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St. Paul Fire & Marine Insurance Co. v. Lexington Insurance Co.

United States District Court, D. Arizona

August 15, 2014

St. Paul Fire & Marine Insurance Company, Charter Oak Fire Insurance Company, and Travelers Indemnity Company of America, Plaintiffs,
v.
Lexington Insurance Company, American Home Insurance Company, Commerce & Industry Insurance Company, and Liberty Mutual Insurance Company, Defendants. Zurich American Insurance Company, Cross-Claimant,
v.
Ohio Casualty Insurance Company, American Safety Indemnity Company, Lexington Insurance Company, American Home Insurance Company, Commerce & Industry Insurance Company, and Liberty Mutual Insurance Company, Cross-Defendants. American Home Insurance Company and) Commerce & Industry Insurance Company, Counter/Cross-Claimants,
v.
St. Paul Fire & Marine Insurance Company, Charter Oak Fire Insurance Company, Travelers Indemnity Company of America, Ohio Casualty Insurance Company, Maryland Casualty Company, Zurich American Insurance Company, and American Guarantee & Liability Insurance Company, Counter/Cross-Defendants. Lexington Insurance Company, Counter/Cross-Claimant,
v.
St. Paul Fire & Marine Insurance Company, Charter Oak Fire Insurance Company, Travelers Indemnity Company of America, Ohio Casualty Insurance Company, Maryland Casualty Company, Zurich American Insurance Company, and American Guarantee & Liability Insurance Company, Counter/Cross-Defendants.

ORDER

STEPHEN M. McNAMEE, Senior District Judge.

For the reasons that follow, the Court declares the remaining parties' respective obligations, but declines to award further declaratory relief.

BACKGROUND

The origins of this declaratory judgment action can be traced back to a residential housing development (the "Development") constructed in Surprise, Arizona between 1996 and 2005. The general contractor was Del Webb Home Construction, Inc. ("DWHC"), a wholly owned subsidiary of Del Webb Communities, Inc. ("DWCI"), which is itself a wholly owned subsidiary of Del Webb Corp. (collectively "Del Webb"). DWHC entered into contracts with six different subcontractors for the provision of various construction tasks. The contracts required the subcontractors to maintain commercial general liability ("CGL") insurance with two million dollars in policy limits and to endorse Del Webb as an additional primary insured. (E.g., Docs. 221-1 at 5-6, 15, 25-26; 226-2 at 18; 265-3 at 17-18, 72-73, 99.) While allowing for the requisite CGL limits to be split between primary and excess policies, the contracts stated: "It is expressly agreed that any other insurance covering [Del] Webb is excess over and non-contributing with [the subcontractor's] commercial general liability insurance." (Id.)[1]

On January 28, 2008 hundreds of Development homeowners served DWCI, the entity that sold the homes, with notice pursuant to Arizona's Purchaser Dwelling Act, Ariz. Rev. Stat. § 12-1361 et seq., alleging construction defects that implicated several subcontractors. On the same day, hundreds of other Development homeowners served DWCI with a demand for arbitration regarding analogous construction defects. The notice of construction defects eventually matured into a civil action, Glen Zelkind et al. v. Del Webb Communities, Maricopa Superior Court Case No. CV2008-3089, that has progressed to trial. The arbitration, however, was resolved in favor of the homeowners resulting in a $13.5 million award against Del Webb, which Del Webb appealed. As of January 3, 2014, the defense costs in the civil action were about to surpass the amount of the arbitration award.

On October 6, 2011, three insurers that were defending Del Webb in the underlying actions filed the instant action against 13 insurers who insured one or more subcontractors and/or Del Webb at various times but refused to contribute or contributed less than their share of defense costs. Plaintiffs sought a declaration of defense duties and a declaration of entitlement to equitable contribution. During nearly three years of proceedings, the complaint has been amended twice, 19 different insurers have appeared, and six Defendants filed counterclaims and crossclaims for relief identical to that sought by Plaintiffs.

The Court and the parties agreed at the April 16, 2012, Rule 16 conference to bifurcate the proceedings so that the first round of dispositive motions would resolve as a matter of law any disputes about whether a party had a duty to defend under one or more policies. (Docs. 97; see 319 at 2.) Four of the nineteen insurers had been dismissed (Docs. 87; 358) before the parties participated in a settlement conference that resulted in the dismissal of another three parties and 32 claims, counterclaims, and crossclaims (Docs. 366; 374; 375; 379; 380). Five dispositive motions were timely filed: one was withdrawn, two were denied as moot pursuant to settlement, and two were decided by the Court. Only two parties filed challenges to their duty to defend under any of their polices (Docs. 258; 267), but neither challenge was successful (Docs. 344; 350).

LEGAL STANDARDS

"In a case of actual controversy... any court of the United States... may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a) (emphasis added). The declaratory judgment case or controversy "requirement is identical to Article III's constitutional case or controversy requirement." American States Ins. Co. v. Kearns , 15 F.3d 142, 143 (9th Cir. 1994). This prerequisite is satisfied where "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. Pacific Coal & Oil Co. , 312 U.S. 270, 273 (1941) (citing Aetna Life Ins. Co. of Hartford v. Haworth , 300 U.S. 227, 239-42 (1937)); Principal Life Ins. Co. v. Robinson , 394 F.3d 665, 671 (9th Cir. 2005) (discussing ripeness).

The controversy must not only be "real and substantial, " but must also be susceptible "of specific relief through a decree of a conclusive character" in the form of "an immediate and definitive determination of the legal rights of the parties... upon the facts alleged." Haworth , 300 U.S. at 241 (distinguishing "an opinion advising what the law would be upon a hypothetical state of facts"). "The litigant must clearly and specifically set forth facts sufficient to satisfy" the case or controversy requirement, Whitmore v. Arkansas , 495 U.S. 149, 155 (1990) (discussing standing), "for each form of relief sought." Friends of the Earth, Inc. v. Laidlaw Envtl. Serv., Inc. , 528 U.S. 167, 185 (2000) (same).

"So long as the court's exercise of jurisdiction over the suit passes constitutional and statutory muster, ' the district court has discretion to determine whether maintaining jurisdiction over the declaratory action would be appropriate." Allstate Ins. Co. v. Herron , 634 F.3d 1101, 1107 (9th Cir. 2011) (quoting Gov't Emp. Ins. Co. v. Dizol , 133 F.3d 1220, 1223 (9th Cir. 1998) (en banc)). The Ninth Circuit "allow[s] district courts broad discretion as long as it furthers the Declaratory Judgment Act's purpose of enhancing judicial economy and cooperative federalism.'" R.R. Street & Co. v. Transp. Ins. Co. , 656 F.3d 966, 975 (9th Cir. 2011) (quoting Dizol , 133 F.3d at 1224).

"When declaratory relief will not be effective in settling the controversy, the court may decline to grant it." Fed.R.Civ.P. 57 advisory committee notes (1937). If the sought declaration neither "serve[s] a useful purpose in clarifying and settling the legal relations at issue" nor "terminate [s] and afford[s] relief from the uncertainty, insecurity, and controversy giving rise to the proceeding, " then "the court should decline to render" declaratory relief Delno v. Market St. Ry. Co. , 124 F.2d 965, 968 (9th Cir. 1942) (quoting Edwin Borchard, Declaratory Judgments 299 (2d ed. 1941)).

DISCUSSION

The parties to this action all issued one or more of three different types of CGL policies that insured Del Webb. First are the parties that issued CGL policies directly to Del Webb. Plaintiff/Counter-Defendant St. Paul Fire & Marine Insurance Company ("St. Paul") issued two CGL policies directly to Del Webb (Doc. 197 ¶ 29), which included primary and excess insurance, that were subject to an "other insurance" provision stating in relevant part: "We have no duty to defend... if your Basic Insurance, or any other insurance, has a duty to defend.... We'll assume the duty to defend... only if[]... your Basic Insurance, or any other insurance, doesn't cover" liability. (Doc. 221-3 at 130, 164.) Similarly, Cross-Claimant/Cross-Defendant Zurich American Insurance Company ("Zurich") and Cross-American Guarantee & Liability Insurance Company ("AGLIC") both issued primary CGL policies to Del Webb. (Docs. 197 ¶ 28; 203 ¶ 28.)

Next are the parties that issued primary CGL policies designating Del Webb as an additional insured. First, "Tanner"-an entity of unknown origin, form, and significance-was issued policies by St. Paul as well as by Plaintiffs/Counter-Defendants Charter Oak Fire Insurance Company ("Charter Oak"), and Travelers Indemnity Company of America ("Travelers"). (Doc. 197 ¶ 29-30.) As to the six subcontractors: Schuck & Sons, Inc. was insured by both Travelers and Defendant/Counter-Claimant/Cross-Claimant/Cross-Defendant Lexington Insurance Company ("LIC"). (Docs. 114 ¶ 24; 145 ¶ 24; 197 ¶ 30.) Atrium Door & Window Company of Arizona, formerly known as Masterview Window Company, LLC (collectively "Atrium") was insured by Travelers as well as Zurich. (Docs. 197 ¶¶ 24, 30; 203 ¶ 24.) Arizona State Plastering, Inc. was insured by Defendants/Counter-Claimants/Cross-Claimants/Cross-Defendants American Home Insurance Company ("AHAC") and Commerce & Industry Insurance Company ("CIIC"), and Defendant/Cross-Defendant Liberty Mutual Insurance Company ("LMIC"). (Docs. 114 ¶ 24; 145 ¶ 24; 197 ¶ 24; 204 ¶ 11.) Design Drywall, Inc., was insured by Cross-Defendants Maryland Casualty Company ("MCC") and American Safety Indemnity Company ("ASIC"). (Docs. 197 ¶ 24; 203 ¶ 24; 206 ¶ 24.) Sharico Enterprises was insured by ASIC and Cross-Defendant Ohio Casualty Insurance Company ("OCIC"). (Docs. 197 ¶ 24; 204 ¶ 11; 206 ¶ 24.) Last, Diversified Roofing, Inc. was insured by LIC. (Docs. 114 ¶ 24; 145 ¶ 24.)

The third type of CGL policies provided excess, as opposed to primary, coverage. Only one party, AGLIC, issued policies of this type, and only to one subcontractor, Atrium. (Docs. 197 ¶ 24; 203 ¶ 24.) Each excess policy was attached to a primary policy issued by Zurich to Atrium and named as insured: "Any person or organization included as an insured in the underlying insurance." (Doc. 221-1 at 118, 125, 155, 162, 196-97, 204.) The underlying Zurich policies endorse as additional insureds: "All persons or organizations where required by written contract." (Doc. 221-3 at 23, 56, 63.) Like the other contracts before the Court, the Atrium contracts state: "The [CGL] policy shall be endorsed to include Del Webb... as additional insureds, with respect to any claims losses, expenses, or other costs arising out of this [][c]ontract, and shall be endorsed as primary coverage with respect to any other insurance which may be carried by [Del] Webb." (Doc. 221-1 at 5, 15, 25-26.)

The relations of the parties to one another are a complex patchwork of claims, counterclaims, and crossclaims. First, St. Paul, Charter Oak, and Travelers (collectively "Plaintiffs") have claims against LIC, AHAC, and CIIC (collectively "AIG") and also LMIC. (Doc. 197.) Next, AIG has counterclaims against Plaintiffs, and crossclaims against OCIC, Zurich, MCC, and AGLIC. (Docs. 153; 154; 155.) Last, Zurich has crossclaims against AIG, OCIC, LMIC, and ASIC. (Doc. 120.) Consistent with the parties' general disregard for procedural rules and this Court's orders (see Docs. 319; 328; 332; 353), neither AIG nor Zurich renewed their respective counterclaims or crossclaims following Plaintiffs' Second Amended Complaint (Doc. 197); AIG did not even bother to file an Answer.

The interests of the parties are relatively simple by comparison: three sets of parties assert they are entitled to reimbursement for the costs of defending Del Webb. Specifically, Plaintiffs, AIG, and Zurich (collectively "Claimants") each allege that they contributed to the defense of Del Webb and that they are entitled to partial or total reimbursement of their contributions. (Compare Doc. 120 at 11, with Doc. 153 at 3-4, with Doc. 154 at 3-4, with Doc. 155 at 4-5.) Claimants all seek the exact same three forms of declaratory relief: a declaration of all parties' defense duties; apportionment of the parties' respective shares of defense costs according to the doctrines of equitable contribution and/or equitable subrogation; and a declaration that Claimants are entitled to reimbursement and an order compelling such reimbursement. (Compare Doc. 120 at 11-13, with Doc. 153 at 3-8, with Doc. 154 at 3-8, with Doc. 155 at 4-9, with Doc. 197 at 12-16). The Court begins with the declaration of the all the parties' duty to defend Del Webb.

The Duty to Defend

Insurers are generally "obligated to assume the defense of" an action brought against an insured when the complaint, "upon its face[, ] alleges facts which come within the coverage of the liability policy." Kepner v. W. Fire Ins. Co. , 109 Ariz. 329, 331, 509 P.2d 222, 224 (1973) (quoting C. T. Drechsler, Annotation, Allegations in third person's action against insured as determining liability insurer's duty to defend, 50 A.L.R. 2d 458, § 3 (1956)). This "duty to defend arises at the earliest stages of litigation and generally exists regardless of whether the insured is ultimately found liable." Regal Homes, Inc. v. CNA Ins. , 217 Ariz. 159, 154, 171 P.3d 610, 615 (App. 2007) (quoting INA Ins. Co. of N. Am. v. Valley Forge Ins. Co. , 150 Ariz. 248, 255, 722 P.2d 975, 982 (App. 1986)). Absent language to the contrary, "if any claim alleged in the complaint is within the policy's coverage, the insurer has a duty to defend the entire suit, because it is impossible to determine the basis upon which the plaintiff will recover (if any) until the action is completed." Lennar Corp. v. Auto-Owners Ins. Co. , 214 Ariz. 255, 261, 151 P.3d 538, 544 (App. 2007) (quoting W. Cas. & Sur. Co. v. Int'l Spas of Ariz., Inc. , 130 Ariz. 76, 79, 634 P.2d 3, 6 (App. 1981)). However, the duty to defend may be obviated if uncontested "facts plainly take the case outside policy coverage." Transamerica Ins. Grp. v. Meere , 143 Ariz. 351, 360, 694 P.2d 181, 190 (1984) (citing Kepner , 109 Ariz. at 331, 509 P.2d at 224).

A declaration of the remaining parties defense duties serves a useful purpose in clarifying the legal relations at issue as it removes uncertainty surrounding an immediate and real dispute over the parties' respective insurance obligations. By not successfully challenging the duty to defend, the parties effectively acknowledged that the alleged facts could establish liability under all of their respective primary policies.[2] Accordingly, the Court hereby declares that all remaining parties share a duty to defend Del Webb under all their respective policies according to the levels of coverage therein. One corollary of this declaration is that each party also has the duty to indemnify for covered liabilities proven at trial, see Colorado Cas. Ins. Co. v. Safety Control Co., Inc. , 230 Ariz. 560, 568, 288 P.3d 764, 772 (App. 2012), subject to the policies' terms, see Cal. Cas. Ins. Co. v. State Farm Mut. Auto. Ins. Co. , 185 Ariz. 165, 168-69, 913 P.2d 505, 508-09 (App. 1996).

Equitable Contribution [3]

The doctrine of equitable contribution is based on the principle that where two or more insurers share the same duty to an insured and less than all of them perform their share of that duty, then the performing insurers are entitled to contribution from the underperforming insurers. Nat'l Indem. Co. v. St. Paul Ins. Cos. , 150 Ariz. 458, 459, 724 P.2d 544, 545 (1986). The duty to defend is shared by and among insurers who issued policies that cover an insured for the facts alleged in the complaint, even if the policies insure against distinct risks. Nucor Corp. v. Employers Ins. Co. of Wausau , 231 Ariz. 411, 421, 296 P.3d 74, 84 (App. 2012) (quoting Certain Underwriters at Lloyd's London & Excess Ins. Co. v. Mass. Bonding & Ins. Co. , 230 P.3d 103, 113 (Or. Ct. App. 2010)) (concluding right to equitable contribution arises where insurers "had the same obligation to defend [the insured]" but one insurer "discharged a disproportionate share of that obligation); Cont'l Cas. Co. v. Signal Ins. Co. , 119 Ariz. 234, 238, 580 P.2d 372, 376 (App. 1978) ("The duty to defend is not synonymous with, nor determinative of the question of coverage."). The remaining parties share the duty to defend pursuant to the Court's declaration that the allegations in the complaint, if true, establish coverage under all the policies.

As to each party's proportionate share of defense costs, the method of calculating proration is left to the Court's discretion. Nucor , 231 Ariz. at 422, 296 P.3d at 85. Arizona favors the "policy limits" approach in which each policy's pro rata share is equal to the quotient obtained by dividing the policy's limit by the sum of all applicable policy limits. AMHS Ins. Co. v. Mut. Ins. Co. of Ariz. , 258 F.3d 1090, 1102 (9th Cir. 2001) (affirming district court's application of Arizona's "policy limits" approach), cited with approval in Nucor , 231 Ariz. at 422, 296 P.3d at 85. The Court finds this approach suitable for calculating the pro rata shares of defense costs in a case where, as here, several insurance carriers each issued multiple polices insuring a single entity that was served with a complaint alleging facts that triggered the defense duties under all the policies. A party's pro rata share of the costs of defense will generally equal the sum of policy limits for each primary policy that party issued divided by the sum of policy limits for all primary policies issued. Assuming the absence of indemnity costs, which would not be shared among those insuring against different risks, see Granite State Ins. Co. v. Emp'rs Mut. Ins. Co. , 125 Ariz. 275, 278, 609 P.2d 90, 93 (App. 1980), all the primary policies would exhaust simultaneously.

This result is equitable with one exception. Atrium satisfied its contractual insurance obligations by purchasing two policies instead of just one: primary CGL policies issued by Zurich and excess CGL policies issued by AGLIC. Under Arizona law, "a specific excess policy attaches upon the exhaustion of its underlying primary policy." AMHS Ins. Co. , 258 F.3d at 1099. Since the AGLIC policies are specific to the underlying Zurich policies and were purchased to provide the same level and amount of coverage as all the other primary CGL policies issued to subcontractors, the Court finds that AGLIC's policies are excess only with respect to the Atrium-Zurich policies.[4] In the interest of equity, the Atrium-Zurich and Atrium-AGLIC policies will be concatenated so that the combined policy limits for each Zurich-AGLIC policy pair will be treated as a single primary policy. As a result, AGLIC's duty to defend (and therefore contribute) will be, or was, [5] triggered when each concatenated policy expends the limits of the underlying Zurich policy. Thereafter, AGLIC is responsible for the concatenated policies' pro rata share.

A declaration of the method for calculating proration serves a useful purpose in clarifying the parties' legal relations at issue. Given that all the remaining parties share the duty to defend Del Webb in the underlying action, calculating the parties' policy limit quotients should, as a practical matter, be a relatively straightforward exercise in addition and division. Computing each party's pro rata share involves multiplication; determination of who has contributed more or less than their share involves subtraction. A party that has contributed more than its pro rata share is entitled to reimbursement from parties that have contributed less than their pro rata shares. The fact that some of the remaining parties have settled with some but not all other remaining parties does not change this result because settlement, in and of itself, does not preclude claims for equitable contribution. See Cal. Cas. Ins. Co. , 185 Ariz. at 170, 913 P.2d at 510. It would, in fact, be inequitable to deny performing insurers contribution from underperforming insurers who settled to avoid having to contribute their fair share of defense costs. See Nucor Corp. , 231 Ariz. at 422, 296 P.3d at 85 (citing Sharon Steel Corp. v. Aetna Cas. and Sur. Co. , 931 P.2d 127, 139 (Utah 1997)) (ruling in context of nonperforming insurer settling with insured).

Further Declaratory Relief

Given the declarations concerning defense duties and the method of calculating pro rata shares, the relations at issue have been clarified and the underlying controversy has been substantially quieted. The only remaining controversy is that some parties are entitled to reimbursement from other parties. Toward that end, Claimants request the Court compute the parties' proportional shares, calculate the difference between proportional share and amount contributed, and issue an order compelling reimbursement. The Court declines to grant this relief.

The remaining requested declaration would not effectively settle the underlying controversy, but only addresses some parties' (Claimants') entitlement to contribution for performance of duties up to this point. The current ledger is a mere snapshot of what the remaining parties owe or are owed, yet additional costs of defense (and indemnity) are inevitably forthcoming. Thus, even if the Court exercised its discretion to render the remaining declaratory relief, the parties' respective obligations and entitlement regarding equitable contribution would not be settled. To the contrary, there will almost certainly be additional disputes as the alignment of performing and underperforming insurers fluctuates.

Further, rulings in the underlying civil litigation are still materially affecting the parties respective duties to defend. Depending on the progression of the trial and evitable appeals, further declarations run the risk of binding a party in a manner inconsistent with that party's true obligation. For example, the settlement agreement between two sets of Claimants, one of which is no longer a party to the action, was delayed "due to a ruling in the [underlying] lawsuit that affects... participation in Del Webb's defense." (Doc. 364 at 2.) The Court is especially wary about rendering a declaration that conflicts with a state court ruling. See R.R. Street & Co. , 656 F.3d at 975.

It may be argued that the Court should stay the proceedings until the underlying actions reach sufficient finality, or alternatively, that the Court should issue the requested relief, maintain the action, and intermittently issue orders compelling the parties to pay one another while the underlying civil suit winds to a close and finds its way up and down the appeals process before reaching finality. Both arguments rest on the same premise: that one or more parties will deny a now certain duty to contribute a calculable sum toward the costs of defense. The mere possibility that a party might not perform a previously uncertain duty, without more, is insufficient to invoke the jurisdiction of federal courts. The Court certainly would not maintain a declaratory judgment action premised on possibility.

The Court finds that the declarations made herein clarify the parties' relations and settle the underlying controversy to the greatest extent practicable given the circumstances.

Accordingly,

IT IS HEREBY ORDERED declaring that St. Paul, Charter Oak, Travelers, Zurich, MCC, AGLIC, AHAC, CIIC, LIC, LMIC, OCIC, and ASIC, all have a duty to defend Del Webb as described in this Order.

IT IS FURTHER ORDERED declaring that the proportional shares of defense costs for St. Paul, Charter Oak, Travelers, Zurich, MCC, AGLIC, AHAC, CIIC, LIC, LMIC, OCIC, and ASIC are equal to their respective policy limits quotients as described in this Order.

IT IS FURTHER ORDERED that the Clerk of Court terminate the case.


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