GOLDEN EAGLE INSURANCE COMPANY, Plaintiff-Appellant, v. TRAVELERS COMPANIES, Defendant-Appellee

Citations: 95 F.3d 807; 1996 WL 502100Docket: 94-56211

Court: Court of Appeals for the Ninth Circuit; September 20, 1996; Federal Appellate Court

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Golden Eagle Insurance Company initiated a declaratory judgment action in state court, seeking a ruling that Charter Oak Fire Insurance Company was obligated to defend Aero-Crete, Inc. in a construction defect lawsuit. Charter Oak removed the case to federal court, where the district court awarded summary judgment to Charter Oak, ruling it had no duty to defend Aero-Crete. Golden Eagle appealed, questioning the district court's exercise of diversity jurisdiction in this state law declaratory relief action.

The Ninth Circuit held that the district court had erred by not exercising its discretion under the Declaratory Judgment Act to determine whether to hear the case. However, this error was deemed harmless since the case had concluded, and the district court's decision was correct on the merits. The court confirmed that diversity jurisdiction existed, and it affirmed the district court’s decision.

In the underlying facts, Aero-Crete performed concrete work for a San Diego apartment building, after which the owner, Pieri-Debbas Enterprises, faced a lawsuit from a subsequent owner, Dale Village Apartment Company, over alleged construction defects. Pieri-Debbas cross-complained against Aero-Crete for indemnity. Golden Eagle had defended Aero-Crete, while Charter Oak denied coverage based on the timing of the alleged damages relative to its policy. Ultimately, Aero-Crete received a defense verdict in the related state court action, which has since concluded.

Aero-Crete initiated a state court action against Charter Oak in the San Diego Superior Court, seeking damages for Charter Oak's alleged failure to defend it against Pieri-Debbas's cross-complaint. The claims included breach of an implied covenant of good faith and fair dealing, interference with economic advantage and contractual relationships, malicious prosecution, abuse of process, and a request for declaratory relief. Charter Oak subsequently removed this case to the United States District Court for the Southern District of California, where it is currently pending.

Golden Eagle is appealing a district court's summary judgment decision in its own declaratory relief action against Charter Oak. The appeal revolves around the applicability of the Declaratory Judgment Act, which does not independently confer federal jurisdiction, necessitating an independent jurisdictional basis, which, in this case, is diversity of citizenship.

The district court has subject matter jurisdiction due to meeting the diversity jurisdiction requirements. However, it must consider whether to remand the case back to state court based on judicial discretion. Federal courts generally have a strong obligation to exercise jurisdiction, but there are exceptions, particularly when state law questions are involved, as established in Brillhart v. Excess Ins. Co. of America. The Supreme Court clarified that the Declaratory Judgment Act offers a discretionary remedy, allowing district courts to stay or dismiss actions for declaratory judgments, particularly when related state court proceedings are ongoing, as supported by prior circuit decisions.

The Brillhart doctrine traditionally applies to cases with parallel state proceedings, but the Declaratory Judgment Act does not mandate such parallelism for a district court to decline jurisdiction. While the presence of a parallel state case is significant for considerations of practicality and judicial efficiency, its absence does not preclude federal court discretion. In evaluating whether a district court has abused its discretion in hearing a declaratory relief action, courts look for specific circumstances warranting federal jurisdiction over state matters. If a district court fails to consider its jurisdictional discretion, remanding the case is appropriate.

In the case of Karussos, the district court addressed the merits without first assessing its jurisdiction, leading to a conclusion that no facts justified federal jurisdiction. The court vacated the district decision and remanded for dismissal, reflecting a similar situation here. The parties desire a resolution on the merits rather than remand or dismissal. However, they have not identified circumstances justifying the district court's exercise of discretion to hear the case.

Golden Eagle argues the underlying state action is not parallel since Charter Oak is not a party and the issues differ, but previous rulings indicate that shared factual circumstances are sufficient for parallelism. Charter Oak claims the district court lacked discretion to decline jurisdiction because the case originated in state court and was removed to federal court, asserting that this removal was appropriate under diversity jurisdiction. However, the court maintains that the origin of the case does not affect the district court's discretion under the Declaratory Judgment Act, which allows for dismissal even when jurisdictional prerequisites are met.

Federal district courts have the authority to remand cases to state courts based on grounds other than those specified in 28 U.S.C. § 1447(c), as established by various Supreme Court and federal appellate court decisions. Charter Oak contends that the essence of Golden Eagle's suit is a damages request, rendering the declaratory relief claim unnecessary, but this argument was previously rejected in *Karussos*. Similar to *Karussos*, Golden Eagle's complaint seeks a declaration regarding the parties' duties concerning defense and indemnity. Charter Oak also argues that since a related action is pending in the same federal district court, it would be inefficient to dismiss this case for state court re-filing. However, both *Karussos* and *Hungerford* clarify that the propriety of jurisdiction is assessed at the time of filing, not appeal. The district court should have declined to entertain the action under the Declaratory Judgment Act, and its failure to do so constituted an error. Although the district court granted summary judgment for the insurer, declaring no coverage under its policy, this decision was also deemed an abuse of discretion. Even if a proper jurisdiction exercise occurs, if the merits are correctly resolved, vacating the judgment to avoid duplicative efforts may sometimes be considered wasteful. In this case, however, the district court's summary judgment was erroneous, necessitating remand.

In the case reviewed, the district court's summary judgment was deemed correct despite an abuse of discretion in retaining and deciding the case. The court properly applied state law to undisputed facts, leading to a conclusion that would likely be the same in state court. Under Rule 61 of the Federal Rules of Civil Procedure, errors that do not affect substantial rights can be disregarded, a principle upheld in appellate courts. The district court's error was considered harmless, and the appeal was evaluated on its merits.

The review of the summary judgment was conducted de novo, with the evidence viewed favorably for the nonmoving party. Under California law, an insurer has a duty to defend any suit with potential coverage, which is broader than the duty to indemnify. The determination of this duty involves comparing complaint allegations with the insurance policy terms, including considering extrinsic facts at the lawsuit's inception.

Charter Oak argued that the underlying complaint indicated an 'occurrence' after its policies expired. In California, the occurrence is defined as when a party is actually damaged, not when the wrongful act occurred. The complaint indicated that defects were discovered less than three years before its filing on January 15, 1992, suggesting the earliest manifestation of defects was January 15, 1989. Since Charter Oak's last policy expired on August 1, 1988, the complaint did not allege defects arising during the policy period.

Golden Eagle presents extrinsic evidence to support its claims, including a December 9, 1986, letter from a developer to Aero-Crete regarding improperly set concrete, a March 25, 1987, letter from a subcontractor citing extra expenses due to issues with lightweight concrete, a March 14, 1988, letter from the developer indicating failing concrete floors, and a chart from plaintiff’s counsel outlining necessary repairs to the floors. Charter Oak's insurance policy defines "property damage" as physical injury or destruction of tangible property during the policy period, including loss of use, but excludes coverage for damage to the insured's products and for damage arising from faulty workmanship. Courts have ruled that faulty workmanship is not considered "property damage" under California law, and exclusions in the policy negate coverage for repairing the insured's own work. The letters from Golden Eagle indicate defective workmanship, which is excluded from coverage, and the chart implies extensive repairs that do not create coverage where none exists. Ultimately, neither the underlying complaint nor the extrinsic evidence suggests potential coverage under Charter Oak's policy, leading to the conclusion that the district court's judgment is correct under California law, despite an abuse of discretion in exercising jurisdiction. A remand would be unnecessary and waste judicial resources.

The court affirmed the decision regarding the duty of an insurance carrier to defend a lawsuit if there is any potential for coverage under its policy, as established in Montrose Chemical Corp. v. Superior Court. This duty is broader than the duty to indemnify and is determined by comparing the allegations in the complaint with the policy terms. Extrinsic facts can be considered when assessing potential coverage at the lawsuit's inception.

In the case at hand, Charter Oak argued that the underlying complaint alleged an occurrence after its policy expired. The court clarified that in California, the time of an occurrence is when the damage becomes apparent, not when the wrongful act occurred. The underlying complaint, filed on January 15, 1992, claimed defects discovered less than three years prior, suggesting the earliest manifestation was January 15, 1989, which was after Charter Oak's last policy period ended on August 1, 1988. 

Golden Eagle contested this by presenting extrinsic evidence, including letters from the developer and subcontractors regarding concrete issues from December 1986 to March 1988, and a chart indicating necessary repairs, arguing that these documents established the timing of the defects. However, the court concluded that the complaint did not allege any defect occurring within Charter Oak's policy period.

Charter Oak's insurance policy defines "property damage" as either physical injury or destruction of tangible property during the policy period, including loss of use, or loss of use of tangible property not physically harmed but caused by an occurrence during the policy period. The policy includes several exclusions: Exclusion N removes coverage for damages to the Named Insured's products; Exclusion A(2)d excludes damages to parts of property undergoing repairs due to the insured's faulty workmanship; and Exclusion A3 eliminates coverage for property damage related to the insured's own work or materials used therein. California courts have ruled that faulty workmanship does not constitute property damage under relevant law, asserting that repairs needed due to the insured's defective work are a business risk and cannot create coverage. 

Evidence cited by Golden Eagle indicates defective workmanship, which is excluded from coverage. Proposed repairs that require removal and replacement of floor coverings do not establish coverage where it does not exist. The conclusion drawn is that neither the underlying complaint nor any extrinsic evidence suggests potential coverage under Charter Oak’s policies, negating the need to consider other arguments by Charter Oak. The district court's exercise of jurisdiction is deemed an abuse of discretion but is considered harmless since the case has concluded and the judgment aligns with California law. A remand would be redundant and waste judicial resources. The court affirmed the judgment.