Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_06-cv-00052/USCOURTS-caed-1_06-cv-00052-0/pdf.json

Parties Involved:
D.H. Williams Construction, Inc.
Defendant
Royal Surplus Lines Insurance Company
Plaintiff

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

ROYAL SURPLUS LINES INSURANCE

COMPANY, a Connecticut

corporation,

Plaintiff,

v.

D.H. WILLIAMS CONSTRUCTION,

INC., a California

Corporation, and DOES 1

through 10, inclusive,

Defendants.

1:06-CV-00052-OWW-SMS

MEMORANDUM DECISION AND ORDER

DENYING DEFENDANT’S MOTION TO

DISMISS; GRANTING DEFENDANT’S

MOTION TO STAY

1. INTRODUCTION

Plaintiffs Royal Surplus Lines Insurance Company (“Royal”)

brings a declaratory judgment action under 28 U.S.C. §2201(a) to

be relieved of any duty to defend or indemnify Defendant D.H.

Williams Construction, Inc. (“Williams”) under a comprehensive

general policy of insurance No. K2HA120996 (“the policy”). The

policy provided coverage from August 1, 2002 to August 1, 2003. 

Williams brings a motion to dismiss or, in the alternative, a

motion to stay the action. Royal opposes the motions. 

2. PROCEDURAL HISTORY

Royal filed its complaint on January 16, 2006. (Doc. 2,

Complaint for Declaratory Relief and Demand for Jury Trial

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(“Complaint”).) On April 14, 2006, Williams filed a motion to

dismiss or, in the alternative, motion to stay the proceedings. 

(Doc. 12, Mot. to Dismiss or, in the alternative, Mot. to Stay.)

Royal opposed the motion on April 28, 2006. (Doc. 14, Memorandum

in Opp. re Mot. to Dismiss (“Opposition”).) On May 8, 2006,

Williams filed a reply. (Doc. 17, Reply to Response to Mot.to

Dismiss(“Reply”).)

3. BACKGROUND OF THE CASE

A. Diversity of the Parties

Jurisdiction is based on diversity and amount in

controversy. 28 U.S.C §1332. Royal is a Connecticut corporation

with its principal place of business in Charlotte, North

Carolina. (Doc. 2, Complaint, ¶1) Williams is a California

corporation, with its principal place of business in Fresno,

California. (Id.) Williams is the only named defendant. (Id.) 

The amount in controversy is in excess of $75,000. (Id., ¶2) 

This amount is comprised of defense fees and costs already

incurred by Royal for defending Williams in an underlying state

action, as well as future defense fees, costs, and indemnity

payments Royal might be required to pay. (Id.) 

B. The Underlying State Action

On January 8, 2003, a complaint was filed against Williams

and the Santa Rosa Rancheria Housing Department (“Santa Rosa”). 

(Doc. 14, Opposition, at 4) The action Earl W. Schott v. D.H.

Williams Constr., Inc., et al., Case No. 03 CE CG 12652 (“the

underlying action”), was filed in the Superior Court of the State

of California, County of Fresno. (Id.) The action centers

around a dispute between Williams and Santa Rosa over the

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 The parties notified the court at oral argument that the 1

original trial date of June 19, 2006 was continued to October

2006. The parties did not give a specific day. 

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construction of the Santa Rosa Housing Subdivision (“the

subdivision”) in Kings County, California. (Id.) A mandatory

settlement conference took place on June 5, 2006. (Doc. 17,

Reply, at 6) The underlying action is proceeding in Fresno

County Superior Court in October 2006. Royal agreed to defend 1

Williams in the state case under a full reservation of rights by

letter dated February 25, 2005. (Doc. 2, Complaint, ¶33) Royal

has provided and continues to provide for D.H. Willams’ defense

in the underlying state action. (Id., ¶42)

i. The Subdivision

In May 2001, Santa Rosa solicited and received bids for the

construction of the subdivision. (Doc. 14, Opposition at 3) The

bid was awarded to Williams. (Id.) On June 8, 2001, Williams

contracted with Santa Rosa to furnish all labor, material,

equipment, services, and platform and complete work required for

the construction of the subdivision. (Id.) On September 18,

2001, Williams subcontracted with Earl W. Schott, Inc. (“Schott”)

to provide construction services at the subdivision. (Id.) As

part of the subcontract, Schott agreed to provide earthwork,

water, sewer, and storm work. (Id.)

After the subdivision was completed, Santa Rosa, as the

owner, filed a Notice of Completion with the Kings County ClerkRecorder on September 16, 2002. (Doc. 2, Complaint, ¶12) On

October 10, 2002, Schott served a “Stop Notice Legal Notice to

Withhold Construction Funds” on Santa Rosa, demanding that it set

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aside $632,760.92 to pay for work completed by Schott under the

subcontract but not paid by Williams. (Id., ¶13) A mechanic’s

lien was filed on the same date. (Id.) 

ii. The Schott Complaint

The Schott complaint alleges that, pursuant to a contract

with Williams, Schott performed the work on the subdivision

between the date of the contract and September 16, 2002. (Doc.

2, Complaint, ¶15) Schott further alleged that it performed all

conditions, covenants, and promises it made under the Schott

subcontract, except repair of a manhole, which Williams would not

permit him to repair. (Id.) The Schott complaint also alleged

that Williams paid $2,081,741.97 to Schott and that the sum of

$592,760.92, including change orders and a $40,000 adjustment

with interest is still owing under the subcontract. (Id.) 

Lastly Schott alleged that Williams failed to pay the balance of

amounts still owed for labor, materials, services, and equipment

to complete earthwork and other related work on real property

owned by Santa Rosa. (Doc. 14, Opposition, at 4) 

iii. The Williams Cross Complaint

On July 9, 2003, Williams filed a cross-complaint in the

underlying action against Schott, Santa Rosa, and other named

defendants for breach of contract, express contractual indemnity,

quantum meruit, as well as for unpaid amounts for work performed,

and specific relief. (Doc. 2, Complaint, ¶16) 

iv. The Santa Rosa Cross Complaint

Santa Rosa filed its initial complaint on July 21, 2004.

(Doc. 2, Complaint, ¶17.) On August 2, 2005, Santa Rosa filed an

amended cross-complaint in response to new information obtained

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during discovery in the underlying state action. (Id., ¶18) 

On November 14, 2005, Santa Rosa filed a Second Amended

Cross-Complaint and claimed the following: 

1. Breach of Contract against Williams. 

2. Breach of Contract against Schott.

3. Negligence against Williams and Schott. 

4. Fraud, Deceit (Intentional

Misrepresentation) against Williams. 

5. Fraud, Deceit (Concealment of Fact)

against Williams. 

6. Fraud, Deceit (Intentional

Misrepresentation) against Schott.

7. Fraud Deceit (Concealment of Fact)

against Schott. 

8. Express Contractual Indemnity against

Williams.

9. Implied Contractual Indemnity against

Williams.

10. Implied Contractual Indemnity against

Schott.

11. Implied Equitable Indemnity against

Williams.

12. Recovery on Performance and Payment Bond

against Williams.

13. Express Contractual Indemnity against

Insurance Company of the West. 

14. Breach of Express Warranty against

Williams.

15. Breach of Implied Warranty against D.H.

Willams. 

(Doc. 2, Complaint, ¶21)

The Santa Rosa cross complaint includes numerous allegations

against Williams. First, Santa Rosa alleges that the “sewer

facilities and storm drain system constructed and managed by

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Williams are severely impaired, cannot be utilized in the housing

subdivision, and must be substantially repaired. (Doc.2,

Complaint, ¶22) 

Further, as to the fraud, deceit (intentional

misrepresentation of fact) cause of action, Santa Rosa alleges

that Williams verbally represented that its construction work was

complete and that it conformed with the requirements of the

engineering plan and specifications. (Id., ¶23) Williams made

these representations on “numerous occasions” including at 

construction meetings in late June, July, August and September of

2002. (Id.) Williams also made a written request to have final

notice of completion issued so that final payment would be made. 

(Id.) In reliance on Williams’ misrepresentations, Santa Rosa

was misled and executed the notice of completion on September 13,

2002. (Id.) 

With respect to the fraud and deceit (concealment of facts)

claims, Santa Rosa alleges that on or about June, 13, 2002, June

14, 2002, and July 24, 2002, Williams contracted with a video

inspection service to videotape the underground storm drain and

sewer lines in the subdivision. (Doc. 2, Complaint, ¶24) Santa

Rosa claims that Williams purposefully concealed the existence of

these video inspection tapes from members of Santa Rosa and the

construction manager. (Id.) Santa Rosa further alleges that the

video inspector told Williams that the condition of the pipes on

the tapes were the worst he had ever seen and that Williams

discussed concealing the inspection tapes with Schott. (Id.) 

Santa Rosa believes that Williams knew important facts about the

storm drain system and failed to disclose these facts and the

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 A copy of the insurance policy was not included in the 2

pleadings. It is therefore unclear whether there is an exclusion

for liability assured under the contract. 

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videotape of the system so that Santa Rosa would issue the notice

of completion. (Id.) The Santa Rosa cross complaint also

includes claims and allegations against Schott. These

allegations and claims are not included in the pleadings.

C. Terms of the Insurance Policy2

Royal issued insurance policy number K2HA120996 to Williams

providing comprehensive general liability coverage for the period

of August 1, 2002 to August 1, 2003. (Doc.2, Complaint, ¶25) 

The policy includes insurance limits of $2 million general

aggregate, $2 million products completed operations aggregate

limit, $1 million per occurrence. (Id.) Subject to all of its

terms, the policy provides liability coverage for those sums that

the insured becomes legally obligated to pay as damages because

of “bodily injury” or “property damage” under Coverage A and

“personal and advertising injury” to which insurance applies

under Coverage B. (Id.)

i. Definitions

The policy contains the following definitions: 

1. “Impaired Property” is defined as

“tangible property,” other than “your

product” or “your work” that cannot be

used or is less useful because:

a. It incorporates “your product” or

“your work” that is known or

thought to be defective, deficient,

inadequate, or dangerous; or

b. You have failed to fulfill the

terms of a contract or agreement;

if such property can be restored to

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use by:

i. The repair, replacement,

adjustment, or removal of

“your product” or “your work”;

or

ii. Your fulfilling the terms of

the contract or agreement.

2. “Your product” is defined as: 

a. Any goods or products, other than

real property, manufactured, sold,

handled, distributed, or disposed

of by:

i. You;

ii. Others trading under your

name; or

iii. A person or organization whose

business or assets you have

acquired; and 

b. Containers (other than vehicles),

materials, parts or equipment

furnished in connection with such

goods or products.

c. “Your product” includes:

i. Warranties or representations

made at any time with respect

to the fitness, quality,

durability, performance or use

of “your product”; and 

ii. The providing of or failure to

provide warnings or

instructions.

d. “Your product” does not include

vending machines or other property

rented to or located for the use of

others but not sold.

3. “Your work” is defined as:

a. Work or operations performed by you

or on your behalf; and 

b. Materials, parts or equipment

furnished in connection with such

work or operations

c. “Your work” includes: 

i. Warranties or representations

made at any time with respect

to the fitness, quality,

durability, performance or use

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 Copies of Commercial General Coverage Form CG-00-01-01-96 3

and Common Policy Conditions IL-00-17-11-85 were not included in

the pleadings. 

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of “your work”; and 

ii. The providing of or failure to

provide warnings or

instructions. 

4. The policy defines “occurrence” as “an

accident including continuous or

repeated exposure to substantially the

same general harmful conditions.”

5. “Residential” means single family

dwellings, multi-unit residential

subdivisions, tract homes, master

planned residential communities,

residential condominiums, residential

townhouses and/or residential duplexes.

(Doc. 2, Complaint, ¶28, ¶31, and ¶32)

ii. Insuring Agreement Under Coverage A

The policy contains Commercial General Coverage Form CG-00-

01-01-96 and Common Policy Conditions IL-00-17-11-85. The 3

insuring agreement under Coverage A provides:

1. Insuring Agreement

a. We will pay those sums that the

insured becomes legally obligated

to pay as damages because of

“bodily injury” or “property

damage” to which this insurance

applies. We will have the right

and duty to defend the insured

against any “suit” seeking those

damages. However, we will have no

duty to defend the insured against

any “suit” seeking damages for

“bodily injury” or “property

damage” to which this insurance

does not apply. We may, at our

discretion, investigate any

“occurrence” and settle any claim

or “suit” that may result.

2. This insurance applies to “bodily

injury” and “property damage” only if: 

a. The “bodily injury” or “property

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damage” is caused by “an

occurrence” that takes place in the

“coverage territory”; and 

b. The “bodily injury” or “property

damage” occurs during the policy

period. 

c. Prior to the policy period, no

insured listed under Paragraph 1 of

Section II - who is an insured and

no “employee” authorized by you to

give or receive notice of an

“occurrence” or claim, knew that

the “property damage” had occurred,

in whole or in part. If such a

listed insured or authorized

“employee” knew, prior to the

policy period, that the “property

damage” occurred, then any

continuation, change or resumption

of such “property damage” during or

after the policy period will be

deemed to have been known prior to

the policy period.

(Doc. 2, Complaint, ¶26)

iii. Insuring Agreement Under Coverage B

The insuring agreement under Coverage B provides: 

1. Insuring Agreement

a. We will pay those sums that the

insured becomes legally obligated

to pay as damages because of

“personal injury” or “advertising

injury” to which this insurance

applies. We will have the right

and duty to defend the insured

against any “suit” seeking those

damages. However, we will have no

duty to defend the insured against

any “suit” seeking damages for

“personal injury” or advertising

injury” to which this insurance

does not apply. We may, at our

discretion, investigate any

“occurrence” and settle any claim

or “suit” that may result.

(Doc. 2, Complaint, ¶27)

iv. Expected or Intended Injury Exclusion 

The policy contains the following “Expected or Intended

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Injury” exclusion, which states that the policy does not apply

to:

1. Expected or Intended Injury:

a. “Bodily injury” or “property

damage” expected or intended from

the standpoint of the insured. 

This exclusion does not apply to

“bodily injury” resulting from the

use of reasonable force to protect

persons or property. 

(Doc. 2, Complaint, ¶29)

v. Business Risk Exclusion 

The policy also contains a “Business Risk” exclusion which

states that the policy does not apply to:

1. Damage to Property

a. “Property Damage” to: 

i. That particular part of real

property on which you or any

contractors or subcontractors

working directly or indirectly

on your behalf are performing

operations, if the “property

damage” arises out of those

operations;

ii. That particular part of any

property that must be

restored, repaired or replaced

because “your work” was

incorrectly performed on it.

(1) This paragraph does not

apply to “property

damage” included in the

“products completed

operations hazard.”

2. Damage to Your Product: “Property

Damage” to “your product” arising out of

it or any part of it. 

3. Damage to Your Work

a. “Property damage” to “your work”

arising out of it or any part of it

and included in the “productscompleted operations hazard.” This

exclusion does not apply if the

damaged work or the work out of

which the damage arises was

performed on your behalf by a

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28 A copy of RSG-1534-0701 was not included in the pleadings. 4

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subcontractor. 

4. Damage to Impaired Property or Property

not Physically Injured

a. “Property Damage” to “impaired

property” or property that has not

been physically injured, arising

out of: 

i. A defect, deficiency,

inadequacy or dangerous

condition in “your product” or

“your work”; or 

ii. A delay or failure by you or

anyone acting on your behalf

to perform a contract or

agreement in accordance with

its terms. 

iii. This exclusion does not apply

to the loss of use of other

property arising out of sudden

and accidental physical injury

to “your product” or “your

work” after it has been put to

its intended use. 

5. Recall of Products, Work, or Impaired

Property

a. Damages, claims for any loss, cost

or expense incurred by you or

others for the loss of use,

withdrawal, recall, inspection,

repair, replacement, adjustment,

removal or disposal of:

i. “Your product”;

ii. “Your work”; or

iii. “Impaired property”

b. if such product, work, or property

is withdrawn or recalled from the

market or from use by any person or

organization because of a known or

suspected defect, deficiency,

inadequacy or dangerous condition

in it.

(Doc. 2, Complaint, ¶30)

vi. Designated Operations Exclusion Residential Work

The policy also includes Endorsement 4 labeled “Designated

Operations Exclusion Work” form RSG-1534-0701. This endorsement 4

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 It is unclear whether Royal was already defending Williams 5

in the underlying action prior to the Santa Rosa second amended

cross complaint being brought. Also, Royal does not contest that

it has a duty to represent Williams in the underlying action. 

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reads in pertinent part as follows: 

The endorsement modified insurance provided

under the following: 

“COMMERCIAL GENERAL LIABILITY COVERAGE PART;

OWNERS AND CONTRACTORS PROTECTIVE LIABILITY

PART; 

PRODUCTS/COMPLETED OPERATIONS LIABILITY

COVERAGE PART”

The insurance does not apply to “bodily

injury,” “property damage,” “personal

injury,” or “advertising injury” arising out

of any residential work conducted by or for

you.

(Doc. 2, Complaint, ¶32) 

D. Royal’s Position on Its Rights and Duties Under the

Policy

Royal is silent as to when it undertook a duty to defend

Williams in the underlying action. In response to the Santa Rosa

cross complaint Royal issued a supplemental reservation of rights

letter dated February 25, 2005. In this letter, Royal explained 5

its position on its responsibilities to defend and indemnify

Williams as to the claims asserted in Santa Rosa’s second amended

complaint. (Doc. 2, Complaint, ¶33) In this letter, Royal

advised Williams that under Coverage A of the policy, the Santa

Rosa Action does not allege “bodily injury” as that term is

defined in the policy. (Id., ¶34) Royal also advised that under

Coverage B of the policy, the Santa Rosa Action does not allege

“personal injury” or “advertising injury” as those terms are

defined in the policy. (Id., ¶35) 

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 These claims include the following: (1) breach of 6

contract, (2) express and implied contractual indemnity, (3)

implied equitable indemnity, (4) recovery on performance and

payment bond, (5) express and implied breach of warranty, (6)

fraud, deceit (intentional misrepresentation of fact), (7) fraud,

deceit (concealment of fact), (8) and punitive damages. Royal

argues that these alleged causes of action and claims for relief

do not qualify as “property damage” caused by an “occurrence” nor

do they otherwise qualify for coverage under the policy. (Doc.

2, Complaint, ¶39)

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In the letter, Royal reserved its rights to the following: 

1. To deny indemnity obligation on the

basis that “property damage” for which

recovery is sought was not caused by an

“occurrence” as defined by the policy. 

2. To the extent that there is any

“property damage” arising out of the

project which Williams knew had

occurred, in whole or in part, prior to

the policy, Royal reserved its right to

deny indemnity, withdraw from the

defense, and to seek reimbursement of

defense fees and costs from Williams. 

3. To rely upon the Business Risk

exclusions to deny indemnity, withdraw

from the defense, and to seek

reimbursement of defense fees and costs

from Williams. 

4. To rely upon the “Designated Operation

Exclusion Residential Work” endorsement,

to deny indemnity, withdraw from the

defense, and to seek reimbursement of

defense fees and costs from Williams. 

5. To rely upon the “expected or intended

injury” exclusion to preclude coverage. 

(Id., ¶¶36-38 and ¶40)

Royal further advised Williams that it had no duty to

indemnify for non covered causes of action or claims for

relief. (Id., ¶39) However, Royal offered to provide 6

independent counsel to Williams pursuant to California Civil Code

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 Cal. Civ. Code §2860(a) provides: 7

“If the provisions of a policy of insurance

impose a duty to defend upon an insurer and a

conflict of interest arises which creates a

duty on the part of the insurer to provide

independent counsel to the insured, the

insurer shall provide independent counsel to

represent the insured...”

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§2860. The parties did not provide Royal’s reservation of 7

rights letter. 

E. Royal’s Declaratory Judgment Action 

While Royal continues to provide a complete defense to D.H

Williams in the underlying case, Royal contends that the

majority, if not all, of the causes of action alleged and damages

sought in the Santa Rosa Action are not covered by the insurance

policy. (Doc. 2, Complaint, ¶43) Royal argues that its

obligation to contribute toward settlement or damages awarded at

trial is minimal. (Id.) 

Royal brings the following causes of action: 

1. Declaratory relief against Williams with

respect to Royal’s duty to indemnify

Williams in the Santa Rosa Action. 

Specifically Royal requests a judicial

determination that: 

a. under the terms of the policy Royal

has no duty to indemnify Williams

in the Santa Rosa action for non

covered causes of action or those

that fall within the policy

exclusions. 

b. that most if not all of the

“property damage” does not fall

within the policy’s insurance grant

which applies “only if” “prior to

the policy period, no insured...

knew that the property damage had

occurred in whole or in part.” 

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2. For declaratory relief against Williams

with respect to Royal’s right to

reimbursement of fees and costs incurred

by Royal in the Santa Rosa Action.

Specifically Royal requests a

declaration that it has a right to

reimbursement of defense fees and costs

it incurred in the Santa Rosa action in

defense of uncovered claims. 

3. For declaratory relief against Williams

with respect to Royal’s right of

reimbursement of any indemnity payments

Royal may make in the Santa Rosa action. 

Specifically, a declaration that Royal

has a right to reimbursement of

indemnity payments that may be made by

Royal in the Santa Rosa Action to the

extent that Royal pays anything towards

settlement or a judgment in the Santa

Rosa Action, other than covered damages

Royal pays in relation to any covered

causes of action. 

(Doc. 2, Complaint, ¶¶ 44-57)

In its declaratory judgment action, Royal seeks:

1. A judicial determination of the rights

and duties of the parties 

2. A judicial determination that Royal has

no obligation to indemnify Williams in

the Santa Rosa Action, other than for

covered damages awarded in relation to

any covered causes of action.

3. A judicial determination that Royal has

a right to reimbursement of defense fees

and costs, incurred in the Santa Rosa

Action, except for those incurred in

defense of claims against Williams for

any covered causes of action.

4. A judicial determination that Royal has

a right of reimbursement of indemnity

payments made by Royal in the Santa Rosa

Action, to the extent that Royal pays

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anything towards settlement or judgment

in the Santa Rosa Action, other than

covered damages Royal pays in relation

to any covered causes of action.

5. Damages in an amount to be determined at

time of trial but believed to be in

excess of the jurisdictional minimums of

this court.

6. Its attorneys’ fees.

7. Costs of suit herein.

8. Any interest to which Royal is entitled.

9. Such other relief that the court deems

proper.

(Doc. 2, Complaint at 25) Royal does not bring any other claims

that would provide an independent basis for federal jurisdiction.

4. MOTION TO DISMISS

A. Standard of Review

A motion to dismiss under Fed. R. Civ. P. 12(b)(1) addresses

the court’s subject matter jurisdiction, derived from the case or

controversy clause of Article III of the U.S. Constitution. 

Gingo v. United States Dep’t of Educ., 149 F. Supp. 2d 1195, 1200

(E.D. Cal. 2000). Federal courts are limited in jurisdiction; it

is presumed that a case lies outside the jurisdiction of the

federal courts and the burden of establishing the contrary rests

upon the party asserting jurisdiction. Kokkonen v. Guardian Life

Ins. Co. of Am., 511 U.S. 375, 377 (1994); see also, Vacek v.

United States Postal Serv., 447 F.3d 1248, 1250 (9th Cir. 2006). 

A Rule 12(b)(1) jurisdictional attack may be facial or

factual. Safe Air v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). 

In a facial attack, the challenger asserts that the allegations

contained in a complaint are insufficient on their face to invoke

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federal jurisdiction. Id. By contrast, in a factual attack, the

challenger disputes the truth of the allegations that, by

themselves, would otherwise invoke federal jurisdiction. Id. A

jurisdictional challenge is a factual attack which relies on

extrinsic evidence and does not assert lack of subject matter

jurisdiction solely on the basis of the pleadings. Id.

Unlike a Fed. R. Civ. P. 12(b)(6) motions, for motions under

Fed. R. Civ. P. 12(b)(1), the moving party may submit affidavits

or any other evidence properly before the court. Association of

Am. Med. Colleges v. United States, 217 F.3d 770, 778 (9th Cir.

2000). It then becomes necessary for the party opposing the

motion to present affidavits or any other evidence to satisfy its

burden of establishing that the court, in fact, possesses subject

matter jurisdiction. Id. The district court does not abuse its

discretion by looking to this extra-pleading material in deciding

the issue, even if it becomes necessary to resolve factual

disputes. Id. 

In a factual 12(b)(1) motion, no presumptive truthfulness

attaches to plaintiff’s allegations, and the existence of

disputed material facts will not preclude the trial court from

evaluating for itself the merits of jurisdictional claims. Ritza

v. International Longshoremen’s & Warehousemen’s Union, 837 F.2d

365, 369 (1988); see also Gingo, 149 F. Supp. at 1200 (quoting

Mortensen v. First Fed. Sav. & Loan Assoc., 549 F.2d 884, 891

(3rd Cir. 1977).) Moreover, the plaintiff has the burden of

proof that jurisdiction does in fact exist. Gingo, 149 F. Supp.

at 1200. Although deference is given to a plaintiff’s factual

allegations in a 12(b)(6) motion, plaintiff’s allegations need

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not be taken as true when considering a rule 12(b)(1) motion. 

Id.

B. Discussion

i. Timeliness of Williams’ Motion 

Royal argues that Williams’ motion is untimely under Fed. R.

Civ. P. 12. Rule 12(a)(1)(A) states, “a defendant shall serve an

answer within 20 days after being served with the summons and

complaint.” However, Fed. R. Civ. P. 6(b) permits a court, at

its discretion, to accept a late filing when the movant’s failure

to meet the deadline was the result of excusable neglect.

Although inadvertence, ignorance of the rules, or mistakes

construing the rules do not usually constitute “excusable”

neglect, it is clear that “excusable neglect” is a somewhat

“elastic concept” and is not limited strictly to omissions caused

by circumstances beyond the control of the movant. Pincay v.

Andrews, 389 F.3d 853, 857 (9th Cir. 2004); Briones v. Riviera

Hotel & Casino, 116 F.3d 379, 381 (9th Cir. 1996).

The United States Supreme Court has established a four-part

balancing test for determining whether there has been “excusable

neglect” under the federal rules of civil procedure. Pincay, 389

F.3d at 856. The four factors include: (1) the danger of

prejudice to the non moving party, (2) the length of delay and

its potential impact on judicial proceedings, (3) the reason for

the delay, including whether it was within the reasonable control

of the movant, and (4) whether the moving party’s conduct was in

good faith. Id. (citing Pioneer Inv. Servs. Co. v. Brunswick

Assocs. Ltd. P’ship, 507 U.S. 380, 395 (1993).) The

determination of whether a party’s neglect is excusable is at

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bottom an equitable one, taking account all relevant

circumstances surrounding the party’s omission. Briones, 116

F.3d at 382.

Royal personally served its complaint to Williams on March

23, 2006. Williams’ response was due on April 12, 2006. 

Williams’ filed its motion to dismiss on April 14, 2006. 

Royal does not claim it suffered any prejudice from Williams

filing the motion two days late. The delay has not been shown to

have an adverse impact on the proceedings. Further, the delay

does not appear to be the result of bad faith. Instead the facts

show that there was some confusion among the parties regarding

Royal granting Williams an extension of time to respond to the

complaint. 

Williams understood that Royal granted it an extension of

time to file a “responsive pleading”. (Doc. 18, Decl. of Alyson

A. Berg (“Berg Declaration”), Ex. A.) Royal clarified in a

letter dated April 14, 2006 that it granted Williams with a two

week extension to “answer” the complaint, not an extension to

file “a responsive pleading.” (Doc. 18, Berg Declaration, Ex.

B.) On that same day, Williams filed its motion to dismiss with

the court. Because Williams filed the motion only two days late

and there are no facts showing prejudice to Royal, bad faith, or

adverse impact on the proceedings, Williams’ motion will be

decided on the merits. Moreover, Royal did not move to enter

Williams’ default and Williams is not foreclosed from filing a

responsive pleading other than an answer out of time. Fed. R.

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 Fed. R. Civ. P. 55(a) states, “When a party against whom a 8

judgment for affirmative relief is sought has failed to plead or

otherwise defend as provided by these rules and that fact is made

to appear by affidavit or otherwise, the clerk shall enter the

party’s default.”

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Civ. P. 55(a).8

ii. The Declaratory Judgment Act and Subject Matter

Jurisdiction Requirement

The Declaratory Judgment Act provides that “in a case of

actual controversy within its jurisdiction... any court of the

United States... may declare the rights and other legal relations

of any interested party seeking such declaration, whether or not

further relief is or could be sought.” 28 U.S.C. §2201(a). Any

such declaration shall have the force and effect of a final

judgment or decree and shall be reviewable as such. Id. 

Before declaratory relief can be granted, federal subject

matter jurisdiction requirements must be satisfied. Gov’t.

Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1222-1223 (9th Cir.

1998) (citing Skelly Oil Co. v Phillips Petroleum Co., 339 U.S.

667, 671 (1950).) The court's jurisdiction in this case is based

exclusively on diversity of citizenship. Original diversity

jurisdiction exists when the parties are of diverse citizenship

and the amount in controversy exceeds $75,000, exclusive of

interests and costs. 28 U.S.C. § 1332(a). Where diversity

jurisdiction exists, the district court has discretion to hear a

declaratory judgment action. Avemco Ins. Co. v. Davenport, 140

F3d 839, 842 n. 1 (9th Cir. 1998). 

Royal is a Connecticut corporation with its principal place

of business in Charlotte, North Carolina. Williams Construction,

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Inc. is a California corporation, with its principal place of

business in Fresno, California. Williams is the only defendant

named in this action. The amount in controversy is in excess of

$75,000. This amount is comprised of defense fees and costs

already incurred by Royal in the defense of Williams in an

underlying state civil action, as well as defense fees and costs

and indemnity payments Royal may be required to pay in the

future. 

iii. Actual Case or Controversy Requirement

In determining whether declaratory relief can be granted, an

inquiry must be made as to whether there is a case of actual

controversy between the parties. Principal Life Ins. Co. v.

Robinson, 394 F.3d 665, 669 (9th Cir. 2005); American States Ins.

Co. v. Kearns, 15 F.3d 142, 144 (9th Cir. 1994). This

requirement is identical to the Article III's constitutional case

or controversy requirement. Kearns, 15 F.3d at 144. In order

for a case to be justiciable under Article III of the

Constitution, it must be ripe for review. Id. A controversy in

this sense must be definite and concrete, touching the legal

relations of the parties having adverse legal interests. West v.

Secretary of the DOT, 206 F.3d 920, 924 (9th Cir. 2000). It must

be a real and substantial controversy, admitting of a specific

relief through a decree of conclusive character, as distinguished

from an opinion advising what the law would be upon a

hypothetical state of facts. Id. 

Williams argues that there is no justiciable controversy in

this case. Williams states that the matter is not ripe for

review as it involves uncertain or contingent events that are

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Abbot Labs v. Gardner, 387 U.S. 136, 154 (1967)(an actual 9

controversy exists where there is a “very real dilemma” between

the Government and petitioners arising from amendments to a

federal regulation.); Aetna Life Ins. Co. v. Haworth, 300 U.S.

227, 242 (1937)(where parties take adverse positions with respect

to their existing obligations under an insurance policy, the

dispute is subject to judicial determination as it is definite

and concrete, rather than hypothetical.); Ohio Forestry Ass'n

Inc. v. Sierra Club, 523 U.S. 726, 733-734 (1998)(there was no

justiciable controversy where the Sierra Club would have ample

opportunity to bring a legal challenge under a federal land and

resources management plan, once the threat of harm was more

imminent.)

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pending in state court. According to Williams, it would be

premature for the court to adjudicate the defense fees and costs

incurred to date knowing that the underlying action and its

ongoing fees and costs have not been fully concluded. Instead,

Williams argues, the court is being asked to rule on abstract or

theoretical disagreements between the parties. In support of its

arguments, Williams cites several cases that are factually

distinguishable or that contradict its legal position. 

9

The Ninth Circuit has held that an actual case or

controversy exists where an insurer seeks a declaration regarding

its present duty to defend and indemnify its insured in a pending

state court liability suit, even if the underlying action has not

yet proceeded to judgment. Kearns, 15 F3d at 144 (making

explicit what was impliedly held in Aetna Casualty & Surety Co. v

Merritt, 974 F.2d 1196 (9th Cir. 1992).) In Kearns, the court

resolved the issue of what is required for the justiciable case

or controversy requirement of a declaratory judgment action. 

American States Insurance Company (“American States”) appealed

the district court judgment dismissing its declaratory relief

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action for lack of jurisdiction. American States Ins. Co. v.

Kearns, 15 F3d 142, 143 (9th Cir. 1994). American States

provided insurance coverage to defendant Kearns, doing business

as Tahoe Boat Company (“Tahoe Boat”). Id. Tahoe Boat was sued

in state court under several theories of liability arising out of

the sale of a boat. Id. American States sought to establish

that under its insurance policy it had no duty to indemnify or to

defend Kearns in the underlying suit. Id. The district court’s

jurisdiction was premised on 28 U.S.C. § 2201(a). Id. American

States undertook Tahoe Boat’s defense with a full reservation of

rights. Id. American States also brought a diversity suit in

federal court for declaratory judgment to establish whether it

had a duty to defend or indemnify Tahoe Boat. Id. The district

court concluded that the action was not sufficiently ripe and

dismissed it for lack of subject matter jurisdiction. Id. The

Ninth Circuit reversed. 

That is the case here. In this case a real dispute exists

between Williams and Royal over Royal's obligations under its

insurance contract involving its duties to defend and indemnify

Williams in the pending state lawsuit. This dispute is not

hypothetical, but definite and concrete. Each party is pleading

coverage and actively disputes whether Royal must defend and

indemnify Williams, now and in the future. The claims involve

the present, specific rights of both parties under the insurance

contract. As in Kearns, Royal insured Williams. Williams has

been sued in state court by third parties under several theories

of liability. That suit is being actively litigated. Royal

seeks to now establish that it has no duty to indemnify or to

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defend Kearns in the pending state suit. Royal has suffered

actual loss by defending Williams under a full reservation of

rights. This case is ripe for adjudication regardless of whether

the underlying liability action in state court has not yet

proceeded to judgment. A dispute between an insurer and its

insured over the duties imposed by an insurance contract

satisfies Article III’s case and controversy requirement. Dizol,

133 F.3d at 1223 n.2 (citing Kearns, 15 F.3d at 144). 

iv. Abstention Under the Declaratory Judgment Act is

Within the Discretion of the Court

If a suit passes constitutional and statutory muster, the

district court must be satisfied that entertaining the action is

appropriate. Dizol, 133 F.3d at 1223. This determination is

discretionary, for the Declaratory Judgment Act is deliberately

cast in terms of permissive rather than mandatory authority. Id. 

However, this discretion is not unfettered. Id. Prudential

guidance for retention of authority over a declaratory relief

action is provided by Brillhart v. Excess Insurance Co. of

America, 316 U.S. 491 (1942). In deciding whether to abstain in

a federal declaratory relief action, the following factors are

considered:

1. Avoiding needless determination of state

law issues

2. Discourage litigants from filing

declaratory actions as a means of forum

shopping 

3. Avoid duplicative litigation 

4. Whether there are parallel state

proceedings

5. Whether the declaratory action will

settle all aspects of the controversy

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6. Whether the declaratory action will

serve a useful purpose in clarifying the

legal action at issue

7. Whether the declaratory judgment action

is being sought merely for the purposes

of procedural fencing or to obtain a

“res judicata” advantage

8. Whether the use of a declaratory action

will result in entanglement between the

federal and state court systems

9. The convenience of the parties

10. The availability and relative

convenience of other remedies

11. Whether there are other claims joined

with an action for declaratory relief

(i.e. bad faith, breach of contract,

breach of fiduciary duty, rescission, or

claims for other monetary relief) 

Dizol, 133 F.3d at 1225 n.5 (citing Kearns, 15 F.3d at 145;

discussing Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 

(1942)); United Nat’l Ins. Co. v. R&D Latex Corp., 242 F.3d 1102,

1112 (9th Cir. 2001). In exercising jurisdiction, the district

court is required to articulate its rationale justifying its

exercise of jurisdiction. R&D Latex Corp., 242 F.3d at 1107;

Dizol, 133 F.3d at 1223. 

a. Abstention When There Is A Pending State

Court Action

There is no presumption in favor of federal abstention in

declaratory actions generally, nor in insurance coverage cases

specifically. Dizol, 133 F.3d at 1225. While the Declaratory

Judgment Act grants district courts with discretion to exercise

federal jurisdiction, an obligation to exert jurisdiction arises

when a declaratory judgment action is joined with claims

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 Such claims include claims of bad faith, breach of 10

contract, breach of fiduciary duty, and rescission. Dizol, 133

F.3d at 1225. 

Hungerford was partially overruled by Dizol’s holding 11

that the Ninth Circuit is not obligated to sua sponte decide

whether a district court abused its discretion in exercising

discretionary jurisdiction when neither party raised the issue. 

Dizol, 133 F.3d at 1227. 

 The holding and rationale in Hungerford is adopted 12

entirely from Allstate Insurance Co. v. Mercier, 913 F.2d 273

(6th Cir. 1990). 

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providing an independent basis for federal review. Id. at 1226 10

n.6. However, in a case such as this where only a declaratory

judgment action is brought, the decision of whether to exercise

jurisdiction while an underlying state action is pending requires

an inquiry into whether a state court is better suited to resolve

the questions in controversy between the parties to the federal

suit. American Nat’l Fire Ins. v. Hungerford, 53 F.3d 1012, 1016

(9th Cir. 1995)(overruled on other grounds by Dizol, 133 F.3d at

1222-1223.) This may entail an inquiry into the scope of the 11

pending state court proceeding, the nature of the defenses open

there, and whether the claims of all parties in interest can

satisfactorily be adjudicated in that proceeding. Id. When an

ongoing state proceeding involves a state law issue that is

predicated on the same factual transaction or occurrence involved

in a matter pending before a federal court, the state court is

the more suitable forum. Id. at 1017. 

12

Williams advances several arguments in support of dismissing

Royal’s declaratory judgment action. First, there is a parallel

proceeding involving the same issues and parties in state court. 

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 For example, Williams argues that any decision as to the 13

question of reimbursement for defense fees and future indemnity

payments cannot be reached since the facts relating to these

issues will be developed in the Schott action. (Doc. 12, Mot. to

Dismiss or, in the alternative, Mot. to Stay, Filed April 14,

2006). This ignores the insurer’s right to have coverage

determined. 

 The business transaction included a transfer of all of 14

PLMC's stock to other corporate entities. Investors for the

company brought a class action against Transcisco, Hungerford,

and other corporate defendants. Hungerford, 53 F.3d at 1014. 

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Critical facts involving Royal’s claims in the declaratory

judgment action will be developed in the underlying action and

any decision on these claims would be premature. Second, Royal 13

has an adequate remedy in state court for declaratory relief. 

The Hungerford case applies the Brillhart factors. American

National Insurance Company brought a declaratory judgment action

against Hungerford seeking a declaration of non coverage for a

defense in an underlying state action. Hungerford, 53 F.3d at

1014. Hungerford was the founder of PLM Companies, Inc. which

later became Transcisco Industries ("Transcisco") as a result of

several business transactions and mergers. Id. Hungerford

served as Chairman of the Board and Chief Executive Officer. Id.

American National provided coverage to Transcisco directors and

officers under a liability insurance policy. Id. Investors for

the company brought a claim in state court against Hungerford14

for breach of fiduciary duty and against the individual

defendants for aiding and abetting in those alleged breaches. 

Id. In addressing American National’s claims for declaratory

relief, the court reasoned that the interest of comity strongly

supported abstaining from exercising jurisdiction in light of the

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pending state law action. Id. at 1018-1019. 

The case of Allstate Insurance Co. v. Veniegas, 2 F. Supp.

2d 1303 (D. Haw. 1998) is also cited by Williams. Allstate filed

a complaint for declaratory judgment seeking a judicial

declaration from the court that it was not obligated to provide

coverage benefits or any other coverage, whether for defense or

indemnity, to Defendants Clarence Cho and survivors of Veneigas. 

Veniegas, 2 F. Supp. at 1305. This case arises out of an

automobile accident involving a Nissan 300 ZX owned by Cho. Id.

at 1304. Cho’s car was driven by Defendant Nakamura who did not

have Cho’s permission to drive the car. Id. As a result of an

argument between Defendant Nakamura and Veniegas, the car skidded

across a roadway, hit a dirt embankment, and overturned causing

the death of Veniegas. Id. Cho was not present at the time the

accident occurred. Id. The Nissan was insured by Allstate for

up to $50,000 per person for accidental harm arising out of the

operation, maintenance or use of the insured vehicle. Id. at

1303-04. 

Eight months after Allstate filed its federal declaratory

judgment action, Defendants filed a state court action against

Nakamura. Id. at 1305. Less than eight days after filing the

state court action, Defendants also filed a motion to dismiss

Allstate’s declaratory relief action. Id. Contrary to

Hungerford, the court in Veniegas exercised jurisdiction over the

federal declaratory judgment action. Id. at 1307. It reasoned

that the state action and the federal action involved two

different set of issues. Id. at 1306. The issues in the

underlying state court action solely revolved around an analysis

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of Hawaii’s negligence law whereas the declaratory relief action

required the application and interpretation of, Hawaii’s

insurance coverage law. Id. Accordingly, Allstate’s declaratory

relief action did not involve a needless determination of state

law. Id. The Veniegas court further reasoned that if the court

were to grant the motion to dismiss, it would in effect be

encouraging insureds to file a lawsuit in state court as a means

of preempting federal court jurisdiction in insurance coverage

cases. Id. The court concluded that exercising federal

jurisdiction in Veneigas would not be an abuse of discretion. 

Id. at 1307. Williams’ contentions will likewise foreclose Royal

from seeking a federal forum in which jurisdiction exists. 

Royal makes several arguments in opposition to Williams’

motion to dismiss. First, Royal correctly argues that the

underlying action involves liability issues under the

construction contract separate and independent from the insurance

coverage issues involved in the federal declaratory relief

action. (Doc. 14, Opposition) Royal points out that it is not

and cannot be a party to the underlying state action and that the

underlying state action does not seek the court’s declaration

regarding the interpretation of Royal’s policy provisions. (Id.) 

Royal argues that it cannot be joined as a party in the

underlying action because it would prejudice Williams’ case. 

(Id.) 

Hungerford addressed several Brillhart factors. First,

Hungerford found that the underlying action sufficiently

paralleled the federal declaratory judgment action. Hungerford,

53 F.3d at 1017. While the federal action presented different

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legal issues in its pleadings than those presented in the state

action, the ultimate legal determination of both actions depended

on the same set of facts. Id. That is not true here as

interpretation of the policy terms are in no way implicated in

the underlying state case. 

In Hungerford, an alternate state remedy existed by which

the legal determinations sought in the federal action could be

made by the state court that had access to a better developed

factual record and was in a superior position to address the

legal issues on which the insurer sought a declaration of right. 

Id. at 1017-18. That is not the case here where insurance law

issues and policy interpretations are to be decided and are

before the state court. 

It is irrelevant here that the underlying case has not been

decided. The Hungerford, court observed that courts should not

be required to decide rights and other legal relations in a

vacuum. Id. at 1017. There is no risk that the district court’s

determination of insurance coverage will conflict with a state

case’s determination of the liability of the parties in the

underlying construction dispute, two of whom are the parties to

the insurance coverage dispute. 

Hungerford also noted the importance of discouraging forum

shopping, procedural fencing, and the race for “res judicata” in

the insurance company’s attempt to obtain a federal forum to

provide the remedy it seeks. Id. at 1018. Veniegas suggests

that the federal court should determine whether the declaratory

judgment action was filed as a “defensive” or “reactive” measure. 

Veniegas, 2 F. Supp. 2d at 1306.

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 Royal cites to the allegations in Santa Rosa’s cross 15

complaint which was filed on November 14, 2005, after the date of

the reservation of rights letter. However, Santa Rosa’s initial

cross complaint was filed on July 21, 2004. 

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b. Analysis

In this case, Royal only brought a federal declaratory

judgment action against its insured, Williams, limited to

insurance issues. Although Royal does not assert a claim that

invokes federal question jurisdiction, diversity provides an

independent grant of federal jurisdiction. That Royal brought

the declaratory judgment claim while the underlying action was

pending in state court is not of consequence because none of the

insurance interpretation issues are present in the state case and

Royal is entitled to have the insurance coverage dispute

resolved. The underlying state case was filed on January 8,

2003. The parties are silent as to when that case was tendered

by Williams to Royal. Royal issued its reservation of rights

letter to Williams on February 25, 2005. Royal issued its letter

“in light of (Santa Rosa’s) new allegations.” Royal filed its 15

declaratory judgment complaint on January 16, 2006, over three

years after the underlying action. A mandatory settlement

conference in the underlying action took place on June 5, 2006

and trial is scheduled for October 2006. 

In this case, Royal correctly asserts that different legal

issues are present in the federal and state actions. The

ultimate facts determined in the state case will have a bearing

on but do not determine coverage. 

Also, Royal should not be forced to seek interpretation of

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its policy in a state court where the pending case does not

implicate insurance issues and the claims in the case will have

to be initiated from ground zero in the state court. The

underlying action will proceed to trial in October 2006, and any

facts that bear on final coverage decisions will then be

determined. As this case progresses, it can be determined if any

factual issues remain that must be determined. Introducing

insurance issues in the state case will increasingly confuse and

unduly complicate that action so that the state action may

undoubtedly require a continuance of the trial or severance. 

Defendant Williams’ MOTION TO DISMISS IS DENIED. 

5. MOTION TO STAY

A. Standard

Although a motion to stay is “not within the ambit” of the

Federal Rules of Civil Procedure, “federal courts often consider

these motions in an effort to maximize the effective utilization

of judicial resources and to minimize the possibility of

conflicts between different courts.” 5A Charles A. Wright &

Arthur R. Miller, Federal Practice and Procedure, § 1360, at 438-

39 (2d ed. 1990). A stay is appropriate when a similar action is

pending in another court (whether state or federal) or when

arbitration may be appropriate. Hungerford, 53 F.3d at 1016 (9th

Cir. 1995)(upholding federal abstention where several state court

claims were pending); Privitera v. California Bd. of Med. Quality

Assurance, 926 F.2d 890, 895-96 (9 Cir. 1990) (holding that a th

stay was not appropriate because there was no indication that

duplicative state court litigation would be avoided or that an

order compelling arbitration would avoid a decision on federal

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constitutional issues); See also Wright & Miller at 439-40. 

A judge has wide discretion to use the inherent power of the

federal court to promote judicial efficiency and prevent

prejudice to the parties in granting or denying a motion to stay. 

See Wright & Miller at 441. In a declaratory judgment action a

district court is authorized in the sound exercise of its

discretion, to stay or dismiss an action seeking a declaratory

judgment before trial or after all arguments have drawn to a

close. Wilton v. Seven Falls, 515 U.S. 277, 288 (1995). In the

declaratory judgment context, the normal principle that federal

courts should adjudicate claims with their jurisdiction yields to

considerations of practicality and wise judicial administration. 

Id. Where the basis for declining to proceed is the pendency of

a state proceeding, a stay will often be the preferable course

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. at n.2. 

B. A Stay is Appropriate When The Declaratory Judgment

Question Prejudices the Parties in the Underlying State

Action

In deciding whether or not to abstain from granting federal

declaratory relief a factor to consider is whether the

declaratory relief action is sought merely for the purposes of

"procedural fencing" or to obtain a "res judicata" advantage in

the underlying state action. Dizol, 133 F.3d at 1225 n.5. When

courts talk about prejudice to the insured from concurrent

litigation of the declaratory relief and third party actions the

focus is on the following: 

1. Prejudice resulting from the insurer

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permitted to join forces with the

plaintiffs in the underlying action as a

means to defeat coverage. 

2. Prejudice resulting from when the

insured is compelled to fight a two

front war, doing battle with the

plaintiffs in the third party litigation

while at the same time devoting its

money and human resources to litigating

coverage issued with its carriers. 

3. Prejudice resulting from any adverse

factual findings in the declaratory

relief action that will have a res

judicata effect on the underlying state

action. 

Scottsdale v. MV Transportation, 36 Cal. 4th 643, 662 (Cal.

2005); Montrose Chem. Corp v. Superior Court, 25 Cal. App. 4th

902, 910 (Cal. Ct. App. 1994) (Montrose II). A stay of a

declaratory relief action to determine coverage is often in order

when the coverage question turns on facts to be litigated in the

underlying third party action to eliminate the risk of

inconsistent factual determinations that could prejudice the

insured. Scottsdale, 36 Cal. 4th at 662. 

Consideration must also be given to the burden on insurance

carriers that must continue to pay defense costs and fees until

the underlying actions are resolved. Montrose II, 25 Cal. App.

4th at 910. However 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.

Scottsdale, 36 Cal. 4th at 662; Montrose II, 25 Cal. App. 4th at

910. 

Royal asserts the three following causes of action in its

complaint: 

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 Santa Rosa also brought a negligence claim against 16

Williams in the underlying action. The parties are silent as to

the Santa Rosa negligence claim. 

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1. A declaration that Royal has no duty to

indemnify Williams in the Santa Rosa

action for non covered causes of action

or those that fall within the policy

exclusions; And a declaration that most

of the "property damage" does not fall

within the policy's insurance grant

which applies "only if" "prior to the

policy period, no insured... knew that

the property damage had occurred in

whole or in part. 

2. A declaration that Royal has a right to

reimbursement of defense fees and costs

incurred by Royal in the Santa Rosa

Action in defense of uncovered claims. 

3. A declaration that Royal has a right to

reimbursement of indemnity payments that

may be made by Royal in the Santa Rosa

Action to the extent that it pays

anything towards settlement or a

judgment in the Santa Rosa Action other

than for covered damages to any covered

causes of action.

Royal lists the following Santa Rosa claims as non covered

causes of action :

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1. breach of contract

2. express and implied contractual

indemnity

3. implied equitable indemnity

4. recovery on performance and payment bond

5. express and implied breach of warranty

6. fraud, deceit (intentional

misrepresentation of fact)

7. fraud, deceit (concealment of fact)

8. punitive damages 

Royal argues that these alleged causes of action and claims

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for relief are not covered because they do not qualify as

“property damage” caused by an “occurrence” nor do they otherwise

qualify for coverage under the policy. Royal does not specify

what claims would fall within the policy’s exclusions. The

policy exclusions include: 

1. The Expected or Intended Injury

Exclusion

2. The Business Risk Exclusion

3. The Designated Operations Exclusion

Residential Work

Williams rejoins that a determination of the declaratory

judgment action would prejudice it by requiring that it fight a

“two front war.” Proceeding with this declaratory judgment

action would prejudice Williams by requiring that it not only

litigate against plaintiffs in the underlying action but also

devote its money and human resources to litigating coverage

issues with Royal. 

Further, any determination of whether Royal has a duty to

defend and indemnify Williams in the Santa Rosa action with

respect to non covered causes of action requires an inquiry into

what causes of action are covered and not covered under the

policy terms and its exclusions. This question will inevitably

turn on facts to be litigated in the underlying complaint. There

is a very real risk of the declaratory judgment action having a

res judicata effect in the underlying action and resulting in

prejudice to Williams. 

Royal’s right to seek adjudication of coverage issues by way

of a declaratory relief action during the pending state action a

balance of the competing interests of the insured and the

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insurer. Royal’s policy limits and payment of non covered

defense fees will soon be implicated in the settlement conference

in the state action. However, Royal has properly reserved its

rights as an insurer under a standard Commercial General

Liability policy, under which it may be compelled to advance sums

to defend its insured against a third party lawsuit. Scottsdale,

36 Cal. 4th at 662. Royal has the right to recoup such costs

from Williams if it determined, as a matter of law, that no duty

to defend ever arose because the Santa Rosa or the Schott actions

never presented any covered claim. Id. 

Lastly, Royal argues that if there is a finding that a stay

is appropriate, the coverage defenses that Royal is responsible

for should be severed from the coverage defenses that are not its

responsibilities. A stay is appropriate to prevent potential

prejudice to Williams if facts are decided here that will

prejudice it in the state case and will require it to fight a two

front war. If the state case is not tried or resolved in

October, Royal may apply for a partial lifting of the stay to

address allegedly insured claims for which no coverage can exist

as a matter of law. 

Williams motion to stay Royal’s declaratory judgment action

is GRANTED.

6. CONCLUSION

Defendant’s MOTION TO DISMISS is DENIED. 

Defendant’s MOTION TO STAY is GRANTED, subject to the terms of

this decision.

Defendant should lodge an order consistent with this

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decision within five days following service of this decision by

the clerk of court. All pending hearings are vacated. The

parties will file a joint status report six months from the date

of this order. 

SO ORDERED

Dated: July 24, 2006 /s/ OLIVER W. WANGER

OLIVER W. WANGER

United States District Judge

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