile because the district
court would have eventually granted summary judgment in
the insurance company’s favor once the district court
considered the criminal indictment. The test for futility,
however, does not depend on whether the proposed
amendment could potentially be dismissed on a motion for
summary judgment; instead, a proposed amendment is futile
only if it could not withstand a Rule 12(b)(6) motion to
dismiss. Because the proposed bad faith claim could
withstand a Rule 12(b)(6) motion to dismiss, Rose’s proposed

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6 Rose v. Hartford Underwriters Ins. Co. No. 98-4286
amendment was not futile. Thus, the district court’s abuse of
discretion in this case does not amount to a harmless error.
Hartford also argues that the district court’s dismissal of
Rose’s motion to amend should be affirmed because the
district court could have taken judicial notice of the criminal
indictment pursuant to Federal Rule of Evidence 201. Rule
201 states in part that:
(a) Scope of rule. This rule governs only judicial notice
of adjudicative facts.
(b) Kinds of Facts. A judicially noticed fact must be
one not subject to reasonable dispute in that it is either
(1) generally known within the territorial jurisdiction of
the trial court or (2) capable of accurate and ready
determination by resort to sources whose accuracy cannot
reasonably be questioned.
(c) When discretionary. A court may take judicial
notice, whether requested or not.
* * *
(e) Opportunity to be heard. A party is entitled upon
timely request to an opportunity to be heard as to the
propriety of taking judicial notice and the tenor of the
matter noticed. In the absence of prior notification, the
request may be made after judicial notice has been taken.
* * *
FED . R. EVID . 201. Although a district court has discretion to
take judicial notice of adjudicative facts pursuant to Rule 201,
the district court in this case did not necessarily take judicial
notice of Rose’s criminal indictment. Because the district
court did not set forth an explanation for its decision to deny
Rose’s motion to amend his complaint, it is impossible to tell
on appeal whether the district court properly took judicial
notice of the indictment pursuant to Rule 201. Furthermore,
Rule 201(e) requires the district court to give a party an
No. 98-4286 Rose v. Hartford Underwriters Ins. Co. 7
opportunity to be heard if judicial notice is taken. See, e.g.,
Lussier v. Runyon, 50 F.3d 1103, 1114 (1st Cir.) (holding that
district court erred when it took judicial notice without giving
parties an opportunity to be heard), cert. denied, 516 U.S. 815
(1995). Because Rose was not given an opportunity to
address the judicial notice issue either before or after the
district court denied his motion to amend, and because the
district court did not necessarily take judicial notice of the
criminal indictment in this case, the district court’s decision
to deny the motion to amend without any explanation does
not amount to a harmless error.
B. Rose’s Indictment and His Bad Faith Claim
We also disagree with Hartford’s claim that Ohio courts
have created a per se rule that precludes a plaintiff who has
been indicted on arson charges from bringing a bad faith
claim against an insurance company when the company
refuses to honor its fire insurance policy. The Ohio Supreme
Court has held that an insurance company does not act in bad
faith when it refuses to honor an insurance policy as long as
the company has a reasonable justification for refusing to
honor a claim. Zoppo v. Homestead Ins. Co., 644 N.E.2d
397, 399-400 (Ohio 1994); see also Thomas v. Allstate Ins.
Co., 974 F.2d 706, 711 (6th Cir. 1992) (“The test, therefore,
is not whether the defendant’s conclusion to deny benefits
was correct, but whether the decision to deny benefits was
arbitrary or capricious, and there existed a reasonable
justification for the denial.”). Hartford claims that a grand
jury indictment on arson charges is irrefutable proof that an
insurance company had a reasonable justification for denying
a fire insurance claim.
Although Hartford fails to cite any Ohio cases directly on
point, it does rely on two unreported cases from the U.S.
District Court for the Northern District of Ohio. See Thomas
v. Allstate Ins. Co., 1:96-CV-1529, slip op. at 3-8 (N.D. Ohio
Aug. 15, 1997); Auto-Owners Mut. Ins. Co. v. Koenig, 3:94-
CV-7201, slip op. at 3-6 (N.D. Ohio Aug. 31, 1995). In
Koenig, for instance, the district court concluded that a

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