The Need to Avoid Different Fact Findings

Insurance coverage disputes brought to defeat coverage while a tort suit is pending in a different court is prejudicial to the insureds if the coverage issue requires a resolution of factual disputes that must also be resolved in the tort action. The potential for divergent factual findings and potential harm to the insured must be balanced with the need for judicial economy.

In State National Insurance Company, Inc. v. US-Sino Investment, Inc., Slip Copy, 2015 WL 5590842 (N.D.Cal., 9/23/2015) Plaintiff State National Insurance Company, Inc. (“State National”) filed a declaratory relief action against 17 defendants stemming from three civil actions in state court involving the death of a construction worker.

FACTUAL BACKGROUND

State National alleges that on October 7, 2011, it issued SINO a commercial general liability policy effective October 9, 2011 to October 9, 2012 (the “Policy”). The Policy contained limits of $1 million per occurrence, $2 million general aggregate, and $2 million products/completed operations aggregate.

SINO and Chen subsequently entered into a contract whereby SINO agreed to build a custom home for Chen in Milpitas, California. SINO hired contractors to perform the work. A payment dispute with the contractor hired to perform soils/grading work allegedly ensued, resulting in the contractor leaving the job in late December 2011 or early January 2012 and leaving the walls unshored.  After enduring three weeks of rain, in mid to late January 2012, SINO, Liu and/or Luo hired new contractors and workers to work at the construction site, including the decedent Raul Zapata Mercado (“decedent”). An inspector from the City of Milpitas went to the construction site and issued a Stop Work Notice due to the danger of the unshored walls that included the likelihood of soil movement and collapse. Despite the Stop Work Notice, however, work allegedly continued on the construction site. On January 28, 2012, the decedent was working in a trench dug into the ground adjacent to an unshored wall, and was killed when the soil and earth moved causing the soil to bury him alive.

UNDERLYING CIVIL ACTIONS IN STATE COURT

As a result of this accident, three civil actions were filed in state court. In addition to the three civil actions, criminal charges were brought against Liu, Luo, and SINO. At oral argument, it was confirmed that Liu and Luo have been convicted and sentenced, and both are currently serving their term; and the criminal charges against SINO have been dismissed.

LEGAL STANDARD

The district court’s power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. Using this power, one case may be stayed in favor of another.

In order to determine whether a stay should be implemented, various interests must be considered: (1) the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay. Whether to grant a stay request is a matter entrusted to the discretion of the district court.

DISCUSSION

The Pacheco Defendants move to stay these proceedings. The Pacheco Defendants argue that in adjudicating the instant declaratory relief action concerning insurance coverage based on certain exclusions of the Policy, this court will have to make certain factual determinations that are at issue in the state civil actions. Specifically, the Pacheco Defendants point to three major issues that will overlap between this action and the state civil actions: (1)     the intent of the insureds and others; (2)     the circumstances surrounding the nature of the accident; and (3)     the nature of the relationship between the insureds and the decedent.

In opposition, State National argues that there is no entanglement between the federal and state proceedings because, in the instant action, the only issues before the federal court are whether State National has a duty to defend or indemnify its insureds in any of the state court actions based on undisputed facts. State National further argues that this court will be presented only with questions of law since it will be examining the terms of the Policy, and thus there is no risk of duplicative litigation.

Upon examining the Policy exclusions State National seeks this court to evaluate in determining coverage, this court agreed with the Pacheco Defendants that such evaluation will necessarily require certain factual determinations. While State National argues that it is sufficient to find that the decedent was buried, the court agrees with the Pacheco Defendants that causation is a key issue in determining the application of this exclusion.

Application of the exclusions require a factual determination as to whether the subsidence arose out of or is attributable to the insured’s ongoing operation or performed on the insured’s behalf. The causation of the accident and the insured’s conduct are issues being litigated in the state civil proceedings.

THE POSSIBILITY OF DAMAGE, HARDSHIP OR INEQUITY

The court considered the possible damage to State National in granting a stay, and the potential hardship or inequity imposed on the Pacheco Defendants in the absence of a stay. State National argues that if a stay is granted, it will suffer prejudice because it would be forced to continue paying defense costs for the state court actions even if it is ultimately found that there was no duty to defend.  On the other hand, the Pacheco Defendants argue that litigating this action will impose a hardship because their focus and limited resources will be pulled away from their state court action in order to defend this action. The Pacheco Defendants further argue that litigating this insurance coverage action before the resolution of the Pacheco Defendants’ state court action will deprive the Pacheco Defendants of the right to have factual issues adjudicated in their chosen forum—state court.

In weighing the risks of prejudice and hardship, it appears that the Pacheco Defendants will endure a greater level of risk. While State National expressed at oral argument that it should not be punished for “doing the right thing” by providing a defense to its insured, providing such a defense is part of an insurer’s obligation and cost of doing business. A temporary stay of this action will not preclude State National from seeking reimbursement of defense fees and costs should it become necessary in the future.

The Pacheco Defendants, however, will suffer prejudice and hardship in the absence of a stay. Under the circumstances now presented, the Pacheco Defendants have been forced to defend a federal insurance coverage dispute in which they are not the insured. Given their limited resources, it is a significant burden for the Pacheco Defendants to litigate claims in two courts.

BALANCING AND CONCLUSION

On balance, the potential prejudice and hardship to the Pacheco Defendants that could result from inconsistent factual determinations outweighs any slight amount of prejudice State National may suffer from a temporary stay. Additionally, a temporary stay may result in the simplification of issues in this action. Therefore, the court concluded that abatement in favor of the parallel state proceedings is justified. Accordingly, the Pacheco Defendants’ Motion to Stay will be granted.

ZALMA OPINION

In this case, however, the action filed by the insurer that required a finding of fact similar to the facts that were needed to be proved in the tort action, would require the plaintiffs to litigate the same facts in two different courts and impose on them the potential for different factual findings in different courts. Since the insurer reserved its rights and could get back the money expended for defense, the court properly balanced the equities and stayed the declaratory relief action.

© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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