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Novae Underwriting, Ltd. v. Cunningham Lindsey Claims Management

April 1, 2008

NOVAE UNDERWRITING, LTD. PLAINTIFF,
v.
CUNNINGHAM LINDSEY CLAIMS MANAGEMENT, INC. AND AMERICAN PATRIOT INSURANCE AGENCY, INC., DEFENDANTS.



The opinion of the court was delivered by: John F. Grady, United States District Judge

MEMORANDUM OPINION

Before the court is the motion of defendant Cunningham Lindsey Claims Management, Inc. to dismiss plaintiff's First Amended Complaint for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). For the reasons explained below, the motion is granted.

BACKGROUND

Plaintiff Novae Underwriting, Ltd. ("Novae") brings this suit against Cunningham Lindsey Claims Management, Inc. ("Cunningham") and American Patriot Insurance Agency, Inc. ("American Patriot") , seeking to avoid liability under a directors' and officers' liability insurance policy (the "Policy"). The Policy was issued to Fairfax Financial Holdings ("Fairfax") by Certain Underwriters at Lloyd's London ("Underwriters"). Cunningham, a subsidiary of Fairfax, is an "Assured" under the Policy, which covers certain claims made against the Assureds. Novae is one of the Underwriters that subscribed to the Policy and a member of the Lloyd's syndicate that served as the Lead Underwriter for the Policy. According to Novae, at issue in this case is coverage for an errors and omissions claim; the Policy provides that each claim for that type of coverage is subject to a $1,000,000 retention. (Exhaustion of the retention triggers the duty to indemnify.)

Jurisdiction is based upon diversity of citizenship. Novae is a private limited company incorporated and registered in the United Kingdom; its principal place of business is in London, England. Cunningham is a Delaware corporation with a principal place of business in Texas. American Patriot is a Wisconsin corporation with a principal place of business in Illinois. Novae alleges that the amount in controversy exceeds $75,000.

Novae seeks a declaration that it has no duty to indemnify Cunningham in connection with a breach of contract and negligence action filed against Cunningham by American Patriot (the "American Patriot Action"). In that action, which is currently pending in state court in Texas, American Patriot alleges that it entered into certain agreements with a group of insurers to offer workers' compensation, general liability, and automobile liability insurance products to roofing contractors (the "Roofers' Program"). Cunningham was hired to administer claims under policies issued to American Patriot's clients as part of the Roofers' Program, and one of its responsibilities as administrator was to set appropriate reserves. American Patriot alleges that Cunningham established unreasonably low reserves, which led to the unwarranted renewal of some policies and the underpriced renewal of other policies, and then concealed the problems. Recovery of actual damages in excess of $1 million (and punitive damages, attorney's fees, costs, and other relief) is sought. American Patriot's expert has opined that actual damages exceed $5 million.

In the instant action, Novae alleges that Cunningham failed to provide written notice to the Underwriters of the American Patriot Action during the Policy Period, which ran from May 2000 to May 2004. Count I of the First Amended Complaint seeks a declaratory judgment that the claim relating to the American Patriot Action (the "American Patriot Claim") "does not fall within" an "Insuring Clause" set forth in the Policy because it was a claim that "must be deemed 'first made' after the Policy Period expired." (First Am. Complt., Prayer for Relief.) In Count II, Novae seeks a declaration that it has no liability on the Policy in connection with the American Patriot Claim because of an exclusion in the Policy for claims based upon or arising from the adequacy or redundancy of claim reserves. Count III seeks "a judgment that Novae has no liability under the Policy" in connection with the American Patriot Claim due to Cunningham's alleged breach of its duty to cooperate with the Underwriters.

Cunningham now moves to dismiss the First Amended Complaint for lack of subject matter jurisdiction.

DISCUSSION

The Declaratory Judgment Act (the "Act") provides that a federal court, "[i]n 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). The Act itself does not supply subject matter jurisdiction, In re VMS Securities Litigation, 103 F.3d 1317, 1327 (7th Cir. 1996), so there must be an independent basis for jurisdiction. Where such a basis exists, as it does here, "[t]he sole requirement for jurisdiction under the Act is that the conflict be real and immediate, i.e., that there be a true, actual 'controversy' required by the Act." Cardinal Chem. Co. v. Morton Int'l, Inc., 508 U.S. 83, 96 (1993). The party seeking a declaratory judgment bears the burden of establishing the existence of an actual controversy. Id. at 95. Even if jurisdictional prerequisites are satisfied, we have wide discretion in deciding whether to declare the rights and relations of the parties. Nationwide Ins. v. Zavalis, 52 F.3d 689, 692 (7th Cir. 1995).

The "actual controversy" requirement is equivalent to Article III's case-or-controversy requirement, see MedImmune, Inc. v. Genentech, Inc., --- U.S. ----, 127 S.Ct. 764, 771, 166 L.Ed. 2d 604 (2007). Cunningham contends that the complaint must be dismissed because Novae's claims have not ripened into a justiciable controversy. Ripeness doctrine is grounded in both Article III concepts and prudential concerns. Lehn v. Holmes, 364 F.3d 862, 867 (7th Cir. 2004). "The central perception is that courts should not render decisions absent a genuine need to resolve a real dispute." 13A Charles Alan Wright et al., Federal Practice and Procedure § 3532.1 (2d ed. 1984). "Basically, the question in each case is whether . . . there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941). Put another way, "[r]ipeness turns on the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration." Pacific Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 201 (1983) (internal quotation marks omitted). "Whether a dispute has reached the stage at which a declaratory judgment under 28 U.S.C. § 2201 is appropriate is a question of federal practice." Lear Corp. v. Johnson Elec. Holdings Ltd., 353 F.3d 580, 583 (7th Cir. 2003).

Cunningham argues that this action is premature because a judgment or settlement in the underlying case, the American Patriot Action, has not yet been effectuated. Novae's indemnification obligation under the Policy is not triggered until the $1 million retention is reached; in Cunningham's view, this contingent duty to indemnify may never vest, and therefore Novae's claims are not ripe. In support of its argument that this is a speculative dispute, Cunningham points out that Novae's original complaint in this action sought a declaration that Novae has no duty to indemnify Cunningham in connection with two underlying lawsuits--the American Patriot Action and another action that we will call the Anderson Action. Cunningham settled the Anderson Action for less than the $1 million retention; therefore, coverage under the Policy was not triggered, and Novae had to amend its complaint in this suit to omit the relief sought in connection with the Anderson action.*fn1

The Seventh Circuit has instructed: We regularly say that decisions about indemnity should be postponed until the underlying liability has been established. . . . A declaration that A must indemnify B if X comes to pass has an advisory quality; and if the decision would not strictly be an advisory opinion (anathema under Article III) it could be a mistake, because it would consume judicial time in order to produce a decision that may turn out to be irrelevant.

Lear, 353 F.3d at 583. This is a general, not absolute, rule; where the plaintiff's legally protected interest is "seriously threaten[ed]" before the underlying claim is resolved, an exception to the general rule exists. See Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 682 (7th Cir. 1992). Moreover, the Seventh Circuit has distinguished declaratory decisions concerning the duty to indemnify from those concerning the duty to defend ...


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