Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_02-cv-02165/USCOURTS-casd-3_02-cv-02165-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Insurance Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

EAGLE STAR INSURANCE

COMPANY LIMITED,

Plaintiff,

CASE NO. 02cv2165 WQH (CAB)

ORDER

vs.

HIGHLAND INSURANCE COMPANY,

Defendant.

HIGHLAND INSURANCE COMPANY,

Third-Party Plaintiff,

 vs.

ACE USA, as successor to Aetna

Insurance Company,

Third-Party Defendant.

HAYES, Judge:

The matters before the Court are the Motion to Dismiss Highlands’s Third-Party

Complaint Without Prejudice filed by Highlands Insurance Company (Doc. # 171) and the

Motion to Dismiss Third-Party Complaint With Prejudice filed by ACE USA (Doc. # 172).

BACKGROUND

On November 2, 2002, Defendant Highlands Insurance Company (“Highlands”) filed

its Notice of Removal which removed the suit filed by Plaintiff Eagle Star Insurance Company

from the Superior Court of the State of California for the County of San Diego. (Doc. # 1).

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On August 7, 2003, the Court granted Highlands leave to file a Third-Party Complaint as a

Third-Party Plaintiff. (Doc. # 24). On August 15, 2003, Highlands filed its Third-Party

Complaint against ACE USA (“ACE”) as a successor in interest to Aetna Insurance Company.

(Doc. # 28). On February 26, 2004, the Court denied ACE’s motion to stay or dismiss the case

in favor of arbitration and granted ACE’s motion to dismiss the third claim for breach of

contract. (Doc. # 56). On January 26, 2006, the United States Court of Appeals for the Ninth

Circuit issued a memorandum disposition reversing this Court’s ruling that the dispute between

Highlands and Ace was not arbitrable. See Doc. 171-2, Ex. C. On October 26, 2007, the Court

stayed the case pending resolution of ACE’s appeal of a settlement agreement between Eagle

Star Insurance Company Limited (“Eagle Star”) and Highlands in Texas state court. (Doc. #

137). On August 26, 2009, the Texas Court of Appeals issued a memorandum opinion

resolving the action pertaining to the settlement between Eagle Star and Highlands. See Doc.

# 137. On November 23, 2009, the Court lifted the stay and ordered the parties to “proceed

forthwith with the resolution of this action.” (Doc. # 161). The parties appeared before the

Magistrate Judge for a status conference on March 19, 2010. (Doc. # 170). Eagle Star and

Highlands “represented [to the Magistrate Judge] that the dispute between Eagle Star and

Highlands has been resolved, and the parties are prepared to dismiss the complaint with

prejudice.” Id. at 1. Although Eagle Star and Highlands reached a settlement agreement,

Highlands and ACE did not. Id. Highlands and ACE disagreed as to whether the Third-Party

Complaint should be dismissed with prejudice or without prejudice. Id. The Magistrate Judge

ordered Highlands and ACE to “file and serve cross-motions for dismissal . . . no later than

April 26, 2010.” Id. at 1-2. On April 26, 2010, the Highlands and ACE filed their crossmotions to dismiss. (Docs. # 171, 172).

ALLEGATIONS OF THE THIRD PARTY COMPLAINT

Highlands entered into a business agreement with Cravens Dargan & Company

(“Cravens”) on June 1, 1964 which appointed Cravens as Highlands’s underwriting manager

for insurance policies written in California and the Pacific Coast. (Doc. # 28 at 3). The

agreement was modified during the course of the business relationship with Cravens and a

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subsidiary, Cravens Dargan & Company, Pacific Coast. Id. at 4. Highlands “became

dissatisfied” with some of the reinsurers selected by Cravens and replaced the reinsurers with

Aetna. Id. Under the terms of an addendum to the 1964 agreement, Highlands, Cravens, and

Aetna agreed that Aetna assumed liability for losses as of January 7, 1975. Id. at 5. ACE is

Aetna’s “corporate successor.” Id. To the extent that Highlands is liable to Eagle Star, ACE

is obligated to indemnify Highlands pursuant to the 1975 agreement. Id. at 6. 

In support of Highlands’s first claim for declaratory judgment, Highlands alleges ACE

disputes “the nature and extent of its obligation to reinsure Highlands with respect to losses

arising from assumed reinsurance risks . . . .” Id. “An actual case or controversy exists

between Highlands and ACE regarding their respective rights and obligations under the

Management Agreements, including but not limited to ACE’s obligation to pay reinsurance

proceeds to Highlands.” Id. Highlands seeks a declaratory judgment which “resolve[s] the

parties’ dispute . . . . [as to] pending and future claims submitted to Highlands by Eagle Star.”

Id.

In support of Highlands’s second claim for indemnification, Highlands alleges ACE is

obligated to indemnify Highlands for “losses it is required to pay in connection with assumed

reinsurance risks underwritten by” Cravens’ subsidiary. Id. at 7. Highlands seeks

“indemnification from ACE for any amounts Highlands may be required to pay Eagle Star

pursuant to the terms of the Management Agreement.” Id. at 7. 

Highlands’s third claim for breach of contract was previously dismissed by the Court.

 (Doc. # 56).

In support of Highlands’s fourth claim for unjust enrichment, Highlands alleges ACE

will be unjustly enriched if it fails to honor its obligation to reimburse Highlands for losses

pursuant to the reinsurance agreement. Id. at 8.

CONTENTIONS OF THE PARTIES

Highlands contends that its claims against ACE are “broader than the claims asserted

by Eagle Star” and “were never addressed or resolved at any stage of the proceedings in this

matter.” (Doc. # 171-1 at 13). Highlands contends that its claims against ACE should

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therefore be dismissed without prejudice, which will allow arbitration of claims which remain

between Highlands and ACE. Id. at 13-14. Highlands contends a dismissal with prejudice

would prevent it from ever adjudicating “subsequent claims against ACE in connection with

the disputed Cravens pool liabilities” before an arbitrator. Id. Highlands contends that there

are additional members of the Cravens insurance pool which may assert claims against

Highlands which ACE must indemnify and that a dismissal with prejudice will prevent

Highlands from seeking such indemnification from ACE. Id. at 15. Highlands contends that

it is arbitrating claims against ACE for “indemnification under the Umbrella Program

reinsurance agreements” and that the arbitration would be impaired by a dismissal with

prejudice in this case. Id. at 17. Highlands contends that “ACE may attempt . . . to offset from

any amounts it owes to Highlands those sums that ACE alleges are owed to it by Highlands,

under any contracts between them” which Highlands could not effectively challenge if its

Third-Party Complaint is dismissed with prejudice. Id. Highlands contends the Federal

Arbitration Act (“FAA”) does not authorize federal courts to dismiss claims which must be

arbitrated with prejudice because only the arbitrator may resolve the claims on the merits. Id.

at 18. Highlands contends that the terms of the settlement agreement between Highlands and

Eagle Star explicitly left open the issue of ACE and Cravens’s obligations to Highlands. Id.

ACE contends that the Court has discretion to determine whether to dismiss the case

with prejudice or without prejudice. (Doc. # 172-1 at 5). ACE contends that the Court should

exercise its discretion to dismiss the case with prejudice where dismissal without prejudice

would be “inequitable or prejudicial” to the defendant. Id. (citation omitted). ACE contends

that Highlands assigned all of its claims against ACE to Eagle Star as part of the settlement

agreement of the original action between Eagle Star and Highlands. Id. Therefore, ACE

contends Highlands “no longer has a right to pursue such claims against ACE . . . . [because

the] claims have been fully and finally resolved.” Id. at 6. ACE contends that all of

Highlands’s claims in the Third-Party Complaint are derivative of the dispute between

Highlands and Eagle Star. Id. ACE contends that Highlands’s claims should be dismissed

with prejudice because they cannot be litigated in any court and must instead be resolved in

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arbitration. Id.

ANALYSIS

Pursuant to Federal Rule of Civil Procedure 41(a), after a responsive pleading has been

filed, “an action may be dismissed at the plaintiff’s request only by court order, on terms that

the court considers proper. . . . Unless the order states otherwise, a dismissal under this

paragraph is without prejudice.” Rule 41(a)(2) is a “broad grant of discretion” allowing district

courts to determine whether a dismissal should be with or without prejudice. Hargis v. Foster,

312 F.3d 404, 412 (9th Cir. 2001). Rule 41(a)(2) “does not contain a preference for one kind

of dismissal or another.” Id. 

When ruling on a motion to dismiss without prejudice, the district court must

determine whether the defendant will suffer some plain legal prejudice as a

result of the dismissal. . . . Although case law does not articulate a precise

definition of ‘legal prejudice,’ the cases focus on the rights and defenses

available to a defendant in future litigation. . . . We conclude that legal prejudice

is just that - prejudice to some legal interest, some legal claim, some legal

argument. Uncertainty because a dispute remains unresolved is not legal

prejudice.

Westlands Water Dist. v. United States, 100 F.3d 94, 96 (9th Cir. 1996). 

The “legal prejudice” identified by ACE is ACE’s assertion that Highlands’s claims

have already been adjudicated on the merits via the settlement agreement between Eagle Star

and Highlands and that Highlands “no longer has a right to pursue such claims against ACE.”

However, Highlands contests this assertion. Such “uncertainty because a dispute remains

unresolved” between the parties does not constitute “legal prejudice” under controlling

precedent. See Westlands, 100 F.3d at 96. ACE has failed to identify “plain legal prejudice”

which will result from a dismissal without prejudice. In any event, this Court cannot

adjudicate the question of whether Highlands’s claims against ACE are barred by the

settlement agreement. In light of the Ninth Circuit’s previous ruling that this Court must

“dismiss[] or stay [] Highlands’s third-party complaint in favor of arbitration,” an assessment

of the merits of or scope of Highlands’s claim would be improper.

CONCLUSION

IT IS HEREBY ORDERED that:

(1) The Motion to Dismiss Highlands’s Third-Party Complaint Without Prejudice

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filed by Highlands Insurance Company (Doc. # 171) is GRANTED.

(2) The Motion to Dismiss Third-Party Complaint With Prejudice filed by ACE

USA (Doc. # 172) is DENIED.

(3) The Third-Party Complaint is DISMISSED WITHOUT PREJUDICE.

(4) Eagle Star Insurance Company Limited and Highlands Insurance Company shall

file their joint motion to dismiss the Complaint within ten days of the date of

this order.

DATED: July 22, 2010

WILLIAM Q. HAYES

United States District Judge

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