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First Mercury Insurance Co. v. Great Divide Insurance Co.
Citations: 241 F. Supp. 3d 1028; 2017 WL 977037; 2017 U.S. Dist. LEXIS 36501Docket: Case No. 16-CV-02114-LHK
Court: District Court, N.D. California; March 14, 2017; Federal District Court
The Court, presided over by Judge Lucy H. Koh, has addressed the motions for summary judgment submitted by Plaintiff First Mercury Insurance Company and Defendant Great Divide Insurance Company. The Court denies Great Divide's motion for summary judgment and strikes First Mercury's second cause of action concerning the breach of the implied covenant of good faith and fair dealing, rendering moot First Mercury's request for attorney's fees related to that claim. However, the Court grants First Mercury's motion for summary judgment. The case centers on a dispute regarding the insurance obligations of First Mercury and Great Divide in relation to an underlying state court action initiated by Amish and Kiran Patel against multiple defendants, including Elite Show Services Inc. and various entities associated with the San Francisco Forty Niners, collectively referred to as the "Underlying Defendants." First Mercury provided a commercial general liability policy to Elite for the period from September 21, 2014, to September 21, 2015, covering additional insureds as specified in written contracts. The policy includes coverage for liabilities arising from the acts or omissions of Elite or those acting on its behalf. In contrast, Great Divide issued a similar policy to the Forty Niner Defendants from March 1, 2014, to March 1, 2015, which also covers various parties, including the Santa Clara Defendants, based on contractual indemnifications. Additionally, a service agreement was established between Elite and the Forty Niners Stadium Management, under which Elite would provide security services at the stadium with prior approval from the Stadium Manager. The Service Agreement grants the Stadium Manager exclusive authority to determine staffing levels for events. Elite is required to indemnify the Santa Clara Defendants, Stadium Manager, and additional indemnities against all losses arising from breaches of the agreement, activities conducted by Elite or its personnel, and any injuries or damages caused by them. Elite must also maintain commercial general liability insurance that prioritizes the client’s coverage and includes the Forty Niners entities as additional insureds. In the Underlying Action, filed on September 25, 2015, the plaintiffs claim injuries sustained during a physical altercation at the Forty Niners stadium on October 5, 2014. They allege negligence against the Forty Niner Defendants and Elite for inadequate security services and assert a second claim against the Santa Clara Defendants for creating a dangerous condition of public property due to insufficient restroom facilities and failure to manage patron safety effectively. First Mercury has accepted the defense for all Underlying Defendants while reserving their rights. On April 21, 2016, First Mercury initiated a lawsuit against Great Divide, seeking a declaratory judgment that Great Divide had obligations including: (1) sharing defense costs in a related state court action, (2) participating in good faith settlement discussions, and (3) sharing indemnity costs. Great Divide responded with a motion to dismiss or stay the action on June 2, 2016, to which First Mercury replied on June 16, and Great Divide filed a rebuttal on June 23. On August 29, 2016, the court denied Great Divide's motion to dismiss regarding the sharing of defense costs, while dismissing without prejudice the claims related to settlement discussions and indemnity as not ripe. The court also denied Great Divide's request to stay the proceedings. Subsequently, on November 16, 2016, First Mercury filed a First Amended Complaint (FAC), reiterating its demand for a declaration of Great Divide's duty to defend and alleging a breach of the implied covenant of good faith and fair dealing. Cross-motions for summary judgment were filed by both parties on December 12, 2016, with oppositions submitted by January 24, 2017. The legal standard for summary judgment requires demonstrating no genuine issue of material fact, with the burden initially on the moving party to identify evidence supporting their claim. If the moving party meets this burden, the nonmoving party must present specific facts indicating a genuine issue for trial, focusing solely on material facts relevant to the case. The court is not responsible for independently searching the record for genuine issues of triable fact; the nonmoving party must specifically identify evidence that prevents summary judgment. If this is not demonstrated, the moving party is entitled to summary judgment as a matter of law. At the summary judgment stage, evidence must be viewed in favor of the nonmoving party, and any conflicting evidence from the moving party must be assumed true for the nonmoving party's claims. In diversity cases, federal courts are bound by the highest state court's decisions and must predict how it would resolve undecided issues. In the absence of clear authority, federal courts may look to state appellate decisions and other persuasive sources. They must assess state law based on existing authority without speculating on future changes. The discussion centers on three main issues from the parties' cross-motions for summary judgment: (1) whether the Defendant has a duty to defend the Plaintiff in an underlying action; (2) whether the Defendant breached the implied covenant of good faith and fair dealing by refusing to defend; and (3) the appropriateness of a stay. The Defendant contests the duty to defend, arguing that no such duty arose and that the policy's "primary and non-contributing" language limits its contribution to defense costs. The Plaintiff argues for a shared apportionment of defense costs and seeks a declaration of the duty to defend. Under California law, an insurer's duty to defend exists if any claims in the underlying lawsuit are potentially covered by the insurance policy, and this duty is broader than indemnification, arising as soon as defense is tendered. The Court's prior ruling on the Defendant's motion to dismiss determined that the claims in the state court action are potentially covered under insurance policies. Relying on Maryland Casualty Co. v. Nationwide Mutual Insurance Co., the Court noted that additional insured provisions provide limited vicarious liability coverage for acts or omissions of the named insured. The ruling emphasized that if the underlying action presents a possibility of vicarious liability for the additional insured due to the named insured's negligence, both insurance providers share a duty to defend. The Court reiterated that Maryland law applies to this case. The Plaintiff's insurance policy covers the additional insureds—Forty Niner Defendants and Santa Clara Defendants—only for liabilities caused by Elite's actions or those of its representatives. Similarly, the Service Agreement mandates that Elite indemnify the other defendants solely for liabilities connected to Elite's breaches or actions. The contract language does not impose broad liability on Elite but restricts it to liabilities linked to its conduct. The Court highlighted that there is a potential for liability against the Forty Niner Defendants and Santa Clara Defendants from the underlying state court action without implicating Elite. An example provided from the Underlying Complaint indicates that the Santa Clara Defendants are accused of creating an unreasonable risk of harm due to inadequate restroom facilities, which could lead to liability exclusive to them. The allegation is not attributable to Elite, which was contracted solely for security services at the Forty Niners Stadium during the incident. Therefore, liability for the alleged insufficient toilet facilities falls on the Defendant, not the Plaintiff. The Defendant fails to recognize that even if Elite was responsible at the facility with the inadequate toilets, the state court proceedings may show that the Underlying Plaintiffs’ injuries are not linked to Elite’s actions. This scenario creates a potential for liability on the part of the Santa Clara Defendants, which activates the Defendant’s obligation to defend the case under Maryland law. The Defendant contends there is no likelihood of indemnification due to claims regarding the Santa Clara Defendants creating a hazardous public property condition through inadequate patron screening and monitoring, which also implicates Elite’s security duties. While Elite may contribute to the damages in the second cause of action, this does not negate the potential liability of the Santa Clara Defendants based on restroom deficiencies, thus necessitating the Defendant to indemnify them. Consequently, since the claims could be covered under the Defendant’s policy, it has a duty to defend in the state court action. Additionally, the Defendant asserts that if it has a duty to defend, the Plaintiff's policy mandates that the Plaintiff cover all defense costs for the state court action. The Plaintiff's policy includes a provision stating that it is primary and non-contributory only if a written contract signed by both parties necessitates it. The relevant Service Agreement indicates that the Plaintiff's policy is primary and non-contributory concerning any policies held by the additional insured. In a previous motion to dismiss, the Defendant argued that all claims in the state court are linked to Elite’s provision of security, thereby making Elite's insurance policy primary and non-contributory. The Plaintiff countered that the claims were potentially covered by the Defendant’s policy but not by Plaintiff's policy with Elite. Maryland law governs the current case, establishing that the Defendant has an obligation to defend the Santa Clara Defendants because there is potential liability that falls under Defendant's insurance policy but not under Plaintiff's policy with Elite. The Court dismissed Defendant's argument that the 'primary and non-contributing' clause in Plaintiff's policy negates this duty, affirming that such language does not apply to defense costs associated with the Santa Clara Defendants' own negligence, as opposed to their vicarious liability for Elite's actions. The Maryland court clarified that the additional insured policy is primary only for vicarious liability situations. Furthermore, the Court addressed the issue of cost apportionment for defense in the underlying action, noting that the Maryland court had remanded the case to determine how defense costs would be allocated. It emphasized that equitable contribution aims to achieve fairness among coinsurers and prevent any insurer from gaining an undue advantage. Citing a Central District of California case, the Court highlighted that trial courts have discretion in selecting the method for allocating defense costs among insurers, taking into account various factors, including the nature of claims and relationships among insurers. Ultimately, the Court concluded that an equal shares method of cost allocation is appropriate, as indicated by the policies involved. The First Mercury policy includes a provision for "Other Insurance" that mandates contribution by equal shares unless a written contract specifies that coverage must be primary and non-contributory. The Defendant's policy similarly states that if other insurance allows for equal shares, it will adhere to that method. The Court has determined that the Plaintiff's policy does not establish primary and non-contributory status relative to the Defendant's policy, thus both policies will contribute equally. The underlying claims involve allegations against the Forty Niner Defendants and Elite regarding negligence related to security at the Forty Niners Stadium, suggesting the Plaintiff may have indemnity responsibilities. The second cause of action pertains to the Santa Clara Defendants' failures, with potential liability for both the Plaintiff and Defendant due to Elite's involvement in screening. The Court concludes that equal sharing of defense costs is appropriate given the claims, relationships, and policy language, finding no inequity in this approach. The Defendant's argument against resolving this issue at the summary judgment stage is dismissed, as no material fact issues are present, and the cited cases regarding indemnification costs are not applicable to defense cost apportionment. The Court determines that equal sharing of defense costs is warranted and grants Plaintiff's motion for summary judgment regarding Defendant's duty to defend and the allocation of defense costs. Defendant's motion for summary judgment is denied. Plaintiff claims that Defendant breached the implied covenant of good faith and fair dealing by failing to contribute to defense costs after the Court established a duty to defend. Both parties seek summary judgment on this claim, but the Court finds the claim procedurally improper. The original complaint contained three causes of action, two of which (related to good faith duty to settle and indemnification) were dismissed without prejudice. In the First Amended Complaint (FAC), Plaintiff added a new cause of action for breach of good faith based on Defendant's failure to comply with the prior order, which the Court views as a different claim from the dismissed one. Federal Rule of Civil Procedure 15 governs amendments to pleadings, and since the deadline to amend passed without Defendant's consent or the Court's leave, the Court strikes this second cause of action from the FAC. Even if the Court considered the claim, it would not succeed, as it is based on an equitable subrogation theory, which allows an insurer to recover costs from another insurer responsible for a loss. To prevail on an equitable subrogation claim, a plaintiff must establish eight elements: (a) the insured incurred a loss for which the defendant is liable, either directly or as the responsible party for the wrongdoer's actions; (b) the loss was not one for which the plaintiff insurer was primarily liable; (c) the insurer compensated the insured for the same loss for which the defendant is primarily liable; (d) the insurer's payment was made to protect its own interests, not as a volunteer; (e) the insured has a viable, assignable cause of action against the defendant that could have been pursued if not compensated; (f) the insurer experienced damages due to the defendant's actions; (g) justice necessitates that the loss be transferred from the insurer to the defendant, whose position is less equitable; and (h) the insurer's damages are a fixed amount, typically equal to what was paid to the insured. The doctrine of equitable subrogation aims to shift the financial burden from the insurer to the party ultimately responsible for the loss. In the case of Transcontinental Insurance Company, the California Court of Appeal addressed the applicability of equitable subrogation among insurers covering different risks. The court found that a primary insurer could seek reimbursement from an excess insurer for defense costs related to claims not covered by the primary insurer. However, in the current situation, the plaintiff has not claimed that it is not primarily liable for defense costs concerning both causes of action in the underlying state court case. The allegations against the defendants, including Elite, relate to their responsibilities for patron safety at the Forty Niners Stadium, indicating that Elite may have contributed to the harm alleged by the plaintiffs. Plaintiff is deemed “primarily liable” for defense costs due to a duty to defend all potentially covered causes of action, which undermines the second element of equitable subrogation. Consequently, the doctrine of equitable subrogation is not applicable as each insurer retains primary responsibility for defense. Even if the breach of the implied covenant of good faith and fair dealing claim is procedurally sound, summary judgment against Plaintiff would be granted since it fails as a matter of law. The request for attorney’s fees related to this failed cause of action is denied as moot. Defendant has renewed a request for a stay, referencing a previous motion to dismiss. District courts possess discretion to dismiss or stay federal declaratory judgment actions when state court proceedings can better resolve the issues. The court evaluates this using the three Brillhart factors: avoiding unnecessary state law determinations, discouraging forum shopping, and preventing duplicative litigation. In a prior order, the court found these factors did not support a stay; the declaratory judgment claim involves settled state law principles, no forum shopping was evident, and the case is not duplicative of state court issues since the duty to defend is based on potential liability rather than actual liability. Defendant's renewed stay request argues the coverage issue is now linked to significant issues in the underlying Patel action, citing an express indemnity provision in the Service Agreement where Elite agreed to indemnify the Forty Niner and Santa Clara Defendants for liabilities arising from Elite's actions. In the state court action, the Forty Niner Defendants and Santa Clara Defendants have filed cross-claims against Elite for express indemnity, which mandates that Elite indemnify them for any actions related to their work. If these cross-claims succeed, it would indicate that their liability stems from Elite’s actions, thus triggering coverage under Plaintiffs' additional insured policy rather than Defendant’s policy. Despite these cross-claims, the prior Brillhart determination remains unchanged. Although Defendant does not specify which Brillhart factor applies, it appears to invoke the third factor concerning the duplicative nature of the claims. However, the court finds that Defendant has a duty to defend as long as there is a potential duty to indemnify, following the precedent set in Buss. This potential obligation persists regardless of the eventual determination of indemnification, affirming that the existence of cross-claims does not impact the court’s earlier ruling against a stay of proceedings. Consequently, the court denies Defendant’s renewed request for a stay. Additionally, the court addresses Defendant’s evidentiary objections to paragraphs 2 through 5 of the Tittman Declaration in opposition to Plaintiff's motion for summary judgment. Defendant argues these statements are inappropriate regarding mediation, disputed in truth, and irrelevant. The court finds no basis for the objection related to mediation, as the statements pertain to proposals made outside mediation. The objection regarding the truth of the statements is also insufficient, as the purpose of summary judgment is to contest the veracity of evidence presented. Lastly, the relevance objection fails, as the evidence is deemed relevant if it has any tendency to affect the determination of consequential facts in the case. Plaintiffs allege breach of the implied covenant of good faith and fair dealing due to Defendant's refusal to contribute to the defense of an underlying action, leading to increased costs for Plaintiffs. The Court overrules Defendant's objections to paragraphs 2 to 5 of the Tittman Declaration, which relate to these costs. The Court also overrules Defendant's objection to paragraph 6 of the Tittman Declaration, as the fees and costs incurred are relevant to potential damages from the alleged breach. Regarding the Kirkness Declaration, Defendant objects to paragraphs 8 and 10, claiming they are argumentative and contain legal conclusions. The Court sustains Defendant’s objection to the phrase in paragraph 8 asserting that participation in the defense aligns with a Court order but overrules objections to the remainder of that paragraph, noting its relevance to Plaintiffs' claims. Conversely, the Court sustains Defendant's objection to paragraph 10, which includes argumentative statements about Defendant's non-compliance with a Court order. Finally, Defendant objects to Plaintiffs' request for judicial notice and accompanying exhibits due to lack of proper authentication. The Court notes that the request fails to meet requirements under Civil Local Rule 7-5(a) and Federal Rule of Civil Procedure 56(c)(4), as it is not supported by an appropriate affidavit or declaration. The Court has sustained the Defendant's objection to the request for judicial notice and its exhibits. Consequently, the Defendant's Motion for Summary Judgment is denied, the Plaintiff's second cause of action for breach of the implied covenant of good faith and fair dealing is struck, and the Plaintiff's request for attorney’s fees related to that cause of action is denied as moot. However, the Court grants the Plaintiff's Motion for Summary Judgment. In a prior order regarding the Defendant's motion to dismiss, judicial notice was taken of the complaint from the underlying state court action. The Defendant argued that Elite was responsible for maintaining qualified personnel at the stadium and offsite parking areas. However, the Service Agreement cited by the Defendant does not provide evidence supporting that Elite had responsibilities at the parking areas on the incident date. The Plaintiff submitted a declaration from Gus Kontopuls, Elite's Qualified Manager, stating that Elite was not responsible for security at the parking lots on that day. The Defendant did not contest this declaration or provide additional evidence. Therefore, the record indicates that Elite did not provide services at those parking lots on the relevant date. The Court elaborates on insurance policy principles, noting that a primary policy must pay before any excess policies and distinguishes between non-contributing policies and equitable contribution among insurers. It clarifies that Plaintiff has a duty to defend both causes of action in the state court action, which does not negate Defendant's potential liability for the second cause of action. Additionally, the Ninth Circuit’s considerations for dismissing or staying actions for declaratory relief include whether the action resolves all aspects of the controversy, its usefulness in clarifying legal relations, potential procedural fencing, the risk of entanglement between federal and state courts, convenience for the parties, and the availability of other remedies.