Stay of a Coverage Suit Due to Overlapping Facts

Stay of a Coverage Suit Due to Overlapping Facts

By David A. Gauntlett[*]

Introduction

California courts have recognized that where the underlying action and coverage action both address the same “substantive issues,” a duty to defend, delaying the adjudication of the coverage issues by issuing a stay is appropriate.[2] In the case of Aspen American Insurance Co. v. Harry William Ou,[3] the court employed this doctrine to stay the coverage case addressing the plaintiff’s right to independent counsel due to the overlap of facts that could prove the plaintiff’s liability with those that might prove the applicability of a policy exclusion.[4]

Overlapping Dispositive Issues Are Key

The court also concurred that overlapping dispositive issues included those related to (1) Ou’s actions and statements made during and after Limon’s surgery, (2) any reports made during or post-operation related to Limon’s medical care, (3) Limon’s medical condition, prior to, during, and after surgery, (4) any events or follow-up acts including those by Ou, and (5) what knowledge Ou had or should have had against expert testimony regarding medical standards of care.[5]

Explaining the conflict, the court stated, “it is in Ou’s interest in the Limon action that Kiefer [appointed defense counsel] marshal facts establish Ou’s actions do not amount to a breach of his professional duties. But it is in Aspen’s interests here to marshal facts that establish the contrary—or at the very least, undermine Ou’s defense with facts that establish Ou had at least a reasonable basis to believe that his medical treatment of Limon would result in a lawsuit.”[6] Therefore, the court granted Ou’s motion for independent counsel at Aspen’s expense.

The court made the grant of stay partial because the parties could proceed with discovery of motions relating to whether a Notice of Intent to sue was sent/received by Ou and whether he had noticed the lawsuit before the date of service.

Most Courts Follow Doctrines Similar to Those of California on This Issue

In Riverport Insurance Co. v. Horizon Human Services,[7] An insured was sued by a third party in state court. The actions arose from the same set of facts, even if not identical factual circumstances. In such a case, it was inappropriate to resolve the insurer's duty to defend where the underlying action was pending.[8] Evidencing hostility toward declaratory relief actions addressing state law coverage issues, the court observed:

Like Karussos and Aero Jet, the duty to avoid needless determination of state law issues weighs heavily in favor of abstention in this case. Riverport does not dispute that its declaratory action involves solely state law issues. This action could have been filed in the Arizona state courts, which are more apt to adjudicate issues involving Arizona insurance law. Exercising jurisdiction in this case would frustrate Congress's intent that insurance law disputes be left to the states. As Aero Jet noted, the issue here is not whether the Court could exercise jurisdiction over this case, but whether it should, given the pending state action. Riverport provides no reason or special circumstance that would make exercising jurisdiction in this case appropriate, and Ninth Circuit precedent “generally counsel[s] against the exercise of federal-court jurisdiction over claims for declaratory relief that involve only state law questions and are brought during the pendency of a related state court proceeding.” Karussos, 65 F.3d at 801.[9]

Landmark American Insurance Co. v. North Captiva Island Club, Inc.[10] analyzed Florida law. The court looked only to the complaint and policy in analyzing the duty to defend. An amended complaint, which supersedes the original, is determinative of that defense duty as clarified in Baron Oil Co. v. Nationwide Mutual Fire Insurance Co. 470 So. 2d 810, 815 (Fla. Dist. Ct. App. 1985).[11] Since a Motion to Dismiss was pending, a stay was sought to determine whether the new pleading would be viable and then if it required a defense or not. The court found that since the power to stay pleadings was incidental to the court's power to control its docket, relief was appropriate.

Some Exceptions Exist

Illinois courts, for example, appear to be more hesitant in granting stays. The court of appeals reversed the circuit court’s decision to stay the Declaratory Relief action in Pekin Insurance Co. v. Minerva Sportswear, Inc.[12] until the conclusion of the underlying lawsuits. At issue was whether the merits of the facts to be adjudicated in the underlying lawsuit would necessarily be addressed in the Declaratory Relief action.

A similar result was reached in Citizens Insurance Co. of America v. Wynndalco Enterprises, LLC.[13] There, Wynndalco allegedly violated the Illinois Biometric Information Privacy Act (“BIPA”) due to a “secretive technology created by a company called Clearview AI, Inc.…that combines a database of over three billion facial scans, amassed by ‘scraping’ photographs from the internet, and a facial recognition application, so as to enable the end-user to identity unknown persons by comparing their facial scan to those included in Clearview’s database.”[14]

The court rejected Citizens’s arguments that there should be a stay of the Declaratory Relief Action under the so-called “Peppers doctrine.” This case did not allow an insurer to inquire into the merits of claims against the insurer under the guise of addressing coverage issues, based on the argument that rulings therein could be detrimental to its interests in the underlying action even though they might benefit the insurer in its coverage case. The court determined this doctrine was not implicated.[15]

This exclusion’s applicability could be assessed based on the face of the complaint without reference to the facts beyond it. There was no basis for a stay of the coverage action to determine facts that need not be established to analyze coverage. The court concluded that at no moment was the insurer obligated to provide a defense in the underlying action.

Attempts to limit the exclusion to “statutory violations” was, in the court’s view, too narrow a construction of the exclusion’s scope. Although not adjudicating the duty to defend as a matter of law, the court rejected Wynndalco’s quest for a stay because:

In sum, Citizens’ declaratory judgment action “presents a question distinct from the issues raised” in the underlying Thornley and Calderon class actions, to which an answer “will serve a useful purpose in clarifying the legal obligations and relationships among the parties,” Nationwide Ins., 52 F.3d at 692, the Court finds that a stay is unwarranted.[16]

Conclusion

Although all courts agree that a coverage action should not litigate issues determinative for the result in an underlying lawsuit, there is some variation in how liberally they view the overlap of dispositive facts. Where there is any such overlap, a policyholder should generally seek a stay of the coverage case until after the underlying suit is resolved. Failure to do so may result in fighting a war on two fronts.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 301 (1993) (“To eliminate the risk of inconsistent factual determinations that could prejudice the insured, a stay of the declaratory relief action pending resolution of the third party suit is appropriate when the coverage question turns on facts to be litigated in the underlying action.”)

[3] No. CV 18-2312 DSF (GJSx), 2019 U.S. Dist. LEXIS 77822 (C.D. Cal. Mar. 14, 2019).

[4] Id. at *12 (“Aspen does concede that the three dispositive issues in its action all turn “upon what Dr. Ou knew regarding the incident or claim and when he knew it.” . . . The Court agrees with Ou that facts needed to prove exclusion under Exclusion (D)(2) would overlap, at least in part, with facts that might be used to prove Ou's liability in the Limon Action.”)

[5] Id. at *12.

[6] Id. at *12–13.

[7] No. CV-15-00704, 2015 U.S. Dist. LEXIS 157262 (D. Ariz. Nov. 20, 2015).

[8] Id.

[9] Id. at *11–12.

[10] No. 2:16-cv-582-FtM-99CM, 2016 U.S. Dist. LEXIS 178634 (M.D. Fla. Dec. 27, 2016).

[11] Id. at *4.

[12] No. 4-19-0831, 2020 Ill. App. Unpub. LEXIS 888, *10 (Ill. App. 4th Dist. May 12, 2020) (“extrinsic evidence is admissible on the question of the insurer's duty to defend the insured [unless] ‘it tends to determine an issue crucial to the . . . underlying lawsuit.’”) (quoting Pekin Insurance Co. v. Wilson, 273 Ill. 2d 446,461 (2010)).

[13] 2021 U.S. Dist. LEXIS 15300 (N.D. Ill. Jan. 27, 2021).

[14] Id. at *4.

[15] Id. at *8 (“To determine whether Citizens has a duty to defend the Court need only ask whether the allegations of the Thornely or Calderon complaints, ‘if proven, . . . would establish an injury’ covered by the Policy—i.e., one that falls outside the scope of the Exclusion.”)

[16] Id. at *12.