United States District Court, S.D. California
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 ...