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W. E. O'NEIL CONSTR. CO. v. NATIONAL UNION FIRE IN

August 31, 1989

W. E. O'NEIL CONSTRUCTION CO., Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 This is a dispute between W. E. O'Neil Construction Company ("O'Neil") and National Union Fire Insurance Company of Pittsburgh ("National Union") concerning the scope of coverage of an insurance policy issued by National Union to O'Neil. Jurisdiction is based on diversity of citizenship. Pending is National Union's motion to dismiss the complaint. For the reasons described below, the motion is denied.

 II. FACTS

 Because this is a motion to dismiss, the Court accepts as true the facts alleged in O'Neil's complaint. See Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957).

 A. The Loss

 On June 18, 1985, O'Neil entered into a construction contract with Underwood Towers Limited Partnership ("the Owner") to build a project consisting of two apartment towers, various townhomes, and a four-level concrete parking garage which was to be attached to the apartment towers. O'Neil contracted with several sub-contractors to build the garage.

 The garage was constructed between May 1986 and December 1986. At the end of 1986, the concrete floors and walls of the garage began to crack. Sometime prior to March 31, 1987, the garage began to be used for parking. At this time, however, the cracking worsened. The cracks increased in length and width, and water began to leak through the cracks. On March 24, 1987, the Owner requested that the cracks be grouted and caulked in order to stem the growth of the cracking. The grouting and caulking began before March 31 and continued thereafter. However, the cracking continued to worsen through mid-1987.

 In the fall of 1987, the Owner and O'Neil each commissioned experts to determine the cause of the cracking. In the spring of 1988, both experts issued reports which concluded that the primary cause of the cracking was the improper placement by G&H Steel, one of O'Neil's subcontractors, of the steel mesh imbedded in the concrete levels. The purpose of that mesh was to help ensure the structural integrity of the garage and to protect the garage against the effects of weather. In the spring of 1988, the Owner made a claim against O'Neil, asserting that the garage was damaged by the cracking and was unusable above the first floor. The Owner claimed that O'Neil, among others, was liable to the Owner for its losses, which it estimated would exceed five million dollars. O'Neil denied any liability for the Owner's loss. On April 27, 1988, the Owner made its first written claim against O'Neil.

 B. The Insurance Dispute

 For the period from March 31, 1986 to March 31, 1987, O'Neil was insured under a comprehensive general liability insurance policy issued by National Union. The policy was a standard form policy, and it included as well a standard Broad Form Comprehensive General Liability Endorsement ("Broad Form Endorsement"), which removed certain exclusions and replaced them with less restrictive exclusions. The policy had a one million dollar limit of liability. O'Neil paid National Union a premium of $ 675,540 for the policy. Upon expiration of the policy on March 31, 1987, O'Neil became insured by Liberty Mutual Insurance Company ("Liberty Mutual"). The Liberty Mutual policy was similar to the National Union policy, and it contained an identical Broad Form Endorsement. The Liberty Mutual policy expired on March 31, 1988.

 O'Neil gave National Union written notice of the Owner's claim against it on May 23, 1988. On July 1, 1988, O'Neil provided additional notice to National Union, tendered its defense of the Owner's claim to National Union, and demanded indemnification pursuant to the policy.

 During the summer and fall of 1988, various meetings took place between O'Neil, subcontractors, the garage architect, the garage engineer, various insurance carriers and other parties to discuss the cracking of the garage and to attempt to settle the Owner's claim. Although National Union never responded in writing to O'Neil's tender of coverage, National Union participated in all of these meetings as O'Neil's insurer. At all but one of these meetings, National Union was represented by J. Donald Tierney. Tierney investigated the Owner's claim on behalf of National Union and was familiar with the facts of the loss and the contentions of the parties.

 On several occasions, National Union acknowledged coverage under the policy. The only issue which National Union raised was whether the cracking occurred during the period covered by the National Union policy as opposed to the Liberty Mutual policy. National Union informed O'Neil that it would contribute to a settlement of the Owner's claim and consistently urged O'Neil to increase its settlement offers to the Owner.

 In late November, 1988, with National Union's knowledge and approval, O'Neil agreed to settle the Owner's claim against O'Neil for 1.8 million dollars. Tierney, on behalf of National Union, told O'Neil that this was a good settlement and recommended that O'Neil settle the Owner's claim for this sum. In response to O'Neil's claim that G&H Steel was liable to indemnify O'Neil for losses arising out of the Owner's claim, G&H's Steel's insurer, Liberty Mutual, agreed to contribute $ 900,000 of the $ 1.8 million settlement on behalf of G&H Steel. Tierney urged O'Neil to accept this contribution. He also urged O'Neil not to demand additional money from Liberty Mutual to settle the Owner's claim, because he feared that Liberty Mutual would withdraw its $ 900,000 contribution on behalf of G&H Steel.

 On December 2, 1988, O'Neil presented National Union with facts which demonstrated that excessive cracking had taken place before March 31, 1987, and was thus within the scope of the National Union policy. O'Neil requested that National Union pay the $ 900,000 settlement contribution on behalf of O'Neil. National Union refused to pay the $ 900,000 settlement contribution. For the first time, National Union claimed that the policy did not cover the claim regardless of when the cracking occurred. O'Neil then funded the $ 900,000 settlement contribution through its own money.

 O'Neil filed this lawsuit against National Union in federal court on February 3, 1989. In Count I, O'Neil alleges that National Union's conduct constitutes a breach of the insurance contract. In Count II, O'Neil claims that National Union is liable in tort for bad faith denial of insurance coverage. In Count III, O'Neil alleges a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill. Rev. Stat. ch. 121 1/2 §§ 251 et seq. Approximately 39 minutes after this federal lawsuit was filed, National Union filed an action in state court for declaratory relief, raising the same factual and legal issues. Although it is not clear that National Union knew at that time that the federal lawsuit had been filed, it had been advised the previous month that O'Neil planned to file suit unless National Union agreed to pay the sum for which O'Neil contended it was liable. *fn1"

 National Union argues that the federal case should be dismissed or stayed in light of the parallel state action. Alternatively, National Union contends that each of the three counts of the complaint fail to state a claim.

 III. ABSTENTION

 National Union contends that the case should be dismissed pursuant to § 2-619(a)(3) of the Illinois Code of Civil Procedure, Ill. Rev. Stat. ch. 110 § 2-619(a)(3), which provides for dismissal of an action in deference to a parallel action in another court. Alternatively, National Union contends that the case should be stayed pursuant to the federal common law abstention doctrine developed in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976), and subsequent cases.

 A. Section 2-619

 Section 2-619(a)(3) provides in part:

 
Defendant may, within the time for pleading, file a motion for dismissal of the action for other appropriate relief upon any of the following grounds:
 
. . . .
 
that there is another action pending between the same parties for the same cause.

 Before the Court reaches the issue of whether application of § 2-619(a)(3) would warrant dismissal under the facts of this case, the Court must determine whether § 2-619(a)(3) applies at all to a case pending in federal court.

 In Seaboard Finance Co. v. Davis, 276 F. Supp. 507 (N.D.Ill. 1967) (Will, J.), a plaintiff filed suit in federal court in Illinois only after previously commencing an action against the same defendants in California state court. The defendants moved to dismiss the Illinois federal case pursuant to § 48(1)(c) of the Illinois Civil Practice Act, the predecessor to § 2-619(a)(3). The court noted that there was no federal doctrine which would allow dismissal under those circumstances, and that although there was a federal doctrine of abatement, that doctrine applied only where the parallel actions were pending in different federal courts, rather than in a state and a federal court. In order to determine whether to apply the state rule, the court reviewed the case law concerning application of state law in federal courts sitting in diversity jurisdiction. After reviewing those cases, the court held that the Illinois statute should apply in federal court, and accordingly dismissed the case.

 The decision in Seaboard has been followed in subsequent district court cases, although generally without substantial independent analysis. See, e.g., Byer Museum of Arts v. North River Ins. Co., 622 F. Supp. 1381, 1383-85 (N.D.Ill. 1985) (Holderman, J.); Brite Industries, Inc. v. Anderson, No. 81 C 5593 (N.D.Ill. March 25, 1982) (Kocoras, J.). *fn2" The district courts have not, however, been universally comfortable with continued application of this holding. See, e.g., Simenc v. Holiday Inns, Inc., No. 83 C 5618, 1984 WL 2139 (N.D.Ill. Feb. 10, 1984) (Moran, J.) (expressing doubts as to the continued validity of application of § 2-619(a)(3) by federal courts).

 The federal district courts which have applied § 2-619(a)(3) generally have not considered whether such application remains appropriate in light of the abstention doctrine first developed in Colorado River, supra, which was decided 9 years after Seaboard. The Colorado River doctrine provides for a stay of a federal case in deference to a pending state case in certain limited circumstances. See infra at Part III.C. In light of the growth of federal abstention doctrine since the decision in Seaboard, the Court finds it appropriate to reevaluate the issue of § 2-619(a)(3)'s application by federal courts.

 Although state law provides the substantive rules of decision in diversity cases, "matters of procedure -- of practice -- are determined under federal law." Coleman v. McLaren, 590 F. Supp. 38, 39 (N.D.Ill. 1984) (Shadur, J.), citing Hanna v. Plumer, 380 U.S. 460, 85 S. Ct. 1136, 14 L. Ed. 2d 8 (1965). Where there is a conflict between a federal common law rule and state law, the state law will not be followed by a federal court where the interests underlying the state law are "merely procedural." See In re Air Crash Disaster Near Chicago, 803 F.2d 304, 313-15 (7th Cir. 1986).

 It is readily apparent that the interests underlying Section 2-619(a)(3) are "merely procedural," particularly with reference to the only way in which the statute conflicts with federal abstention doctrine -- i.e., whether the federal court case should be stayed or dismissed. Indeed, "any provision deriving from a state's code of civil procedure (the title of ch. 110 of the Illinois Revised Statutes) starts out at least inherently suspect as a putative source of power for a federal court." Coleman, 590 F. Supp. at 39 (emphasis in original). Because § 2-619(a)(3) speaks only to matters of procedure or "court administration about which the federal courts have independent competence," Air Crash Disaster, 803 F.2d at 315 (citation omitted), the Court finds that application of the statute by a federal court would be inappropriate.

 This conclusion is buttressed by the development of the Colorado River abstention doctrine. In Seaboard, Judge Will did not find any strong federal considerations which justified application of federal rather than state law. See Simenc, 1984 WL 2139 at 12. Such a strong federal interest was subsequently recognized, however, in Colorado River, which held that a federal court should abstain only rarely, in light of "the unflagging obligation of the federal courts to exercise the jurisdiction given them." 424 U.S. at 817, 96 S. Ct. at 1246. Furthermore, federal courts have devised an extensive body of law on the subject of when Colorado River abstention is appropriate. See infra at Part III.B. Based on the procedural nature of Section 2-619(a)(3), the tension between that statute and the federal court's obligation to exercise properly conferred jurisdiction, and the ...


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