INSURANCE: Seeking declaratory judgment as to duty to defend defective siding claims does not constitute direct or anticipatory repudiation breach of contract but is endorsed by Montana Supreme Court… duty to indemnify for insured’s out-of-pocket settlements brokered without insurer’s consent not plausible breach of contract… plaintiff in underlying State Court suit against siding Defendant not a necessary party to declaratory action under rationale forged by this Court in light of open question in 9th Circuit… Landis stay of declaratory action granted as to on-the-merits determination of whether claims in State Court suit are covered by Policy, denied in all other respects… Christensen.
Various persons have asserted claims against Northwest Painting alleging that defective siding was installed on their property. Michelle Desjarlais has sued Northwest in Montana State Court. Northwest notified Cincinnati Ins. of this claim under its CGL policy and Cincinnati is providing a defense under reservation. None of the other claims “have been filed in court,” but other claims continue to “pour in” and Northwest has “paid out-of-pocket” to settle “certain claims.” Cincinnati seeks a declaration that it has no duty to indemnify or defend Northwest as to the Desjarlais suit. She was not named as a party to Cincinnati’s declaratory action. Northwest has counterclaimed alleging that Cincinnati breached or engaged in an anticipatory repudiation of its duty to defend and breached its duty to indemnify. Before the Court is Northwest’s motion to join necessary party and stay proceedings and Cincinnati’s partial motion to dismiss.
To state a direct or anticipatory repudiation breach of contract claim under Montana law the insured must first allege existence of a contract that contains a duty to defend. For a direct breach of contract claim it must allege that the insurer failed to furnish a defense after a complaint was filed against the insured that alleges facts which, if proven, would result in a covered liability under the contract. For an anticipatory breach of contract claim it must allege facts plausibly establishing that the insurer has entirely, absolutely, and unequivocally repudiated its contractual obligation to provide a defense for future claims. Northwest succeeds in the first regard by alleging that it and Cincinnati are parties to an insurance contract containing a duty to defend. It is in the 2nd regard where its direct breach of contract claim loses its plausibility.
As Cincinnati argues, the allegations in Northwest’s counterclaim demonstrate that the only claim possibly triggering the duty to defend is the Desjarlais suit. Northwest’s allegations further establish that Cincinnati has been providing a defense subject to a reservation of rights. In other words, taking Northwest’s counterclaim as alleged, Cincinnati has not breached its contractual duty to defend; it is actively fulfilling it. Under these allegations, Northwest cannot plausibly state a claim for direct breach of contract. This claim will be dismissed.
Northwest’s anticipatory repudiation breach of contract fares no better. The problem is not so much with Northwest’s allegations, but their implausible application to Montana’s law regarding anticipatory repudiation claims. Northwest claims that Cincinnati is liable for anticipatory repudiation because it filed the declaratory action, asserted it has no duty to defend, and reserved its right of reimbursement. Cincinnati argues that it is just following the procedure endorsed by the Montana Supreme Court when a suit triggers the duty to defend but the insurer maintains that it ultimately presents an uncovered claim. The Court agrees.
Montana law unambiguously outlines the path an insurer should follow when its insured is named in a suit but contests its obligation to provide a defense. First, an insurer should initially provide a defense, because if it incorrectly withholds one it will be liable for all “natural and ordinary consequences of the breach,” including the value of any settlement, costs, and attorney fees. Independent Milk (Mont. 1923). Second, if an insurer intends to recoup the costs incurred in defending its insured it should timely and explicitly reserve “its right to recoup defense costs.” Ribi (Mont. 2005). Finally, the insurer should expeditiously file a separate declaratory action so the dispute regarding the contractual duty to defend can be resolved. Tidyman’s (Mont. 2014); Freyer (Mont. 2013) (noting that in situations akin to that presented here the Montana Supreme Court has “repeatedly admonished insurers” to “defend the insured and file a declaratory judgment action to discern coverage”). Such conduct is not the anticipatory repudiation of a contractual duty to defend, but is the strict adherence to various teachings from the Montana Supreme Court.
Northwest’s allegations that Cincinnati has furnished a defense against the Desjarlais suit under reservation and then filed a declaratory action on the issue is not the sort of entire, absolute, and unequivocal repudiation of a contractual obligation necessary to state a claim. Under the facts that Northwest itself alleges, the only plausible theory advanced is that Cincinnati has conditionally repudiated its duty to defend (while actively continuing to honor it) with such repudiation only becoming entire, absolute, and unequivocal upon a favorable ruling in the instant declaratory action. The Court will grant Cincinnati’s motion to dismiss as to both of Northwest’s breach of contractual duty to defend counterclaims.
Northwest’s remaining breach of contract counterclaim complains that Cincinnati flouted its duty to indemnify by refusing to settle claims by other claimants, which Northwest was forced to then settle at its own cost, out of pocket. Cincinnati agues that this claim should be dismissed because the Policy prohibits settlement of claims by Northwest without Cincinnati’s consent. It maintains that it is proper to examine the Policy, an outside material, in adjudicating this 12(b)(6) motion because Northwest’s counterclaim references it. Northwest endorses this approach and does not directly contest Cincinnati’s position regarding the Policy’s prohibition on unapproved settlements by the insured.
The Policy’s CGL and umbrella coverages provide that “no insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without the insurer’s consent.” Under Cincinnati’s view, because Northwest’s breach of contractual duty to indemnify counterclaim fails to establish that Northwest’s out-of-pocket settlements were reached with Cincinnati’s consent, it fails to state a claim. Northwest puts up little resistance in response. Instead, it argues that Cincinnati has anticipatorily repudiated its duty to indemnify by filing this declaratory action. Additionally, it confusingly devotes significant argument in its response brief to the notion that Cincinnati has breached the covenant of good faith & fair dealing by failing to properly investigate claims. Neither of these arguments accurately reflects the claims in Northwest’s counterclaim or otherwise contests the substance of Cincinnati’s argument regarding the duty to indemnify claim.
Unlike the breach of contractual duty to defend claim, Northwest does not premise its breach of the contractual duty to indemnify counterclaim on a theory of anticipatory repudiation. Its counterclaim does not mention the duty of good faith at all, let alone assert a stand-alone claim couched under an ostensible failure to investigate. Accordingly, the Court will disregard those arguments as they either distort the pleadings, are an attempt to assert new claims, or have no bearing on whether Northwest has plausibly pled a claim for breach of the contractual duty to indemnify. Provencio (ED Cal. 2009) (“Raising a completely new theory of liability, with only attenuated connection to the complaint, in a brief in opposition to a motion to dismiss” can only be accomplished after requesting leave to file an amended complaint).
Left with little else, the Court has no choice but to adopt Cincinnati’s argument. Morrissey (9th Cir. 2003) (it is not a court’s job to develop a party’s arguments). The Policy, upon which Northwest’s counterclaim necessarily relies, establishes that a duty to indemnify for out-of-pocket settlements only arises if such settlements are brokered with Cincinnati’s consent. Northwest’s counterclaim does not contain any allegations that it obtained consent from Cincinnati prior to entering into the out-of-pocket settlements. Consequently, Northwest’s breach of the contractual duty to indemnify counterclaim lacks facial plausibility and will be dismissed.
Northwest maintains that Desjarlais, the plaintiff in the only underlying suit against Northwest, must be joined as an indispensable party to Cincinnati’s declaratory action. Cincinnati does not oppose joining her but disagrees that she must be joined as an indispensable party.
To determine whether a party must be joined pursuant to Rule 19 this Court “must determine: (1) whether an absent party is necessary to the action; and then, (2) if the party is necessary, but cannot be joined, whether the party is indispensable such that in equity and good conscience the suit should be dismissed.” Roberts (9th Cir. 2020). As to whether the party is necessary, the Court must determine whether: “complete relief can be afforded if the action is limited to the existing parties;” or “the absent party has a ‘legally protected interest’ in the subject of the action and, if so, whether the party’s absence will ‘impair or impede’ the party’s ability to protect that interest or will leave an existing party subject to multiple, inconsistent legal obligations with respect to that interest.” White (9th Cir. 2014). “If the answer to either of those questions is affirmative, then the party is necessary and must be joined.” Id. The parties hone their arguments on the legally protected interest prong, so the Court will focus its attention there as well.
Whether an injured 3rd-party claimant is a necessary party to a declaratory action between an insurer and its insured appears to be an open question in the 9th Circuit. Authority from other courts is numerous and conflicting. District courts within the 9th Circuit have generally found them to be necessary parties when the subject of the action is whether the 3rd-party claim is covered by available insurance proceeds. Despite the weight of this persuasive authority, the Court elects to forge its own path given the circumstances here. Bakia (9th Cir. 1982) (“there is no precise formula for determining whether a particular nonparty should be joined under Rule 19(a)” and the “determination is heavily influenced by the facts and circumstances of each case”). The Court is skeptical that Desjarlais has a legally protected interest in the Rule 19(a) sense. The 9th Circuit has been clear that a mere “financial stake” in the outcome is insufficient to constitute a legally protected interest. Cachil Dehe (9th Cir. 2008). It is hard to see how her interest in this suit extends beyond a mere financial interest.
She obviously has an interest in a favorable coverage determination because without one she will possibly be left with an uncovered judgment. But this interest is nothing more than “speculation about a future event,” mainly that she will possibly prevail in the underlying action and then possibly be unable to collect on a judgment against Northwest because of a lack of attachable assets. This is insufficient to constitute a legally protected interest under Rule 19(a). Moreover, this Court has rejected the notion that anyone has a legally protected interest in having their judgments covered by insurance. Philadelphia Indemnity (D.Mont. 2021) (“The law, as a general matter, does not entitle one to have an actionable claim covered by insurance.”). Moreover, the Court is skeptical that even if Desjarlais had a legally protected interest it would not be protected without joinder or that either Northwest or Cincinnati would be subject to multiple, inconsistent legal obligations with respect to that interest. Rule 19(a)(1)(B). The parties correctly focus this inquiry on whether she, if absent from this action, would be bound by any judgment of this Court regarding availability of coverage for her claim. Northwest maintains that she “would not necessarily be bound by the outcome of this Court’s determination of coverage liability.” Cincinnati contends that there is no risk of double, multiple, or otherwise inconsistent obligations because “collateral estoppel and/or res judicata would apply to Desjarlais and the property owners without their joinder because they are in privity with Northwest on the issue of coverage.”
Neither claim (res judicata) nor issue (collateral estoppel) preclusion will apply “to a party that was not a party in the prior proceeding” unless they are in privity with a party to that proceeding. Denturist Association (Mont. 2016). The question thus becomes whether Desjarlais is in privity with either Cincinnati or Northwest such that a coverage determination in this action would be binding on her and thus eliminate the risk of double, multiple, or inconsistent obligations. Ultimately, privity is a “factual determination of substance, not mere form,” requiring a “consideration of the realities of litigation.” Id.
The interests of Desjarlais and Northwest are sufficiently aligned to justify the conclusion that collateral estoppel or res judicata would likely bar relitigation of this coverage dispute in a subsequent action. They seek the same endgame — coverage for a potential liability event on the part of Northwest. There is no reason to conclude that Northwest will advance different or worse arguments than Desjarlais as to the issue of coverage when they are after the same outcome. Consequently, even if she had a legally protected interest within the meaning of Rule 19(a)(1)(B) (which she does not), her absence would neither impede her ability to protect this interest nor create a risk of double, multiple, or inconsistent legal obligations.
Having concluded that Desjarlais is not a necessary party, the Court will deny Northwest’s motion to join her as an indispensable party. The Court also declines to join her simply because Cincinnati does not oppose this result. The Court will not thrust a party into this suit on the basis of an agreement of the parties. Either party is free to move for leave to amend their pleadings to advance a claim against Desjarlais. She is also free to move for leave to intervene under a theory of mandatory or permissive joinder.
Northwest urges the Court to stay this action pursuant to Landis (US 1936) pending resolution of the underlying Desjarlais suit. Cincinnati disputes that Landis governs, instead relying on Brillhart (US 1942) and in any event opposes a stay.
The Court is persuaded by Northwest’s argument that Landis applies. Brillhart is not a good fit for several reasons. First, it arose in the context of a parallel state court proceeding “presenting the same issues, not governed by federal law” and “between the same parties.” The Desjarlais suit neither raises identical issues nor has identical parties. Second, Brillhart governs situations in which a party urges a district court to decline jurisdiction over an otherwise proper declaratory claim. Robinson (9th Cir. 2005). It applies when a party urges the court to dismiss or remand a declaratory claim altogether, not when a party simply requests that adjudication be stayed. Dizol (9th Cir. 1998). Finally, the 9th Circuit has made clear that Brillhart is inappropriate when an action presents at least one independent non-declaratory judgment claim. Dizol. A “claim is independent if it would continue to exist if the request for a declaration simply dropped from the case.” Scotts (9th Cir. 2012). While declaratory claims predominate here, at least one non-declaratory counterclaim is brought by Northwest under Montana’s UTPA.
Under Landis this Court possesses the “discretionary power to stay proceedings in its own court.” Lockyer (9th Cir. 2005). A Landis stay is inappropriate unless the party seeking it makes out “a clear case of hardship or inequity in being required to go forward, if there is even a fair possibility that the stay will work damage to someone else.” Id. The 9th Circuit has distilled the Landis inquiry into a weighing of “the competing interests which will be affected by the granting or refusal to grant a stay,” including “the possible damage which may result from the granting of a stay, the hardship or inequity which a party may suffer in being required to go forward, and 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.” Id.
Northwest argues that any hardship imposed on Cincinnati by having to continue expending defense costs is insufficient to preclude a stay while it will be forced to litigate on 2 fronts in this action and the Desjarlais suit and the orderly course of justice will be impeded should this Court wade into unresolved factual issues regarding coverage that will necessarily be resolved by the State Court adjudicating the Desjarlais suit. In Cincinnati’s view, both parties benefit if the duty to defend and indemnification issues in this action are resolved without delay. It also maintains that a stay is improper because the issues in this action — whether it has a duty to defend or indemnify Northwest against certain property owner claims — are ultimately distinct from the issues in the Desjarlais suit, which advances myriad claims against various parties. Weighing the factors itself, the Court concludes that there is an appropriate middle ground.
Before diving into the factors, the Court finds it prudent to discuss the circumstances surrounding this case, which underscore the need for a stay of some but not all parts. The parties agree that multiple property owners have put Northwest on notice of claims, that more claims are possible, and that only one (Desjarlais) has actually proceeded to court. Cincinnati seeks various declarations including that it has no duty to defend or indemnity Northwest with respect to the Desjarlais suit, it has no duty to defend or indemnity Northwest with respect to all other property owner claims including an administrative complaint, and it need not reimburse or indemnify Northwest for out-of-pocket settlements entered into without its consent. Northwest seeks counter declarations and advances a UTPA claim.
It is proper to split this dispute into 2 analytical categories for assessing whether a stay should be imposed. On one side are the declaratory claims that relate to the Desjarlais suit. On the other side are the declaratory claims related to other property owners’ claims, the issue of reimbursement or indemnification for out-of-pocket settlements, and the UTPA claim. Essentially, there are the Desjarlais claims and everything else. A limited stay of the Desjarlais claims is proper but the Court will not stay any other part of the case.
The Court will address the first 2 Landis factors in tandem because both involve weighing possible ill effects occasioned on the parties by either staying or refusing to stay this action. As Northwest points out, an insurer’s continued expenditure of defense costs during a stay is generally insufficient to constitute “damage” in the Landis context. Bottini (SD Cal. 2020) (“Arguments concerning defense costs have been rejected by courts to support any prejudice to the non-moving party on a motion to stay.”). The logic behind this is that because insurers are “in the business of advancing defense costs,” they cannot complain about having to do so, Ou (CD Cal. 2019), and can often recoup wrongfully expensed defense costs from the insured, Zurich (ND Cal. 2019). Consequently, the Court agrees that Cincinnati’s continued expenditure of defense costs as to the Desjarlais suit is not sufficient reason to deny Northwest’s request for a stay.
But the Court is concerned that Cincinnati will be harmed if it is unable to begin discovery into the aspects of this case that involve other claimants than Desjarlais. This weighs against staying this action in its entirety. As to Northwest, the difficulties attendant to fighting the Desjarlais suit claim on 2 fronts weighs in favor of a stay on the part of Cincinnati’s claim that involves its duty to indemnify the claims advanced in that action. Zurich. However, this risk of harm does not translate to the other aspects of this case which do not depend on resolution of the Desjarlais suit. The first 2 Landis factors weigh in favor of staying the Desjarlais suit duty to indemnify claim but not any other claims advanced in this action.
The Court reaches a similar conclusion as to the 3rd factor — the orderly course of justice. While Cincinnati’s Desjarlais suit duty to indemnify claim may require this Court to wade into factual issues that will ultimately be resolved in the Desjarlais suit, this is the State Court’s prerogative and this Court will not “risk making factual determinations that may conflict with the state court’s findings” on these issues. Id. Additionally, if a stay were not granted as to the Desjarlais suit duty to indemnify claim Cincinnati would be incentivized to improperly posture itself in a manner adverse to Northwest’s interest in that proceeding. Home Indemnity (D.Or. 2001). Both of these considerations weigh in favor of entering a stay as to the Desjarlais suit duty to indemnify claim. As with the other considerations, however, these concerns are not implicated by any other part of this case.
After weighing the foregoing factors, the Court concludes that it should stay adjudication of Cincinnati’s declaratory claim regarding its duty to indemnify Northwest in the Desjarlais suit, but refuses to stay any other aspect of the case. Cincinnati’s remaining declaratory claims may proceed without delay, including the Desjarlais suit duty to defend claim, because resolution of that issue presents a question of law resolvable without a factual record. Deck (Mont. 2016) (to determine whether there is a duty to defend, one need only examine the underlying complaint to asses if it “alleges facts, which if proven, would result in coverage”).
Cincinnati Ins. v. Northwest Painting, 44 MFR 250, 7/26/21.
Kristine Beal & Ian Gillespie (Beal Law Firm), Missoula, for Cincinnati; J.R. Casillas & Trent Baker (Datsopoulos, MacDonald & Lind), Missoula, for Northwest.