Atlantic Casualty Ins. v. GTL, Greytak, and Tanglewood Investors

INSURANCE/JURISDICTION: Insurer’s dec action retained in Federal Court rather than returning to State Court where case stayed by stipulation and insurer only intervenor… coverage of claims against road contractor barred by failure of contractor to give timely notice, showing of prejudice not required…. Molloy.

GTL contracted with Tanglewood Investors and John Greytak in 7/09 to improve property in Granite Co. including construction of a road. GTL sued in 3/10 to foreclose its construction lien. Greytak/Tanglewood hired a lawyer and sent a demand letter to GTL contesting the lien and alleging construction defects. Greytak/Tanglewood pled the claims from their demand as counterclaims. That case settled 4/13/11. GTL’s CGL insurer Atlantic Casualty was first notified of the claims in the underlying suit 5/23/11 and hired an adjuster to investigate. While it was investigating, Greytak/Tanglewood moved for entry of judgment in the state suit pursuant to the settlement agreement. Judgment was entered 6/21/12, and Atlantic moved to intervene and set it aside 8/6/12. Judge Dayton granted its motion to intervene and set aside judgment 9/18. Pursuant to stipulation he ordered the suit stayed. Atlantic claims that notice of Greytak/Tanglewood’s claims against GTL was insufficient and thus there is no coverage of their claims. It filed this declaratory action 1/23/12. Greytak/Tanglewood counterclaimed. GTL was served but did not appear and default was entered against it 7/9/12. The parties filed summary judgment motions in 8/12. Atlantic unsuccessfully sought cooperation of GTL and its counsel for production of files related to the counterclaims. A protective order sought by GTL asserting attorney-client relationship in response to a subpoena by Defendants was denied 10/17/12.

The procedural posture is the most significant consideration for keeping this action in Federal Court. While there is generally no presumption in favor of abstention, Dizol (9th Cir. 1998), “gratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided,”Brillhart (US 1942). If a declaratory case in federal court is reactive — filed after institution of state proceedings involving the same issues and parties — a presumption arises in favor of abstention. Chamberlain (9th Cir. 1991). This action comes on the heels of a state suit based on the same subject, but the configuration of the parties here differs in important respects. Atlantic was not an original party to the state suit, and GTL, the insured plaintiff in the underlying suit, defaulted. These differences skew the parallelism of the proceedings, disturbing a condition precedent to the presumption for abstention. The imperfect parallelism also affects the Brillhart factors. While notions of federalism and comity are of special importance in areas traditionally governed by state administrative structures like insurance regulation, Dizol, where a state court proceeding is inadequate to adjudicate the rights of all parties these concerns must yield to considerations of justice, practicality, and sound administration which motivate the other Brillhart factors. The interest of avoiding prejudice counsels in favor of entertaining Atlantic’s dec action. Its interests were not represented until its intervention. If this action were stayed or dismissed, lacking complete diversity, its only recourse would be in the state forum selected by its insured for adjudication of the underlying dispute. The outcome would bind it to the forum selected by its insured despite the fact that the insured failed to appear in this dec action and, after settlement, the interests of both parties in the underlying suit are now aligned against Atlantic. There is no risk of gratuitous interference with the orderly & comprehensive disposition in the state case, as Dayton stayed it based on the stipulation. Keeping the case and entering judgment on the merits serves the interest of judicial economy. The parties have exhaustively briefed the central legal questions, and the Court heard argument on their summary judgment motions. A decision on the claims is appropriate at this time and in this forum, rather than forcing the parties to return to a state proceeding where Atlantic appears only as an intervenor.

The dispositive substantive issue is sufficiency of GTL’s notice to Atlantic of Greytak/Tanglewood’s claims. The CGL policy requires the insured to provide notice as soon as practicable in the event of an occurrence, offense, claim, or suit. It defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Suit” is defined as “a civil proceeding in which damages … to which the insurance applies are alleged.” “Claim” and “offense” are not defined, but their plain meaning in the context of an insurance contract is easy to discern. A reasonable insured would understand “claim” to mean “a demand for compensation, benefits, or payment.” Webster’s. A reasonable insured could not help but understand “offense” to mean “a breach of moral or social conduct.” Id. Steadle (Mont. 2011) found an identical provision “simple, clear, unambiguous and easy to understand,” intended to allow the insurer “opportunity to defend its interests and to prevent or mitigate adverse judgments,” and explained that a notice requirement is a condition precedent to coverage. The bar of deficient notice includes injured 3rd-party claimants. Id.

GTL first received notice of pendency of a claim against it 4/30/10 when Greytak/Tanglewood dispatched a written demand to its counsel asserting claims for compensation for faults in construction of the road. The plain language as would be understood by a reasonable insured presents a “claim” and raises the possibility of a “suit.” Therefore it triggered the notice condition. Greytak/Tanglewood stated the claims in the demand letter as counterclaims in the state case 11/5/10. This definitively constitutes a “suit.” The counterclaims could also be considered an event which triggered the notice condition. GTL did not notify Atlantic as soon as practicable after these triggering events. Atlantic first heard about the claims and suit from a letter mailed 5/23/11, over a year after the demand letter and over 6 months after the filing of the counterclaims. In Steadle, with an identical notice condition, a 5-month delay was deficient. GTL’s notice to Atlantic was deficient and Atlantic has no duty to defend or indemnify it. Greytak/Tanglewood’s claims are not covered.

Greytak/Tanglewood argue that Atlantic must show prejudice as a result of the deficient notice, relying on XL (D.Mont. 2009, not reported in F.Supp). XL was decided before Steadle, and is predicated on Montana Supreme Court authority applying a prejudice rule to UM and UIM claims because of public policy. The more recent and pertinent binding authority is contrary to Defendants’ prejudice claims.

Greytak/Tanglewood claim Francis Nugent’s affidavit, which Atlantic cites for the proposition that notice was not provided until 5/11, does not meet the personal knowledge requirement of Rule 56(c)(4) and relates inadmissible hearsay. Her position as a litigation examiner for Atlantic is sufficient to infer personal knowledge. Kaypro (9th Cir. 2000). She stated that she knows the facts to be true, and her position places her in direct responsibility for handling complex claims involving coverage, liability, and damages. She has been employed in this capacity for over 5 years and was the primary adjuster for the Greytak/Tanglewood claims. The alleged hearsay relates to Defendants’ degree of cooperation with Atlantic’s investigation of the claims. Resolution of this is not required to reach the conclusion that GTL provided inadequate notice.

Atlantic Casualty Ins. v. GTL, Greytak, and Tanglewood Investors, 40 MFR 130, 1/14/13.

Matthew Hutchison (Kaufman, Vidal, Hileman & Ramlow), Kalispell, for Atlantic; Liesel Shoquist & Quentin Rhoades (Sullivan, Tabaracci & Rhoades), Missoula, for Defendants.