San Diego Unified Port District v. National Union Fire Insurance Co. of Pittsburgh

          ORDER: (1) DENYING MOTION TO DISMISS; AND (2) DENYING MOTION TO SEVER AND STAY [DOCKET NO. 15]

          HON. ROGER T. BENITEZ UNITED STATES DISTRICT JUDGE

         Before this Court is a Motion to Dismiss the First Amended Complaint ("FAC") pursuant to Federal Rule of Civil Procedure 12(b)(6) and a Motion to Sever and Stay Certain Claims pursuant to Federal Rules of Civil Procedure 21 and 42, filed by Defendant National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), successor-in-interest to Landmark Insurance Company ("Landmark"). (Docket No. 15.) Plaintiff San Diego Unified Port District (the "Port") filed an Opposition, to which Defendant replied. (Docket Nos. 16, 17.) For the reasons stated below, the Court DENIES Defendant's Motions.

         BACKGROUND

         National Union^[1] sold the Port primary and umbrella liability insurance, promising to defend and indemnify the Port against certain property damage liability claims or lawsuits. (FAC ¶¶ 5-8.) National Union issued four primary policies to the Port (collectively, "Primary Policies"). (FAC ¶¶6, 7 & Exs. A-D.) The parties agree that two of the primary policies are exhausted ("Exhausted Primary Policies"). (FAC ¶ 7 & Exs. C, D (Policy Nos. SMP 8002308 & GLA 5000574.)) There are two other primary policies, which the Port contends are not exhausted ("Unexhausted Primary Policies"). (FAC ¶6 & Exs. A, B (Policy Nos. GLA 5000110 and SMP 8002932.))

         National Union also sold the Port "the first layer of liability insurance directly above the Unexhausted Primary Policies and Exhausted Primary Policies in the form of umbrella insurance ("Umbrella Policies"). (FAC ¶ 8 & Exs. E-H.) Coverage under the four Umbrella Policies is triggered once the Primary Policies are exhausted. (FAC ¶¶ 15, 16.)

         According to the FAC, the Port tendered, and National Union agreed to provide a defense under the Unexhausted Primary Policies to certain claims ("Claims") and lawsuits ("Suits") asserted against the Port.^[2] (FAC ¶¶ 11, 12.) Subsequently, National Union informed the Port that it "unilaterally would be assigning payments for one of the Port's defense experts to [National Union's] indemnity obligation against the Unexhausted Primary Policies' limits." (FAC ¶ 13.) National Union then tendered the asserted remaining policy limits to the Port and informed the Port that "[National Union] considered the Unexhausted Primary Policies to be exhausted and that it would cease defending the Port in the Claims and Suits." (FAC ¶ 13.) National Union did not seek a judicial determination concerning exhaustion. (FAC ¶ 14.) The Port contested National Union's assertion that the Unexhausted Primary Policies were exhausted. (FAC ¶ 15.) The Port also asserted that even if the Unexhausted Primary Policies were exhausted, "the terms of the Umbrella Policies would require National Union to drop down and defend the Port in the Claims and Suits." (FAC ¶ 15.)

         National Union "repeatedly disputed" a defense obligation under the Umbrella Policies. But on September 15, 2015, between the filing of the original complaint and the operative FAC, National Union acknowledged through a letter from counsel that it "has a defense obligation to defend [S]uits in accordance with the terms of its [U]mbrella Policies." (FAC ¶ 16; Mot. Ex. I.)^[3] As a result of National Union's failure to defend, the Port has incurred its own defense costs for the Claims and Suits. (FAC ¶ 18.)

         On November 20, 2015, the Port filed the FAC. The first claim for relief seeks a declaratory judgment that the Unexhausted Primary Policies are not exhausted and thus National Union must continue to defend Suits and Claims under them. The second and third claims ask for a declaratory judgment that National Union must defend Suits and Claims, respectively, under the Umbrella Policies. The fourth claim for relief asserts breach of contract, and the fifth claim pleads bad faith and a breach of the implied covenant of good faith and fair dealing.

         National Union moves to dismiss on several grounds. Principally, it argues that the first claim for relief Policies are exhausted-is dispositive and renders the second through fifth claims moot. (Mot. at 2.) Therefore, the second through fifth claims should be dismissed. (Id.) In the alternative, it moves to sever and stay the second through fifth claims for relief pending resolution of the first claim. (Id. at 13-15.)

         LEGAL STANDARD

         Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint if, taking all factual allegations as true and construing them in favor to the nonmoving party, the complaint fails to state a plausible claim for relief on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556-57 (2007). Dismissal is appropriate if the complaint fails to state enough facts to raise a reasonable expectation that discovery will reveal evidence of the matter complained of, or if the complaint lacks a cognizable legal theory under which relief may be granted. Twombly, 550 U.S. at 556. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678.

         DISCUSSION^[4]

The Court addresses each claim for relief that National Union moves to dismiss and then discusses National Union's Motion to Sever and Stay.

         I. Second Claim for Relief

         The second claim seeks a declaratory judgment that National Union must defend Suits under the Umbrella Policies in the event of exhaustion of the primary layer of insurance. (FAC ¶ 30.) National Union argues that the second claim for relief is "moot" and "does not present a controversy ripe for determination" because (1) if the Primary Policies are not exhausted, there is no dispute about the Umbrella Policies, and (2) if the Primary Police are exhausted, then Nation Union has already acknowledge in its September 15, 2015 letter ("September letter") that it will defend Suits under the Umbrella Policies. (Mot. at 7.) The Port contends that the September letter does not moot the need for a judicial determination because it is not binding. (Reply at 3.)

         Defendant's arguments, while styled as a Rule 12(b)(6) motion, challenge Plaintiffs standing to bring a declaratory judgment action. Because standing "pertain[s] to a federal court's subject-matter jurisdiction under Article III, [it is] properly raised in a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), not Rule 12(b)(6)." White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000); St. Clair v. City of Chico, 880 F.2d 199, 201 (9th Cir. 1989) ("[M]otions raising issue of ripeness are treated as brought under Rule 12(b)(1) even if improperly identified by the moving party as brought under Rule 12(b)(6).") Thus, the Court interprets Defendant's Motion as a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction under the Declaratory Judgment Act.

         The Declaratory Judgment Act states: "In a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested parties seeking such declaration." 28 U.S.C. § 2201(a). Accordingly, a district court must first inquire whether there is an actual controversy within its jurisdiction. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir. 1994). Second, if there is an actual controversy, the court must decide whether to exercise its jurisdiction. Id. at 143-44.

         A. Existence of Actual Controversy

         An "actual controversy" exists when "there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Maryland Cos. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941) (finding actual controversy between insurer and insured in declaratory judgment action to determine whether insurer had duty to defend). In the insurance setting, an "actual controversy" may exist even if defendant's liability is contingent. See Sentry Ins. v. Provide Commerce, Inc., No. 14-cv-2868, 2016 WL 1241553, at *3.-4 (SD, Cal..Mar. 30. 2Q1.6).. .Indeed, "litigation over insurance coverage has become the paradigm for asserting jurisdiction despite 'future contingencies that will determine whether a controversy ever actually becomes real.'" Assoc. Indem. Corp. v. Fair child Indus., Inc., 961 F.2d 32, 35 (2d Cir. 1992) (internal citation omitted). Courts in this District have held that an insured may seek a declaration whether an insurer has a duty to defend even if that liability has yet to develop. Sentry Ins., 2016 WL 1241553, at *3-4; see also Am. States, 15 F.3d at 144 (actual controversy exists where insurer brought declaratory judgment action to establish whether it had duty to defend or to indemnify insured).

         The Court finds that there is an actual controversy because the Port has pled a substantial controversy between parties having adverse interests. Specifically, the Port has shown that the parties have taken different positions regarding Defendant's duty to defend Suits under the Umbrella Policies. While National Union recently said it would defend Suits under the Umbrella Policies in the September letter, "[v]oluntary discontinuance of alleged illegal activity" by a defendant does not moot a case. Iron Arrow Honor Soc 'y v. Heckler, 464 U.S. 67, 72 (1983); see also Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 670 (2016) (holding that an unaccepted offer of judgment does not moot a case). National Union's agreement to provide a defense is not binding, and declaratory judgment would offer relief from uncertainty and prevent duplicative litigation in the future.

         Furthermore, the Port has shown that the dispute, although related to a contingent liability, is ripe for adjudication. The pendency of a decision whether the Unexhausted Primary Policies are exhausted does not moot the need for judicial relief. See Fed. Ins. Co. v. SafeNet, Inc., 758 F.Supp.2d 251, 262 (S.D.N.Y. 2010) (declaratory judgment action appropriate to consider even where primary coverage has not been exhausted). National Union contends that the Primary Policies are already exhausted. That issue will be decided in this litigation. If National Union is correct, then the Umbrella Policies will be triggered. As noted above, clarifying the parties' legal relations now will avoid future litigation on this issue and may facilitate settlement discussions.

         B. Decision to ...