ROGER T. BENITEZ, 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 Propedure 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
National Union
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.
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. 1.)
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—a declaration regarding whether the two Unexhausted Primary 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.)
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.
The Court addresses each claim for relief that National Union moves to dismiss and then discusses National Union's Motion to Sever and Stay.
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 Policies are exhausted, then National Union has already acknowledged 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 a/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.
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 Cas. 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 (S.D. Cal. Mar. 30, 2016). 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. Fairchild 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.
Once a district court has determined whether an actual controversy exists, the court must then determine whether to exercise its subject matter jurisdiction. Am. States., 15 F.3d at 143-44. In Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), the Supreme Court provided guidance regarding a court's discretion to entertain declaratory relief. The Brillhart factors require that in deciding whether to exercise its subject matter jurisdiction, the court should (1) avoid needless determination of state laws; (2) discourage litigants from filing declaratory actions as a means of forum shopping; and (3) avoid duplicative litigation. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 672 (9th Cir. 2005) (internal citations omitted); see also Nat'l Union Fire Ins. Co. v. Tokio Marine & Nichido Fire Ins. Co., No. 10-cv-1733, 2011 WL 5404115, at *3-4 (S.D. Cal. Nov. 8, 2011) (considering Brillhart factors in motion to stay declaratory judgment action). "Essentially, the district court `must balance concerns of judicial administration, comity, and fairness to the litigants.'" Am. States, 15 F.3d at 144 (internal citations omitted).
The Court has considered the Brillhart factors and concludes that they weigh in favor of the Court exercising jurisdiction. The claim involves a determination whether the Umbrella Policies must drop down to cover Suits. "This evaluation should involve a relatively straightforward analysis of the policy, without infringing on novel state law issues." Progressive Cas. Ins. Co. v. Dalton, No. 12-cv-00713, 2012 WL 6088313, at *7 (E.D. Cal. Dec. 6, 2012) (considering interpretation of insurance contract coverage). The present action does not appear to be the result of forum shopping. There is no parallel state court proceeding involving the same issues of state law. And, as previously noted, exercising jurisdiction over this action would prevent duplicative litigation in the event that the Unexhausted Primary Policies are deemed exhausted.
Because Plaintiff pleads an actual controversy and the Brillhart factors weigh in favor of this Court exercising jurisdiction, Plaintiff has adequately stated a claim for a declaratory judgment action. Therefore, Defendant's motion to dismiss or, in the alternative, to sever and stay the second claim for relief is
The third claim for relief seeks a declaratory judgment that Defendant must defend Claims under the Umbrella Policies if the primary layer of insurance is exhausted. (FAC ¶ 34.) National Union argues that the third claim fails as a matter of law because the Umbrella Policies only apply to Suits, not Claims. (Mot. at 7.)
Interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation.
The interpretation of the language in the Insuring Agreements and Limit of Liability sections of the four Umbrella Policies is disputed by the parties. (FAC Exs. E-H.) The relevant language is the same in each policy and is reproduced below. The Insuring Agreements state as follows:
(FAC Ex. E at 4.)
The Limit of Liability section states, in relevant part:
(B) In the event of . . . exhaustion of the aggregate limits of liability under said underlying insurance by reason of losses paid thereunder during this policy period, this policy shall . . . (2) continue in force as underlying insurance.
(FAC Ex. E at 5, 13.)
The Port argues that National Union, the insurer that drafted both the Primary and Umbrella Policies, demonstrated "explicit intent" to cover Claims in the Umbrella Policies in two specific clauses. (Opp'n at 8.) First, the Port contends that the provision that "[t]his Insuring Agreement shall also apply to occurrences not covered by any underlying insurance due to exhaustion" means the Umbrella Policies will cover occurrences that would have been covered under the Primary Policies had those policies not been exhausted. (Id. at 7-8.) And because "the [P]rimary [P]olicies . . . clearly cover [C]laims, the reasonable interpretation of this provision is that the excess coverage includes [C]laims." (Id. at 8.) Second, the Port argues that the language that "[i]n the event of . . . exhaustion . . ., this policy shall . . . continue in force as underlying insurance" means that "[i]n any matter that would have been covered by an underlying Primary Policy, but is not covered by reason of the Primary Policy's exhaustion, the Umbrella Policy is to provide the same coverage as the Primary Policy," namely that the Umbrella Policies will cover Claims. (Id. at 8.)
In contrast, National Union contends the Umbrella Policies only apply to Suits. It notes that Part I of the Insuring Agreement requires the insurer to pay sums that the insured is "legally obligated to pay as damages," which case law equates with Suits, not Claims. (Mot. at 7.) Furthermore, National Union argues that, under Part I1(a), it is required to "defend any suit," but is granted the discretionary right to investigate and settle Claims. (Mot. at 8.) National Union objects to the Port's interpretation of the two provisions noted above. First, National Union contends that the introductory language in Part II of the Insuring Agreement ("This Insuring Agreement shall also apply to occurrences not covered by any underlying insurance due to exhaustion. . . .") means that the Umbrella Policies' defense obligations are "activated only when the underlying insurance is exhausted," not that they provide the same coverage. (Mot. at 13.) Second, National Union argues that "phrase `continue in force as underlying insurance' simply means that the policy slips into the role of a primary policy, not that it suddenly adopts the terms of the underlying primary policy." (Reply at 7.)
The Court concludes that the language governing National Union's defense obligations is ambiguous. The policy reads that the insurer "shall defend any suit . . ., but [the insurer] shall have the right to [investigate, negotiate, and settle] any claim or suit." (FAC Ex. E at 4 (emphasis added.)) The California Supreme Court found similar language to mean that "insurers are required to defend a `suit,' but have discretion to investigate and settle a `claim.'" Foster-Gardner, Inc., 18 Cal. 4th at 863, 878, 880.
Because words in a contract are to be interpreted in their ordinary and popular sense, a layperson could interpret the second sentence in two possible ways, both reasonable. See Legacy Vulcan Corp. v. Super. Ct., 110 Cal.Rptr.3d 795, 803 (Ct. App. 2d 2010). On one hand, he could find that the Umbrella Policies cover occurrences that would have been covered by the underlying insurance if the underlying insurance was not exhausted by payment of its limits. And because the Port attests, and National Union does not dispute, that the underlying insurance covered both Suits and Claims arising from occurrences,
The Court was unable to find any controlling authority construing the provisions in question in connection with an umbrella insurance policy. The Court considered the various policy provisions discussed by the parties and other contract language in light of the rules governing contract interpretation, yet cannot say as a matter of law that the contracts' terms unambiguously preclude a defense duty for Claims. The purpose of umbrella insurance is to "fill any gaps in coverage left open by the [underlying insurance.]" Wells Fargo Bank v. Cal. Ins. Guarantee Ass'n, 45 Cal.Rptr.2d 537, 539 n.2 (Ct. App. 1st 1995). This objective seemingly supports the Port's position. Therefore, given the two possible layman's interpretations, the lack of controlling authority, and the general goal of umbrella insurance, there is "doubt as to the parties' intent" to include a duty to defend Claims under the Umbrella Policies. Martinez, 2011 WL 90313, at *7.
Thus, the Court concludes that an actual controversy exists and, consistent with its reasoning above in Part I, it chooses to exercise jurisdiction over this declaratory judgment action. The Court notes that, although it could not find California state court decisions interpreting the provisions in question, the Court expects discovery to develop evidence to aid in the Court's interpretation of the provisions such that the Court is not involved in a "needless determination of state laws." Robinson, 394 F.3d at 672. Accordingly, Defendant's motion to dismiss or, in the alternative, to sever and stay the third claim is
The Port's fourth claim for relief alleges breaches of National Union's contractual duties to (1) payor reimburse for legal obligations arising out of Claims and Suits and (2) defend the Port in Claims and Suits under the Unexhausted Primary Policies. (FAC ¶ 39.) To state a claim for breach of contract under California law, a plaintiff must allege: (1) the existence of a contract; (2) its performance or excuse for nonperformance; (3) defendant's breach of the contract; and (4) resulting damage to plaintiff. Tri-Union Seafoods, 88 F. Supp. 3d at 1173. In determining whether a plaintiff has stated a claim for breach of an insurance contract, a court must compare the allegations of the complaint with the terms of the contract. Mortazavi v. Fed. Ins. Co., No. 13-cv-3141, 2014 WL 940328, at *2 (S.D. Cal. Mar. 11, 2014).
National Union does not dispute (1) the existence of a contract or (2) the Port's performance or excuse for nonperformance. Instead, it appears that National Union contests the Port's pleading of breach and damages. National Union asserts that the FAC admits that it has not breached its duty to defend because it agreed to continue defending Suits and Claims pending judicial resolution of the exhaustion issue. (Mot. at 10, Ex. 1.) It further argues that the Port's Opposition admits that National Union has paid some defense costs and that the FAC does not allege any particular facts about unpaid defense costs. (Mot. at 10; Reply at 8.)
Taking all factual allegations as true and construing them in the light most favorable to Plaintiff, the Court concludes that Plaintiff has adequately pleaded a breach of contract. The Port alleged that National Union promised to defend and indemnify the Port against Suits and Claims under the Unexhausted Primary Policies. (FAC ¶ 9.) The terms of the Unexhausted Primary Policies do not appear to rebut that allegation. (FAC Ex. A at 15 & Ex. B at 45.) The Port also alleged that it tendered the Suits and Claims to National Union, which National Union initially agreed to defend under the Unexhausted Primary Policies. (FAC ¶¶ 11, 12.) Subsequently, National Union informed the Port that it considered the Policies exhausted and would cease defending the Port in the Suits and Claims. (FAC ¶ 13.) These allegations are adequate to plead breach. See Travelers Indem. Co. of Conn., 221 F. Supp. 2d at 1229-30 ("The duty to defend arises immediately upon the insured's tender of a defense . . . [and] continues until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage." (emphasis in original)).
As a result of National Union's actions, the Port incurred its own defense fees and costs, specifically unreimbursed attorneys' fees, investigative costs, and expenses, as well as "other foreseeable economic losses." (FAC ¶ 18, 40.) Thus, the Port has alleged that it has been injured as a result of Defendant's breach. See Stream Cast Networks, Inc. v. IBIS LLC, No. CV 05-04239, 2006 WL 5720345, at *5 (C.D. Cal. May 2, 2006) ("Under Rule 8, the fact of damage—and the type of damage—can be alleged in conclusory terms."). Therefore, Defendant's motion to dismiss the fourth claim for relief is
The Port's fifth claim for relief alleges bad faith and breach of the implied covenant of good faith and fair dealing. "In the insurance context, the primary test of whether an insurer breaches the implied covenant of good faith and fair dealing is whether the insurer withheld payment of an insured's claim urrreasonably and in bad faith. . . . [T]he insurer must engage in a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement." Mortazavi, 2014 WL 940328, at *3 (citing other sources). Bad faith is usually a fact question. Id.
National Union argues that there is no basis for a bad faith claim because it continues to defend the Port in Suits and Claims subject to the resolution of the exhaustion issue. (Mot. at 12, Ex. 1.) It also asserts that the Port only alleges legal conclusions that are devoid of factual content. (Id.)
The Court agrees with the Port and finds that it has sufficiently alleged a breach of the implied covenant of good faith and fair dealing. The Port alleges that National Union abandoned the Port's defense after unilaterally assigning defense costs as indemnity payments and asserting that the Policies were exhausted. National Union has provided no authority to support its position that its later decision to provide a defense pending resolution of the Policies' exhaustion somehow moots the legal effect of its prior conduct.
The truth of the Port's allegations is a question of fact inappropriate for resolution on a motion to dismiss. See McGregor v. Paul Revere Life Ins. Co., 92 F. App'x 412, 416 (9th Cir. 2004) (finding that reasonableness of insurer's conduct in denying coverage was fact question). Therefore, Defendant's motion to dismiss the fifth claim for relief is
National Union argues that in the alternative to dismissal, the second through fifth claims for relief should be severed and stayed pending resolution of whether the Unexhausted Primary Policies are exhausted. A court, in its broad discretion, may sever and stay claims. Fed. R. Civ. P. 21, 42(b); Landis v. N. Am. Co., 299 U.S. 254 (1936) ("[T]he powerto stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.").
The Court has considered the relevant factors and declines to sever and stay part of this action. The Court has already explained that it will exercise jurisdiction over the two declaratory relief actions related to the Umbrella Policies. See supra Part I.B, II.B. The same reasoning applies to the Port's claims for breach of contract and breach of the covenant of good faith and fair dealing. Judicial economy would not be served by severance or stay because if the Unexhausted Primary Policies are exhausted, as National Union asserts, the second through fifth claims will have to be decided. Severance or stay would delay the progression of this case. Moreover, there is no risk of prejudice to either party because it does not appear that the issues in this case overlap with the factual and legal issues in the underlying Suits and Claims. Therefore, the Court exercises its discretion and
For the reasons stated above, the Court
