Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-01611/USCOURTS-casd-3_12-cv-01611-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgement

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

NAVIGATORS SPECIALTY INSURANCE

COMPANY,

Plaintiff,

CASE NO. 3:12-cv-1611-GPC-JMA

ORDER:

(1) GRANTING DEFENDANT

CRMBC’S MOTION TO STAY

(2) DENYING DEFENDANT

CHSI’S MOTION TO DISMISS

(3) DISMISSING PLAINTIFF’S

MOTION TO STRIKE 

[DKT. NOS. 3, 9, 25]

vs.

CHSI OF CALIFORNIA, INC., et al.,

Defendant.

On August 28, 2012, Defendant California Restaurant Mutual Benefit Corp. (“CRMBC”)filed

a motion to dismiss Plaintiff’s complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt.

No. 3.) On August 29, 2012, Defendants CHSI filed a motion to dismiss Plaintiff’s complaint

pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. No. 9.) On September 25, 2012, Plaintiff

filed an ex parte motion to strike Defendants’ notice of joinder. (Dkt. No. 25.) On February 1, 2013,

the Court held a hearing on these pending motions. For the reasons set out below, the Court hereby

GRANTS Defendant CRMBC’s motion to stay, DENIES CHSI’s motion to dismiss, and

DISMISSES Plaintiff’s motion to strike. 

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I. BACKGROUND

On or around September 16, 2004, California Restaurant Mutual Benefit Corporation

(“CRMBC”) entered into a Management Services Contract with CHSI for the performance of

underwriting services. CRMBC is an organization formed by a group of related California

businesses to operate a group workers’ compensation self-insurance fund that pools compensation

liabilities and provides a common benefit delivery system for its members. CHSI was hired by

CRMBC as a business experienced in the management and operation of self-insured groups. On

March 28, 2012, CRMBC filed a lawsuit in the Superior Court of California against CHSI and

others, alleging breach of contract and other claims. Prior to the initiation of the lawsuit, CHSI on

July 8, 2011, provided notice to their insurer Navigators Specialty Insurance Company

(“Navigators”) of the potential claim by CRMBC. After initial review, Navigators agreed to treat

the July 8, 2011 letter as notice of a potential claim under the policy agreement. On April 17,

2012, Navigators advised that it would provide CHSI with a defense in the CRMBC action, subject

to a complete reservation of rights, including the right to withdraw from the defense and/or seek

reimbursement.

On July 28, 2012, Navigators filed this insurance coverage lawsuit, seeking declaratory

judgment regarding no duty to defend or indemnify; applicable limit of liability; and other

provisions that may bar or limit coverage. (Dkt. No. 1.) In particular, Navigators seeks judgment

that there is neither coverage for, nor a duty to defend, the Defendant/Insured CHSI under the

Policy agreement in connection with the underlying state court action California Restaurant Mutual

Benefit Corporation v. CHSI of California, Inc., et al., 37-2012-00052274-CU-BC-NC. (the

“CRMBC Action.”)

Pending before this Court are two motions to dismiss. In the first-filed motion to dismiss,

CRMBC seeks an order to dismiss Navigators’ claim or in the alternative an order to stay until the

underlying liability action is fully adjudicated. (Dkt. No. 3.) CRMBC first asserts that Navigators’

complaint fails to state a claim or proper ground upon which a declaratory judgment can or should

be granted under the Declaratory Judgment Act, 28 U.S.C. § 2201 & 2202 (“DJA”), and therefore

the action is entitled to dismissal under FRCP 12(b)(6). CRMBC asks the Court to decline to

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exercise its permissive declaratory judgment jurisdiction over Navigators’ action because it

“conflicts with and turns on facts and other issues that are necessarily at issue and will be resolved

in the Underlying Action...[which] renders Navigators’ declaratory action neither necessary nor

proper at this time.” (Dkt. No. 3) CRMBC further asserts that dismissal is warranted because

Navigators action is the product of improper forum shopping, the action will not dispose of the

entire action or legal disputes between the parties, and the underlying action touches on substantial

and important issue of state public and regulatory policy. (Dkt. No. 3 at 1-3.) Defendant CHSI

filed a motion to join Defendant CRMBC’s motion to stay. (Dkt. No. 18.)

Defendant CHSI subsequently filed a motion to dismiss, echoing many of the allegations

made by CRMBC. (Dkt. No. 9.) In particular, CHSI contends that Navigators must establish that

no potential coverage exists for the CRMBC Action in order to obtain declaratory relief for no duty

to defend. That determination relies upon the adjudication of facts and law in the underlying

action. CHSI further asserts that Navigators failed to ascertain a declaration that it had no duty to

defend prior to the underlying action taking place, and therefore is precluded to obtaining a

determination of no duty to defend. Lastly, CHSI outlines the areas of factual overlap between this

case and the underlying CRMBC Action, and asserts the underlying action is a “parallel state court

action involving the same issues and parties.” Accordingly, CHSI requests the Court decline to

review Navigators’ claim for declaratory relief. 

The “CRMBC Action”

It is undisputed that this insurance coverage dispute arises out of allegations in the 

underlying state court action that the Insured/Defendant CHSI failed to properly manage and

operate a self-insured workers compensation group (CRMBC) by charging insufficient rates to

members. According to CRMBC’s state court complaint, Defendant John Kalb, CHSI’s chief

underwriting officer, was responsible for accepting and rejecting applications for workers

compensation coverage on behalf of CRMBC and setting rates for members in accordance with

guidelines established by CHSI and CRMBC. (Dkt. No. 1, Ex. 3, “CRMBC Complaint.”) Mr.

Kalb performed these duties on behalf of CHSI, who was appointed as CRMBC’s Administrator. 

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Pursuant to the terms of the Management Services Agreement, CRMBC authorized CHSI to

“manage the daily operations of the mutual benefit group and to accept and underwrite applications

from applicants to the Program,” in addition to act as the manager of CRMBC’s business with

various authority regarding the compensation policy coverage. (Id.) 

CRMBC alleges that CHSI breached the terms of the Management Services Agreement by

failing to properly underwrite CRMBC accounts and applications for workers compensation

coverage, resulting in a substantial deficit of over $4 million.(Id.) As a result of this alleged

mismanagement, the California Office of Self-Insurance Plans performed a special audit of

CRMBC that revealed deficiencies in the CRMBC group fund from 2005-2011.(Id.) Based on

these allegations, CRMBC asserts four counts against CSHI for breach of written contract,

negligent supervision and training, negligent misrepresentation, and breach of fiduciary duty. 

Navigators’ Complaint

As a result of the underlying CRMBC action, Plaintiff/Insurer Navigators has brought this

action seeking declaratory judgment that it is under no duty to indemnify Defendant/Insured

CSHSI in the CRMBC action. In it’s first claim, Navigators asserts that CHSI is not entitled to

coverage under the Policy because CHSI failed to establish the condition precedent necessary to

trigger coverage. Navigators asserts that the insurance Policy established, as a condition precedent,

that no Insured had a basis to believe prior to the inception date of the first policy issued on July

12, 2009, that “any such act or omission, or related act or omission, might reasonably be expected

to be the basis of a claim.” (Dkt. No. 1 at 10.) Navigators asserts that CHSI and Mr. Kalb were

“aware of acts or omissions that might reasonably be expected to be the basis of a claim.

Specifically, beginning at least as early as January 2009, Kalb and/or CHSI knew that they were

charging rates for worker’s compensation insurance on behalf of CRMBC that were lower than the

rates that the CRMBC Board of Trustees had approved.” (Id.) In short, Navigators claims that

CHSI knew that their acts on behalf of CRMBC would result in the basis of a claim. Since CHSI

knew of these actions prior to the inception date of the policy issued by Navigators on July 29,

2012, then the entire CRMBC Action claim is exempt from coverage. 

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Navigators further alleges that the policy agreement does not cover claims that arise out of

professional services performed if the Insured was “an owner, partner, member, director, officer or

employee” of the entity for which it performed services. (Dkt. 1, Ex. A, “Policy Agreement.”)

Navigators asserts that CHSI and its Chief Executive Officer Jim Leftwich, “operated and managed

CRMBC and/or was a director, officer or employee of CRMBC.” Thus, the professional services

are not covered under the Policy agreement. Lastly, in the event that the Court determines that

Navigators has a duty to defend or indemnify, Navigators seeks to limit liability. First, Navigators

seeks to limit liability to $2 million in connection with the CRMBC Action. In the alternative,

Navigators seeks to limit the policy coverage in whole or in part based other grounds detailed in

the policy coverage that prohibit the types of damages that CRMBC seeks in its action. 

Insurance Policy 

The insurance policy issued by Navigators to CHSI on July 12, 2009 is an errors and

omissions insurance policy with a limit of liability of $2 million for each claim. The policy

obligates Navigators to pay sums in excess of the $25,0000 deductible that CHSI becomes legally

obligated to pay:

as damages and claim expenses as a result of a claim first made against the

Insured and reported in writing to the Company during the policy period or

Extended Reporting Period, byreason of an act or omission including personal

injury in the performance of professional services by the Insured or by

someone for whom the Insured is legally responsible, provided that: 1) Such

act or omission was committed on or subsequent to the retroactive date...; and

2) Prior to the inception date of this policy and if continuously renewed, no

Insured had a basis to believe that any such act or omission, or related act or

omission, might reasonably be expected to the basis of a claim. 

The policy does not provide coverage for claims:

[b]ased on or arising out of professional services performed for or by any

business enterprise not named in Item 1. In the Declarations if on or after the

date or time of the act or omission giving rise to such claim: 1) Any Insured

controlled, owned, operated or managed such entity; or 2) Any Insured was

an owner, partner, member, director, officer or employee of such entity.

Control of or ownership in a business enterprise is presumed if any Insured

owned or held 25% or more of the equity and/or debt instruments of such

enterprise. 

Professional services is defined as “financial risk management, business consulting,

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and notary services. Furthermore the policy does not apply to any claim:

based upon or arising out of any dishonest, intentionally wrongful,

fraudulent, criminal or malicious act or omission by an Insured. The

Company will provide the Insured with a defense of such claim unless and

until such dishonest, intentionally wrongful, fraudulent, criminal or

malicious act or omission has been determined by any final adjudication,

finding of fact or admission by the Insured...and the Company will have

the right to seek recovery of the defense costs incurred from the Insured

found to have committed the acts or omissions. 

(Dkt. No. 1, Ex. A)

II. STANDARD OF REVIEW

The federal Declaratory Judgment Act provides, “In a case of actual controversy within its

jurisdiction...any court of the United States, upon the filing of an appropriate pleading, may declare

the rights and other legal relations of any interested party seeking such declarations, whether or not

further relief is or could be sought.” 28 U.S.C. §§ 2201(a) (emphases added). Accordingly, once

jurisdiction is established, it is always discretionary with the Court whether to entertain an action

for a declaratory judgment. Public Affairs Associates, Inc. v. Rickover, 369 U.S. 111, 112, 82 S.

Ct. 580, 582, 7 L. Ed. 2d 604 (1962); Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494,

62 S. Ct. 1173, 1175, 86 L. Ed. 1620 (1942). “In the declaratory judgment context, the normal

principle that federal courts should adjudicate claims within their jurisdiction yields to

considerations of practicality and wise judicial administration.” Wilton v. Seven Falls Co., 515

U.S. 277, 288, 115 S. Ct. 2137, 2143, 132 L. Ed. 2d 214 (1995). The Court may refuse to give

such relief if the declaratory relief would not settle the controversy between the parties. Aetna Cas.

& Sur. Co. v. Quarles, 92 F.2d 321 (C.C.A. 4th Cir. 1937); Williams v. Ball, 294 F.2d 94 (2d Cir.

1961), cert. denied, 368 U.S. 990, 82 S. Ct. 598, 7 L. Ed. 2d 526 (1962). 

The Ninth Circuit has elaborated on the Brillhart factors articulated by the Supreme Court

as to when declaratory relief is appropriate. “In deciding whether to entertain action under

Declaratory Judgment Act, district courts should avoid needless determination of state law issues,

discourage litigants from filing declaratory actions as means of forum shopping, and avoid

duplicative litigation.” Gov't Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998). 

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The pendency of a state court action alone does not require a district court to refuse federal

declaratory relief. Rather, “if there are parallel state proceedings involving the same issues and

parties pending at the time the federal declaratory action is filed, there is a presumption that the

entire suit should be heard in state court.” Id. citing Chamberlain v. Allstate Ins. Co., 931 F.2d

1361, 1366–67 (9th Cir.1991). The Supreme Court has counseled district courts to “ascertain

whether the questions in controversy between the parties to the federal suit, and which are not

foreclosed under the applicable substantive law, can better be settled in the proceeding pending in

the state court. This may entail inquiry into the scope of the pending state court proceeding and the

nature of defense open there.” Brillhart, 316 U.S. 112. In addition, the Ninth Circuit has

acknowledged several additional factors relevant to the analysis: 

The Brillhart factors are not exhaustive. We have suggested

other considerations, such as ‘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; whetherthe declaratoryaction 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. 

Dizol, 133 F.3d at 1225 n.5. 

In the insurance context, when an insurer brings a declaratory relief action in the district

court to determine its obligation to defend or indemnify its insured, while a state court action to

resolve the same issue of coverage between the same parties is pending, a stay or dismissal of the

declaratory relief action is proper. Wilton, 515 US. At 283; Aetna Casualty & Surety Co. V.

Merritt, 974 F.2d 1196, 1199 (9 Cir. 1992). The fact that the issues are not identical or one party th

in the federal action is not a party in the state action does not, however, preclude the court from

issuing a stay. Polido v. State Farm Mutual Auto Ins. Co., 110 F.3d 1418, 1423 (9 Cir., 1997) th

(overruled on other grounds in Dizol, 133 F.2d 1220). “However, there is no presumption in favor

of abstention in declaratory actions generally, nor in insurance coverage cases specifically.” Dizol

133 F.3d at 1225. 

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III. DISCUSSION

It is undisputed that this Court has diversity jurisdiction pursuant to 28 U.S.C. §1332. 

Navigators’ claim is a dispute between an insurer and an insured over the duties to defend an

indemnify. This type of dispute has been held to satisfy the “case and controversy” requirement for

purposes of the Declaratory Judgment Act, whether or not there is an underlying state court action

pending. American States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9 Cir. 1994); Aetna 974 F.2d at th

1199. Accordingly, the Court considers whether it should exercise its discretion to decline

jurisdiction over this matter, or stay it pending resolution of the underlying state court litigation. 

Defendants contend that the coverage action will be duplicative of the underlying CRMBC

action, as there is substantial overlap of the factual and legal issues that must be adjudicated in

CRMBC action prior to resolution of the present coverage claim. In short, Defendants contend that

the CRMBC Action is a “parallel action with the same issues and same parties,” and therefore fails

to satisfy the first factor of the Brillhart test. Navigators accurately notes that it is not a party to the

CRMBC action, nor is insurance coverage an issue in the underlying case. However, an exact or

precise identity of issues between the federal and state action is not required to support dismissal of

a declaratory action. Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278-79 (6 Cir. 1933). th

The question for the Court is whether Navigators’ coverage obligations can be determined

independently of the adjudication of the CRMBC Action. If, however, Navigators’ coverage turns

on factual issues that are in dispute in state court, a dismissal or stay of the request is appropriate. 

Am. States Ins. Co. V. Canyon Creek, 786 F.Supp. 821, 824-25 (N.D.Cal.1991) (“To decide

whether coverage exists under the applicable policies, the Court merely must determine whether

the allegations in the complaints in the state court actions, even if accepted as true, give rise to

coverage under the policies at issue. In ruling one way or another on this issue, the Court is in no

way reaching the merits of the underlying complaints.”) 

The Court turns to Navigators’ first claim, which contends that the policy excludes

coverage for claims that existed prior to the inception of the policy agreement on July 9, 2012 (the

“Prior Knowledge Condition”). Navigators asserts that CHSI and/or John Kalb are not entitled to

coverage under the policy because the basis of the CRMBC action arises out of a claim which

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CHSI had “knowledge beginning at least as early as January 2009 [that] Kalb and/or CHSI knew

[sic] they were charging rates for worker’s compensation insurance on behalf of CRMBC that were

lower than the rates that the CRMBC Board of Trustees had approved.” CHSI’s knowledge that

their actions would be the basis of a claim, although previously undisclosed, existed prior to the

inception of the policy agreement. Navigators contends that the CRMBC claim is therefore

excluded under the “Prior Knowledge Condition,” and Navigators has no duty to defend CHSI in

the underlying state court action. Defendants counter that the factual issue of whether CHSI and/or

John Kalb knew that they were undercharging worker’s compensation claims is at the heart of the

CRMBC action. Indeed, the underlying CRMBC complaint alleges that CHSI “failed to perform

its obligations under the contract in that it failed to perform underwriting duties adequately and

charge sufficient rates.” (CRMBC Complaint at 13.) 

To assess Navigators’ first claim, this Court would need to make two factual

determinations. First, the Court would need to determine what CHSI and/or Kalb knew prior to the

inception date at issue, and, second, whether such knowledge would have been basis to believe that

a claim might be made. CRMBC asserts in it’s opening brief that the Court must look at the

subjective intent of CHSI and/or Mr. Kalb to determine the ultimate coverage question. In reply,

Navigators pleads that the Court utilize a reasonable person standard, which would preclude any

subjective test that would need to take place in the underlying action. See Weddington v. United

Nat’l Ins. Co., 346 F. App’ x 224, 2126 (9 Cir. 2009) (ruling on a coverage defense as a matter of th

law where “the use of the phrase ‘or could have reasonably foreseen’ indicates that coverage is

excluded where a claim was foreseeable from a reasonable, objective viewpoint.”). At this time,

the Court will refrain from asserting whether a subjective or objective test is required to determine

the claim. See Indian Harbor Ins. Co. v. Meridiian Comm., Inc., No. C 06-655, 2007 WL 951282

(N.D. Cal. Mar. 27, 2007.) (“the question of whether an objective or subjective test applies to this

kind of prior knowledge provision has not been clearly settled by California courts.”) Regardless

of the type of test used to determine the claim, it remains that there are certain factual issues that

overlap in both cases. To assess CRMBC’s breach of contract claim, the state court will need to

determine if CHSI and/or John Kalb failed to adequately perform their underwriting services

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according to the terms of the contract. This requires a determination of the existence of an

agreement, any violations between the parties of the agreement, and damages. To determine

whether CHSI violated the terms of the contract, the state court will need to inquire as to what the

parties knew regarding the performance of services during the contractual period. In the present

coverage claim, this Court will also need to determine whether CHSI and Mr. Kalb performed

professional services for CRMBC, and what CHSI and Mr. Kalb knew about the performance of

those services that could have lead to the basis of a claim. Accordingly, there is factual overlap

between these two cases as to the knowledge that CHSI and Mr. Kalb had regarding the

performance of their underwriting services to CRMBC. 

The Court turns to Navigators’ second claim to further assess whether there is significant

overlap between the two cases to warrant dismissal or stay. As detailed by the insurance policy

above, Navigators asserts that policy coverage does not extend to claims that are based upon or

arise out of services performed for a business enterprise if any insured “operated or managed” the

business enterprise, or any insured was a “director, officer or employee” of such enterprise (the

“Business Enterprise Exclusion”). In its’ complaint, Navigators’ cites CRMBC’s website, which

states that Jim Leftwich is “the founder and CEO of CHSI, the program administrator for the

CRMBC...[and] Jim was asked to serve on the [CRMBC] Board of Trustees by other members

because of his broad experience and expertise.” (Dkt. No. 1 at 5.) The question of whether CHSI’s

claim is precluded under the policy based on the Business Enterprise Exclusion has no factual

connection to any of the claims in the underlying CRMBC Action. Nowhere in CRMBC’s

complaint or in any of the briefings do the Defendants’ assert that the CRMBC Action requires a

finding of fact that Jim Leftwich either “operated or managed” CRMBC or that he was a CRMBC

“director, officer or employee.” The Court therefore finds no overlap between the two cases

regarding Navigators’ second claim. 

Navigators third and fourth claims are broadly based on an interpretation of the policy

agreement. The third claim seeks to limit coverage based on the policy that “any claim based in

whole or in part on any act or omission...in the performance of professional services committed

prior to December 13, 2010, then each claim limit of liability is $2 million.” (Dkt. No. 1 at 12.) 

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The factual issue to be determined here is whether or not CHSI actions were performed prior to

December 13, 2010. The CRMBC complaint alleges that CRMBC and CHSI entered into their

contractual agreement on or around September 2004, and that CHSI set rates and issued

distributions between 2005 and 2011. (CRMBC Complaint at 12.) CRMBC’s Complaint, if taken

to be true, therefore sufficiently states the facts needed to determine the limited liability issue in

question, and the Court could make this determination without any inquiry into the adjudication of

the CRMBC Action. Navigators’ fourth claim seeks to further limit coverage for the CRMBC

Action based in whole or in part by other “potentially applicable provisions of the policy.” Again,

this claim largely turns on the interpretation of the policy language.

Having reviewed Navigators’ four claims, the Court finds but one area of necessary factual

overlap with the underlying CRMBC action. The similarity, however, is in Navigator’s first and

primary coverage claim, which largely turns on the facts in the underlying state court action. 

Defendants contend that even if there are only a few similarities, that the cases are “parallel

because they both arise out of the same factual transaction.” (Dkt. 9 at 15.) Defendants rely on the

Ninth Circuit decision in Employers Reinsurance Corporation v. Karussos, 65 F.3d 796, 800 (9th

Cir. 1995) (overruled on other grounds by Dizol, 133 F.3d at 1227). In this case, the Ninth Circuit

held the district court abused its discretion in asserting jurisdiction over a declaratory judgment

action that involved only state law questions of insurance coverage and was brought during

pendency of related state court proceedings. Id. The Court relied on the Hungerford rule that

courts should “‘decline to assert jurisdiction in insurance coverage and other declaratory relief

actions presenting only issues of state law during the pendency of parallel proceedings in state

court’ unless there are ‘circumstances present to warrant an exception to that rule.” Id. at 798,

quoting American National Fire Insurance Co. V. Hungerford, 53 F.3d 1012, 1019 (9 Cir. 1995). th

In Karussos, the Ninth Circuit found that courts should invoke the Hungerford rule even

when there are only some similar issues among the two actions. Similar to this case, in Karussos,

the Insurer brought a complaint seeking declaratory judgment in federal district court under the

premise that the Insurer had a duty to defend the Insured. Karussos, 65 F.3d at 800. The issue of

the duty to defend turned on factual questions that overlapped with those at issue in the underlying

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state court litigation. Id. In remanding the case, the Ninth Circuit reminded courts that concerns of

“‘practicality’ and ‘wise judicial administration’ generally counsel against the exercise of federalcourt jurisdiction over claims for declaratory relief that involve only state law questions and are

brought during the pendency of a related state court proceeding.” Id. at 801, referencing

Hungerford, 53 F.3d 1012 and Continental Cas. Co. V. Robsac Indus., 947 F.2d 1367, 1374 (9th

Cir. 1991). Here, there are only questions of state law before the Court, and it remains undisputed

that the case relates to the underlying state court action. Accordingly, the Court finds it sufficient

to find that the underlying state court action, while not precisely the same, is sufficiently related to

the present case to weigh in favor of withholding jurisdiction at this time.

The Court next considers the second Brillhart factor which seeks to discourage parties from

using federal declaratory judgment actions as a means of forum shopping. Dizol, 133 F.3d at 1225. 

Bringing a separate insurance claim in district court alone does not constitute improper forum

shopping. The only evidence suggesting forum shopping is that Navigators filed the district court

action following the CRMBC state court action, possibly as a reactionary measure. As articulated

by the Ninth Circuit in Robsac, improper forum shopping relates to “the defensive or reactive

nature of a federal declaratory judgment suit, and...if a declaratory judgment suit is defensive or

reactive, that would justify a court’s decision not to exercise jurisdiction.” Robsac, 947 F.2d at

1371-1372 (internal citation omitted). Here, there are certain signals that indicate Navigators filed

the present lawsuit as a tactical advantage. First, Navigators filed the present litigation only four

months after CRMBC filed the underlying state court action. Defendant CRMBC accurately points

out that Navigators seeks an improper procedural advantage by litigating the coverage defenses “on

the basis of a barren record.” At the time of the filing of the motions to dismiss, the CRMBC state

court lawsuit had been stayed pending arbitration between the parties, and the discovery period was

in the nascent phases. (Dkt. No. 3, Ex. A.) Second, Navigators does not have an ability to

intervene in the underlying state court action; however, it does have state court remedies following

the resolution of the lawsuit. Navigators fails to directly respond to these concerns. Nor does

Navigators entertain the proposition that it has available state court remedies to resolve its

coverage action in the future on the basis of a more fully developed record. Accordingly, and due

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to caution articulated by the Supreme Court regarding forum shopping, the Court finds that

Navigators seeks an improper advantage by seeking declaratory relief in this Court. 

The Court further considers whether Navigators’ action would constitute duplicative

litigation, and additionally whether the resolution would fully resolve the legal questions at issue

between the parties. Similar to the question as to overlap of factual and legal issues detailed above,

the Court finds that there would necessarily be duplicative questions of fact that would need to be

determined in the present litigation. In particular, Navigators’ first claim requires determining

whether CHSI and/or Mr. Kalb knew that their actions could be the basis of a claim. Resolving

these questions to determine the issue of insurance coverage, however, will not fully resolve the

legal questions at issue between the parties. Even assuming arguendo that the Court were to

dismiss Navigators’ first claim due to overlap, and render judgment on the last three claims - the

factual and legal issues between the remaining parties would still exist in the underlying state court

action. Furthermore, if the Court were to proceed with all of Navigators’ claims, the Insured,

CHSI, could be required to take inconsistent positions in the two actions in terms of what

knowledge it had and when it had the knowledge regarding alleged mismanagement of CRMBC’s

account. Courts have held that regardless of factual overlap, prejudice to the insured occurs when

it is forced to fight a “two front war.” Great Am. Ins. Co. v. Sup. Ct., 178 Cal. App. 4th 221, 271

(2009). As such, the declaratory relief action will not resolve all of the coverage issues among the

parties, and further could result in unfair prejudice against the insured, CHSI. It therefore remains

within the Court’s discretion not to take up this action. Dizol, 133 F.3d at 1225. 

IV. CONCLUSION

The Court finds that Navigators’ action has sufficient factual overlap with the underlying

state court action, Navigators’ attempt to bring this action before the Court constitutes a reactive

filing, and the adjudication of Navigators’ case could result in duplicative judgments that would

violate the principles of judicial efficiency and potentially result in unfair prejudice against the

insured. Although these factors may warrant dismissal, if the pending state court action is settled

between the parties, then the risks articulated above would be greatly minimized if not fully

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eliminated. A stay of declaratory relief action pending resolution of the third party suit is therefore

appropriate. See Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287 (Cal. 1993). 

The Court exercises its’ authority to STAY Navigators’ claim. Accordingly, the Court

hereby GRANTS Defendant CRMBC’s motion to stay, DENIES Defendant CHSI’s motion to

dismiss, and DISMISSES Plaintiff’s motion to strike Defendant CHSI’s motion to join as MOOT.

(Dkt. Nos. 3, 9, 25) 

Having so held, the Court hereby VACATES the hearing date scheduled for May 10, 2013

on Plaintiff’s motion for summary judgment. The Court further ORDERS Defendants CRMBC

and CHSI to file a status report with this Court every four months regarding the state court action. 

The first status report is therefore due to the Court on or before June 3, 2013. 

IT IS SO ORDERED. 

DATED: February 4, 2013

HON. GONZALO P. CURIEL

United States District Judge

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