Geovera Specialty Insurance Company f/k/a USF&G Specialty Insurance Company v. Poulton
Filing
25
MEMORANDUM AND ORDER granting in part and denying in part 8 Motion to Dismiss and Motion for Judgment on the Pleadings; granting in part and denying in part 13 Motion for Judgment on the Pleadings; denying 14 Motion to Dismiss; denying 15 Motion to Certify a Question of Law to the RI Supreme Court. So Ordered by Chief Judge William E. Smith on 9/26/2017. (Jackson, Ryan)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
___________________________________
)
)
)
)
)
Plaintiff,
)
)
v.
)
)
KURT POULTON,
)
)
Defendant.
)
___________________________________)
GEOVERA SPECIALTY INSURANCE
COMPANY f/k/a USF&G SPECIALTY
INSURANCE COMPANY,
C.A. No. 16-432 WES
MEMORANDUM AND ORDER
WILLIAM E. SMITH, Chief Judge.
I. Background
Plaintiff GeoVera Specialty Insurance Company (“GeoVera”)
issued a homeowner’s insurance policy to Defendant Kurt Poulton
(“Poulton”) in 2006 for his residence located in Tiverton, Rhode
Island.
The
policy
was
effective
from
October
2006
through
October 2007, and was renewed for one year thereafter, expiring
in
October
personal
2008.
The
liability.
policy
In
June
included
2016,
a
$500,000
Poulton
asked
limit
GeoVera
for
to
defend and indemnify him in a civil action pending in Newport
County Superior Court involving property he owned in Portsmouth,
Rhode Island.
The background of that lawsuit is as follows:
In
2005, Sandy Point Farms, Inc. (“the Farm”) initiated litigation
against
Sandy
Point
Village,
LLC
(controlled
by
co-members
Poulton and Robert J. Kielbasa) about its alleged misuse of its
real property in Portsmouth that abuts the Farm’s property, and
the
resulting
damage
to
the
Farm’s
property
(“state
court
action”). The Farm alleged that Sandy Point Village, LLC used
impermissible drainage systems to drain effluent and water from
the apartment complex located on the land and that this drainage
caused erosion and a permanent change to the water table on the
Farm’s
property,
which
in
turn
led
to
the
delay
of
the
development of the Farm’s property. In 2010, the Farm amended
its complaint to add Poulton and Kielbasa as individually named
defendants, allegations about damage caused by a second lot of
abutting land owned by Poulton and Kielbasa, and a count for
negligence.
GeoVera
replied
to
Poulton’s
request
for
defense
and
indemnification with a letter stating that, in order to finalize
its
investigation
information
and
into
Poulton’s
documents.
claim,
GeoVera
was
it
needed
clear
additional
that
it
was
neither accepting nor rejecting Poulton’s tender of the state
court action for defense and indemnification.
Poulton quickly
responded to GeoVera’s letter with another letter, claiming that
GeoVera had a legal obligation to immediately accept his request
to defend and indemnify and giving GeoVera an ultimatum: either
agree to defend him or he would file a third-party complaint.
2
GeoVera’s
response
in
early
August
asserted
that,
while
its
investigation thus far had not indicated that it had a duty to
defend and indemnify Poulton, GeoVera was willing to provide a
defense under a reservation of rights pending the completion of
its investigation and/or a judicial determination of coverage.
GeoVera also filed its complaint in this case, seeking a series
of declaratory judgments that GeoVera’s policy did not cover
Poulton for his alleged wrongdoing to the Farm’s property and
GeoVera did not have a duty to defend or indemnify Poulton in
the state court action.
Poulton filed a counterclaim, alleging that GeoVera’s offer
to defend him under a reservation of rights was made in bad
faith
in
violation
of
Rhode
Island
General
Laws
§
9-1-33.
Poulton seeks a declaratory judgment that GeoVera owes him a
duty of defense and indemnification against the Farm’s claims
and that GeoVera is not entitled to recover any expenses it
incurs under a reservation of rights.
There are four motions currently pending before the Court:
(1)
GeoVera’s
combined
Motion
for
Judgment
on
the
Pleadings
declaring that Poulton is not entitled to insurance coverage and
Motion
To
Dismiss
Poulton’s
counterclaim
(ECF
No.
8);
(2)
Poulton’s Motion for Judgment on the Pleadings that Poulton is
entitled to a defense from GeoVera in the state court action
3
(ECF
No.
13);
(3)
Poulton’s
Motion
To
Dismiss
or,
in
the
alternative, to stay this case pending resolution of the state
court action (ECF No. 14); and (4) Poulton’s Motion To Certify a
Question of Law to the Rhode Island Supreme Court (ECF No. 15).
II. Legal Standard
“To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim
to
relief
that
is
plausible
on
its
face.’”
Coll.
Hill
Properties, LLC v. City of Worcester, 821 F.3d 193, 195–96 (1st
Cir.
2016)
(2009)).
pleads
(quoting
Ashcroft
v.
Iqbal,
556
U.S.
662,
678
“A claim has facial plausibility when the plaintiff
factual
reasonable
content
inference
that
that
misconduct alleged.”
allows
the
the
defendant
court
is
to
draw
liable
Iqbal, 556 U.S. at 678.
the
for
the
The Court may
supplement the facts and inferences drawn from the complaint
with
information
reference
facts
into
the
susceptible
“gleaned
from
complaint,
to
documents
matters
judicial
of
notice.”
incorporated
public
record,
Guadalupe-Baez
by
and
v.
Pesquera, 819 F.3d 509, 514 (1st Cir. 2016) (quoting Haley v.
City of Boston, 657 F.3d 39, 46 (1st Cir. 2011)).
In this case,
GeoVera’s complaint includes the complaints from the state court
action,
the
insurance
policy,
and
4
a
series
of
letters
it
exchanged with Poulton, all of which the Court has considered in
resolving the pending motions.
The legal lens through which the Court considers a motion
for judgment on the pleadings is the same as that for a motion
to dismiss for failure to state a claim.
See Perez-Acevedo v.
Rivero-Cubano, 520 F.3d 26, 29 (1st Cir. 2008) (citing Curran v.
Cousins, 509 F.3d 36, 43–44 (1st Cir. 2007)).
“Because [a Rule
12(c)] motion calls for an assessment of the merits of the case
at an embryonic stage, the court must view the facts contained
in the pleadings in the light most favorable to the nonmovant
and draw all reasonable inferences therefrom . . . .”
Id.
(quoting R.G. Fin. Corp. v. Vergara–Nunez, 446 F.3d 178, 182
(1st Cir. 2006)).
III. Discussion
A. Whether GeoVera has a Duty To Defend Poulton in the
State Court Action
GeoVera moves for judgment on the pleadings on three of its
ten requests for declaratory judgment that it does not have a
duty to defend or indemnify Poulton for any claim asserted by
the Farm because: (1) the Farm’s allegations in its Verified
Amended Complaint (“Complaint”) about the damage, the discovery
of the damage, the communication of the damage to Poulton, and
the initiation of litigation for the alleged damages caused by
Poulton’s use of his Portsmouth property, all predate the start
5
of
GeoVera’s
policy
coverage,
meaning
that
the
Farm
has
not
alleged “property damage” caused by an “occurrence” as defined
in GeoVera’s insurance policies (Count I); (2) the Farm’s claims
are precluded from coverage by the policy’s “business exclusion”
(Count V); and (3) the Farm’s claims are precluded from coverage
by the policy’s “pollution exclusion” (Count VI). Poulton is
moving for judgment on the pleadings that it is entitled to a
defense from GeoVera in the state court action.
Insurance
insureds:
the
companies
duty
to
have
two
defend
broad
and
obligations
the
duty
to
to
their
indemnify.
Travelers Cas. & Sur. Co. v. Providence Washington Ins. Co., 685
F.3d
22,
25
(1st
Cir.
2012).
As
the
First
Circuit
has
explained:
Whether an insurer’s duty to defend arises from the
inception of a lawsuit against its policyholder hinges
‘on whether the complaint in the underlying tort
action alleges facts and circumstances bringing the
case within the coverage afforded by the policy. That
question is resolved by comparing the complaint in
that action with the policy issued by the insurer; if
the complaint discloses a statement of facts bringing
the case potentially within the risk coverage of the
policy the insurer will be duty-bound to defend
irrespective of whether the plaintiffs in the tort
action can or will ultimately prevail.’
Id. (quoting Flori v. Allstate Ins. Co., 388 A.2d 25, 26 (R.I.
1978)); see also Emhart Indus., Inc. v. Century Indem. Co., 559
F.3d 57, 65 (1st Cir. 2009), as amended on denial of reh’g and
reh’g en banc (Apr. 17, 2009).
6
Pursuant to this “pleadings
test,”
the
Court
must
focus
allegations in the pleadings.
65 (citations omitted).
exclusively
on
the
factual
Emhart Indus., Inc., 559 F.3d at
“In determining whether the allegations
in a complaint are sufficient to create a duty to defend, [the
Court]
appl[ies]
general
rules
of
contract
construction
give[s] words their ‘plain, ordinary meaning.’”
and
Narragansett
Jewelry Co. v. St. Paul Fire and Marine Ins. Co., 555 F.3d 38,
41 (1st Cir. 2009) (quoting Allstate Ins. Co. v. Russo, 641 A.2d
1304, 1306–07 (R.I. 1994)).
“Any doubts about the sufficiency
of the allegations are resolved in favor of the insured.”
Id.
“Rhode Island’s pleadings test triggers the duty to defend only
when the pleading allegations show the potential that property
damage occurred during the policy period.”
Sur. Co., 685 F.3d at 32.
the
duty
continues
Travelers Cas. &
Once the duty to defend is triggered,
“until
the
coverage
question
is
resolved
either by the establishment of facts showing no potential for
coverage or by the conclusion of the underlying lawsuit.”
Id.
at 25 (citations omitted).
1. “Occurrence” of “Property Damage”
The
personal
liability
section
of
the
policy
issued
GeoVera states, in relevant part, that:
If a claim is made or a suit is brought against an
‘insured’ for damages because of . . . ‘property
damage’ caused by an ‘occurrence’ to which this
coverage applies, we will:
7
by
. . .
2. Provide a defense at our expense by counsel of our
choice, even if the suit is groundless, false or
fraudulent.
We may investigate and settle any claim
or suit that we decide is appropriate.
Our duty to
settle or defend ends when our limit of liability for
the ‘occurrence’ has been exhausted by payment of a
judgment or settlement. 1
Property damage is defined in the policy as “physical injury to,
destruction
of,
or
loss
of
use
of
tangible
property.” 2
An
occurrence is defined in the policy as “an accident, including
continuous
general
or
repeated
harmful
exposure
conditions,
which
to
substantially
results,
during
the
the
same
policy
period, in . . . property damage.” 3
The
operative
complaint
for
assessing
GeoVera’s
duty
to
defend is the Complaint filed by the Farm in state court in
2010.
In the Complaint, the Farm clearly states that it “seeks
to recoup the damage that defendants’ unreasonable drainage has
caused,
and
also
seeks
Poulton
and
Kielbasa
to
injunctive
remediate
relief
their
ordering
properties
Defendants
so
as
to
eliminate the unreasonable flow of drainage and erosion onto
1
Compl. Ex. C 16, ECF No. 1-3.
2
Id. at 2.
3
Id.
8
[the
Farm’s]
property.” 4
The
Complaint
reflects
several
allegations that are tied to specific years or time periods,
such as “[s]tarting no later than 2003, defendants illegally
drained effluent and water from a 29 bedroom apartment complex
and its parking lots onto Lot 17 through the use of illicit
drainage conduits and due to failed septic systems of Lot 191.” 5
In addition, the Farm alleges that it discovered the damage to
its
land
allegedly
caused
by
thereafter
experienced
delays
property. 6
Moreover,
Poulton
the
to
Poultons
the
and
in
2003,
development
Kielbasa
of
allegedly
and
its
made
promises in Fall 2004 to “undertake remedial measures to stop
the illegal run-off” from their two lots, but did not complete
these measures. 7
The Farm also alleges that Poulton and Kielbasa
“consolidate[d] failed septic systems servicing” the apartment
units on one of the lots in 2005, which “materially redirected
water flow onto” the Farm’s property. 8
indicate
that
the
alleged
damage
to
All of these allegations
the
Farm’s
property
was
perpetrated, discovered, and discussed with Poulton prior to the
4
Compl. ¶ 2, ECF No. 1-1.
5
Id. ¶ 14.
6
Id. ¶¶ 17-20.
7
Id. ¶ 21.
8
Id. ¶ 22.
9
inception of the insurance policy in question.
pleadings
test
applied
in
Rhode
Island,
Pursuant to the
this
would
negate
GeoVera’s duty to defend Poulton in the underlying state court
action.
See Travelers Cas. & Sur. Co., 685 F.3d at 25.
However, there are two broader allegations in the Complaint
that are not tethered to a specific date or year: (1) “After
Poulton and Kielbasa took title to Lot 192, they continued to
maintain and use certain portions of the systems that [Sandy
Point Village, LLC] previously installed, to the benefit of Lot
192 and to the detriment of [the Farm’s property]” 9; and (2)
“Poulton and Kielbasa have also installed and/or maintained one
or more PVC pipes and other drains and conduits on Lots 191 and
192
that
unreasonably
direct
drainage
sediment directly onto Lot 17”. 10
of
surface
water
and
The Complaint does not include
either the date Poulton and Kielbasa took title to Lot 192 or a
date or timeframe during which they allegedly installed the “PVC
pipes
and
Complaint
however
other
drains
indicates
slight,
that
because
and
conduits”
there
it
is
is
a
on
both
potential
possible
that
lots.
for
The
coverage,
these
events
occurred during the policy periods (October 2006 - October 2008)
and given the liberal pleadings test applied in Rhode Island,
9
10
Id. ¶ 15.
Id. ¶ 16.
10
GeoVera’s duty to defend has been triggered.
See Travelers Cas.
& Sur. Co., 685 F.3d at 25; Flori, 388 A.2d at 26.
The First
Circuit has commented that:
Rhode Island cases display a consistent message: lack
of specificity in a complaint leaving in doubt whether
a state of facts exists showing the case is within the
risk of coverage, or pleadings that display the
existence of a question of fact regarding coverage,
trigger the duty to defend, and that duty continues
until such time as facts are shown to foreclose
coverage (or the parties settle).
Travelers Cas. & Sur. Co., 685 F.3d at 31 (citations omitted).
Extrinsic evidence obtained during discovery may reveal that the
only occurrence(s) of property damage happened prior to October
2006,
but
allegations
“the
pleadings
without
test
focuses
consideration
of
on
the
extrinsic
pleading
evidence;
therefore, the duty to defend may arise even where ‘known facts
conflict with the facts alleged in the . . . complaint.’”
Id.
at 25 (quoting Flori, 388 A.2d at 26).
In its effort to convince the Court that GeoVera’s duty to
defend
has
not
been
triggered
by
the
underlying
state
court
action, GeoVera analogizes the instant case to a First Circuit
case.
In
the
latter
case,
the
First
Circuit
held
that
an
insurance policy did not cover property damage when car wash
equipment malfunctioned, the malfunction was discovered, and the
insured
filed
suit
against
the
manufacturer
all
before
the
inception of the insurance policy, but the insured had continued
11
to experience the damage from the equipment’s malfunctions after
the
commencement
of
the
policy
period.
Bartholomew
Appalachian Ins. Co., 655 F.2d 27, 28 (1st Cir. 1981).
v.
The
analogy to the timing of damage, discovery, and litigation in
the
underlying
state
court
action
is
clear;
but
here,
the
Complaint contains allegations that are untethered to a specific
year or timeframe, which compels a different conclusion.
Moreover, and as Poulton argues, the Rhode Island Supreme
Court has considered separate, similar occurrences of property
damage
to
continuous
potentially
fall
exposure
the
to
within
same
insurance
occurrence
coverage
might
not.
when
See
Employers Mut. Cas. Co. v. Arbella Prot. Ins. Co., 24 A.3d 544,
557
(R.I.
2011).
allegations
in
Poulton’s
the
Complaint
point
can
is
be
well
read
to
taken.
suggest
The
that
separate occurrences of property damage may have happened rather
than
continuous
exposure,
as
GeoVera
would
have
it.
The
discovery process will flesh this out; but for now, the benefit
of the doubt favors Poulton.
2. Business Exclusion
GeoVera argues that the claims in the Complaint “clearly
fall”
within
the
business
exclusion
of
the
policy
at
issue
because the water drainage that allegedly caused the damage to
the
Farm’s
property
originated
12
from
the
29-bedroom
apartment
complex
operated
GeoVera
also
preclude
by
argues
coverage
Sandy
that
Point
the
because
Village,
business
it
LLC
on
exclusion
construes
the
Lot
191. 11
applies
to
Complaint’s
allegations to indicate that the water and effluent was directed
onto the Farm’s property through pipes and other drain conduits
using both lots of land.
The policy’s exclusions to personal
liability coverage include an exclusion for “‘property damage’
arising out of or in connection with a ‘business’ conducted from
an ‘insured location’ or engaged in by an ‘insured’, whether or
not
the
‘business’
is
owned
or
operated
by
an
‘insured’
or
employs an ‘insured.’” 12
In his objection to GeoVera’s Motion for Judgment on the
Pleadings,
Poulton
concedes
that
Lot
191
is
not
an
“insured
location” covered by GeoVera’s policies, but he asserts that Lot
192 is an “insured location” that was covered by the policy and
that the policy’s business exclusion cannot apply because Lot
192 is vacant, with no businesses operating on it.
Paragraph 14
of the Complaint refers to the apartment complex as located on
Lot 191, and there is no indication in the Complaint that a
business is operated from Lot 192, which Poulton contends is
vacant.
Even so, the business exclusion might still apply if
11
Mem. in Supp. of Pl.’s MJP 21, ECF No. 9.
12
Compl. Ex. C 17.
13
all of the damage to the Farm’s property flowing from Lot 192
stems from Poulton’s engagement in the business operated from
Lot 191.
But the Complaint does not make this allegation.
As
stated above, paragraph 16 alleges a broad set of facts about
the installation of PVC pipes, drains, and other conduits on Lot
192
that
directed
drainage
onto
the
Farm’s
property.
But
paragraph 16 does not allege that these installations were in
any way connected to the apartment complex that operates from
Lot 191; to make this inferential leap at this early stage of
litigation would contravene the principle that any doubts about
the allegations are to be resolved in favor of the insured.
Narragansett Jewelry Co., 555 F.3d at 41.
See
GeoVera is therefore
not entitled to a declaration at this stage that the policy’s
business exclusion precludes coverage of the Farm’s claims in
the state court action.
3. Pollution Exclusion
GeoVera also asserts that the policy’s pollution exclusion
provision
bars
Poulton’s
claim
for
coverage
for
the
Farm’s
claims against him because the Farm has alleged damage caused by
pollutants
as
defined
by
the
policy’s
exclusion.
Poulton
counters that the pollution exclusion is inapplicable because
GeoVera has alleged damage from surface water run-off, which is
not included in the policy’s definition of “pollutant.”
14
With respect to Lot 192, the Complaint alleges that Poulton
“installed and/or maintained one or more PVC pipes and other
drains and conduits . . . that unreasonably direct drainage of
surface
water
property].” 13
and
In
sediment
addition,
directly
the
onto
Complaint
[the
alleges
that
Farm’s
“[t]he
unreasonable drainage of surface water and erosion onto [the
Farm’s property] has irreparably altered the water table” and
that “engineers halted the installation [of a drain] to avoid
the dispersion and direct drainage of effluent into the drain’s
fresh water stream outlet.” 14
Basically, the damage alleged is
from water and effluent drained on to the Farm’s property from
Poulton’s property.
The policy’s “Special Provisions” section added a pollution
exclusion to the personal liability coverage.
The exclusion
includes, in pertinent part, “‘property damage’ arising out of
the
actual,
alleged,
or
threatened
discharge,
dispersal,
seepage, migration, release, or escape of pollutants at, on, in
or
from
any
‘insured
location’
.
.
.
.” 15
“Pollutants”
is
expressly defined as “any solid, liquid or thermal irritant or
contaminant,
including
smoke,
vapor,
soot,
fumes,
13
Compl. ¶ 16.
14
Id. ¶ 17.
15
Compl. Ex. C Special Provisions 1, ECF No. 1-4.
15
acids,
alkalis, chemicals and waste.
Waste includes materials to be
recycled, reconditioned or reclaimed.” 16
Neither surface water nor effluent are explicitly included
in
the
policy’s
definition
of
pollutant.
While
“waste”
can
certainly mean effluent in some contexts, it is not clear that
the definition of pollution here would include effluent.
When a
policy’s terms are capable of more than one reasonable meaning,
then the policy is strictly construed in favor of the insured
and against the insurer. Derderian v. Essex Ins. Co., 44 A.3d
122, 127 (R.I. 2012); Town of Cumberland v. R.I. Interlocal Risk
Mgmt. Tr., Inc., 860 A.2d 1210, 1215 (R.I. 2004). 17
therefore
finds
that
the
pollution
exclusion
The Court
would
not
necessarily exclude coverage by the policy for the claims that
the Farm has made against Poulton in the state court action.
B. Whether Poulton’s Counterclaim for Bad Faith Should Be
Dismissed
In Poulton’s counterclaim, he alleges that GeoVera’s offer
to
defend
under
a
reservation
of
rights
was
in
bad
faith
pursuant to Rhode Island General Laws § 9-1-33, and he seeks a
declaratory judgment that GeoVera has a duty to defend and that
16
17
Id.
Moreover, as this Court has remarked in the past, “the
only clear principle from the abundance of pollution exclusion
cases is that the issue is always fact driven and hotly
contested.” Picerne-Military Hous., LLC v. Am. Int’l Specialty
Lines Ins. Co., 650 F. Supp. 2d 135, 140 n.3 (D.R.I. 2009).
16
GeoVera is not entitled to recover any defense expenses that it
incurs
while
defending
under
a
reservation
of
rights.
In
GeoVera’s Motion To Dismiss Poulton’s counterclaim, it argues
that the counterclaim for bad faith must be dismissed because
GeoVera’s
offer
to
provide
a
defense
under
rights is not bad faith as a matter of law.
a
reservation
of
GeoVera emphasizes
that, while its reservation of rights included the right to seek
recovery of expenses if it was ultimately held that the policy
did not cover the Farm’s state court action against Poulton,
GeoVera
did
not
condition
its
ultimately recover its expenses.
GeoVera’s
conduct
prior
to
defense
on
its
ability
to
Poulton argues that all of
filing
the
declaratory
judgment
action before this Court was in bad faith, including the time
GeoVera
took
to
respond
to
Poulton’s
initial
notice
of
the
claim, that GeoVera offered a defense but under a reservation of
rights, and that GeoVera filed the instant declaratory judgment
action.
Rhode Island General Laws § 9-1-33 18 “provides a cause of
action for an insured when an insurer wrongfully and in bad
18
R.I. Gen. Laws § 9-1-33(a) states, in relevant part,
that:
Notwithstanding any law to the contrary, an insured
under any insurance policy as set out in the general
laws or otherwise may bring an action against the
insurer issuing the policy when it is alleged the
17
faith refuses to pay or settle an insurance claim.”
Lewis v.
Nationwide Mut. Ins. Co., 742 A.2d 1207, 1209 (R.I. 2000).
“It
has long been held in this state that a bad faith action does
not
exist
until
contract.”
the
plaintiff
first
establishes
a
breach
of
Wolf v. Geico Ins. Co., 682 F. Supp. 2d 197, 198
(D.R.I. 2010); see also Lamoureaux v. Merrimack Mut. Fire Ins.
Co., 751 A.2d 1290, 1293 (R.I. 2000) (“Before a bad-faith claim
can even be considered, a plaintiff must prove that the insurer
breached its obligation under the insurance contract.”).
There
is
no
question
that
“[a]n
insurer
may
seize
the
initiative and seek resolution of coverage questions, including
the
duty
to
defend,
in
a
declaratory
judgment
action.”
Travelers Cas. & Sur. Co., 685 F.3d at 25; see also Emhart
Indus., Inc., 559 F.3d at 74 (“Under Rhode Island law, questions
of coverage, including the duty to defend, may be addressed in a
separate declaratory judgment action.”).
“[A]n insurer wishing
to avoid liability may bring a declaratory judgment action in
order to clarify coverage terms without the action necessarily
being
viewed
as
a
‘bad-faith
maneuver.’”
Labonte
v.
Nat’l
insurer wrongfully and in bad faith refused to pay or
settle a claim made pursuant to the provisions of the
policy, or otherwise wrongfully and in bad faith
refused to timely perform its obligations under the
contract of insurance. In any action brought pursuant
to this section, an insured may also make claim for
compensatory damages, punitive damages, and reasonable
attorney fees.
18
Grange Mut. Ins. Co., 810 A.2d 250, 254 (R.I. 2002) (quoting
Rumford Prop. and Liability Ins. Co. v. Carbone, 590 A.2d 398,
401 (R.I. 1991), abrogated on other grounds by Skaling v. Aetna
Ins. Co., 799 A.2d 997 (R.I. 2002)).
The Rhode Island Supreme
Court has stated that “an insurer has the right to debate a
claim that is fairly debatable.”
Skaling, 799 A.2d at 1010.
It
is also well settled that an insurer may seek a resolution of a
coverage
question
while
simultaneously
defending
in
the
underlying cause of action under a “reservation of rights.”
See
Shelby Ins. Co. v. Ne. Structures, Inc., 767 A.2d 75, 76 (R.I.
2001).
After examining the letters exchanged between the parties
prior to the inception of this declaratory judgment action, it
is clear that GeoVera offered to provide an immediate defense
while reserving its right to seek a judicial determination about
whether
action. 19
its
policy
covered
the
claims
in
the
state
court
As a matter of law, therefore, GeoVera did not act in
bad faith by seeking a judicial declaration of its obligations
to Poulton.
Poulton also argues that GeoVera proceeded in bad faith by
not
acknowledging
Poulton’s
claim
19
within
fifteen
days
as
See Compl. Ex. I, ECF No. 1-11; see also Compl. Exs. E-H,
ECF Nos. 1-7 through 1-10.
19
required
Rhode
by
Rhode
Island
“[n]othing
Island
Administrative
Administrative
herein
shall
be
Code
§
Code
§
11-5-73:2
construed
to
11-5-73:6(A).
provides
create
nor
that
imply
private cause of action for violation of this regulation.”
a
See
also Unfair Claims Settlement Practices Act, R.I. Gen. Laws §
27-9.1-1
et
seq.
(“Nothing
contained
in
[the
Unfair
Claims
Settlement Practices Act] shall be construed to create or imply
a
private
While
cause
the
of
slight
action
delay
in
for
violation
initially
of
this
responding
chapter.”).
to
Poulton’s
request for a defense in the state court action may provide
relevant evidence to resolve a claim for bad faith, it does not,
on its own, provide a basis for maintaining a claim for bad
faith as part of Poulton’s counterclaim.
With
judgment
respect
that
to
GeoVera
Poulton’s
cannot
request
recover
for
any
a
declaratory
defense
expenses
incurred while defending under a reservation of rights, both
parties cited several cases decided in courts around the country
that have either allowed or disallowed an insurance company to
recover costs expended during a defense prior to a determination
that a policy did not cover the claims alleged.
There is no
dispute that this is an open question of law in Rhode Island,
but the Court need not address this issue at this early stage.
It
is
the
Court’s
understanding
20
that
GeoVera
has
not
yet
incurred any costs of defense because Poulton refused its offer
to defend under a reservation of rights, so there are currently
no costs to recoup.
To decide this issue of law now would be
premature, especially because it is before the Court on a motion
to dismiss a counterclaim seeking a declaratory judgment that
GeoVera could never recoup costs that it has not yet incurred.
GeoVera’s
Motion
To
Dismiss
Poulton’s
counterclaims
therefore granted in part and denied in part.
is
To the extent
that Poulton’s counterclaim alleges that GeoVera has proceeded
in bad faith pursuant to Rhode Island General Laws § 9-1-33, the
counterclaim
is
dismissed.
Poulton’s
counterclaim
for
a
declaratory judgment that GeoVera has a duty to defend proceeds
for
the
reasons
set
forth
in
Section
A,
supra,
and
his
counterclaim for a declaratory judgment that GeoVera may not
recoup its costs of defense will proceed as well, as it may be
ripe later.
C. Poulton’s Motion To Dismiss or Stay Pending Outcome of
State Court Action
Poulton requests that, after concluding GeoVera owes him a
duty to defend, the Court dismiss GeoVera’s complaint because
the question of whether GeoVera has a duty to indemnify Poulton
can be resolved in the state court action.
Poulton argues that
the factual questions determined in state court are the same as
those that will need to be litigated in this case.
21
In the
alternative,
Poulton
requests
that
the
Court
stay
this
case
pending resolution of the state court action.
The
Court
discretion
declines
to
abstain
Poulton’s
from
invitation
hearing
to
exercise
GeoVera’s
its
declaratory
judgment action.
The Court has narrowly denied GeoVera’s Motion
for
the
Judgment
discovery
informs
on
process
whether
is
Pleadings
likely
and
has
reveal
duty
GeoVera’s
to
to
made
clear
evidence
defend
that
that
will
the
further
continue.
GeoVera’s decision to litigate its claim that its policy does
not cover the Farm’s claims against Poulton in the state court
action
is
well
founded
under
prior
case
law.
See,
e.g.,
Travelers Cas. & Sur. Co., 685 F.3d at 25; Emhart Indus., Inc.,
559
F.3d
at
74;
Labonte,
810
A.2d
at
254;
Conanicut
Marine
Services, Inc. v. Ins. Co. of N. Am., 511 A.2d 967, 971 n.10
(R.I. 1986).
D. Poulton’s
Court
Motion
To
Certify
to
Rhode
Island
Supreme
Poulton also requests that this Court certify the following
question of law to the Rhode Island Supreme Court:
Whether an insurer may satisfy both its duty to deal
in good faith with its insured and its duty to defend
by issuing a unilateral reservation of rights letter
to its insured ‘offering’ a defense, the acceptance of
which is conditioned on the insured’s agreement to
reimburse the insurer all defense costs that it incurs
providing the very ‘defense’ it has offered, if the
22
insurer is successful in its
action against its insured. 20
The
reasons.
Court
denies
Poulton’s
declaratory
Motion
To
judgment
Certify
for
three
complaint
First, the series of letters attached to GeoVera’s
do
not
support
Poulton’s
claim
that
GeoVera
conditioned its offer to defend upon a specific reservation of
its rights with respect to an ability to recoup costs down the
road.
Second, the case law is clear that GeoVera has not acted
in bad faith by offering to defend under a general reservation
of rights and subsequently filing a declaratory judgment action
in this Court to determine its obligations to Poulton.
See
Travelers Cas. & Sur. Co., 685 F.3d at 25; see also Emhart
Indus.,
Inc.,
559
F.3d
at
74;
Labonte,
810
A.2d
at
Conanicut Marine Services, Inc., 511 A.2d at 971 n.10.
254;
Third,
for the reasons previously stated, the issue Poulton presents is
not
yet
ripe
for
this
Court’s
close
examination,
including
whether the question should be certified to the Rhode Island
Supreme Court.
IV. Conclusion
For
the
reasons
stated
herein,
GeoVera’s
Motion
for
Judgment on the Pleadings declaring that Poulton is not entitled
to insurance coverage (ECF No. 8) is DENIED; GeoVera’s Motion To
20
Mot. for Certification to R.I. Supreme Ct. Ex. A, ECF No.
15-1.
23
Dismiss Poulton’s counterclaim (ECF No. 8) is GRANTED IN PART
AND
DENIED
Pleadings
IN
that
PART;
Poulton’s
Poulton
is
Motion
entitled
to
for
Judgment
insurance
on
the
company’s
defense in the state court action (ECF No. 13) is GRANTED IN
PART to the extent explained above; Poulton’s Motion To Dismiss
or, in the alternative, to stay this case pending resolution of
the state court action (ECF No. 14) is DENIED; and Poulton’s
Motion To Certify a Question of Law to the Rhode Island Supreme
Court (ECF No. 15) is DENIED.
IT IS SO ORDERED.
William E. Smith
Chief Judge
Date: September 26, 2017
24
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