Opinion
3:23-cv-00075-HZ
06-07-2023
HALLMARK SPECIALTY INSURANCE COMPANY, Plaintiff, v. SENTIA WELLNESS, INC., Defendant.
David Frederick Cutter Batescarey LLP Jason Wright Wright Law PDX Attorneys for Plaintiff Michael E. Farnell Parker Jones Parsons Farnell & Grein, LLP Attorneys for Defendant
David Frederick Cutter Batescarey LLP Jason Wright Wright Law PDX Attorneys for Plaintiff
Michael E. Farnell Parker Jones Parsons Farnell & Grein, LLP Attorneys for Defendant
OPINION & ORDER
MARCO A'HERNANDEZ UNITED STATES DISTRICT JUDGE
Plaintiff Hallmark Specialty Insurance Company (“Hallmark”) brings this declaratory judgment action against Defendant Sentia Wellness, Inc. (“Sentia”). Plaintiff seeks a declaration that Defendant is not entitled to defense and indemnity coverage under an excess insurance policy issued by Plaintiff. Before the Court is Defendant's motion to stay litigation during the pendency of three underlying state court cases involving Defendant's directors and officers. Defendant also seeks to stay this case until its primary insurance policy with another insurance provider has been exhausted. Plaintiff opposes this motion. The Court grants Defendant's motion and stays all proceedings until liability has been resolved in the underlying actions.
BACKGROUND
Defendant Sentia formed on April 15, 2019 as a spinoff corporation from Cura Partners, Inc. (“Cura Partners”). Compl. ¶¶ 2, 29, ECF 1. To fund the new company, Cura Partners' officers solicited and obtained debenture funding from investors. Id. ¶¶ 28, 30-31. Sentia struggled financially, leading some investors to file an action in Oregon state court on January 6, 2022, against certain Sentia directors and officers. Id. ¶ 33. The investors allege that the Sentia directors and officers breached fiduciary duties and committed securities fraud by making materially misleading statements and omissions that induced the investors to purchase over $74 million in Sentia debentures. Id. ¶ 34. After some of their Oregon state court claims were dismissed, the investors filed a demand for arbitration in New York state court on November 15, 2022. Id. ¶ 39. While facing these two pending actions, Sentia filed an affirmative lawsuit against several of the investors in Oregon state court on May 16, 2022. The investors filed counterclaims against Sentia on September 26, 2022, bringing claims similar to their initial lawsuit against Sentia. Id. ¶¶ 45-46.
Sentia has indemnity insurance under a policy issued by Crum & Forster Specialty Insurance Company (“Followed Policy”). Id. ¶ 10, Ex. 1. The policy covers both the corporate entity and Sentia's individual directors and officers up to the policy's $2 million limit of liability. Sentia has an excess professional liability insurance policy issued by Plaintiff Hallmark (“Excess Policy”), which “generally follows-form” to the policy issued by Crum & Forster. Id. ¶ 13. Liability attaches to the Hallmark Excess Policy only after the limits of the Crum & Forster Followed Policy have been exhausted. Id. Ex. 2.
For each of the underlying actions, Sentia tendered the suits to Crum & Forster for defense and indemnity. Farnell Decl. Ex. 5, ECF 6-5. Crum & Forster responded by denying it had a duty to defend or indemnify Sentia and that “there is no coverage for this matter under the C&F Specialty Policy.” Farnell Decl. Ex. 5. At the same time, Sentia sent tender notices to Hallmark to reserve its rights under Hallmark's Excess Policy. See Farnell Decl. Ex. 2, ECF 6-2 (“The purpose of this letter is to tender this Arbitration Demand to Hallmark . . . for defense and, if necessary, indemnity); Farnell Decl. Ex. 4, ECF 6-4 (“The purpose of this letter is to tender this Amended Answer & Counterclaims to Hallmark . . . for defense, and if necessary, indemnity.”). On February 17, 2022, after some back-and-forth correspondence, Hallmark also disclaimed coverage: “Since the Followed Policy has not yet been exhausted, Hallmark does not have a present duty to defend or indemnify the Insureds.” Farnell Decl. Ex. 7, ECF 6-7. In June 2022, Sentia sued Crum & Forster in Oregon state court, seeking a declaration that Crum & Forster, as its primary insurer, has a duty to defend Sentia's officers and directors in the underlying actions. Farnell Decl. Ex. 6, ECF 6-6. Sentia did not include Hallmark in its suit against Crum & Forster and has not brought a separate action against Hallmark. Hallmark filed this declaratory judgment action against Sentia on January 17, 2023.
To reserve rights under the Excess Policy, Sentia was required to provide written notice to Hallmark when it tendered a claim on the Followed Policy. The Excess Policy states:
The Insureds shall, as a condition precedent to their rights under this Policy, give to Insurer written notice of:
(i) any Claim at the same time and in the same manner required by the terms and conditions of the Followed Policy, regardless of the amount of the Claim or the Underlying Limit applicable to the Claim[.]
DISCUSSION
Defendant Sentia moves the Court to stay this declaratory judgment action until the underlying state court liability actions have been resolved and the Crum & Forster policy has been exhausted. Defendant argues: (1) there is currently no “actual controversy” under the Declaratory Judgment Act because the case is not ripe and (2) even if the Court finds an “actual controversy,” it should use its discretion to stay these proceedings until the underlying state court actions are resolved.
Before a district court may grant relief under the Declaratory Judgment Act, it “must first inquire whether there is an actual case or controversy within its jurisdiction.” Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir. 2005). “[I]f the court finds that an actual case or controversy exists,” it then determines whether to exercise its jurisdiction by analyzing the Brillhart factors. Id. (citing Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942)).
I. Ripeness
Under the Declaratory Judgment Act, “in a case of actual controversy,” a court “may declare the rights and other legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a). Put differently, a court has jurisdiction to award declaratory relief “only in a case of actual controversy.” Am. States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir. 1994). The actual controversy requirement of the Declaratory Judgment Act “is the same as the ‘case or controversy' requirement of Article III of the United States Constitution.” Aydin Corp. v. Union of India, 940 F.2d 527, 528 (9th Cir. 1991) (citation omitted). To determine whether Plaintiff's declaratory judgment action presents a justiciable case or controversy, the Court must “consider whether the facts alleged . . . show that there is a substantial controversy . . . of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Shell Gulf of Mex., Inc. v. Ctr. for Biological Diversity, Inc., 771 F.3d 632, 635 (9th Cir. 2014) (emphasis added) (citation omitted); see Aydin Corp., 940 F.2d at 528 (“In order for a case to be justiciable under Article III . . . it must be ripe for review.”).
Generally, courts consider a coverage dispute between an insurer and its insured to be a case or controversy for the purpose of conferring jurisdiction. Century Indem. Co. v. Marine Grp., LLC, 848 F.Supp.2d 1229, 1234 (D. Or. 2012). “An insurer's declaratory judgment action regarding its duty to defend and indemnify [is] sufficiently ripe, even when the underlying action in state court has not yet proceeded to judgment.” Kearns, 15 F.3d at 144; see Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998) (“The pendency of a state court action does not, of itself, require a district court to refuse federal declaratory relief.”). Thus, if there is a basis for federal court jurisdiction, such as diversity of citizenship, an insurer may seek a declaration in federal court regarding its obligations to defend and indemnify even before the insured's liability has been established in a state court action. See Kearns, 15 F.3d at 144 (“[T]here is no per se rule against the district court exercising its jurisdiction to resolve an insurance coverage dispute when the underlying liability suit is pending in state court.”).
In this declaratory judgment action, another layer exists between Plaintiff's sought relief and the underlying state court liability actions-Plaintiff is only an excess insurer. “There is no clear consensus as to whether a claim against an excess insurer is ripe for adjudication where the underlying primary policies have not yet been exhausted.” Century Indem. Co., 848 F.Supp.2d at 1235. But when excess insurance is at issue, courts have established that “a claim is ripe where there is a substantial likelihood that the dispute will reach the excess policies.” Id. (emphasis added).
Here, if liability is established in the underlying actions, Defendant may be liable for damages of over $60 million. The limit on Defendant's primary insurance policy with Crum & Forster is $2 million. Thus, Defendant faces liability in excess of the Crum & Forster policy limits, which would trigger Plaintiffs duty to indemnify. Because a declaratory judgment action on Crum & Forster's primary policy would be ripe for adjudication, and is in fact pending in state court, Plaintiff's claim for declaratory relief on the Excess Policy is also ripe. See Century Indem. Co., 848 F.Supp.2d at 1237 (holding that declaratory judgment claims by an excess insurer “present a genuine case or controversy” when “it is substantially likely that the excess policies will be triggered,” even though underlying liability had not yet been determined). Accordingly, there is no jurisdictional bar to the Court proceeding with this declaratory judgment litigation.
II. Discretionary Factors
Even if a declaratory judgment action is ripe, the Court has discretion to decide whether it should exercise its declaratory relief jurisdiction. Scottsdale Ins. Co. v. Ortiz & Assocs., Inc., No. 3:13-CV-01791-AA, 2014 WL 1883653, at *3 (D. Or. May 9, 2014). Under the Brillhart factors, courts may decline declaratory relief jurisdiction if exercising jurisdiction would (1) involve the needless determination of state law issues; (2) encourage the filing of declaratory actions as a means of forum-shopping; or (3) risk duplicate litigation or entangle federal and state court systems. Dizol, 133 F.3d at 1225 (citing Cont'l Cas. Co. v. Robsac Indus., 947 F.2d 1367, 1371 (9th Cir. 1991)). On the other hand, a court may choose to retain jurisdiction if a declaratory judgment would “serve a useful purpose in clarifying the legal relations at issue.” Allstate Ins. Co. v. Herron, 634 F.3d 1101, 1107-08 (9th Cir. 2011). “Oregon district courts typically wait until the underlying litigation is resolved and liability is determined before ruling on an insurer's duty to indemnify.” Scottsdale Ins. Co., 2014 WL 1883653, at *2.
Resolving whether Plaintiff has a duty to indemnify Defendant's directors and officers would require the court to review the facts in the underlying actions and determine whether Defendant's potential liability falls within the terms of the policy. The underlying actions are in state court and involve state-law claims, including breach of fiduciary duties and state statutory claims. See Farnell Decl. Ex. 1. In addition, Defendant's state court declaratory judgment action against its primary insurer involves issues that overlap with this action. See Farnell Decl. Ex. 6. Although the exclusionary provisions in Crum & Forster's Followed Policy may vary slightly from those in Plaintiff's Excess Policy, the issues in both declaratory judgment actions are similar. As such, proceeding with Plaintiff's declaratory judgment action at this time would require the Court to make needless determinations of state law issues, would risk duplicate litigation, and would encourage forum-shopping. The Brillhart factors favor declining jurisdiction until the various state court actions have been resolved.
III. Duty to Defend
Lastly, Plaintiff has no present duty to defend Defendant's officers and directors in the underlying liability actions. Defendant's pending state court declaratory judgment suit alleges that its primary insurer, Crum & Forster, has a duty to defend its directors and officers in the underlying liability suits. Defendant did not include Plaintiff in that lawsuit and has brought no separate action against Plaintiff. Whether Plaintiff has duty to defend would be at issue only if Defendant loses in its state court declaratory judgment action against Crum & Forster or the $2 million dollar liability limit on the Crum & Forster policy has been exhausted. Notwithstanding Defendant's notice letters to Plaintiff, which were required under the terms of the Excess Policy, Defendant has not tendered defense of the underlying actions to Plaintiff. Thus, unless and until it is determined that Crum & Forster has no duty to defend Defendant's directors and officers, Plaintiff's declaratory judgment action on its duty to defend is not justiciable.
CONCLUSION
The Court GRANTS Defendant's Motion to Stay. All proceedings in this case are stayed until further order of the Court.
IT IS SO ORDERED.