## Facts

- Terrence D. Stradford, a dentist, operated a dental practice and related entities in Staten Island, New York.
- A commercial property policy covering the office was issued by Northern Insurance Company of New York, part of the Zurich group (collectively, Zurich).
- In 1999, Stradford failed to pay premiums, and the policy was cancelled for a period (approximately October 10, 1999 through December 13, 1999).
- To obtain reinstatement, Stradford provided a “no claims” certification letter (dated around December 6, 1999) representing that no losses had occurred during the relevant period before reinstatement.
- Zurich reinstated the policy on or about December 14, 1999, and Stradford was notified of reinstatement around early January 2000.
- Less than ten days after being notified, Stradford submitted a claim for water damage allegedly caused by frozen pipes, reporting damage to the premises and dental supplies with claimed losses around $151,000.
- Zurich paid approximately $151,154 on the initial submission.
- After further investigation, Zurich concluded the loss occurred outside the covered period (during the lapse/cancellation period), disclaimed coverage, and demanded return of the payment.
- Stradford later submitted a revised submission asserting higher property damage (about $168,000) and substantial business-interruption losses (about $1.2 million).
- Stradford and related entities sued Zurich seeking policy benefits (roughly $1.38 million).
- Zurich answered and asserted multiple counterclaims against Stradford, including fraud-based counterclaims seeking, among other things, repayment of amounts paid and other damages.
- Stradford moved to dismiss several counterclaims as inadequately pleaded under Federal Rule of Civil Procedure 9(b), and also moved to dismiss certain counterclaims under Rule 12(b)(6).
- Zurich moved for leave to amend its counterclaims.

## Issues

1. Whether Zurich’s fraud-based counterclaims satisfied Federal Rule of Civil Procedure 9(b) by pleading the alleged fraud with sufficient particularity, including identification of the specific false statement(s).
2. Whether certain counterclaims independently failed to state a claim under Rule 12(b)(6).
3. Whether Zurich should be granted leave to amend its counterclaims under Rule 15(a) after dismissal.

## Decision

- The court applied Rule 9(b)’s heightened pleading standard to Zurich’s fraud-based counterclaims.
- The court dismissed the challenged fraud-based counterclaims because Zurich did not plead the circumstances of the alleged fraud with the required specificity, including failure to identify which of Stradford’s statements were alleged to be false.
- The court granted Stradford’s Rule 12(b)(6) motion as to certain counterclaims that failed to state a claim.
- The court granted Zurich leave to amend its counterclaims under Rule 15(a).

## Legal Principles

- Allegations of fraud in federal court must satisfy Rule 9(b) by stating the circumstances constituting fraud with particularity.
- A Rule 9(b) pleading generally must specify the content of the alleged misrepresentation, identify who made it, and state when and where it was made, along with an explanation of why it was false.
- Although fraudulent intent (scienter) may be alleged generally, a party still must identify the particular misrepresentation(s) said to be fraudulent; suspicious timing and circumstantial facts alone are not enough without tying them to specific statements.
- Counterclaims sounding in fraud are subject to Rule 9(b) to the same extent as complaints.
- Dismissal for failure to plead fraud with particularity is often without prejudice where more detailed allegations may cure the deficiency.
- Under Rule 15(a), leave to amend is freely given when justice so requires, absent reasons such as undue delay, bad faith, or undue prejudice.

## Conclusion

In Stradford’s suit for additional insurance benefits after Zurich paid a water-damage claim under a reinstated policy and later disclaimed coverage, the court dismissed Zurich’s fraud-based counterclaims for failure to plead fraud with particularity under Rule 9(b), including failure to identify the specific false statements allegedly made by Stradford, dismissed certain other counterclaims for failure to state a claim, and granted Zurich leave to amend its counterclaims.


Stradford v. Zurich Insurance Co., 2000 WL 31027517 (2002)