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American International Specialty Lines Insurance Co v. Pacifica Amber Trail

November 9, 2011


The opinion of the court was delivered by: Honorablelarryalanburns United States District Judge


I. Introduction

On August 31, 2005, Pacifica bought an apartment complex with the intention of converting the units into condominiums. That same day, AISLIC issued to Pacifica an excess insurance policy. The policy provides $20 million of coverage to Pacifica, per occurrence and in the aggregate, but only after Pacifica has paid $2 million toward a covered loss. On May 31, 2011, after the units had been converted into condominiums, the homeowners' association (HOA) filed a lawsuit against Pacifica in Alameda County Superior Court alleging various construction and maintenance defects. The question in this case is whether AISLIC has a duty to defend or indemnify Pacifica in that action. Specifically, AISLIC seeks a declaratory judgment that "the AISLIC Policy does not provide coverage to Pacifica for the claims asserted by the Association" and "[t]hat AISLIC is under no obligation to pay any judgments, damages, costs or expenses that are associated with or arise out of the Association's claims, or to indemnify Pacifica for any such amounts." (Dkt. No. 1 at 6.) Now before the Court is Pacifica's motion to either dismiss or stay AISLIC's request for a declaratory judgment.

Pacifica concedes, appropriately, that the Court has jurisdiction over the matter. Its argument for a dismissal or stay is that AISLIC's coverage obligations necessarily turn on what happens in state court:

Pacifica requests that this court either dismiss this action entirely or, in the alternative, stay the declaratory relief action because:

(1) the action predominantly revolves around state law factual issues that will necessarily be decided in the state court action;

(2) failure to dismiss or stay this action raises the likelihood of inconsistent factual determinations and conflicting decisions between the state and federal court; and (3) failure to dismiss or stay will prejudice Pacifica's defense in the underlying action. (Dkt. No. 9 at 1.) AISLIC's response is that there is no overlap between this action and the HOA's action in state court, and the matters can therefore be separately and independently adjudicated. AISLIC argues it has no duty to defend or indemnify Pacifica for the State Action because the Association's claims -- whether meritorious or not -- are by their very nature not covered under the Policy." (Dkt. No. 11 at 1.)

II. Legal Standard

AISLIC brings its request for a declaratory judgment under the Declaratory Judgment Act, which provides that "[i]n a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). The word "may" is important; the Court can, in its discretion, dismiss or stay AISLIC's request for a declaratory judgment and simply wait for the case against Pacifica in state court to play out. Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995).

In Brillhart v. Excess Insurance Company of America, 316 U.S. 491 (1942), the Supreme Court identified three factors for courts to consider in deciding whether to entertain a declaratory judgment action: (1) avoiding needless determination of state law issues; (2) discouraging forum shopping; (3) and avoiding duplicative litigation. See R.R. Street & Co. Inc. v. Transport Ins. Co., 656 F.3d 966, 975 (9th Cir. 2011). "The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief." Gov't Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998). In insurance coverage disputes in particular, nothing bars an insurer from "bring[ing] a declaratory judgment action against an insured on an issue of coverage." Id. But, this assumes that "the coverage issue in the federal action [is] not contingent on any further state court proceedings." Am. Cas. Co. of Reading, Pennsylvania v. Krieger, 181 F.3d 1113, 1119 (9th Cir. 1999). In an alternative scenario, "[i]f there are parallel state proceedings involving the same issues and parties pending at the time the federal declaratory action is filed, there is a presumption that the entire suit should be heard in state court." Dizol, 133 F.3d at 1225.

AISLIC attributes to Pacifica the position that "for the purposes of abstention, an insurance coverage action is automatically 'parallel' to an action concerning the insured's liability to a third party." (Dkt. No. 11 at 2.) That's obviously untrue, but it's also an oversimplification of Pacifica's position, just as it would be an oversimplification to say that AISLIC's position is that insurance coverage disputes and liability disputes are inherently separate. The question here, really, is whether AISLIC's coverage obligations to Pacifica could turn in any way on the outcome of the HOA's court action against Pacifica. If so, the Court should either dismiss or stay AISLIC's request for a declaratory judgment.

AISLIC says its coverage obligations cannot conceivably turn on what happens in state court: "[T]he Association's claims are for contractual, economic losses, which fall categorically outside the scope of the Policy's general liability coverage." (Dkt. No. 11 at 1.) Pacifica takes the opposite position: "[L]instigation of this [coverage] matter would necessarily require discovery and resolution of factual issues which are at issue in a related state court construction defect matter." (Dkt. No. 9 at 1.)

III. State Court Action

The HOA's lawsuit against Pacifica alleges construction defects in the conversion of the apartment complex to condominium units. It attributes those defects to deficiencies not only in their construction, but also in their design, planning, development, manufacture, installation, supervision, and improvement - to the extent those imply different acts in between the conceptualization of the project and its present ...

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