Med-Plus, Inc. v. American Casualty Co. of Reading, PA

Filing 35

MEMORANDUM & ORDER re Defendant's 19 Motion to Dismiss; and, Plaintiff's 20 Cross Motion for Partial Summary Judgment. Defendant's motion (Dkt. 19) is construed in part as a motion to dismiss and in part as a mot ion for summary judgment; the motion is DENIED in its entirety. The court GRANTS Plaintiff's cross-motion for partial summary judgment (Dkt. 20) and issues a declaratory judgment that Plaintiff is entitled to independent counsel in Abbott Labs. V. Adelphia Supply USA, No. 15-CV-5826 (CBA) (LB) insofar as that action involves claims for punitive damages. Within 30 days of entry of this Order, the parties are DIRECTED to jointly submit a status report that enumerates all outstanding issues in this action. The parties shall consider whether Plaintiff has any ripe claims that have been neither resolved nor mooted. So Ordered by Judge Nicholas G. Garaufis on 8/3/2017. (Lee, Tiffeny)

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK
-X

MED-PLUS,INC.,

MEMORANDUM & ORDER

Plaintiff,

16-CV-2985(NGG)
(JO)

-against-

AMERICAN CASUALTY CO. OF READING,PA,
d/b/a CNA,
Defendant.
X

NICHOLAS G. GARAUFIS,United States District Judge.

Plaintiff Med-Plus,Inc., initiated this diversity action against Defendant American

Casualty Company ofReading,PA,with whom Plaintiff holds a commercial general liability
insurance policy. (Compl.(Dkt. 1).) Plaintiff asserts a claim for breach of contract and seeks a
declaratory judgment entitling Plaintiff to select independent defense counsel in a separate
ongoing lawsuit, Abbott Labs, v. Adelnhia Supply USA,No. 15-CV-5826(CBA)
(LB)

(E.D.N.Y.)(the "Underlying Action"). Pending before this court are Defendant's motion to
dismiss the action and Plaintiffs cross-motion for partial summary judgment. (Def. Mot. to

Dismiss(Dkt. 19); PI. Cross-Mot. for Partial Summ. J.(Dkt. 20).) For the reasons stated below,
the court DENIES Defendant's motion and GRANTS Plaintiffs cross-motion.
I.

BACKGROUND

All facts summarized in this section are undisputed. (See PI. R. 56.1 Statement("PI.

56.1")(Dkt. 22); Def. Resp. to PI. 56.1 ("Def. 56.1")(Dkt. 25).) Plaintiff is a New Jersey

corporation that conducts a medical supply business throughout the United States. (Def. 56.1
at 1-2.) Plaintiff was a named insured in a commercial general liability insurance policy

(the "Policy")issued by Defendant, effective from December 8,2014,to December 8, 2015. (Id
at 2; see also Ex. A,Compl.("Policy")(Dkts. 1-3 to -5).)
A. The Underlying Action

On October 9, 2015—^i.e., during the Policy's coverage period—^the Underlying Action
was commenced in this district by Abbott Laboratories and certain affiliated entities("Abbott").

(Compl.(Abbott Dkt. 1).) Abbott sells medical equipment for diabetic patients, and alleges that
various medical supply companies conspired to import diverted international diabetes equipment
for sale in the United States. (Id

2-4.) In the original complaint, Abbott asserted claims

including trademark infringement, firaud, racketeering, and unfair competition. (Id ^ 1.)
Med-Plus was not initially named as a defendant in the Underlying Action, but was added
as a defendant in the first amended complaint, filed on November 20,2015. (1st Am.Compl.

(Abbott Dkt. 156).) Med-Plus appeared in the Underlying Action in December 2015,and was

represented by Stem & Schurin LLP,the same counsel representing Plaintiff in the instant
action. (Not. of Appearance(Abbott Dkt. 228).) In early March 2016, Plaintiff notified
Defendant ofthe pending "trade dress" claim in the Underlying Action, and Defendant

responded that none ofthe claims in the Abbott first amended complaint were covered under the
Policy. (Def. 56.1 at 4-5.)

Abbott filed a second amended complaint(the "Abbott SAC")on March 28,2016, which
modified the substance of its trade dress claim against Med-Plus and other defendants. (Abbott
SAC(Abbott Dkt. 307).) The Abbott SAC seeks compensatory and punitive damages, among
other forms of relief. (Id. at 155-56.)
B. Defendant's March 30,2016,Letter

Plaintiff notified Defendant ofthe amendment the same day it was filed. (Def. 56.1

at 5-6.) On March 30, 2016, Defendant sent a letter (the "March 30 Letter") stating that
2

Defendant "agree[d]to defend Med-Plus [] with respect to this matter subject to a full
reservation ofrights." (Mar. 30, 2016, Ltr. from Pamela Ellingson to Roger Mezhibovsky

("Mar. 30 Ltr.")(Dkt. 23-6) at 2.) Defendant explained that the Policy "applies to liability for

damages because of'personal and advertising injury,'" subject to certain exclusions, and

concluded that the Abbott SAC "does potentially allege a claim for trade dress infringement
arising out of[Med-Plus's] advertisement." (Id. at 2-3.) Defendant's reservation of rights

"include[d] the right to file a declaratory judgment action to determine the parties' rights and

obligations, the right to withdraw from the defense, and the right to seek reimbursement of
defense payments." (Id. at 3.)
With regard to defense costs and selection of counsel, the March 30 Letter stated the
following:

[Wjhen a complaint includes both covered and uncovered claims[,]
New Jersey law requires that the insurer pay the costs ofthe covered
claims, but not the costs for defending or prosecuting uncovered
claims. Thus,when an insurer is faced with an underlying complaint
involving covered [and] uncovered claims,... [the insurer] must
attempt to negotiate a fair allocation of defense costs with the
insured.

We have determined that five of the thirteen causes of action in the

SAC potentially allege a trade dress infringement claim covered
under the subject policy. The remaining eight causes of action are
not covered....

[W]e propose that [American Casualty] pay 5/13 of the defense
expense and Med-[Plus] pay the remaining 8/13. [American
Casualty] is willing to have Stem & Schurin LLP continue as
defense counsel on your behalf. Please let us know if you are in
agreement with these terms or if you would like to discuss them
further.

(Id at 5-6.)

C. The Initiation of This Action

On June 9,2016, Plaintifffiled the instant Complaint, asserting diversity jurisdiction

under 28 U.S.C. § 1332. (Compl.^ 5: see also id. ^ 10(alleging that Defendant has a principal
place of business in Illinois).) Plaintiff asserts a cause of action for breach of contract and seeks

declaratory judgment.^ (Id

27-37.) Plaintiffs counsel wrote to Defendant that same day,

stating:"As previously expressed to you, Med Plus cannot accept the terms and rates that were
offered by [American Casualty]. Frankly, we would like to resolve this ...,but if we cannot,
we will move forward with service ofthe Complaint that has been filed." (June 9,2016,Email
from Steven Stem to Pamela Ellingson (Dkt. 23-7).)

D. Subsequent Communication Between the Parties
On June 28,2016, Defendant sent a letter stating that American Casualty "agrees to

defend and indenmify its insured," Med-Pius,"against all causes of action" in the Underlying

Litigation. (June 28,2016, Ltr. from Pamela Ellingson to Steven Stem (Dkt. 23-8) at 1.)

Defendant also stated "that punitive damages and damages in excess ofthe policy limit, claims
that are excluded by public policy and policy language or by Code or Statute, do not create a
conflict of interest." (Id at 2.) Defendant instmcted that "[djefense of Med-Plus,Inc. will now
be transferred" to an attomey selected by Defendant. (Id)

Plaintiff responded on June 30, 2016,to "acknowledge and confirm" Defendant's

position that it would "defend and indemnify" Plaintiff. (June 30,2016, Ltr. from Steven Stem
to Pamela Ellison (Dkt. 23-9) at 1.) Plaintiff objected, however,that"a claim for punitive
damages does indeed create a conflict of interest which entitles Med Plus to select its own

independent covmsel which must be paid for by" Defendant. (Id at 1-2(citations omitted).)

^ Plaintiff construes its request for declaratory judgment as a second cause of action. (See Compl. 34-37.)
Declaratoryjudgment is a remedy, however, not a freestanding cause of action. See 28 U.S.C. § 2201.

In a July 6,2016, email, Defendant stated that it "agrees to defend and indemnify MedPlus against all causes of action and damages sought in the Abbott complaint, up to the available

limits ofthe policy, without reservation." and once again stated its intention to appoint new
counsel for Med-Plus. (July 6,2016,Email from Charles Carluccio to Steven Stem (Dkt. 23-10)
(emphasis added).)
n.

DISCUSSION

Defendant moves to dismiss the complaint for lack of subject matter jurisdiction under
Federal Rule of Civil Procedure 12(b)(1), and also for failure to state a claim upon which relief

may be granted under Rule 12(b)(6). Plaintiff moves for partial summary judgment on the issue
of whether Plaintiff is entitled to select independent counsel in the Underlying Action, with
reasonable costs paid by Defendant.

The court finds an ongoing actual controversy, and therefore denies Defendant's 12(b)(1)
motion. The court construes Defendant's 12(b)(6) motion as a motion for summary judgment,

and adjudicates it simultaneously with Plaintiff's cross-motion for summary judgment. The
court finds that the potential for punitive damages in the Underlying Action creates a conflict of
interest that entitles Plaintiff to select independent counsel. The court rejects Defendant's

arguments regarding Stem & Schurin's eligibility to be selected as independent counsel, while
recognizing that such arguments may potentially be raised at another time or in another forum.
A. Subject Matter Jurisdiction
1. Legal Standards

a. Declaratory Judgment

"In a case of actual controversy within its jurisdiction," a district court"may declare the
rights and other legal relations of any interested party seeking such declaration." 28 U.S.C.
§ 2201(a). The Federal Rules of Civil Procedure "govem the procedure for obtaining a
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declaratory judgment," as they do other civil actions. Fed. R. Civ. P. 57. "The existence of
another adequate remedy does not preclude a declaratory judgment that is otherwise

appropriate." Id For the purpose of establishing subject matter jurisdiction,"a complaint
seeking a declaratory judgment is to be tested ... as if the party whose adverse action the
declaratory judgment plaintiff apprehends had initiated a lawsuit against the declaratory

judgment plaintiff."^ Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc..
697 F.3d 59,68(2d Cir. 2012)(quoting Fleet Bank. N.A. v. Burke. 160 F.3d 883, 886(2d Cir.
1998)).
b.

Mootness

"Article III restricts federal courts to the resolution of cases and controversies. That

restriction requires that the party invoking federal jurisdiction have standing—^the personal
interest that must exist at the commencement ofthe litigation." Carter v. HealthPort Techs.,

LLC,822 F.3d 47, 55(2d Cir. 2016)(alterations omitted)(quoting Davis v. Fed. Election

Comm'n,554 U.S. 724,734(2008)). "But it is not enough that the requisite interest exist at the
outset. 'To qualify as a case fit for federal-court adjudication, an actual controversy must be
extant at all stages ofreview, not merely at the time the complaint is filed.'" Davis. 554 U.S.
at 732-33(quoting Arizonans for Official English v. Arizona, 520 U.S. 43,67(1997)).
If, at any point, a court discerns the absence of any actual, ongoing controversy, the court
must dismiss the action as moot. See, e.g., Nat'l Convention Servs., L.L.C. v. Applied

Underwriters Captive Risk Assurance Co.,Inc., No. 15-CV-07063(JGK),2017 WL 945189, at

*1 n.l (S.D.N.Y. Mar. 9, 2017)(dismissing as moot a claim for declaratoryjudgment regarding

^ This "core principle" was developed with regard to federal-question jurisdiction, but"has been extended to the
diversity jurisdiction context as well." Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc.. 697 F.3d 59,
68(2d Cir. 2012)(collecting cases).

an arbitration clause because, after the filing of the complaint, the "defendants stated that they

will not seek to enforce the arbitration clause"). But see Fed. Election Common v. Wis. Right to

Life. Inc.. 551 U.S. 449,462(2007)(noting the "established exception to mootness for disputes
capable ofrepetition, yet evading review").

c. Dismissalfor Lack ofSubject Matter Jurisdiction Under Rule 12(b)(1)

"A Rule 12(b)(1) motion challenging subject matter jurisdiction may be either facial or
fact-based." Carter. 822 F.3d at 56. "When the Rule 12(b)(1) motion is facial,i^, based solely

on the allegations of... the complaint and exhibits attached to it...,[t]he task ofthe district
court is to determine whether the Pleading alleges facts that affirmatively and plausibly suggest"

that jurisdiction is proper. Id.(alterations, internal quotation marks, and citations omitted).
"Alternatively, a defendant is permitted to make a fact-based Rule 12(b)(1) motion,

proffering evidence beyond the Pleading." Id at 57(citations omitted). Ifthe defendant's
evidence exposes a potential jurisdictional defect,"the plaintiffs will need to come forward with
evidence oftheir own," though they "are entitled to rely on the allegations in the Pleading ifthe
evidence proffered by the defendant... does not contradict plausible allegations that are
themselves sufficient to show standing." Id "Ifthe extrinsic evidence presented by the
defendant is material and controverted, the district court will need to make findings offact in aid
of its decision as to standing." Id
2. Analysis

Defendant's motion to dismiss for lack ofjurisdiction relies on multiple evidentiary

submissions documenting communication between the parties regarding the Underlying Action.
CSee Def. Mem.in Supp. ofDef. Mot.("Def. Mem.")(Dkt. 19-1).) Therefore, the court will

analyze Defendant's Rule 12(b)(1) motion as a factual attack on jurisdiction, to be assessed
based on all material evidence. See Carter. 822 F.3d at 56-57. The court finds that subject
7

matter jurisdiction is proper with regard to Plaintiffs request for declaratory judgment, and
accordingly denies Defendant's Rule 12(b)(1) motion.

Defendant does not appear to dispute thatjurisdiction existed at the time the Complaint
was filed. Rather, Defendant emphasizes that, since that time. Defendant has agreed to

"indemnify Med-Plus for all claims and damages up to the limits ofthe [Policy]—^without any
reservation ofrights on any issue." (Def. Mem. at 4.) On that basis. Defendant asserts that
"there is no live controversy for the Court to decide, and American Casualty is entitled to

proceed with the experienced defense counsel it has selected to represent Med-Plus in the Abbott

case."^ (Id.) Though Defendant's briefing never uses the word "moot," Defendant's argument is
properly construed as asserting a lack of subject matter jurisdiction on grounds of mootness.
Defendant is mistaken.

It is clear from the parties' communications that Defendant asserts a right to select
Plaintiffs counsel in the Underlying Action, while Plaintiff asserts a right to proceed with its
chosen counsel of Stem & Schurin. In the March 30 Letter, Defendant itselfreserved "the right

to file a declaratory judgment action to determine the parties' rights and obligations" under the

Policy. (Mar. 30 Ltr. at 3.) Since then. Defendant has purported to withdraw all reservations,

but only in connection with Defendant's disputed representations that(1)the possibility of
punitive damages in the Underlying Action does not create a conflict ofinterest, and

^ Plaintiff accurately states that "[a] determination of whether or not there is a 'justiciable controversy' under the
Declaratory Judgment Act, 28 U.S.C. § 2201, must necessarily be made as ofthe date ofthe filing ofthe
Complaint."(PI. Mem. in Supp. ofPI. Cross-Mot. & in Opp'n to Def. Mot.(Dkt. 21)at 7(citations omitted).)
Plaintiff appears to argue, however,that Defendant's motion should be denied on the basis that its argument "is
premised exclusively on facts and changes to its position that occurred after Med Plus had already filed its
Complainf in this action. (Id at 8.) Plaintiff has erroneously conflated two jurisdictional doctrines. "Diversity
jurisdiction, once established, is not defeated by the addition ofa nondiverse party to the action." FreeportMcMoRan.Inc. v. K N Enerev. Inc.. 498 U.S. 426,428(1991)(emphasis added). Any federal action, however, may

be mooted if events subsequent to the filing ofthe complaint deprive the plaintiff ofany continuing personal stake in
the outcome. Davis. 554 U.S. at 732-33.

8

(2)Defendant therefore has the right to select Plaintiffs counsel. There is thus an "actual
controversy" for the purpose of28 U.S.C. § 2201(a).

Defendant cites a single case in support ofits jurisdictional argument, a District of
Delaware decision that found unripe a request for declaratory judgment in connection with an
ongoing indemnification dispute. (See Def. Mem. at 3 (discussing Hartford Fire Ins. Co. v.
InterDigital Commc'ns Corp.. 464 F. Supp. 2d 375(D. Del. 2006)).) Even if this case had

precedential value, it would offer no support for Defendant's argument. Analyzing Pennsylvania
law,the Hartford Fire court explained that "[t]he insurer's duty to defend an insured is a separate

and distinct obligation from the insurer's duty to indemnify the insured. The duty to indemnify
is a narrower duty, and arises only when the insured is determined to be liable for damages
within the coverage ofthe policy." Hartford Fire. 464 F. Supp. 2d at 378(emphasis added)

(intemal quotation marks and citations omitted)."^ In that case, the court dismissed the
indemnification claim as unripe, but permitted "the question of[the insurer's] duty to defend [to]
go forward," noting that a finding for the insurer on that issue would "eliminate the issue of
indemnity." Id. at 382.

In this case, Plaintiff similarly seeks a declaration ofthe parties' respective rights

regarding the selection of counsel in the Underlying Action, a component of Defendant's duty to

defend. There is a live controversy. Accordingly, Defendant's motion to dismiss for lack of
subject matter jurisdiction is denied.

** See also, e.g.. Ansonia Assocs. Ltd. P'ship v. Pub. Serv. Mut. Ins. Co.. 692 N.Y.S.2d 5, 7(N.Y. App. Div. 1999)
("The insurer's obligation to provide its insured with a defense is broader than its duty to indemnify the insured for
loss." fciting Goldberg v. Lumber Mut. Cas. Ins. Co.. of N.Y.. 77N.E.2d 131, 133(N.Y. 1948))).

B. Legal Standards for Cross-Motions on the Merits
1. Motion to Dismiss for Insufficient Pleadings Under Rule 12(by6')

To defeat a Rule 12(b)(6) challenge,"a complaint must plead specific facts sufficient to

support a plausible inference that the defendant is liable for the misconduct alleged. While 'the
plausibility standard is not akin to a probability requirement, it asks for more than a sheer
possibility that a defendant has acted unlawfully.'" Doe v. Columbia Univ.. 831 F.Sd 46,54
(2d Cir. 2016)(internal citations and alterations omitted)(quoting Iqbal. 556 U.S. at 678).
"On a motion to dismiss, all factual allegations in the complaint are accepted as true and

all inferences are drawn in the plaintiffs favor." Littleiohn v. City ofNew York. 795 F.Sd 297,

306(2d Cir. 2015)(citation omitted). However,this leniency is "inapplicable to legal

conclusions" or "[t]hreadbare recitals ofthe elements ofa cause of action, supported by mere
conclusory statements." Ashcroft v. Iqbal, 556 U.S. 662,678 (2009). As a general rule, courts

"do not consider matters outside the pleadings in deciding a motion to dismiss for failure to state
a claim." Nakahata v. N.Y.-Presbvterian Healthcare Svs.. Inc., 723 F.Sd 192,202(2d Cir. 2013)

(citation omitted). "Rather, where matter outside the pleadings is offered and not excluded by
the trial court, the motion to dismiss should be converted to a motion for summaryjudgment."

Id. at 202-03 (citing Fed. R. Civ. P. 12(d)). Before ordering such a conversion,the court should
ensure that "[a]11 parties [are] given a reasonable opportunity to present all the material that is
pertinent to the motion." Fed. R. Civ. P. 12(d).
2. Motion for Summary Judgment Under Rule 56

Summary judgment must be granted when "there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter oflaw." Fed. R. Civ. P. 56(c). "A

'material' fact is one capable ofinfluencing the case's outcome under governing substantive law,
and a 'genuine' dispute is one as to which the evidence would permit a reasonable juror to find
10

for the party opposing the motion." Fieueroa v. Mazza. 825 F.3d 89,98(2d Cir. 2016)(citing
Anderson v. Liberty Lobby. Inc.. 477 U.S. 242,248 (1986)).

"In making this determination, the Court'must construe the facts in the light most

favorable to the non-moving party and must resolve all ambiguities and draw all reasonable
inferences against the movant.'" Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y..

822 F.3d 620,631 n.l2(2d Cir. 2016)(quoting Beyer v. Ctv. ofNassau,524 F.3d 160,163
(2d Cir. 2008)). "Conclusory allegations, conjecture, and speculation," however,"are

insufficient to create a genuine issue offact." Joseph v. N. Shore Univ. Hosp.. 473 F. App'x 34,

36(2d Cir. 2012)(summary order)(quoting Shannon v. N.Y. Citv Transit Auth.. 332 F.3d 95,99
(2d Cir. 2003)). If"the nonmoving party has failed to make a sufficient showing on an essential
element of her case with respect to which she has the burden of proof," then the movant is
entitled to summary judgment. El-Nahal v. Yasskv. 835 F.3d 248,252(2d Cir. 2016)(quoting
Celotex Corp. v. Catrett. 477 U.S. 317, 323 (1986)).
C. Choice of Law

The parties initially briefed the cross-motions under the assumption that New Jersey law
govems all issues in this case, but neither party cited any law in support ofthat assumption. The
court therefore ordered supplemental briefmg on choice oflaw. ISee Mar. 16, 2017, Order

(Dkt. 30).) Plaintiffs supplemental memorandum "submits that New York law should be
applied to the particular issues to be considered in the parties' cross motions." (PI. Suppl. Mem.
re Choice of L.("PI. COL Mem.")(Dkt. 32).) Defendant, meanwhile, argues that New Jersey

law govems all claims. (Def. Suppl. Mem. re Choice of L.("Def. COL Mem.")(Dkt. 4).)
1. Legal Standard

"Where jurisdiction is predicated on diversity of citizenship, a federal court must apply
the choice-of-law mles ofthe forum state." Thea v. Kleinhandler. 807 F.3d 492,497(2d Cir.
11

2015)(citing Forest Park Pictures v. Universal Television Network. Inc.. 683 F.3d 424,433
(2d Cir. 2012); Klaxon Co. v. Stentor Elec. Mfg. Co.. 313 U.S. 487,496 (1941)). "Where a
choice of law clause is not dispositive, '[t]he first step ... is to determine whether there is an
actual conflict between the laws of the jurisdictions involved.'" Fireman's Fund Ins. Co. v.
Great Am.Ins. Co. ofN.Y.. 822 F.3d 620,641 (2d Cir. 2016)(alterations in original)(quoting In
re Allstate Ins. Co. tStolarzV 613 N.E.2d 936,937(N.Y. 1993)). "[I]n the absence of any

conflict between the laws ofthe two jurisdictions ...,no choice-of-law analysis is required."
O'Learv v. S & A Elec. Contracting Corp.. 53 N.Y.S.3d 617,619(N.Y. App. Div. 2017)(citing
J. Aron & Co. v. Chown,647 N.Y.S.2d 8(N.Y. App. Div. 1996)).

"If an actual conflict exists. New York applies '[t]he 'center of gravity' or 'grouping of

contacts' choice oflaw theory.'" Fireman's Fund. 822 F.3d at 641 (quoting Stolaiz, 613 N.E.2d

at 939). "[T]he New York Court of Appeals has endorsed the following factors" as relevant for
the "center of gravity" approach: "the places of negotiation and performance; the location ofthe

subject matter; and the domicile or place of business ofthe contracting parties." Id at 642
(intemal quotation marks and citations omitted). If, with regard to an insurance contract,"the
insured risk is scattered throughout multiple states. New York courts deem the risk to be located

principally in one state," and use "the state ofthe insured's domicile ... as a proxy for the
principal location ofthe insured risk." Id.(alterations, intemal quotation marks, and citations
omitted).

"New York further recognizes that sometimes 'the policies underlying conflicting laws in

a contract dispute are readily identifiable and reflect strong governmental interests, and therefore
should be considered.' In such cases, a court'may properly consider State interests to determine

12

whether to apply New York law.'" Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135,152
(2d Cir. 2008)(quoting Stolarz,613 N.E.2d at 939).
2. Analysis

Neither party has directed the court's attention to a choice-of-law provision in the Policy.
The "center of gravity" approach favors the application of New Jersey law in this case. Plaintiff
is a New Jersey corporation with its primary office in New Jersey. Plaintiff does business in
multiple states, and so the principal location ofthe insured risk is deemed to be New Jersey,
Plaintiff's domicile. No other state has a stronger pull on the center of gravity. Thus,the court's

choice-of-law analysis for each issue concerning the Policy will proceed as follows:(1)if there

is no conflict between New York and New Jersey law,the court will apply New York law;^(2)if
there is a conflict, the court will apply New Jersey law pursuant to the "center of gravity"

approach, unless a "strong governmental interest" favors the application of New York law.
D. Analysis

Neither party has cited contractual terms in the Policy governing the selection of counsel
for purposes of defending against covered claims. The court must therefore rely on non-contract

doctrines to resolve the pending cross-motions. Defendant's Rule 12(b)(6) motion is essentially
a mirror image ofPlaintiff's motion for summary judgment in terms ofthe legal arguments and
proffered evidence. Because Defendant itself submitted multiple evidentiary exhibits, and
because both parties rely on the same evidence in making their arguments, the court sees fit to

apply Rule 12(d) and analyze Defendant's motion as a motion for summary judgment.^ The

^ Defendant argues that if"there is no conflict," there is "no overriding reason to apply to New York law," and so
New Jersey law should be applied instead. (Def. Reply to PI. COL Mem.(Dkt. 34).) Defendant's proposal is flatly
foreclosed by long-established choice-of-law principles in New York, as explained above.
® In light ofthis characterization, the court need not consider Plaintiffs argument that Defendant's motion should be
rejected on procedural grounds "since it relies entirely on documents and communications that were neither attached
to the Complaint nor incorporated by reference." (PI. Mem.in Supp. of Cross-Mot.(Dkt. 21) at 10.)
13

court grants Plaintiffs motion for partial summary judgment on the question of whether Plaintiff
is entitled to select independent counsel in the Underlying Action. Defendant's motion is denied.
1. Punitive Damages and Conflicts ofInterest

The court finds that Plaintiffs argument as to conflicts of interest would produce the
same result whether analyzed under New York or New Jersey law. Therefore, under New
York's choice-of-law principles, New York law will govern the dispute.

New York law clearly prohibits insurers from indemnifying punitive damages assessed

against insured entities. Zurich Ins. Co. v. Shearson Lehman Hutton. Inc.. 84 N.Y.2d 309, 319
(N.Y. 1994)(discussing "New York's unambiguous policy against insurance coverage for
punitive damages"). The New Jersey Supreme Court has not ruled on the issue. Chubb Custom
Ins. Co. V. Prudential Ins. Co. of Am., 195 N.J. 231, 245 n.3 (N.J. 2008)("[T]here has never

been a declaration by this Court or the Legislature that punitive damages are uninsurable.").
However,at least two decision from the Appellate Division have followed the New York model

of prohibiting coverage for punitive damages. See Fireman's Fund Ins. Co. v. Imbesi. 826 A.2d
735,757(N.J. Super. Ct. App. Div. 2003); Johnson & Johnson v. Aetna Cas. and Sur. Co.. 667
A.2d 1087(N.J. Super. Ct. App. Div. 1995)("New Jersey sides with those jurisdictions which
proscribe coverage for punitive damage liability because such a result offends public policy and
frustrates the purposes of punitive damage awards."). Thus,the best available authority suggests
that, under both New York and New Jersey law, punitive damages are not insurable as a matter
of public policy.

Further, under the law of both states, the possibility of punitive damages creates a conflict
ofinterest that entitles policyholders to independent counsel. See Ansonia Assocs. Ltd. P'shp. v.
Pub. Serv. Mut. Ins. Co.. 257 A.D.2d 84,87(N.Y. App. Div. 1999)(finding a "conflict of

interest" based on the potential for punitive damages: the "defendant insurance companies face
14

no augmented financial risk by foregoing settlement and proceeding to trial," and so the insured
"is forced to elect between exposure to potentially ruinous punitive damages by proceeding to

trial and the loss ofcoverage for compensatory damages by entering into a compromise without

the insurer's consent")^; Dieve v. Roval Blue Servs.. Inc.. 961 N.Y.S.2d 478,480(N.Y. App.
Div. 2013)(finding that counsel "retained by the defendants' insurance company ... would be
subject to divided loyalties" in defending against claims for which "the insurance company has
disclaimed coverage," and remanding for selection of unconflicted coimsel (citing Prashker v.
U.S. Guarantee Co.. 1 N.Y.2d 584, 593(N.Y. 1956)); Aquino v. State Farm Ins. Cos.. 793 A.2d
824, 831-32(N.J. Super. Ct. App. Div. 2002)(noting that certain claims against the insured

involved punitive damages, which were not covered under the insurer's policy, and concluding

that the "conflict [] necessitated separate counsel" on those claims).^
Defendant argues that the mere possibilitv of punitive damages means that any conflict of
interest is hypothetical. (See Def. Mem.at 2("The mere fact that" the Abbott SAC seeks
"punitive damages against 'all defendants' did not mean that such damages would or should or
were likely to be awarded against Med-Plus.").) Defendant argues that Plaintiff has improperly
"ask[ed] the Court to provide an advisory opinion on a potential scenario that may never be
realized." (Id.) Defendant is mistaken. It would be illogical to delay appointing independent
counsel until after the risk underlying a conflict of interest has fully materialized and harmed the
client. A conflict of interest can insidiously infect professional decision making in myriad ways

' reasoning in Ansonia directly refutes Defendant's argument that "Med-Plus and American Casualty have a
The
complete unity of interest in ensuring that all claims asserted against Med-Plus are defeated." (Def. Mem. in Opp'n
to PI. Cross-Mot.& in Further Supp. of Def. Mot.("Def. Opp'n")(Dkt. 24)at 15.)
® Defendant argues that Aquino is inapplicable because the insurer in that case "had issued a reservation ofrights as
to the [] counts" that involved the possibility of punitive damages, whereas Defendant "waived its reservation of
rights months ago." (Def. Opp'n at 11; see also Def. Mem. at 5("[GJiven that American Casualty has agreed to be
fully responsible for all damages, up to its $1 million policy limit, there is no question as to American Casualty's
fidelity to Med-Plus.").) Defendant cannot, however, voluntarily waive an exclusion that is mandated as a matter of
public policy.
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over the course of a lawyer's representation, which is why lawyers are generally instructed either

to decline conflicted representation or to obtain written informed consent from each affected
client. See, e.g..N.Y. R.Prof1 Conductr. 1.8 cmt.ll ("Third-party payers"—^"such as []

liability insurance company[ies]"—^"frequently have interests that may differ from those ofthe
client. A lawyer is therefore prohibited from accepting or continuing such a representation

unless the lawyer determines that there will be no interference with the lawyer's professional
judgment and there is informed consent from the client.").

Conflicts of interest are best addressed prophylactically so as to avoid a challenging

retrospective analysis of whether an attorney's conflict ofinterest had a material effect on the
representation. Plaintiff has offered sufficient support for its claim that punitive damages are a
legitimate possibility in the Underlying Action. (PI. Reply in Further Supp. ofPI. Cross-Mot. at
5-6 (noting that punitive damages have previously been awarded in similar actions, and also that
Abbott's success in securing preliminary injunctive relief is a sign of likely success on the

merits).) That possibility means that Plaintiff and Defendant do not have complete unity of
interests.

The court grants Plaintiffs request for a declaratory judgment that Plaintiff may select

independent counsel in the Underlying Action based on the threat of punitive damages. This
entitlement comes with the caveat that Plaintiff does not have a blanket right to counsel ofits

choosing for all purposes in the Underlying Action. Rather, the right is limited to issues that

present a probable conflict of interest with the insurer. For example, should it become clear that
certain claims in the Underlying Action are eligible for punitive damages while others are not.

Plaintiffs right to independent coimsel would be limited to the punitive-damage-eligible claims.

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Similarly, if Abbott agreed not to seek punitive damages, Plaintiff would no longer have a right
to independent counsel on that basis.
2. Defendant's Challenges to Plaintiffs Chosen Counsel

The court has concluded that Plaintiff is entitled to independent counsel, but it does not

necessarily follow that Plaintiffis specifically entitled to the continued services of Stem &
Schurin. Defendant challenges Stem & Schurin's eligibility, and also raises concems about the
method for calculating Plaintiffs defense costs. At this time,the court sees no reason to

disqualify Stem & Schurin or to articulate a binding cost allocation formula.
Defendant argues, first, that it "has 'the right' to reject Med-Plus's counsel due to the

acrimonious relationship caused by Med-Plus filing a declaratory judgment action," even after
Defendant"had agreed to fiilly defend and indemnify Med-Plus up to its policy Imnt." (Def.

Mem. at 7.) Defendant offers no binding authority in support ofthis "acrimonious relationship"
theory, however. The court declines to disqualify Plaintiffs chosen covmsel solely on the basis
that they represented Plaintiffin the instant lawsuit. Plaintiff merely sought to secure a right
that, as the court has determined. Plaintiff was legally entitled to exercise.

Defendant next objects to Stem & Schurin's representation on the grounds that the firm

represent several defendants in the Underlying Action, some insured and some not. Defendant
argues that it "has no obligation under its policy or otherwise to fund the defense of[Stem &
Schurin's] other clients, who are not American Casualty insureds." (Def. Mem.in Opp'n to PI.
Cross-Mot. & in Further Supp. ofDef. Mot.(Dkt. 24) at 19.) Defendant's concems about the
allocation of costs are not relevant at this time. Tme,the Complaint seeks "compensation for []
total reasonable defense costs" in the Underlying Action(Compl.^ 2), but Plaintiffs motion for

partial summary judgment was limited to the issue ofPlaintiffs asserted right to independent
counsel. Plaintiffs motion did not address the calculation of payment, nor has Defendant
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asserted a pertinent counterclaim. In any event, a fee dispute may well be unripe. The court is
not convinced that it would be appropriate to adjudicate a fee dispute before the close ofthe

underlying litigation.^ Before the Underlying Action concludes,the parties may be able to reach
an agreement as to the allocation offees without the need for additional litigation.

Defendant further hypothesizes that Stem & Schurin may not have fulfilled its obligation
under the New York Rules ofProfessional Conduct to secure written informed consent firom all

co-defendants represented by the firm in the Underlying Action. (Def. COL Mem. at 3.)
Defendant offers no proof ofthis accusation, however, and "[cjonclusory allegations, conjecture,

and speculation are insufficient to create a genuine issue offact."'® Joseph,473 F. App'x at 36
(alteration omitted)(quoting Shannon,332 F.3d at 99). In addition. Defendant has not justified
its attempt to assert rights that belong to Stem & Schurin's clients.

The court declines to disqualify Stem & Schurin from selection as Plaintiffs independent
counsel in the Underlying Action. The court cautions, however,that this refusal to disqualify
Stem & Schurin should not be eonstmed as an affirmative declaration that that the firm is

actually eligible,
m.

CONCLUSION

For the reasons stated above. Defendant's motion (Dkt. 19)is eonstmed in part as a

motion to dismiss and in part as a motion for summary judgment; the motion is DENIED in its

' Defendant argued in its challenge to subject matter jurisdiction,"[i]f every insurer/defense counsel fee dispute,
As
no matter how young and where the bills at issue have not even been presented, is deemed a justiciable controversy,
the Court will be flooded with cases such as this one, which do not present a live, immediate controversy." (Def.
Opp'n at 8(citation omitted).) Defendant's jurisdictional challenge was misplaced because this case involves a
threshold dispute over the duty to defend. However, Defendant's argument appropriately anticipated Defendant's
own attempt to assert a premature fee dispute concerning the allocation ofcosts.
Defendant requests that this court review "all ofthe retainer agreements for all clients in the [Underlying Action],
all bills to those clients, all time sheets and proof of payment by all the clients" in order to assess the suitability of
Plaintiffs chosen counsel. (Def. Opp'n at 20.) This request is beyond the scope ofthe current cross-motions, as
discussed in the text.

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entirety. The court GRANTS Plaintiffs cross-motion for partial summary judgment(Dkt. 20)
and issues a declaratory judgment that Plaintiff is entitled to independent counsel in Abbott Labs.

V. Adelpbia Supply USA.No. 15-CV-5826(CBA)
(LB)insofar as that action involves claims for
punitive damages.

Within 30 days ofentry ofthis Order, the parties are DIRECTED to jointly submit a

status report that enumerates all outstanding issues in this action. The parties shall consider
whether Plaintiff has any ripe claims that have been neither resolved nor mooted.
SO ORDERED.

s/Nicholas G. Garaufis
NICHOLAS G. GARAUFIS'

Dated: Brooklyn, New York

August3_,2017

United States District Judge

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