Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_18-cv-00707/USCOURTS-casd-3_18-cv-00707-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332in Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

CAPITOL SPECIALTY INSURANCE 

CORPORATION,

Plaintiff,

v.

AMTRUST INTERNATIONAL 

UNDERWRITERS LIMITED, et al.,

Defendants;

_____________________________________

AND RELATED COUNTERCLAIMS

AND CROSS-CLAIMS.

Case No. 3:18-cv-707-L-WVG

ORDER GRANTING MOTION 

TO STAY

Pending before the Court in this insurance action is a motion to stay filed by 

Defendants and Cross-Defendants McAvoy Construction, Inc. and Russell McAvoy 

(collectively "McAvoy"). Plaintiff/Counter-Defendant Capitol Specialty Insurance 

Corporation ("Capitol") and Defendant/Counterclaimant/Cross-Claimant AmTrust 

International Underwriters Limited ("AmTrust," collectively "Insurers") each filed 

an opposition. McAvoy replied. For the reasons which follow, McAvoy's motion 

to stay is granted.

/ / / / /

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In May 2013, McAvoy was retained by the Ellen Joy Marks Trust ("Marks") 

as a general contractor on a custom residential project located in San Diego. The 

project was to pass final inspection and be substantially completed around 

September 2014. Due to alleged faulty work, the final inspection did not take place 

until November 2015. In March 2016, Ms. Marks moved into the residence

although the project was still not completed. In addition to prior defective work 

which had not been remedied, after moving in, Ms. Marks discovered new defects. 

She also found that major and minor work remained to be done. On August 11, 

2016, she sent a notice of breach and a demand to cure to McAvoy. On November 

14, 2016, she filed a construction defect lawsuit in state court captioned Marks v. 

McAvoy Construction, Inc. et al., San Diego County Superior Court case no. 37-

2016-00039955-CU-BC-CTL, alleging breach of contract, breach of the implied 

covenant of good faith and fair dealing, building code violations, negligence and 

accounting (the "Underlying Action"). She produced a 23-page list of defects 

which she attributed to McAvoy and its numerous subcontractors. 

McAvoy tendered the defense of the Underlying Action to its Insurers. 

AmTrust had issued commercial general liability policies to McAvoy with effective 

dates of June 30, 2014 to June 30, 2016. Capitol had issued a commercial general 

liability policy with effective dates of May 6, 2016 to May 6, 2017. Capitol agreed 

to defend McAvoy with a reservation of rights. 

Shortly thereafter, Capitol filed the instant action against McAvoy and 

AmTrust seeking a declaratory judgment of no duty to defend and no duty to 

indemnify McAvoy, declaratory judgment that AmTrust had a duty to defend, as 

well as equitable contribution and indemnity from AmTrust. After this action was 

filed, AmTrust agreed to defend McAvoy in the Underlying Action and reimburse

Capitol for an equitable share of the defense costs, both with a reservation of rights. 

In this action, AmTrust cross-claimed against McAvoy seeking a declaratory 

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judgment of no duty to defend and no duty to indemnify and reimbursement of 

defense costs. AmTrust also counterclaimed against Capitol seeking a declaratory 

judgment of no duty to defend and no duty to indemnify as well as equitable 

contribution. The Court has diversity jurisdiction over all claims pursuant to 28 

U.S.C. §1332.

McAvoy filed the pending motion requesting the Court to stay this action 

pending the resolution of the Underlying Action. The motion is based primarily on 

the overlap in factual issues and duplicative discovery. Both Insurers oppose. 

Although they concede that liability and coverage actions always entail a certain 

amount of factual overlap, they argue that this action should not be stayed. At the 

very least, they claim, they should be allowed to file summary judgment motions on 

the duty to defend issues, which, according to them, can be resolved completely 

separate and apart from the Underlying Action.

The Declaratory Judgment Act, 28 U.S.C. §2201, confers on federal courts

unique and substantial discretion in deciding whether to declare the 

rights of litigants. On its face, the statute provides that a court "may

declare the rights and other legal relations of any interested party 

seeking such declaration” . . .. The statute's textual commitment to 

discretion, and the breadth of leeway . . . distinguish the declaratory 

judgment context from other areas of the law in which concepts of 

discretion surface. [It is] an enabling Act, which confers a discretion 

on the courts rather than an absolute right upon the litigant.

Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995) (emphasis in original, quoting 

28 U.S.C. §2201(a); other citations and internal quotation marks omitted). 

"Consistent with the nonobligatory nature of the remedy, a district court is 

authorized . . . to stay or dismiss an action seeking declaratory judgment." Id. at 

288. As requested here, a stay is often preferable to dismissal "because it assures 

that the federal action can proceed without risk of a time bar if the state case, for 

any reason, fails to resolve the matter in controversy." Id. n.2. When parallel state 

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court proceedings are pending, "presenting an opportunity for ventilation of the 

same state law issues," the district court may stay the case in federal court to allow 

for completion of the state court case. Id. at 290 (discussing Brillhart v. Excess Ins. 

Co. of Am., 316 U.S. 491 (1942)). "[F]ederal courts should generally decline to 

entertain reactive declaratory actions." R.R. Street & Co. Inc. v. Transport Ins. Co., 

656 F.3d 966, 976 (9th Cir. 2011). Three factors first articulated in Brillhart bear 

upon the decision whether to stay (or dismiss) a declaratory relief action: avoiding 

needless determination of state law issues; discouraging forum shopping; and 

avoiding duplicative litigation. Id. at 975.

The pending action presents insurance coverage and contribution issues

while the Underlying Action presents liability issues. All claims are asserted under 

California law. Neither the parties named, nor the legal claims alleged in the 

Underlying Action and in this coverage action are identical. The Insurers latch on 

to this and claim that at least the duty to defend issues are independent of the issues 

raised in the Underlying Action. In their opposition briefs both Insurers point to 

their respective definitions of occurrence and pre-existing occurrence exclusions, 

arguing that the timing of the alleged damage is central to their duty to defend 

claims while irrelevant to any claims raised in the Underlying Action. 

The Insurers' opposition is based on an oversimplified view of construction 

defect litigation, especially in light of the 23-page list of defects produced by 

Marks, which attributes the defects not only to McAvoy but also to its numerous 

subcontractors. It is beyond question that the Underlying Action will entail 

litigation of each alleged defect. It seems patently unnecessary to cover the same 

ground in this action, even if, as Insurers contend, all they are interested in in this 

action is the timing of each defect. 

Moreover, upon review of Capitol's complaint and AmTrust's cross-claim, it 

is apparent that the Insurers intend to litigate their duties to defend on additional 

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grounds than merely the timing of each occurrence, which grounds they intend to

present "based on the . . . evidence, documents, testimony, expert reports, and other 

information developed in the Underlying Action." (See, e.g., doc. no. 1 at 10; see 

also id. at 10-11; doc. no. 8 at 11-12.) The actions are therefore intertwined at the 

point of factual issues with direct bearing on the declaratory relief claims presented 

in this Court. 

Finally, “[t]he differences in factual and legal issues between the state and 

federal court proceedings are not dispositive.” Polido v. State Farm Mut. Auto Ins. 

Co., 110 F.3d 1418, 1423 (9th Cir. 1997), overruled on other grounds in Gov't 

Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998). This is because the 

Insurers "could have presented the issues [they] brought in federal court in a 

separate action to the same court that will decide the underlying tort action." 

Polido, 110 F.3d at 1423. The dispositive question is "whether there was a 

procedural vehicle available to the insurance company in state court to resolve the 

issues raised in the action filed in federal court." Id. The Insurers have presented 

no reason, and the Court is aware of none, why they could not have raised the same 

coverage issues in a declaratory relief action filed in state court. The issues 

presented here could be "ventilated" in the Underlying Action. 

/ / / / /

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For the foregoing reasons, the Brillhart factors favor staying this action 

pending the conclusion of the Underlying Action.1 McAvoy's motion to stay is 

granted as follows:

1. This action is stayed pending the conclusion of Marks v. McAvoy 

Construction, Inc. et al., San Diego County Superior Court case no. 37-2016-

00039955-CU-BC-CTL ("Underlying Action").

2. No later than ninety (90) days of the filing of this Order or entry of 

final judgment in the Underlying Action, whichever first occurs, Capitol Specialty 

Insurance Corporation and AmTrust International Underwriters Limited shall 

jointly file a status report advising this Court of the status of the Underlying Action. 

Failure timely to comply with this provision may result in the dismissal of this 

action, including the counterclaims and cross-claims.

IT IS SO ORDERED.

Dated: October 31, 2019

 

1 Although the Court may also consider other factors, "the three Brillhart

factors remain the philosophic touchstone." Dizol, 133 F.3d at 1225. The other 

factors are “whether the declaratory action will settle all aspects of the controversy; 

whether the declaratory action will serve a useful purpose in clarifying the legal 

relations at issue; whether the declaratory action is being sought merely for the 

purposes of procedural fencing or to obtain a ‘res judicata’ advantage; or whether 

the use of a declaratory action will result in entanglement between the federal and 

state court systems. In addition, the district court might also consider the 

convenience of the parties, and the availability and relative convenience of other 

remedies.” Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 672 (9th Cir. 2005) 

(quoting Dizol, 133 F.3d at 1225 n.5). None of the foregoing factors counsel 

against granting McAvoy's motion.

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