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Navigators Specialty Insurance Company v. Chsi of California

February 4, 2013


The opinion of the court was delivered by: Hon. Gonzalo P. CURIELUnited States District Judge


On August 28, 2012, Defendant California Restaurant Mutual Benefit Corp. ("CRMBC") filed a motion to dismiss Plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. No. 3.) On August 29, 2012, Defendants CHSI filed a motion to dismiss Plaintiff's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. No. 9.) On September 25, 2012, Plaintiff filed an ex parte motion to strike Defendants' notice of joinder. (Dkt. No. 25.) On February 1, 2013, the Court held a hearing on these pending motions. For the reasons set out below, the Court hereby GRANTS Defendant CRMBC's motion to stay, DENIES CHSI's motion to dismiss, and DISMISSES Plaintiff's motion to strike.


On or around September 16, 2004, California Restaurant Mutual Benefit Corporation ("CRMBC") entered into a Management Services Contract with CHSI for the performance of underwriting services. CRMBC is an organization formed by a group of related California businesses to operate a group workers' compensation self-insurance fund that pools compensation liabilities and provides a common benefit delivery system for its members. CHSI was hired by CRMBC as a business experienced in the management and operation of self-insured groups. On March 28, 2012, CRMBC filed a lawsuit in the Superior Court of California against CHSI and others, alleging breach of contract and other claims. Prior to the initiation of the lawsuit, CHSI on July 8, 2011, provided notice to their insurer Navigators Specialty Insurance Company ("Navigators") of the potential claim by CRMBC. After initial review, Navigators agreed to treat the July 8, 2011 letter as notice of a potential claim under the policy agreement. On April 17, 2012, Navigators advised that it would provide CHSI with a defense in the CRMBC action, subject to a complete reservation of rights, including the right to withdraw from the defense and/or seek reimbursement.

On July 28, 2012, Navigators filed this insurance coverage lawsuit, seeking declaratory judgment regarding no duty to defend or indemnify; applicable limit of liability; and other provisions that may bar or limit coverage. (Dkt. No. 1.) In particular, Navigators seeks judgment that there is neither coverage for, nor a duty to defend, the Defendant/Insured CHSI under the Policy agreement in connection with the underlying state court action California Restaurant Mutual Benefit Corporation v. CHSI of California, Inc., et al., 37-2012-00052274-CU-BC-NC. (the "CRMBC Action.")

Pending before this Court are two motions to dismiss. In the first-filed motion to dismiss, CRMBC seeks an order to dismiss Navigators' claim or in the alternative an order to stay until the underlying liability action is fully adjudicated. (Dkt. No. 3.) CRMBC first asserts that Navigators' complaint fails to state a claim or proper ground upon which a declaratory judgment can or should be granted under the Declaratory Judgment Act, 28 U.S.C. § 2201 & 2202 ("DJA"), and therefore the action is entitled to dismissal under FRCP 12(b)(6). CRMBC asks the Court to decline to exercise its permissive declaratory judgment jurisdiction over Navigators' action because it "conflicts with and turns on facts and other issues that are necessarily at issue and will be resolved in the Underlying Action...[which] renders Navigators' declaratory action neither necessary nor proper at this time." (Dkt. No. 3) CRMBC further asserts that dismissal is warranted because Navigators action is the product of improper forum shopping, the action will not dispose of the entire action or legal disputes between the parties, and the underlying action touches on substantial and important issue of state public and regulatory policy. (Dkt. No. 3 at 1-3.) Defendant CHSI filed a motion to join Defendant CRMBC's motion to stay. (Dkt. No. 18.)

Defendant CHSI subsequently filed a motion to dismiss, echoing many of the allegations made by CRMBC. (Dkt. No. 9.) In particular, CHSI contends that Navigators must establish that no potential coverage exists for the CRMBC Action in order to obtain declaratory relief for no duty to defend. That determination relies upon the adjudication of facts and law in the underlying action. CHSI further asserts that Navigators failed to ascertain a declaration that it had no duty to defend prior to the underlying action taking place, and therefore is precluded to obtaining a determination of no duty to defend. Lastly, CHSI outlines the areas of factual overlap between this case and the underlying CRMBC Action, and asserts the underlying action is a "parallel state court action involving the same issues and parties." Accordingly, CHSI requests the Court decline to review Navigators' claim for declaratory relief.

The "CRMBC Action"

It is undisputed that this insurance coverage dispute arises out of allegations in the underlying state court action that the Insured/Defendant CHSI failed to properly manage and operate a self-insured workers compensation group (CRMBC) by charging insufficient rates to members. According to CRMBC's state court complaint, Defendant John Kalb, CHSI's chief underwriting officer, was responsible for accepting and rejecting applications for workers compensation coverage on behalf of CRMBC and setting rates for members in accordance with guidelines established by CHSI and CRMBC. (Dkt. No. 1, Ex. 3, "CRMBC Complaint.") Mr. Kalb performed these duties on behalf of CHSI, who was appointed as CRMBC's Administrator.

Pursuant to the terms of the Management Services Agreement, CRMBC authorized CHSI to "manage the daily operations of the mutual benefit group and to accept and underwrite applications from applicants to the Program," in addition to act as the manager of CRMBC's business with various authority regarding the compensation policy coverage. (Id.)

CRMBC alleges that CHSI breached the terms of the Management Services Agreement by failing to properly underwrite CRMBC accounts and applications for workers compensation coverage, resulting in a substantial deficit of over $4 million.(Id.) As a result of this alleged mismanagement, the California Office of Self-Insurance Plans performed a special audit of CRMBC that revealed deficiencies in the CRMBC group fund from 2005-2011.(Id.) Based on these allegations, CRMBC asserts four counts against CSHI for breach of written contract, negligent supervision and training, negligent misrepresentation, and breach of fiduciary duty.

Navigators' Complaint

As a result of the underlying CRMBC action, Plaintiff/Insurer Navigators has brought this action seeking declaratory judgment that it is under no duty to indemnify Defendant/Insured CSHSI in the CRMBC action. In it's first claim, Navigators asserts that CHSI is not entitled to coverage under the Policy because CHSI failed to establish the condition precedent necessary to trigger coverage. Navigators asserts that the insurance Policy established, as a condition precedent, that no Insured had a basis to believe prior to the inception date of the first policy issued on July 12, 2009, that "any such act or omission, or related act or omission, might reasonably be expected to be the basis of a claim." (Dkt. No. 1 at 10.) Navigators asserts that CHSI and Mr. Kalb were "aware of acts or omissions that might reasonably be expected to be the basis of a claim. Specifically, beginning at least as early as January 2009, Kalb and/or CHSI knew that they were charging rates for worker's compensation insurance on behalf of CRMBC that were lower than the rates that the CRMBC Board of Trustees had approved." (Id.) In short, Navigators claims that CHSI knew that their acts on behalf of CRMBC would result in the basis of a claim. Since CHSI knew of these actions prior to the inception date of the policy issued by Navigators on July 29, 2012, then the entire CRMBC Action claim is exempt from coverage.

Navigators further alleges that the policy agreement does not cover claims that arise out of professional services performed if the Insured was "an owner, partner, member, director, officer or employee" of the entity for which it performed services. (Dkt. 1, Ex. A, "Policy Agreement.") Navigators asserts that CHSI and its Chief Executive Officer Jim Leftwich, "operated and managed CRMBC and/or was a director, officer or employee of CRMBC." Thus, the professional services are not covered under the Policy agreement. Lastly, in the event that the Court determines that Navigators has a duty to defend or indemnify, Navigators seeks to limit liability. First, Navigators seeks to limit liability to $2 million in connection with the CRMBC Action. In the ...

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