Century Indemnity Co. v. Marine Group, LLC

Citations: 848 F. Supp. 2d 1229; 2012 U.S. Dist. LEXIS 65891; 2012 WL 256552Docket: Civ. No. 08-1375-AC

Court: District Court, D. Oregon; January 26, 2012; Federal District Court

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Excess insurance policies issued by Federal Insurance Company, Chicago Insurance Company, and Arrowood Indemnity Company to Northwest Marine Iron Works (NWMIW) are at the center of a legal dispute. Century Indemnity Company filed a declaratory judgment action against The Marine Group, LLP, Northwest Marine, Inc., and NWMIW, seeking clarification on its rights and obligations under its policy with NWMIW. BAE Systems San Diego Ship Repair joined this action, asserting third-party claims against several insurers for breach of contract and seeking a declaratory judgment regarding the insurers' defense and indemnification duties.

The Excess Insurers filed a motion for summary judgment, claiming that the breach of contract claims and the request for declaratory judgment are not ripe for adjudication because the third-party plaintiffs (TPPs) have not shown exhaustion of the primary insurance policies. In response, the TPPs argued that the court should exercise its discretion to hear the declaratory judgment claim for reasons of fairness and judicial economy.

The court found that the breach of contract claim is not ripe and should be dismissed without prejudice. However, it determined that the request for declaratory judgment is ripe for adjudication and will be considered. The legal standard for summary judgment requires the movant to demonstrate the absence of any genuine dispute regarding material facts, and if successful, the burden shifts to the nonmoving party to identify specific facts establishing a genuine issue for trial. The nonmoving party cannot rely solely on allegations or unsupported assertions, and the evidence must be viewed favorably towards them. Summary judgment is appropriate when, based on the totality of the record, no rational trier of fact could find in favor of the nonmoving party.

TPPs are considered potentially responsible parties under the EPA's action related to environmental damage at the Portland Harbor Superfund Site, with estimated damages exceeding $1 billion, potentially rising to $2 billion when including investigation and Natural Resource Damages (NRDs). The EPA has identified at least 141 potentially responsible parties (PRPs). TPPs possess excess insurance policies providing coverage after the primary policy reaches $20.5 million. According to Oregon case law, excess insurance policies are activated only after primary insurance is exhausted. The duty to indemnify differs from the duty to defend, with potential indemnification arising from trial outcomes even without a duty to defend being established initially. Excess Insurers argue that TPPs' breach of contract claim is invalid because their duty to indemnify has not been triggered until the underlying policies are exhausted, which TPPs have not demonstrated. TPPs contend that the Insurers' denial of coverage constitutes an unequivocal repudiation of contract obligations, a matter that should be resolved by a jury rather than through summary judgment.

Both TPPs and Excess Insurers reference Paulsell v. Cohen to define contract repudiation, requiring clear, unconditional, and final refusal to perform contractual duties. Oregon law mandates that repudiation must be direct and cannot be inferred from the assertion of affirmative defenses. In situations where underlying policies remain unexhausted but an excess insurer has repudiated its obligations, a declaratory judgment regarding coverage may be warranted, although a breach of contract claim would be premature. Consequently, TPPs' breach of contract claim against the Excess Insurers is dismissed without prejudice.

TPPs also seek a declaratory judgment on the Excess Insurers' duty to indemnify them in an environmental action. The Excess Insurers contend that this request is not ripe as it is based on speculative future damages that may exceed primary policy limits, arguing that adjudicating this matter would impose unnecessary legal costs and violate judicial economy principles. TPPs counter that their request is grounded in the Declaratory Judgment Act, which allows federal courts to declare rights in cases of actual controversy. The court must assess whether a case or controversy exists and if it should exercise jurisdiction over the matter.

A dispute between an insurer and its insured typically constitutes a case or controversy that satisfies jurisdictional requirements under Article III, as established in prior cases such as Government Employees Insurance Co. v. Dizol and American National Fire Insurance v. Hungerford. However, for such disputes to be properly adjudicated, they must meet ripeness standards aimed at avoiding premature court involvement in abstract disagreements. Ripeness involves both constitutional aspects—concerning sufficient injury and standing—and prudential considerations—regarding the adequacy of the record for review. 

The ripeness of claims against excess insurers remains ambiguous if primary policies have not been exhausted, although a practical likelihood of reaching excess policies can render claims ripe. Courts emphasize the likelihood of contingencies occurring rather than their certainty, allowing claims against excess insurers to proceed despite potential liabilities. This was exemplified in E.R. Squibb & Sons, Inc. v. Lloyd's Companies, where substantial damages and pending claims indicated a likelihood of excess policy involvement, thereby confirming jurisdiction under the Declaratory Judgments Act. Similarly, in Connecticut General Life Insurance Co. v. Zurich American Life Insurance Co., the court found claims against excess insurers ripe based on the insured's incurred damages and the potential for future claims, suggesting a reasonable expectation for triggering excess coverage.

The Superior Court of Delaware established a framework for assessing the ripeness of issues for adjudication, emphasizing a balance between the Declaratory Judgment Act’s objective of early dispute resolution and the principles of judicial economy and restraint. In Hoechst Celanese Corp. v. National Union Fire Insurance Co., the court clarified that while absolute proof of triggering an excess insurer's policies is unnecessary, there must be a reasonable likelihood that claims against the defendant will materialize. The court noted significant expenditures exceeding a $20 million threshold, supporting the case's ripeness.

Conversely, in Iolab Corp. v. Seaboard Surety Co., the Ninth Circuit ruled that claims against excess insurers were improperly dismissed due to unexhausted primary insurance policies, as California law mandates full exhaustion of primary policies before a secondary policy's liability arises. The underlying claims in Iolab had settled at $14.5 million, with primary coverage totaling $36 million, which far exceeded the settlement amount. The Ninth Circuit upheld the dismissal, stating that Iolab could not pursue excess insurers until primary insurers' obligations were resolved. The court also rejected treating Iolab's action as a request for declaratory relief, citing California law's inapplicability and the unnecessary costs that would burden excess insurers if required to defend against claims that may not activate their coverage.

In a related case, Schnitzer Investment Corporation faced liability for environmental contamination amounting to $3.2 million, having received a $2.3 million settlement from a prior property owner, leaving a remaining liability of $900,000. The excess insurer, Certain Underwriters at Lloyd's of London, sought dismissal, arguing that Schnitzer's $4 million primary insurance precluded the possibility of exhausting primary coverage and triggering excess policies. Schnitzer countered with arguments regarding horizontal versus vertical exhaustion, asserting that the ultimate liability was undetermined.

The court distinguishes the issues in this case from those in Schnitzer, noting that the Excess Insurers have not effectively demonstrated how the county circuit court's order impacts the current decision. It acknowledges that exhaustion of primary policies is generally required before an excess insurer is obligated to indemnify. However, the court refrains from delving into the specifics of another insurance dispute lacking binding authority. It confirms that the primary policies have not been exhausted and must determine if there is sufficient likelihood that the excess policies will be activated to warrant jurisdiction for a declaratory judgment. Other courts have employed a "substantial or reasonable likelihood" standard for this determination. With potential liability exceeding $2 billion and the uncertainty around the total liability of potentially responsible parties (TPPs), the court assesses that it is substantially likely the excess policies will be invoked, establishing a genuine case or controversy.

Subsequently, the court considers its discretion to entertain the request for declaratory judgment. Citing precedents, it explains that the district court must weigh judicial administration, comity, and fairness. Including the Excess Insurers promotes judicial economy, as their dismissal would strain judicial resources. There are no comity issues raised, and their continued involvement does not unfairly impact the litigants. Thus, the court decides to exercise its discretion to grant declaratory relief.

In conclusion, the court partially grants and partially denies the Excess Insurers' Motion to Dismiss, clarifying that the motion is more appropriately classified as one for summary judgment. It acknowledges TPPs' argument that any dismissal motion relying on evidence beyond the pleadings should be treated as a motion for summary judgment. The court agrees with this assessment, referencing relevant case law, and notes that primary insurers have denied coverage except for Argonaut.