Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_13-cv-00044/USCOURTS-casd-3_13-cv-00044-0/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

ADMIRAL INSURANCE COMPANY,

Plaintiff,

CASE NO. 13cv44-WQH-JMA

ORDER

vs.

SHAH & ASSOCIATES, INC., dba PDC

CORPORATION,

Defendant. __________________________________

SHAH & ASSOCIATES, INC., dba PDC

CORPORATION,

Counterclaimant,

 vs.

ADMIRAL INSURANCE COMPANY,

Counterdefendant. 

HAYES, Judge:

The matters before the Court are the Motion for Stay filed by

Defendant/Counterclaimant Shah & Associates, Inc. (“Shah”) (ECF No. 10), and the

Motion to Dismiss the Counterclaim filed by Plaintiff/Counterdefendant Admiral

Insurance Company (“Admiral”) (ECF No. 17).

I. Background

Shah has been continuously insured by Admiral for professional liability since

April 21, 2009. (Shah Decl. ¶12, ECF No. 10-2). Admiral issued to Shah an Architects

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& Engineers Professional Liability Policy (the “Policy”) for the policy period of April

21, 2011 to April 21, 2012. (Compl., Ex. A at A-2, ECF No. 1-1). The Policy states

that Admiral has “the right and duty to defend any ‘claim’ or suit against the ‘Insured’

seeking ‘damages’ because of a ‘professional incident,’ even if any of the allegations

of the suit are false or fraudulent.” Id. at A-5. The Policy contains a number of

conditions and limitations on coverage, including a condition of coverage that “prior

to the effective date of this policy, no ‘Insured’ had knowledge of a ‘professional

incident’ or circumstance that could reasonably be expected to result in a ‘claim.’” Id.

The Policy defines “professional incident” to mean “a negligent act, error or omission

in the rendering of or failure to render ‘professional services’ by you or a person acting

under your direction, control or supervision and for whose acts, errors or omissions you

are legally liable.” Id. at A-7. The Policy defines “professional services” to mean

“work performed by you for others involving specialized training, knowledge and skill

in the pursuit of the business stated in the declarations.” Id. at A-7. The Policy

describes Shah’s business as “Telecommunications Design and Engineering Services.” 

Id. at A-2. The Policy also contains exclusions which state:

This policy does not apply to: ...

E. any liability based upon or arising out of any ‘professional incident’ or circumstances that any ‘Insured’ knows or should reasonably

anticipate would result in a ‘claim’ prior to the effective date of this

policy; ...

M. any liability based upon or arising out of the deficiency or malfunction of any product, process, technique or equipment which is sold, manufactured or furnished by or on behalf of the ‘Insured’; ...

V. any liability based upon or arising out of any construction, demolition, erection, excavation or the assembly or installation of components or equipment; ....

Id. at A-7, A-8.

This action arises out of a lawsuit captioned, Allen, et al. v. NRC Systems. Inc.,

et al., filed on November 15, 2011 in the Sacramento County Superior Court, Case No.

34-2011-00114009 (“the Allen lawsuit”). (Compl. ¶ 8, ECF No. 1). The Allen lawsuit

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was filed by the survivors of Stephen Allen and the owner of the airplane Allen piloted

on the day of his death. Allen was killed on January 10, 2011 when the crop-dusting

airplane he was flying over property known as “the Webb Tract” in Contra Costa

County, California, crashed into an unmarked meteorological tower (the “MET tower”). 

Id. The defendants in the Allen lawsuit are alleged to be the owners and managers of

property on which the MET tower was located, the company with farming rights on the

property, a seed supplier, and the companies which designed, manufactured and

constructed the MET tower. Id. ¶ 9. Shah is alleged to be one of the companies

responsible for erecting the MET tower on the Webb Tract. Id. The complaint in the

Allen lawsuit (“Allen complaint”) pleads claims for wrongful death based upon both

strict liability and negligence theories, and seeks compensatory and punitive damages. 

(Compl., Ex. B at B-33, B-38, ECF No. 1-1). The Allen complaint pleads issues

relating to the design, manufacturing, construction, permitting, installation, erection,

and failure to warn about the existence of the MET tower. Id. at B-36, 37, 39, 40. The

Allen complaint alleges:

All Defendants were the agents, employees, contractors, joint venturers

and partners of each other, and/or had some other relationship imposing vicarious liability on each Defendant for the acts and/or omissions of each

of the other Defendants. At all times, each of the Defendants was acting within the course and scope of said agency, employment, contract, joint venture, or other relationship, and with the permission, knowledge and consent of each of the other Defendants.

Id. at B-34.

In early December 2011, “shortly after service” of the Allen complaint, Shah

tendered the defense to Admiral. (Shah Decl. ¶ 3, ECF No. 10-2). On December 15,

2011, Admiral denied coverage. (Shah Decl, Ex. 1, ECF No. 10-5). In the denial letter,

Admiral stated:

You have advised that both you and your project manager, Paulo Pueliu, were aware of the accident which occurred on January 10, 2011 when Mr. Pueliu was contacted by an investigator who indicated that legal action was being contemplated. You both acknowledged that you had a concern that if a lawsuit was filed, Shah & Associates could be implicated; however, you did not report this matter to Admiral during the relevant policy period nor indicate it on the application for renewal of this insurance which was signed on March 16, 2011.

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In view of the foregoing, it is clear that you had knowledge of a ‘professional incident’ or circumstance that could reasonably be expected to result in a claim prior to the effective date of Admiral’s policy in violation of the Insuring Agreement. Additionally, exclusion E precludes coverage for this matter. ...

Accordingly, Admiral disclaims coverage and will neither defend nor

indemnify Shah & Associates in this litigation.

Id. at 3-4. Admiral reversed its denial on August 27, 2012 and issued a letter on

September 19, 2012 stating that “Admiral presently agrees to participate in the defense

of [Shah] in the Allen lawsuit,” but reserving its rights to dispute coverage on numerous

issues. (Shah Decl. ¶¶10-11, Ex. 4, ECF No. 10-8).

On January 8, 2013, Admiral initiated this action by filing a Complaint in this

Court against Shah, alleging diversity jurisdiction. (Compl., ECF No. 1). Admiral

seeks a declaration that it owes no duty to defend or indemnify Shah and reimbursement

for defense costs paid. As stated in its Complaint, Admiral seeks to prove:

a. an insured had knowledge of a ‘professional incident’ or circumstance that could reasonably be expected to result in a

‘claim’ prior to the inception of the Admiral Policy on April 21,

2011;

b. the ‘professional incident’ or circumstance that could reasonably be expected to result in a ‘claim’ was not disclosed on Shah’s

application for insurance;

c. the Underlying Action arises out of the alleged deficiency or malfunction of one or more products, processes, techniques or equipment sold, manufactured or furnished by or on behalf of Shah;

d. the Underlying Action arises out of the construction, erection,

assembly or installation of components or equipment; and

e. the Underlying Action does not result from a ‘professional incident’ involving specialized training knowledge and skill in the pursuit of the business stated in the Declarations, which is

‘Telecommunications Design and Engineering Services.’

Id. ¶ 15.

On April 2, 2013, Shah filed a Counterclaim against Admiral, alleging breach of

contract and breach of the implied covenant of good faith and fair dealing arising out

of Admiral’s initial refusal to defend Shah in the Allen lawsuit. (ECF No. 9).

On April 2, 2013, Shah filed the Motion for Stay. (ECF No. 10). On April 22,

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2013, Admiral filed an opposition to the Motion for Stay. (ECF No. 11). On April 29,

2013, Shah filed a reply and objections to evidence submitted by Admiral. (ECF No.

16).

On May 7, 2013, Admiral filed the Motion to Dismiss the Counterclaim pursuant

to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 17). On May 24, 2013, Shah

filed an opposition (ECF No. 18), and on June 3, 2013, Admiral filed a reply (ECF No.

3).

II. Motion for Stay

A. Contentions of the Parties

Shah requests that the Court stay this action pending final disposition of the Allen

lawsuit. Shah contends that the issues in this action substantially overlap with those at

issue in the Allen lawsuit, and prosecution of this action may prejudice the defense of

the Allen lawsuit, warranting a stay in accordance with the principles stated in Montrose

Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 302 (1993). Shah contends:

[T]o rebut Admiral’s Second Cause of Action seeking a declaration that it has no duty to indemnify Shah with regard the underlying action, Shah will have the burden to establish that its liability arose from ‘a negligent act, error or omission in the rendering of, or failure to render, professional services.’ The prejudice to Shah of being forced to prove its own negligence, while defending a lawsuit alleging such negligence, is self-evident.

(ECF No. 10-1 at 6). Shah contends that “Admiral’s efforts to prove that Shah had

prior knowledge of ‘circumstances’ that would give rise to a claim also carry the

potential to prejudice Shah’s defense because the plaintiffs in the underlying action also

seek to prove that Shah had prior knowledge of facts that it knew or should have known

created a hazard to air traffic, so that they can assert that Shah’s conduct was willful to

support an award of punitive damages.” Id.

Admiral contends:

Admiral will establish that it has no duty to defend or indemnify Shah in the Allen lawsuit because the Allen plaintiffs’ claims—whether meritorious or not—are by their nature not covered under the Admiral

Policy. To assess Admiral’s position, the Court need not parse the

underlying facts or determine the merit of the underlying claims, so there is no risk of inconsistent determinations or overlap between the issues at

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work in the Allen lawsuit.

(ECF No. 11 at 2). Admiral contends that there is no potential for coverage for the

Allen lawsuit under the Policy for the following reasons: 

[P]rior to the effective date of the Policy on April 21, 2011, Shah had

knowledge of a ‘professional incident’ or circumstance that could

reasonably be expected to result in a claim; the ‘professional incident’ or circumstance was not disclosed on Shah’s application for insurance; the Allen lawsuit arises out of the alleged deficiency or malfunction of one or more products, processes, techniques or equipment sold, manufactured or furnished by or on behalf of Shah; the Allen lawsuit arises out of the

construction, erection, assembly or installation of components or equipment; and the Allen lawsuit does not result from a ‘professional incident’ involving the specialized training, knowledge and skill in the

pursuit of the business stated in the Declarations, which is

‘Telecommunications Design and Engineering Services.’ None of these issues are issues in the Allen lawsuit.

Id. at 3-4. Admiral contends that this action should not be stayed, or, alternatively,

Admiral requests that the Court bifurcate those issues in this case which overlap with

the Allen lawsuit from the other issues which do not overlap with the Allen lawsuit.

B. Applicable Law

“[T]he power to stay proceedings is incidental to the power inherent in every

court to control disposition of the cases on its docket with economy of time and effort

for itself, for counsel, and for litigants.” Landis v. N. Am. Co., 299 U.S. 248, 254

(1936). “[A] district court is authorized, in the sound exercise of its discretion, to stay

or to dismiss an action seeking a declaratory judgment.... 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 (1995). The Court of Appeals for the

Ninth Circuit has stated:

The Brillhart [v. Excess Insurance Co., 316 U.S. 491 (1942)] factors remain the philosophic touchstone for the district court. The district court

should avoid needless determination of state law issues; it should

discourage litigants from filing declaratory relief actions as a means of

forum shopping; and it should avoid duplicative litigation. 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. The pendency of a state

court action does not, of itself, require a district court to refuse federal declaratory relief. Nonetheless, federal courts should generally decline to

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entertain reactive declaratory actions.

G.E.I.C.O. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998) (citations omitted).

Under California law, “[t]o eliminate the risk of inconsistent factual

determinations that could prejudice the insured, a stay of the declaratory relief action

pending resolution of the third party suit is appropriate when the coverage question

turns on facts to be litigated in the underlying action.” Montrose, 6 Cal. 4th at 301-02

(citations omitted). The rationale behind this rule is as follows:

There are three concerns which the courts have about the trial of coverage issues which necessarily turn upon facts to be litigated in the underlying

action. First, the insurer, who is supposed to be on the side of the insured and with whom there is a special relationship, effectively attacks its insured and thus gives aid and comfort to the claimant in the underlying suit; second, such a circumstance requires the insured to fight a two front war, litigating not only with the underlying claimant, but also expending precious resources fighting an insurer over coverage questions—this effectively undercuts one of the primary reasons for purchasing liability

insurance; and third, there is a real risk that, if the declaratory relief action proceeds to judgment before the underlying action is resolved, the insured

could be collaterally estopped to contest issues in the latter by results in the former.

Haskel, Inc. v. Superior Court, 33 Cal. App. 4th 963, 979 (1995) (citation omitted). “It

is only where there is no potential conflict between the trial of the coverage dispute and

the underlying action that an insurer can obtain an early trial date and resolution of its

claim that coverage does not exist.” Id. (citation omitted). “When such a potential

conflict exists, a district court should enter a stay.” Progressive Cas. Ins. Co. v. Dalton,

2:12-CV-00713, 2012 WL 6088313, at *11 (E.D. Cal. Dec. 6, 2012). “Federal courts

in California have followed the Montrose rule.” Id.; see also OneBeacon Ins. Co. v.

Parker, Kern, Nard & Wenzel, No. 1:09-CV-00257, 2009 WL 2914203, at *4 (E.D. Cal.

Sept. 9, 2009).

C. Discussion

“An insurer has a very broad duty to defend its insured under California law. The

California Supreme Court has stated that ‘the insured is entitled to a defense if the

underlying complaint alleges the insured’s liability for damages potentially covered

under the policy, or if the complaint might be amended to give rise to a liability that

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would be covered under the policy.’” Anthem Elecs., Inc. v. Pac. Emp’rs Ins. Co., 302

F.3d 1049, 1054 (9th Cir. 2002) (quoting Montrose, 6 Cal. 4th at 299). The duty to

defend extends to “all claims potentially within policy coverage, even frivolous claims

unjustly brought.” Horace Mann Ins. v. Barbara B., 4 Cal. 4th 1076, 1086 (1993). 

“[T]he determination whether the insurer owes a duty to defend usually is made in the

first instance by comparing the allegations of the complaint with the terms of the

policy.”1

 Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19 (1995) (citation omitted).

Admiral alleges that it has no duty to defend or indemnify Shah based upon

Policy exclusions E., M. and V. (Compl. ¶ 15, ECF No. 1). In alleging that Policy

exclusion E. applies, Admiral alleges that Shah “had knowledge of a ... circumstance

that could reasonably be expected to result in a ‘claim’ prior to ... April 21, 2011.” Id. 

In support of their claim for punitive damages, the Allen complaint alleges that Shah

“knew ... that the ‘MET’ tower installed on the ‘Webb Track’ property constituted a

hazard to air traffic.” (Compl., Ex. B at B-12, ECF No. 1-1). With respect to exclusion

E., Admiral in this action and the Allen plaintiffs in the Allen lawsuit will each attempt

to show that Shah had prior knowledge of circumstances that would give rise to the

incident at issue.2

In alleging that Policy exclusion M. applies, Admiral alleges that “the [Allen

lawsuit] arises out of the alleged deficiency or malfunction of one or more products ...

or equipment sold, manufactured or furnished by or on behalf of Shah.” (Compl. ¶ 15,

1

 Instead of comparing the Policy to the Allen complaint, Admiral focuses on the “brief statement of the case” filed by the Allen plaintiffs in their case management statement. (ECF No. 11-4). Admiral cites no authority indicating that a “brief statement of the case” in a case management statement supercedes the allegations of the complaint, or that a court may disregard the allegations of the underlying complaint in favor of a case management statement in determining whether an insurer has a duty to defend.

2

 In its opposition brief, Admiral “contends that Shah had knowledge of circumstances that a reasonable person would result in a claim being made against it

because of the telephone call from an investigator in January of 2011 investigating a person’s death after colliding with the MET Tower..., not because Shah’s conduct in

connection with its work on the MET Tower was knowingly wrong.” (ECF No. 11 at 7). However, Admiral’s Complaint is not limited to the single circumstance of a phone call in January 2011 or to any specific time frame.

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ECF No. 1). The Allen complaint alleges that Allen defendants NRG Systems and

Renewable Resources Group “manufactured [and] sold” the “MET” tower, which was

“defectively ... manufactured” and caused the death of Stephen Allen. (Compl., Ex. B

at B-36, ECF No. 1-1). The Allen complaint alleges that “[a]ll Defendants were the

agents, employees, contractors, joint venturers and partners of each other ... imposing

vicarious liability on each Defendant for the acts and/or omissions of each of the other

Defendants.” Id. at B-34. With respect to exclusion M., Admiral in this action and the

Allen plaintiffs in the Allen lawsuit will each attempt to show that Shah is liable for

deficiencies in the manufacture or sale of the MET tower.

In alleging that Policy exclusion V. applies, Admiral alleges that “the [Allen

lawsuit] arises out of the construction, erection, assembly or installation of components

or equipment.” (Compl. ¶ 15, ECF No. 1). The Allen complaint alleges that Shah was

hired “for the erection of the ... ‘MET’ tower.” (Compl., Ex. B at B-38, ECF No. 1-1;

see also ECF No. 11-4 at 7 (the Allen plaintiffs allege the same in the “brief statement

of the case” in their case management statement)). The Allen Complaint alleges that

Shah “negligently and carelessly selected, installed, erected and otherwise cause[d] to

exist the ... ‘MET’ tower on the ‘Webb Tract’ property.” Id. at B-39. With respect to

exclusion V., Admiral in this action and the Allen plaintiffs in the Allen lawsuit will

each attempt to show that Shah erected or installed the MET tower on the Webb Tract.

Admiral contends that “[t]he coverage issue to be decided in the declaratory relief

action is whether Shah could potentially be held liable for its telecommunications

design or engineering services as opposed to supplying, installing, or erecting the MET

tower because only the former is covered by the Admiral Policy.” (ECF No. 11 at 4). 

Admiral contends that “[t]he design allegations as to the MET tower are not directed

towards Shah, but instead are only directed against [Shah’s Allen co-defendants] NRG

Systems and RRG.” Id. at 5. The Policy covers negligent acts, errors, or omissions in

“the rendering of or failure to render ‘professional services’ by ... a person acting under

[Shah’s] direction, control or supervision and for whose acts, errors or omissions [Shah

is] legally liable.” (Compl., Ex. A at A-7, ECF No. 1-1). The Allen complaint alleges

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that the Allen plaintiffs’ injuries were caused in part because the MET tower “was

defectively designed,” and “[a]ll Defendants were the agents, employees, contractors,

joint venturers and partners of each other ... imposing vicarious liability on each

Defendant for the acts and/or omissions of each of the other Defendants.” (Compl., Ex.

B at B-34, B-37, ECF No. 1-1). The Court does not find that the Allen plaintiffs’ case

management statement or the contract between Shah and Renewable Resources Group

“eliminate[s] the potential for coverage.” Waller, 11 Cal. 4th at 19 (“[W]here the

extrinsic facts eliminate the potential for coverage, the insurer may decline to defend

even when the bare allegations in the complaint suggest potential liability.”) (citations

omitted); cf. Palp, Inc. v. Williamsburg Nat’l Ins. Co., 200 Cal. App. 4th 282, 289

(2011) (“[W]hen a suit against an insured alleges a claim that potentially could subject

the insured to liability for covered damages, an insurer must defend unless and until the

insurer can demonstrate, by reference to undisputed facts, that the claim cannot be

covered. In order to establish a duty to defend, an insured need only establish the

existence of a potential for coverage; while to avoid the duty, the insurer must establish

the absence of any such potential. Doubts concerning the potential for coverage and the

existence of duty to defend are resolved in favor of the insured.”) (citing, inter alia,

Montrose, 6 Cal. 4th at 299-300).

The Court finds that “the coverage question[s] [raised by Admiral’s Complaint

in this action] turns on facts to be litigated in the underlying [Allen] litigation.” 

Montrose, 6 Cal. 4th at 301-02. Pursuant to the Montrose rule, “[t]o eliminate the risk

of inconsistent factual determinations that could prejudice the insured, a stay of the

declaratory relief action pending resolution of the third party suit is appropriate.” Id.

at 301.

When considering the Brillhart/Dizol factors,3

 the Court finds that a stay of this

action pending resolution of the Allen lawsuit is appropriate. As discussed above,

3

 See Dizol, 133 F.3d at 1225 (“The district court should avoid needless

determination of state law issues; it should discourage litigants from filing declaratory relief actions as a means of forum shopping; and it should avoid duplicative litigation.”) (citations omitted).

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Admiral’s claim for declaratory relief regarding whether Admiral has a duty to defend

or indemnify Shah necessarily requires an adjudication of factual matters at issue in the

Allen lawsuit. “Federal courts should be reluctant to decide factual issues which are

currently at-issue in state court.” State Farm Fire & Cas. Co. v. McIntosh, 837 F. Supp.

315, 316 (N.D. Cal. 1993) (“Where a federal court determines such a factual issue, the

parties may be collaterally estopped from litigating the issue further in the underlying

state action. This disrupts the orderly adjudication of the underlying state case, since

it forecloses the examination of some parts of the case while leaving other parts in need

of resolution.”) (citations omitted); cf. Dizol, 133 F.3d at 1225 (“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.”) (citation omitted). “[W]ith the risk of duplicative litigation comes the risk

of inconsistent outcomes.... Additionally, separate suits stemming from the same

overall controversy and involving overlapping issues proceeding simultaneously on

parallel tracks may waste scarce judicial resources.” OneBeacon Ins. Co., 2009 WL

2914203, at *6 (quotation omitted). To the extent Admiral filed this action in this Court

in an effort to avoid the mandatory stay rule announced in Montrose, imposing a stay

in this action would “discourage litigants from filing declaratory relief actions as a

means of forum shopping.” Dizol, 133 F.3d at 1225.

The Motion for Stay is granted. The Court declines to bifurcate those issues in

this case which overlap with the Allen lawsuit from the other issues which do not

overlap with the Allen lawsuit. This action is stayed pending further order of the Court.

III. Motion to Dismiss

Because the Court has determined that a stay is appropriate in this case, the

Motion to Dismiss the Counterclaim is denied without prejudice to renew the motion

after the stay is lifted.

IV. Conclusion

IT IS HEREBY ORDERED that the Motion for Stay is granted. (ECF No. 10). 

The Motion to Dismiss is denied without prejudice. (ECF No. 17). This action is

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stayed pending further order of the Court. The parties shall file a status report as to the

progress of the Allen lawsuit no later than six months from the date this Order is filed. 

Either party may file a motion to lift the stay when the Allen lawsuit is resolved or for

other good cause. The Clerk of the Court shall administratively close this case; the case

will be reopened when the stay is lifted, without prejudice to the rights of any party.

DATED: July 23, 2013

WILLIAM Q. HAYES

United States District Judge

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