Homeland Insurance Company of New York v. Southwest Real Estate Purchasing Group Incorporated et al

Filing 25

ORDER granting in part and denying in part 15 Motion to Dismiss; denying 15 Motion to Stay. (See document for further details). Signed by Judge Frederick J Martone on 12/4/12.(LAD)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Homeland Insurance Company of New)
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York,
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Plaintiff,
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vs.
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Southwest Real Estate Purchasing Group)
Inc.; CRC Insurance Services Inc.; M&O)
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Agencies Inc,
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Defendants.
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No. CV 12-00856-PHX-FJM
ORDER

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The court has before it defendant CRC Insurance Services, Inc. (“CRC”) motion to

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dismiss or alternatively to stay the action (doc. 15), defendants M&O Agencies, Inc.

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(“M&O”) and Southwest Real Estate Purchasing Group, Inc.’s joinder in the motion (docs.

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16, 17), plaintiff Homeland Insurance Company of New York’s (“Homeland”) response (doc.

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20), and defendants’ reply (doc. 24).

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Homeland issued a group property insurance policy to Southwest Real Estate

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Purchasing Group (“Southwest”), which provides excess insurance coverage to members of

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Southwest, including the Seville Garden Apartments (“Seville”). Defendants CRC and M&O

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are the insurance brokers responsible for procuring the Homeland policy for Southwest.

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Under the terms of the policy, Homeland’s excess coverage obligation is triggered when

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damage to an insured property exceeds $5,000,000.

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Seville was among many properties damaged as a result of a hailstorm on October 5,

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2010. After Seville filed a claim for insurance coverage, issues arose as to Homeland’s

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obligation to fund a gap between Seville’s primary and excess insurance coverage.

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Homeland filed this declaratory judgment action against Southwest, CRC and M&O

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(the “insurance defendants”) seeking a declaration that Homeland has no obligation to pay

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any claims arising out of the October 5, 2010 hailstorm for Seville or the other 16 Southwest

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members, unless the total amount of claims for damage to an insured property exceeds

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$5,000,000. Homeland also seeks equitable indemnity against CRC and M&O, as the parties

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responsible for negligently planning and placing the insurance program. Finally, Homeland

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asserts a claim for negligent misrepresentation arising from CRC’s negotiations in procuring

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the Homeland policy.

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Currently pending in state court is an action by Seville against the parties in this

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action, as well as against numerous other insurance agencies and brokers, seeking coverage

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for hail damage to its property. Defendants now move to dismiss the complaint before us or

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alternatively to stay this action pending the outcome of the state court proceeding.

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II

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We have discretion to stay or dismiss a federal action in favor of a related state

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proceeding when (1) an action seeks only declaratory relief, Wilton v. Seven Falls Co., 515

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U.S. 277, 286, 115 S. Ct. 2137, 2142 (1995) (discussing Brillhart v. Excess Ins. Co., 316

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U.S. 491, 62 S. Ct. 1173 (1942)), or (2) when exceptional circumstances exist, Moses H.

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Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 14, 103 S. Ct. 927, 936 (1983)

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(quoting Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 813, 96

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S. Ct. 1236, 1244 (1976)). The discretionary standard announced in Brillhart controls a

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district court’s decision to stay a purely declaratory judgment action pending the outcome

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of a parallel state court proceeding. In contrast, the “exceptional circumstances” test

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developed in Colorado River applies when “[c]laims . . . exist independent of the request for

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a declaration.” Scotts Co. v. Seeds, Inc., 688 F.3d 1154, 1158 (9th Cir. 2012) (citation
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omitted). Claims are “independent” if they “could be litigated in federal court even if no

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declaratory claim had been filed.” St. Paul Fire & Marine Ins. Co. v. Nonprofits United, 91

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Fed. Appx. 537, 538 (9th Cir. 2004) (citation omitted).

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Homeland asserts not only a claim for declaratory relief, but also claims for equitable

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indemnity and negligent misrepresentation. It argues that in the event it is found liable for

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the gap in insurance coverage, it is entitled to equitable indemnity and damages from CRC

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and M&O. These claims are “independent” in that they would be viable even without the

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declaratory claim. Therefore, we apply the Colorado River exceptional circumstances test

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in deciding whether to abstain.

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“[T]he [general] rule is that the pendency of an action in the state court is no bar to

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proceedings concerning the same matter in the Federal court having jurisdiction.” Colorado

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River, 424 U.S. at 817, 96 S. Ct. at 1246 (citation omitted). The Colorado River doctrine is

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a narrow exception to “the virtually unflagging obligation of the federal courts to exercise

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the jurisdiction given to them.” Id. When considering whether to stay a proceeding under

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Colorado River, we consider (1) the inconvenience of the federal forum, (2) the desire to

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avoid piecemeal litigation, (3) the order in which the forums obtained jurisdiction, (4)

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whether federal or state law provides the rule of decision, (5) whether the state court

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proceedings are adequate to protect the federal litigant’s rights, (6) the desire to avoid forum

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shopping, and (7) whether the state court proceedings will resolve all issues before the

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federal court. R.R. Street & Co. v. Transport Ins. Co., 656 F.3d 966, 978 (9th Cir. 2011).

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These factors counsel against abstention in this case.

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Defendants argue that abstention is appropriate because the claims presented in this

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action involve the same insurance transactions, policy, and occurrence at issue in the state

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court proceeding. They contend that only state law insurance issues are presented and this

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duplicate litigation may result in inconsistent interpretations of the Homeland policy. We

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disagree.

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The state court action is limited to Seville’s claim only. In contrast, this declaratory

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judgment action seeks to resolve the coverage obligations among Homeland, Southwest,
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CRC and M&O arising from a gap in coverage involving 17 separate properties. Therefore

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the state court proceedings will not resolve all the issues presented here. Although the state

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court action was filed first, the declaratory claims presented in the instant case first addressed

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the “gap” coverage issues. Southwest’s declaratory judgment cross-claim was filed in state

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court after this action was commenced. This declaratory judgment action will resolve all

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aspects of the coverage obligations under the Homeland policy. While it is true that state law

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issues are presented by Homeland’s complaint, this case involves not only Arizona law, but

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also potentially Massachusetts and Alabama state law. Both the state and federal forums are

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in Phoenix and thus both are equally convenient. There is no evidence of forum shopping

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by Homeland. We conclude that exceptional circumstances do not exist to warrant

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abstention. Defendants’ motion to dismiss or alternatively stay the action is denied.

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III

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Defendants next move to dismiss Homeland’s claim in Count 2 for equitable

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indemnity. They contend that the equitable indemnity claim is precluded by the express

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indemnity provision in the Broker Agreement between CRC and Homeland, which provides

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indemnification based on the “failure to comply with any statutes, regulations or regulatory

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or administrative agency requirements or orders.” Motion, ex. E ¶ 11. Defendants argue that

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this contractual indemnity provision determines the extent of the duty to indemnify and

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precludes any equitable indemnity claim.

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It is well established that where “there is an express indemnity contract, the extent of

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the duty to indemnify must be determined from the contract, and not by reliance on implied

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indemnity principles.” INA Ins. Co. v. Valley Forge Ins. Co., 150 Ariz. 248, 252, 722 P.2d

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975, 979 (Ct. App. 1986); see also Schweber Elecs. v. Nat’l Semiconductor Corp., 174 Ariz.

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406, 410, 850 P.2d 119, 123 (Ct. App. 1992) (“When the parties expressly agree upon

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indemnity provisions in their contract, the extent of the duty is defined by the contract itself

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rather than common law principles.”); MT Builders, LLC v. Fisher Roofing, Inc., 219 Ariz.

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297, 302, 197 P.3d 758, 763 (Ct. App. 2008) (“When, as here, there is an express indemnity

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agreement between parties, the extent of the duty to indemnify must be determined from that
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agreement.”).

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Homeland contends that it is not relying on a contractual indemnity theory, but rather

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on an equitable claim for indemnity. They argue that it would be “against public policy” to

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limit its indemnity rights “to the very narrow provision in the Broker Agreement.” Response

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at 7. But Homeland has cited no case to contradict the overwhelming authority providing

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that the existence of an express indemnity provision precludes an indemnity claim based on

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equitable principles. Arizona courts have consistently concluded that a claim for equitable

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indemnity is precluded where “the parties have already themselves determined how and

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under what circumstances losses shall be allocated.” INA Ins., 150 Ariz. at 252, 722 P.2d

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at 979 (citation omitted). CRC’s motion to dismiss Count 2 is granted.
However, there is no express indemnity agreement between Homeland and M&O.
Therefore Homeland’s indemnity claim against M&O remains viable.
IV

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Finally, defendants contend that Homeland’s negligent misrepresentation claim is

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precluded by the economic loss doctrine. This doctrine refers to a “common law rule limiting

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a contracting party to contractual remedies for the recovery of economic losses

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unaccompanied by physical injury to persons or other property.” Flagstaff Affordable

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Housing Ltd. v. Design Alliance, Inc., 223 Ariz. 320, 323, 223 P.3d 664, 667 (2010). The

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Arizona Supreme Court has recently explained that its “adoption of the economic loss

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doctrine in construction defect cases reflects [its] assessment of the relevant policy concerns

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in that context.” Id. at 329, 223 P.3d at 673 (emphasis added). The court cautioned that “it

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does not suggest that the doctrine should be applied with a broad brush in other

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circumstances.” Id.

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The key rationale underlying the economic loss rule presupposes that there has been

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a fair and equitable negotiation of the allocation of risk between the parties. Negligent

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misrepresentation, like fraud, undermines the presumption that the parties have negotiated

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equitably. The extension of the doctrine to negligent misrepresentation would go beyond the

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rule’s purpose and essentially eliminate the tort of negligent misrepresentation. We doubt
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that the Arizona Supreme Court would be willing to extend this doctrine this far. We

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conclude that the economic loss rule does not bar plaintiff’s claims. Defendants’ motion to

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dismiss Count 3 is denied.

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III

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IT IS ORDERED GRANTING IN PART AND DENYING IN PART defendants’

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motion to dismiss or alternatively to stay the action (doc. 15). IT IS ORDERED

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DENYING defendants’ motion to stay. IT IS ORDERED GRANTING defendants’

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motion to dismiss Count 2 as against CRC only. IT IS ORDERED DENYING defendants’

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motion to dismiss Count 3.

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DATED this 4th day of December, 2012.

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