Court: District Court, S.D. Ohio; March 15, 2013; Federal District Court
Defendant Bluemile, Inc. owns a Columbus data center providing various services and holds an insurance policy from Plaintiff Hartford Casualty Insurance Company covering business interruption losses from July 8, 2010, to July 8, 2011. On February 10, 2011, an electrical surge caused by Atlas Industrial Contractors at Bluemile's facility led to temporary service disruption, with Bluemile claiming lingering issues thereafter. Bluemile submitted a claim to Hartford for income losses due to this interruption, asserting losses exceeding $7 million and entitlement to recovery up to the policy limit of $5,213,000. Hartford contends that the policy limits extended business interruption (EBI) coverage to 90 days post-restoration, having paid $514,898 for that period, while Bluemile disputes this limitation.
Procedurally, after unsuccessful mediation attempts, Bluemile's counsel notified Hartford on March 5, 2012, of potential litigation if the claim was not settled within 45 days. Following further discussions, Hartford filed for declaratory judgment regarding EBI coverage in federal court on April 27, 2012. Concurrently, on May 1, 2012, Bluemile initiated a state court action against Hartford and Atlas for negligence and other claims, which later led to Atlas filing its own suit against Bluemile for unpaid fees. The federal court granted Bluemile’s motion to dismiss the action, resulting in the case being dismissed.
Bluemile has filed a motion to dismiss Hartford’s federal Complaint for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Bluemile contends that the ongoing State Court Action and principles of discretionary jurisdiction in Declaratory Judgment Actions, along with abstention principles, warrant dismissal of federal jurisdiction in this matter. Hartford opposes this motion.
The Declaratory Judgment Act allows federal courts to declare the rights of parties in cases of actual controversy, providing discretion rather than an obligation to grant relief. The Supreme Court has affirmed that this discretion is significant, enabling courts to decide on the appropriateness of such actions even when jurisdictional prerequisites are met.
In evaluating whether to exercise jurisdiction under the Declaratory Judgment Act, courts in the Sixth Circuit consider five factors: (1) whether the action would settle the controversy; (2) whether it would clarify legal relations; (3) whether it serves merely as procedural fencing; (4) whether it would increase friction between federal and state courts; and (5) whether there is a more effective alternative remedy.
Regarding the first factor, Bluemile argues that a declaratory judgment would not resolve the entire controversy since the amount owed by Hartford would still be in dispute, even if the duration of EBI coverage is limited. Hartford counters that the Policy allows for the resolution of any loss amount disputes through third-party appraisal. The Sixth Circuit has established that a declaratory action can address insurance coverage issues not covered in state court, despite not resolving the underlying state court case.
A line of cases indicates that while declaratory actions can clarify the insurer-insured relationship, they do not resolve the ongoing controversy in state court. Granting declaratory relief to Evanston and Travelers will clarify insurance coverage and obligations to defend Bowling Green but will not clarify the relationships among other parties involved. The current action, tied to a pending Illinois lawsuit, will not resolve legal issues in that case and primarily concerns the duration of the EBI period rather than the amount of liability, which remains disputed in state court. Atlas, potentially affected by the damages determination, is not a party to the declaratory action, leading to concerns of piecemeal litigation and possible prejudice against Atlas. A more comprehensive resolution in state court is preferable as it allows for a single decision-maker to address all liability and damages issues. The clarity of legal relations is also under scrutiny; the district court's judgment must clarify relationships in the declaratory action and the underlying state action. A split in appellate precedent exists regarding whether the district court’s decision needs to clarify both relationships, with some cases finding that jurisdiction should not be exercised if the declaratory judgment does not clarify the broader legal relationships in the state action.
A decision from this Court regarding the scope of EBI coverage will only partially clarify the legal relationship between Bluemile and Hartford, as it will not definitively resolve the monetary obligations owed to Bluemile. While the judgment may provide some clarity between the insurer and insured, it is not expected to be more beneficial than Bluemile's concurrent request for a declaratory judgment in state court. Additionally, the Court's ruling would not clarify the relationships in the underlying state action involving Bluemile and Atlas or Hartford's potential subrogation rights against Atlas. Therefore, the second Grand Trunk factor does not support exercising jurisdiction in this case.
The third Grand Trunk factor examines whether the declaratory remedy is being utilized for "procedural fencing" or to create a race for res judicata. Both parties have accused each other of improper procedural tactics. Hartford filed its federal action shortly before Bluemile filed its state action, with Hartford suggesting that Bluemile's later filing aimed to undermine Hartford's federal relief rights. Bluemile counters that Hartford rushed to court upon learning of its imminent state action. An attorney affidavit from Bluemile highlights prior mediation attempts, suggesting Hartford was aware of Bluemile's intentions well before filing. The factor aims to prevent jurisdiction for declaratory plaintiffs who file first to gain a favorable forum. However, the Sixth Circuit cautions against assuming improper motives without evidence. In this case, evidence supports Bluemile’s claim that Hartford engaged in procedural fencing, particularly since both filings occurred within two business days, implying a race for forum selection.
Hartford's motivation for filing its action appears to be procedural fencing, as evidence suggests it knew it could adjudicate its claims in state court. This consideration weighs against federal jurisdiction. The analysis of increased friction between federal and state courts involves three subfactors: the importance of underlying factual issues for case resolution, the state court's superior capacity to evaluate these issues, and the relationship of these issues to state law. In this case, the issue at hand concerns the interpretation of an insurance policy clause, which is primarily a matter of state law. The state courts are more experienced in resolving such insurance contract interpretations and are better equipped to enforce relevant public policies. Additionally, an alternative remedy exists in the form of Bluemile's State Court Action, which addresses the same questions of contract interpretation. The state courts can adequately protect Hartford's interests, and there is no indication they would not treat these matters fairly. Consequently, all five Grand Trunk factors indicate that federal jurisdiction is not warranted, leading the Court to grant Bluemile’s Motion and dismiss Hartford’s declaratory judgment action. The case referenced is Bluemile, Inc. v. Atlas Industrial Contractors, Ltd. et al., with proper notice and service acknowledged in all pending actions. Hartford's motion to dismiss or sever claims in the State Court Action was denied, resulting in a stay of those claims pending the Court's decision.
