Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_19-cv-01015/USCOURTS-caed-2_19-cv-01015-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Constitutionality of State Statute(s)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

NORTHLAND INSURANCE 

COMPANY,

Plaintiff,

v.

GYMSTARS GYMNASTICS, INC; ALL 

STAR GYMNASTICS INC.; JANE GM 

DOE; and DOES 1 through 10, 

inclusive,

Defendants.

No. 2:19-cv-01015-MCE-AC

MEMORANDUM AND ORDER

Through this action, Plaintiff Northland Insurance Company (“Plaintiff”) seeks a 

declaratory judgment that it owes no coverage for an action brought against Defendants 

Gymstars Gymnastics (“Gymstars”) and All Star Gymnastics (“All Star” and collectively

with Gymstars, “Gym Defendants”) in El Dorado County Superior Court. Presently 

before the Court is Gym Defendants’ Motion to Stay the instant federal action pending 

resolution of the underlying state court action. ECF No. 13. This matter has been fully 

briefed. ECF Nos. 18, 19. For the reasons set forth below, Gym Defendants’ Motion is 

DENIED.

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1 Because oral argument would not be of material assistance, the Court ordered this matter 

submitted on the briefs. E.D. Local Rule 230(g).

Case 2:19-cv-01015-MCE-AC Document 21 Filed 04/29/20 Page 1 of 8
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BACKGROUND2

Plaintiff provided Commercial General Liability insurance coverage to Gymstars 

for annual policy periods effective March 15, 2001, to March 15, 2004, and to All Star for 

annual policy periods effective July 13, 2001, to July 13, 2003 (the “Policies”). Under the 

Coverage A insuring agreement, Plaintiff covers those sums that the insured becomes 

legally obligated to pay as damages because of “bodily injury” or “property damage” 

which is caused by an “occurrence” and which takes place during the policy period. 

Under the Coverage B insuring agreement, Plaintiff covers those sums that the insured 

becomes legally obligated to pay as damages because of “personal and advertising 

injury” which is caused by an offense arising out of the insured’s business, but only if the 

offense was committed during the policy period.

The Policies specify that Plaintiff will have no duty to defend the insureds against 

any “suit” seeking damages to which this insurance does not apply. Significantly, the 

Policies contain the following endorsements:

EXCLUSION – PHYSICAL/SEXUAL ABUSE

This endorsement modifies insurance provided under the 

following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART

This insurance does not apply to any “bodily injury,” “property 

damage,” “personal injury,” “advertising injury,” or medical 

expense arising out of:

1. The actual, alleged, or threatened physical abuse, sexual 

abuse or molestation by anyone.

2. The investigation, hiring, training, placement, supervision, 

or retention of anyone who engages or has engaged in 

physical abuse, sexual abuse or molestation. This 

endorsement applies whether damages arise from an act 

or failure to act.

3. The reporting of or failure to report to authorities any 

physical abuse, sexual abuse, or molestation.

2 The following recitation of facts is taken, sometimes verbatim, from Plaintiff’s Complaint. ECF 

No. 1.

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***

EXCLUSION – ASSAULT OR BATTERY

This endorsement modifies insurance provided under the 

following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART

This insurance does not apply to “bodily injury,” “property 

damage,” “personal injury,” “advertising injury,” or medical 

expense arising out of assault and battery or out of any act or 

omission in connection with the prevention or suppression of 

an assault or battery, whether caused by or at the instigation 

or direction of the insured, an “employee” or patron of the 

insured, or any other person.

On February 13, 2018, Jane Doe initiated a lawsuit against Gym Defendants and 

DOE 1, a gym coach employed by Gym Defendants, in El Dorado County Superior Court

for sexual, physical, mental, and emotional abuse (“Underlying Lawsuit”). The complaint 

alleges that between 1999 and 2002, DOE 1 sexually abused Jane Doe when she was 

15 to 18 years old. Jane Doe further alleges that despite prior reports of DOE 1’s 

misconduct, he was allowed by Gym Defendants to continue his sexual abuse of Jane 

Doe. The Underlying Lawsuit asserts the following causes of action: (1) Sexual 

Harassment against DOE I and Gym Defendants; (2) Sexual Battery against DOE I; 

(3) Assault against DOE 1; (4) Gender Violence against DOE 1; (5) Intentional Infliction 

of Emotional Distress against DOE I and Gym Defendants; (6) Negligence against Gym 

Defendants; (7) Negligent Supervision against Gym Defendants; (8) Negligent 

Hiring/Retention against Gym Defendants; (9) Negligent Failure to Warn, Train or 

Educate against Gym Defendants; and (10) Constructive Fraud against DOE I and Gym 

Defendants. 

On May 15, 2018, Plaintiff received notice of the Underlying Lawsuit. Plaintiff 

agreed to provide Gym Defendants a defense subject to a complete reservation of rights, 

including the right to seek reimbursement of defense costs. On June 3, 2019, Plaintiff 

filed the current coverage action, asserting causes of action for declaratory relief and 

///

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reimbursement of defense costs.3 Plaintiff seeks adjudications that it owes no duty to 

defend or indemnify Gym Defendants under the Policies in connection with the 

Underlying Lawsuit. Plaintiff alleges that based on the plain and clear terms of the 

Policies and California law, Jane Doe’s claims in the Underlying Lawsuit are not covered 

or potentially covered. A trial is scheduled for May 2020 but Gym Defendants state that 

discovery is still ongoing. Mem. ISO Mot. Stay, ECF No. 13-1, at 5:3–5.

STANDARD

The power to issue a motion to stay derives from a federal district court's power to 

control its docket and ensure that cases before it are justly determined. Levya v. 

Certified Grocers of Cal., Ltd., 593 F.2d 857, 864–65 (9th Cir.1979), cert. denied, 

444 U.S. 827, 100 S. Ct. 51, 62 L. Ed.2d 34 (1979). Indeed, “a trial court may, with 

propriety, find it is efficient for its own docket and the fairest course for the parties to 

enter a stay of an action before it, pending resolution of independent proceedings which 

bear upon the case.” Id. at 863–64. “This rule applies whether the separate 

proceedings are judicial, administrative, or arbitral in character, and does not require that 

the issues in such proceedings are necessarily controlling of the action before the court.” 

Id. A federal district court has broad discretion in deciding whether to issue a stay. Fed. 

Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir.1989).

ANALYSIS

Whenever an insurer defends a third-party action against its insureds under a 

reservation of rights, “an a-typical insurer-insured relationship is created . . . . [F]actual 

determinations made in the coverage case, were that to be litigated first, could be 

3 Plaintiff also named Jane Doe as a Defendant in the present action “in order to bind her to the 

adjudications sought in its Declaratory Relief Action.” Pl.’s Opp., ECF No. 18, at 4 n.1. 

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binding in the third-party action to the disadvantage to the insured.” Home Indem. Co. v. 

Simson Lumber Co., 229 F. Supp. 2d 1075, 1091 (D. Or. 2001). Thus, under California 

law, when an insurer seeks a declaratory judgment under an insurance policy and there 

is an underlying third-party action against the insureds, a stay of the declaratory relief 

action pending resolution of the underlying third-party suit is appropriate “when the 

coverage question turns on facts to be litigated in the underlying action.” Montrose 

Chem. Corp. v. Super. Ct. (Montrose I), 6 Cal. 4th 287, 301 (1993). Granting a stay in 

such cases serves to “eliminate the risk of inconsistent factual determinations that could 

prejudice the insured.” Id. Such factual inconsistencies may arise “because the 

[insurer’s] duty to defend frequently turns on coverage, and . . . coverage frequently 

turns on factual issues to be litigated in the third party liability action.” Montrose I, 

6 Cal. 4th at 305. Federal courts in California have followed the Montrose rule. 

OneBeacon Ins. Co. v. Parker, Kern, Nard & Wenzel, 1:09–CV–00257 AWI GSA, 2009 

WL 2914203, at *4 (E.D. Cal. Sept. 9, 2009) (citing Cort v. St. Paul Fire & Marine Ins. 

Cos., 311 F.3d 979 (9th Cir. 2002); Conestega Servs. Corp. v. Exec. Risk. Indem., 

312 F.3d 976 (9th Cir. 2002)).

Courts have noted three major concerns surrounding 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 defending the insured and with whom there is a special 

relationship, is effectively attacking its insured and thus aiding the claimant in the

underlying suit. Haskel, Inc. v. Super. Ct., 33 Cal. App. 4th 963, 979 (1995) (citing 

Montrose Chem. Corp. v. Super. Ct. (Montrose II), 25 Cal. App. 4th 902, 910 (1994)). In 

order to guard against such abuse, the Court must not permit the insurer to effectively 

join forces with the third-party claimants in order to defeat coverage. Montrose II, 

25 Cal. App. 4th at 909–10.

Second, litigating the coverage dispute while the underlying action is still pending 

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 

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questions.” Haskel, Inc. 33 Cal. App. 4th at 979 (citing Montrose II, 25 Cal. App. 4th at 

910). Fighting such a two-front war “effectively undercuts one of the primary reasons for 

purchasing liability insurance.” Id.

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 the results in the former.” Id.

“It is only when 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.” Montrose II, 25 Cal. App. 4th at 910 

(emphasis added). When such a potential conflict exists, a district court should enter a 

stay. “By contrast, when the coverage question is logically unrelated to the issues of 

consequence in the underlying judgment, the declaratory relief action may properly 

proceed to judgment.” Montrose I, 6 Cal.4th at 302. Put differently, it is only when there 

is no overlap of issues that the Court has discretion to not order a stay. Great Am. Ins. 

Co. v. Super. Ct., 178 Cal. App. 4th 221, 235–36 (2009).

In the present case, Plaintiff is defending Gym Defendants in the Underlying 

Lawsuit under a reservation of rights. Gym Defendants’ liability in the Underlying 

Lawsuit hinges on Jane Doe establishing that Gym Defendants knew or should have 

known of DOE I’s sexual abuse of Jane Doe because they received reports of 

misconduct. See Compl., ECF No. 1, at 3 ¶ 14. In order to demonstrate no duty to 

defend, Gym Defendants must prove the existence of a potential for coverage, while 

Plaintiff must establish the absence of any such potential. Montrose I, 6 Cal. 4th at 300. 

More specifically, Plaintiff must prove conclusively that it has no duty to defend Gym 

Defendants because all the facts alleged in the Underlying Lawsuit, and known to 

Plaintiff outside the allegations in the Underlying Lawsuit, necessarily fall within the 

Physical/Sexual Abuse exclusion, the Assault or Battery exclusion, or some other 

coverage limitation. See States Ins. Co. v. Progressive Cas. Ins. Co., 180 Cal. App. 4th 

18, 26 (1995).

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Gym Defendants allege that Plaintiff’s declaratory judgment action overlaps with 

the Underlying Lawsuit, and, as a result, this Court will be forced to resolve factual 

issues that are intertwined with the Underlying Lawsuit. Mem. ISO Mot. Stay, ECF 

No. 13-1, at 10. For example, the Court will have to address whether “all of the 

allegations of non-sexual conduct are inseparable from [DOE I’s] sexual abuse.” Id. at 

10:15–16. Plaintiff, on the other hand, asserts that the issue in this declaratory judgment 

action is whether the allegations made by Jane Doe in the Underlying Lawsuit fall within 

the exclusions of the Policies. Pl.’s Opp. Mot. Stay, ECF No. 18, at 9:4–10. In other 

words, the declaratory judgment action can be resolved by comparing the pertinent 

terms of the Policies to the allegations in the Underlying Lawsuit.

Because the limited issue asserted in this declaratory judgment action is separate 

from any underlying claim between Jane Doe and Gym Defendants, the Court can 

adjudicate the issue in this action without rendering conclusions regarding the 

Underlying Lawsuit. “The extent of coverage does not depend on whether defendants 

are found liable in the underlying action. The declaratory judgment action simply seeks 

a determination as to whether the allegations in the underlying action are of the nature 

intended to be covered by the insurance policy.” Allstate Ins. Co. v. Huerta, 

No. S-06-856 LKK/KJM, 2006 WL 2655239, at *3 (E.D. Cal. Sept. 13, 2006). Similarly, 

Plaintiff only seeks a determination as to whether the Policies encompass the allegations 

in the Underlying Lawsuit, and Plaintiff takes no position on an underlying claim. 

Moreover, while the Court’s analysis of the Policies involves legal conclusions, resolution 

of a claim against Gym Defendants will require factual determinations. Because the 

coverage issues do not turn on the Underlying Lawsuit’s liability questions, this Court 

can adjudicate the coverage obligations without impeding any underlying claim.

Furthermore, because the Court does not find a conflict between the declaratory 

judgment action and an underlying action, the concerns that generally favor the Court 

granting a motion to stay are not present in this case. First, the Court is not persuaded 

that Plaintiff will attack Gym Defendants and offer aid to Jane Doe in the Underlying 

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Lawsuit. Plaintiff appears to assert no position regarding claims by Jane Doe against 

Gym Defendants. Second, the present situation will not require Gym Defendants to fight 

a two-front war. Gym Defendants have not demonstrated a clear case of hardship or

inequity in having to defend themselves in two separate actions, especially since Plaintiff 

is currently defending Gym Defendants in the Underlying Lawsuit. See Great Am. 

Assurance Co. v. M.S. Indus. Sheet Metal, Inc., Case No. SACV 11-754-JST (MLGx), 

2011 WL 13228037, at *3 (C.D. Cal. Sept. 22, 2011). Third, the Court does not find that 

this declaratory judgment action will collaterally estop Plaintiff and Gym Defendants from 

contesting issues in the Underlying Lawsuit. Gym Defendants are not only able to argue 

that the allegations in the Underlying Lawsuit are covered by the insurance policy while 

at the same time not admitting to the truth of the Underlying Lawsuit, but “the mere 

possibility of collateral estoppel does not justify a stay of the declaratory proceeding.” 

M.D. Sass Investors Servs., Inc. v. Reliance Ins. Co., 810 F. Supp. 1082, 1090 

(N.D. Cal. 1992).

Given the foregoing, the Court does not find a potential conflict between the 

coverage dispute in this Court and the Underlying Lawsuit. Because the coverage 

question can be resolved without litigating facts that may be disputed in the Underlying 

Lawsuit, Gym Defendants’ Motion to Stay is DENIED.

CONCLUSION

For the foregoing reasons, Gym Defendants’ Motion to Stay, ECF No. 13, is 

DENIED.

IT IS SO ORDERED.

Dated: April 28, 2020

Case 2:19-cv-01015-MCE-AC Document 21 Filed 04/29/20 Page 8 of 8