Opinion
Case No. 5:00-CV-131.
March 22, 2001.
ORDER
IT IS HEREBY ORDERED that Defendant's Motion to Dismiss (Dkt. No. 6) pursuant to Federal Rule of Civil Procedure 12(b)(6) is DENIED .
OPINION INTRODUCTION
This matter is before the Court on Defendant Deerfield Insurance Company's ("Defendant") Motion to Dismiss Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The action by Plaintiff Lansing Board of Water and Light ("Plaintiff") is one for declaratory judgment pursuant to 28 U.S.C. § 2201. This Court has jurisdiction over this action under 28 U.S.C. § 1332 because the parties are of diverse citizenship and because the amount in controversy exceeds $75,000.
From April 27, 1998, to April 27, 1999, Defendant's predecessor, First Reinsurance of Hartford, insured Plaintiff under an insurance policy entitled Public Officials Liability Insurance, policy number TCB 73506. During this period of insurance coverage, Performance Abatement Services, Inc. ("PAS") made a claim against Plaintiff and then initiated suit against Plaintiff in this Court. In this same lawsuit, SCS Group, L.C. ("SCS") filed a counterclaim against Plaintiff. This underlying lawsuit stems from a project by Plaintiff to remove and dispose of asbestos at the Plaintiff's Ottawa Station Property. See Performance Abatement Services, Inc. v. Lansing Board of Water and Light and SCS Group, L. C, No . 5:98-CV-70 (W.D.Mich. 1998 ) . Plaintiff awarded the bid on the project to SCS, and SCS subcontracted portions to PAS. The claims by SCS and PAS against Plaintiff are essentially that the drawings and other information provided to them by Plaintiff regarding the asbestos project failed to indicate the true scope of the project and that PAS was forced to remove more asbestos than disclosed without proper additional remuneration.
Defendant sent Plaintiff a letter, dated July 30, 1998 , stating its intent to provide a defense for Plaintiff: (Compl. Exh. D at 3.) In this letter, Defendant made a reservation of rights and noted at least seven different reasons under the policy which might preclude coverage. On December 7, 1998 , this Court issued an Opinion and corresponding Order dismissing Counts I and II of PAS's Complaint and Counts II, III, and IV of SCS's Complaint with prejudice, and dismissing Count VIII of PAS's Complaint without prejudice. On January 7, 1999 , this Court issued another Order clarifying its December 7, 1998 Order, stating that Count VIII of PAS's Complaint was dismissed without prejudice only as to Defendant, Lansing Board of Water and Light, now Plaintiff in this suit.
Plaintiff then sent a letter to Defendant, dated August 17, 2000, questioning Defendant's July 30, 1998 letter regarding reservation of rights and asking Defendant to acknowledge its asserted obligations and duties under the Policy. (Compl. Exh. E.) Plaintiffs letter amounted to a request for Defendant to withdraw its reservation of rights. Defendant responded to Plaintiff's August 17, 2000 letter with an August 31, 2000 letter. (Compl. Exh. F.) In this letter, Defendant added three other reservation of rights theories, but reasserted its acceptance of the duty to defend Plaintiff in the underlying litigation to this case. (Compl. Exh. F at 7.) In addition to reasserting its original reservation of rights and adding others in this letter, Defendant stated that in light of the exclusion clause covering irritants, it "will consider whether it will initiate coverage litigation" at the conclusion of the underlying suit. (Compl. Exh. F at 7.)
On October 26, 2000, this Court issued yet another Order in the underlying case denying Plaintiff's Motion to Dismiss Defendant/Cross-Plaintiff SCS's Second Amended Cross-Complaint, and Entry of Default against SCS on Plaintiff's Complaint in the underlying suit to this action.
Plaintiff filed this suit for declaratory judgment against Defendant on October 31, 2000. Defendant filed the present Motion to Dismiss on November 17, 2000.
I. Legal Standard
"To survive a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a 'complaint must contain either direct or inferential allegations respecting all the material elements to sustain recovery under some legal theory.'" Begala v. PNC Bank, 214 F.3d 776, 779 (6th Cir. 2000) (quoting Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988)). In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court "must construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations as true, and determine whether the plaintiff can undoubtedly prove no set of facts in support of his claim that would entitle him to relief." Columbia Natural Resources, Inc., v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995). Despite this liberal standard, "'more than bare assertions of legal conclusions [are] ordinarily required to satisfy federal notice pleading requirements.'" Begala, 214 F.3d. at 779 (quoting Scheid, 859 F.2d at 436). The Court need not accept "bare assertions of legal conclusions" and "need not accept as true legal conclusions or unwarranted factual inferences." In re Sofomar Danek Group, Inc., 123 F.3d 394, 400 (6th Cir. 1997).
II. Discussion
In its Motion, Defendant makes two basic arguments. First, Defendant asserts that contained within the insurance contract at issue is a "No Action" clause, and this clause prevents Plaintiff from initiating a declaratory relief action at this time. Second, Defendant contends that the Court should dismiss the present declaratory action because no "actual controversy" currently exists between the parties.
A. "No Action" Clause
Defendant maintains that the ostensible "No Action" clause contained in the insurance policy it issued to Plaintiff precludes the ability of Plaintiff to file this action for declaratory judgment. In interpreting insurance policies, Michigan law mandates that courts view the policy as a whole and give meaning to all of its terms. Fresard v. Michigan Millers Mut. Ins. Co., 327 N.W.2d 286, 28889 (Mich. 1982); Advanced Watch Company, Ltd. v. Kemper National Ins. Co., 99 F.3d 795, 799 (6th Cir. 1996). "Terms are to be interpreted by considering their commonly understood meanings." Advanced Watch, 99 F.3d at 799-800 (citing Upjohn Co. v. New Hanpshire Ins. Co., 476 N.W.2d 392, 397 (Mich. 1991)). More specifically, when interpreting Michigan insurance law, the Sixth Circuit Court of Appeals has stated that "Michigan law requires a court to 'give effect to all the words in an insurance contract if they serve a reasonable purpose.'" Advanced Watch, 99 F.3d at 800 (quoting Harrow Products, Inc. v. Liberty Mut. Ins. Co., 64 F.3d 1015, 1024-25 (6th Cir. 1995)).
Since both parties apply Michigan law to the interpretation of the insurance policy in question, the Court will assume, without deciding, that Michigan law applies to this case.
The clause at issue in this declaratory action states the following:
13. Legal Action Limitation
The Insured may not bring any legal action against the Company concerning this Policy. . . .
(Plaint. Compl. Exh. A at 9.) Defendant argues that this clause in the insurance policy prohibits Plaintiff from bringing this action for declaratory relief. In support of this proposition, Defendant cites to Batsakis v. Federal Deposit Ins. Corp., 670 F. Supp. 749, 759 (W.D.Mich. 1987), Cissell v. American Home Assur. Co., 521 F.2d 790 (6th Cir. 1975), and Coil Anodizers, Inc. v. Wolverine Ins. Co., 327 N.W.2d 416, 418 (Mich.App. 1982); see also Haxton v. CNA Financial Corp., Nos. 89-6072, 89-6116, 1990 U.S. App. LEXIS 19764, at * 2 (6th Cir. Nov. 2, 1990) (no action clause stating "[n]o action shall be taken against the Insurer. . . ."). Yet, the cases cited by Defendant are easily distinguishable from this case given the language of the "No Action" clauses in those cases as compared to the language contained in Plaintiff's policy.
In Batsakis, the language in the insurance policy at issue read as follows: "7. ACTION AGAINST COMPANY No action shall lie against the Company . . . ." Batsakis, 670 F. Supp. at 759 (emphasis added). The Batsakis court held that the "No Action" clause in that insurance policy did not allow for an action for declaratory relief by the plaintiff because the phrase "[n]o action" encompassed both actions for monetary relief as well as declaratory relief. Id . Similarly, in Coil Anodizers, the court interpreted the "No Action" clause in that insurance policy to preclude an action by the insured against the insurer until the insured met all the conditions of the clause. Coil Anodizers, 327 N.W.2d at 418. The clause at issue in Coil Anodizers read accordingly: " No action shall lie against the company. . . ." Id at 417 (emphasis added). Finally, in Cissell v. American Home Assurance Co., 521 F.2d 790, 792 (6th Cir. 1975), the court also interpreted the meaning of a "no action" clause as preventing plaintiff from suing the insurer until the conditions precedent in the clause had been fulfilled. The clause in Cissell read that "'no action shall lie against the company. . . .'" Id . (emphasis added).
What is obvious from examining the clauses at issue in the cases described above, unlike the clause at issue here, is that they all lack the qualifying term "legal". The term "legal" precedes the term "action" in the clause at issue in Plaintiff's insurance policy. The clause in Plaintiffs policy uses the phrase "legal action" not once but twice; both in the title to the clause and in the body of the clause. According to Defendant's argument, the words "legal" and "action" should be read together to mean actions both in law and in equity. Such an interpretation by the Court would go against Michigan law as it applies to the interpretation of insurance contracts.
As required by Michigan law, the Court must, in interpreting insurance contracts, give meaning to all the terms as those terms are commonly understood. Fresard v. Michigan Millers Mut. Ins. Co., 327 N.W.2d 286, 288-89 (Mich. 1982); Advanced Watch Company, Ltd. v. Kemper National Ins. Co., 99 F.3d 795, 799 (6th Cir. 1996). According to Black's Law Dictionary, the word "action" means a civil or criminal judicial proceeding. Black's Law Dictionary 28-29 (7th ed. 1999). The definition includes a reference to the Uniform Commercial Code which defines the term "action" as including such judicial proceedings as "'recoupment, counter claim, set-off, suit in equity, and any other proceedings in which rights are determined.'" Id . (quoting U.C.C. § 1-201(1)) (emphasis added); see also Mich. Comp. Laws § 440.1201 (using same definition of "action"). In addition, the word "action" is defined in Michigan Court Rule 2.101(A) as "a 'civil action'". Mich. Ct. R. 2.101; see also Fed.R.Civ.P. 2 ("There shall be one form of action to be known as 'civil action'".) Based on these definitions, the Court finds that the tern "action", as it is commonly understood, is defined to include both actions at law and equity.
Such an understanding of the term "action" as written in the Policy is supported by other language in the policy. Under Section 3.H, the policy states that "demands or actions seeking relief or redress in any form other than money damages" are excluded from coverage under Plaintiff's policy. (Plaint. Compl. Exh. A at 4.) (Emphasis added.) This section implies that the term "action" as used in the Policy includes both actions at law and in equity, but that the insurer is not liable to the insured for equitable actions.
This leaves the Court with the problem of how to read the term "legal" as a qualifier preceding the term "action" in the Policy. Since the term "action", as it is commonly understood, already includes both legal and equitable actions, to read the phrase "legal action" as written in the Policy to include both legal and equitable actions would require the Court to conflate the meanings of these two words. Such an interpretation would render the word "legal" superfluous for purposes of understanding the clause. This reading of the clause would run directly counter to Michigan law requiring a court to give meaning to all the words in an insurance policy having a reasonable purpose. Therefore, in order to give meaning to each word in the clause, the Court finds the phrase "legal action", as contained in the policy, to mean actions at law for money damages as opposed to equitable or other actions. Although the distinction between courts of law and equity has almost completely disappeared due to the merger of these two courts in various jurisdictions, the differences between legal and equitable relief still carry significance. The Seventh Amendment of the Constitution mandates a jury trial for suits at common law, but not at equity, as does the State of Michigan. See U.S. Const. amend. VII; Ecco, Ltd. v. Balimony Mfg. Co., Inc., 446 N.W.2d 546 (Mich.App. 1989).
Plaintiff's Complaint is one for declaratory relief. "Normally an action for declaratory relief is equitable in nature." Gelman Sciences, Inc. v. Fireman's Fund Ins. Co., 455 N.W.2d 328, 330 (Mich.App. 1990). See e.g. Great Northern Life Ins. Co. v. Vince, 118 F.2d 232, 233 (6th Cir. 1941) ("The nature of an action for declaratory relief under the statute, is said to be 'neither legal nor equitable, but sui generis.'"); Merrill Lynch v. Doe, 868 F. Supp . 582 (S.D.N.Y. 1994) (declaratory relief equitable in nature); Massachusetts Mut. Life Ins. Co. v. Hardwick, 118 F. Supp. 485, 488 (E.D.Tenn. 1953). Since Plaintiff's present action for declaratory relief is not a legal action but an equitable action for purposes of the Policy, the "No Legal Action" clause contained in the Policy does not preclude Plaintiff's declaratory action here.
B. Declaratory Judgment Act and Case or Controversy
Defendant maintains that even if the "No Action Clause" in the Policy does not prevent Plaintiffs present declaratory action, there exists no case or controversy between the parties at present as required by the Declaratory Judgment Act, 28 U.S.C. § 2201. Defendant supports this argument by indicating that it has continued to state in all correspondence to Plaintiff that it accepts its duty to defend Plaintiff in the underlying litigation with PAS and SCS. In addition, Defendant argues that it is premature for this Court to address the issue of indemnification because the underlying suit has not yet produced an outcome adverse to Plaintiff. Defendant then cites a string of cases for the proposition that without an outcome in the underlying case, any Opinion by this Court in this declaratory action would amount to an advisory opinion, and such advisory opinions are not within this Court's domain.
Plaintiff first counters by indicating that Defendant's cites are misused, since those cases stand for the proposition that federal courts should not entertain suits for declaratory relief in which the underlying cases are in state court, and obviously that is not the case here. Plaintiff then points to the large number of cases in which federal courts in this circuit have rendered judgments in declaratory relief suits involving insurance coverage. Finally, Plaintiff argues that its pleadings contain sufficient allegations to withstand scrutiny under Rule 12(b)(6), and that a statement in Defendant's August 31, 2000 letter constitutes a threat of litigation that defeats any claim by Defendant that there presently exists no controversy between the parties.
The Declaratory Judgment Act ("Act") states "[i]n a case or controversy within its jurisdiction . . . any court in the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration whether or not further relief is or could be sought." 28 U.S.C. § 2201. The decision of whether to grant declaratory relief is within the discretion of the court. Mount Vernon Fire Ins. Co. v. Hicks, 871 F. Supp. 947, 950 (E.D.Mich. 1994) (citing Public Afairs Press v. Rickover, 369 U.S. 111, 112 (1962)). A district court ought not entertain a suit for declaratory relief unless there is an actual "substantial controversy between parties having adverse legal interest, 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); see also Jones v. City of Lakeland, 224 F.3d 518, 529 (6th Cir. 2000) (citing Maryland) .
A declaratory judgment action is "ripe" for purposes of the statute only if an actual controversy exists between the parties. Orix Credit Alliance, Inc. v. Wolfe, 212 F.2d 891, 896 (5th Cir. 2000). "Whether particular facts are sufficiently immediate to establish an actual controversy is a question that must be addressed on a case-by-case basis." Id . "The threat of litigation, if specific and concrete, can indeed establish a controversy upon which declaratory judgment can be based." Id . at 897; see also NUCOR Corp. v Aceros Y Maquilas de Occidente, 28 F.3d 572, 578 (7th Cir. 1994); Friedman v. Geller, 925 F. Supp. 611, 613 (E.D.Wis. 1996).
While Defendant is correct that in providing a defense for Plaintiff in the underlying suit while reserving rights does not present an "actual controversy" for purposes of the Act, Federal Ins. Co. v. Michigan Mut. Liab. Co., 166 F. Supp. 537, 538 (E.D. Penn. 1958), it is also clear that the threat of litigation presents an actual controversy under the Act. Orix, 212 F.3d at 896. Defendant's threat of litigation against Plaintiff was clear and specific, even if implicit, in its August 31, 2000 letter to Plaintiff. Therefore, because an actual controversy exists between the parties, the Court will deny Defendant's Motion.
The Court need not address the considerations and factors set forth in Grand Trunk W. R.R . CO. v. Consol. Rail Corp., 746 F.2d 323 (6th Cir. 1984), at this time because the issue of whether declaratory judgment is appropriate in this case is not before the Court. The parties are encouraged to submit motions for summary judgment pursuant to Federal Rule of Civil Procedure 56 when appropriate.