Pennsylvania National Mutual Casualty Insurance Company v. Covil Corporation

Filing 19

OPINION and ORDER granting 11 Motion to Dismiss; finding as moot 11 Motion to Stay. Signed by Honorable Bruce Howe Hendricks on 3/31/21.(alew, )

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
PENNSYLVANIA NATIONAL MUTUAL )
CASUALTY INSURANCE COMPANY,
)
)
Plaintiff, )
vs.
)
)
COVIL CORPORATION By Its Duly
)
Appointed Receiver, Peter D.
)
Protopapas,
)
)
Defendant. )
_________________________________ )

Civil Action No. 6:20-1729-BHH

OPINION AND ORDER

This matter is before the Court on Defendant Covil Corporation’s (“Covil”) motion
to dismiss or stay (ECF No. 11). For the reasons set forth in this Order, the motion to
dismiss is granted.
BACKGROUND
Covil was an installer of thermal insulation materials from 1954 through 1991.
Covil’s operations allegedly exposed numerous persons to asbestos who thereby
suffered bodily injury. The alleged bodily injury has given rise to dozens of claims and tort
suits against Covil (“Underlying Asbestos Suits”), in which asbestos claimants seek to
recover from Covil for their bodily injuries.
Covil filed a declaratory judgment action in the Court of Common Pleas, Fifth
Judicial Circuit, County of Richland, South Carolina (“State Court Action”) alleging that
during a relevant portion of its operations, Sam J. Crain & Co., Inc. (“Crain Agency”)
served as Covil’s insurance broker. (State Court Action Compl., ECF No. 11-3.) In that
case, Covil contends that based on the Crain Agency’s advice about Covil’s business
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insurance needs, from 1986 to 1988, it purchased insurance from Pennsylvania National
Mutual Casualty Insurance Company (“Penn National”). Covil further contends that
Mission Insurance Company (“Mission”) issued umbrella coverage to Covil from at least
1986 to 1987 (the “Mission policy”). Covil has experienced losses related to the
Underlying Asbestos Suits that it asserts trigger coverage under the Mission policy, which
purportedly has a liability limit of $5,000,000. (Id. ¶ 10.) Mission was liquidated on
September 12, 1987, and the Mission policy is missing. (Id. ¶¶ 10–11.) Covil alleges that
the South Carolina Property and Casualty Insurance Guaranty Association (“Guaranty
Association”), which was statutorily created to protect the policyholders of insolvent
insurance companies, steps into the shoes of Mission to the extent of its obligation on
covered claims arising from the Underlying Asbestos Suits. (See id. ¶ 12.)
The Honorable Jean H. Toal (Chief Justice Ret.) (“Justice Toal”) is presiding over
many of the Underlying Asbestos Suits in a consolidated asbestos docket in South
Carolina state court (“Receivership Court”). Justice Toal appointed Peter D. Protopapas,
pursuant to South Carolina Code § 15-65-10, as Receiver for Covil (“Receiver”) on
November 2, 2018. The order of appointment vested the Receiver with the power and
authority to fully administer all assets of Covil, including the right and obligation to
administer any insurance assets. The Receiver is acting on behalf of Covil, managing the
defense of the Underlying Asbestos Suits as well as numerous declaratory judgment
actions related to Covil’s historical insurance coverage.
On May 22, 2020, Penn National removed the State Court Action to federal court
alleging diversity jurisdiction under 28 U.S.C. § 1332, notwithstanding the presence of its
co-defendants—the Crain Agency and the Guarantee Association (“non-diverse

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defendants”)—which shared South Carolina citizenship with Covil. See Covil Corp. v.
Penn. Nat’l Mut. Cas. Ins. Co., et al., No. 3:20-cv-1979-BHH (D.S.C.), ECF No. 1. Penn
National asserted that the citizenship of the non-diverse defendants should be ignored
under the doctrines of fraudulent and nominal joinder. Penn National also filed a motion
in the alternative to realign the non-diverse defendants as plaintiffs, thereby creating
complete diversity. Id., ECF No. 5. Covil filed a motion to remand, asserting that the nondiverse defendants were properly joined and properly aligned as defendants. Id., ECF
No. 21. On March 30, 2021, the undersigned denied Penn National’s request to disregard
the citizenship of the non-diverse defendants, denied the motion in the alternative to
realign the non-diverse defendants as plaintiffs, and granted Covil’s motion to remand.
Id., ECF No. 34.
Penn National filed the instant declaratory judgment action four days after Covil
filed the State Court Action, seeking resolution of insurance coverage issues that were
already pending in the State Court Action. (See Brief in Opp. to Mot. to Dismiss or Stay,
ECF No. 14 at 10–11 (itemizing duplicative coverage issues).) Covil filed a motion to
dismiss or stay this action, requesting that this Court decline to exercise jurisdiction and
allow the first-filed, more comprehensive State Court Action to proceed. (See ECF No.
11-1 at 2.) Covil expressly stated that the relief requested in the motion to dismiss or stay
was premised on the Court’s resolution of the State Court Action in favor of remand (id.),
which has now occurred. These matters are ripe for disposition and the Court now issues
the following ruling.
LEGAL STANDARD
“[D]istrict courts possess discretion in determining whether and when to entertain

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an action under the Declaratory Judgment Act, even when the suit otherwise satisfies
subject matter jurisdictional prerequisites.” Wilton v. Seven Falls Co., 515 U.S. 277, 282
(1995). “It is well established that a declaration of parties’ rights under an insurance policy
is an appropriate use of the declaratory judgment mechanism.” United Capitol Ins. Co. v.
Kapiloff, 155 F.3d 488, 494 (4th Cir. 1998). Declaratory judgment actions to ascertain
liability coverage typically involve a separate proceeding, often in state court, by a tort
plaintiff against the insured defendant. Federal courts have not held that such declaratory
judgment actions inherently create undue entanglement with the underlying state tort
actions. “Such a rule would . . . be flatly inconsistent with controlling Supreme Court
precedent approving the use of declaratory judgment actions by insurers in precisely that
situation.” Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 376 (4th Cir. 1994).
Moreover, “a District Court cannot decline to entertain such an action as a matter of whim
or personal disinclination.” Pub. Affairs Assocs., Inc. v. Rickover, 369 U.S. 111, 112
(1962). Rather, the Court considers four factors (“Nautilus factors”) in deciding whether
to exercise its discretionary jurisdiction or to abstain:
(i) the strength of the state’s interest in having the issues raised in the
federal declaratory action decided in the state courts; (ii) whether the issues
raised in the federal action can more efficiently be resolved in the court in
which the state action is pending;[] (iii) whether permitting the federal action
to go forward would result in unnecessary “entanglement” between the
federal and state court systems, because of the presence of “overlapping
issues of fact or law”[; and (iv)] whether the declaratory judgment action is
being used merely as a device for “procedural fencing”— that is, “to provide
another forum in a race for res judicata” or “to achiev[e] a federal hearing in
a case otherwise not removable.”
Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257 (4th Cir. 1996) (quoting Nautilus, 15
F.3d at 377) (modification in original). “The critical question . . . is whether–on the facts of

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this case–the additional considerations of federalism, efficiency, and comity . . . are
sufficiently compelling to justify a refusal to exercise jurisdiction, despite the obvious utility
of the declaratory relief sought.” Nautilus, 15 F.3d at 377.
DISCUSSION
Covil asserts that the Court should decline to exercise jurisdiction over this
declaratory judgment action because South Carolina has a strong interest in having its
courts decide the issues at hand, a South Carolina state court can resolve the issues
more efficiently, permitting this action to proceed will result in unnecessary entanglement
between this Court and the state court adjudicating the State Court Action, and this action
constitutes a procedural fencing maneuver by Penn National. The Court agrees and finds
that the Nautilus factors weigh in favor of abstention. Accordingly, the action will be
dismissed.
First, South Carolina has a strong interest in having its courts decide the issues
raised by this action. Rulings on the declaratory judgment claims raised by Covil in the
State Court Action, and rehashed by Penn National here, invoke unsettled principles of
South Carolina insurance law that will affect plaintiffs, defendants, and insurers in a
multitude of asbestos cases because the interpretation of the relevant policy provisions
will repeatedly arise in South Carolina asbestos cases. See Great Am. Ins. Co. v. Gross,
468 F.3d 199, 211 (4th Cir. 2006) (stating district courts may decline jurisdiction where
there is a question of state law that is “unsettled”). Specifically, the court that decides
these claims will need to address the following issues in the unique context of asbestos
cases, where the alleged bodily injury often does not manifest until decades after
exposure: aggregate limits of liability for bodily injury damage, proper application of the

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“completed operations hazard,” the application of multiple “per occurrence” limits of
liability, and the allocation of loss among numerous insurers where the precise genesis
of the bodily injury may be uncertain. South Carolina courts have a strong interest in
resolving these matters for the sake of efficient, consistent, and complete adjudication of
asbestos-related South Carolina insurance law.
Second, the Court finds that South Carolina courts can resolve the primary
insurance claims raised by Penn National more efficiently. In Great American Insurance
Company v. Gross, the Fourth Circuit explained the application of the second Nautilus
factor as follows:
In evaluating these efficiency concerns, the Supreme Court has directed us
to focus primarily on “whether the questions in controversy between the
parties to the federal suit . . . can better be settled in the proceeding[s]” that
are already “pending in the state court[s].” Brillhart, 316 U.S. at 495, 62 S.
Ct. 1173. This in turn requires careful inquiry into “the scope of the pending
state court proceeding[s],” including such matters as “whether the claims of
all parties in interest [to the federal proceeding] can satisfactorily be
adjudicated in that proceeding, whether necessary parties have been
joined, [and] whether such parties are amenable to process in that
proceeding.”
468 F.3d at 211–12 (quoting Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 495 (1942))
(alterations in original). The same declaratory judgment claims at issue here, involving
the same parties, are now pending before Justice Toal in the Receivership Court after the
Court’s remand of the State Court Action. Moreover, the Court has already remanded to
the Receivership Court two other actions involving related coverage issues pertaining to
Covil and its insurers. See Finch v. Sentry Cas. Co. et al., No. 3:19-cv-1827-BHH
(D.S.C.), ECF No. 55; Protopapas v. Wall Templeton & Haldrup PA, et al., No. 3:19-cv01635-BHH (D.S.C.), ECF No. 63. Justice Toal has already begun her analysis of the

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policy provisions at issue and how they apply to asbestos litigation against Covil. Thus,
there is little reason for this Court to devote its time and resources to adjudicating issues
that will be satisfactorily adjudicated in the State Court Action. See Wilton, 515 U.S. at
288 (“In the declaratory judgment context, the normal principle that federal courts should
adjudicate claims within their jurisdiction yields to considerations of practicality and wise
judicial administration.”).
Third, the Court’s retention of jurisdiction over this matter would result in
unnecessary entanglement with the state courts. “Entanglement is likely when many of
the issues in the declaratory action are also being litigated by the same parties in the
related state court action.” Fenwick Commons Homeowners Ass’n, Inc. v. Pennsylvania
Nat’l Mut. Cas. Ins. Co., No. 2:19-CV-00057-DCN, 2019 WL 1760150, at *4 (D.S.C. Apr.
22, 2019). As already noted, the same issues, litigated by the same parties, are pending
in the Receivership Court. This scenario presents the paradigmatic unwanted potential of
a race to res judicata and of conflicting decisions. See Mitcheson v. Harris, 955 F.2d 235,
239 (4th Cir. 1992) (“For the federal court to charge headlong into the middle of a
controversy already the subject of state court litigation risks ‘[g]ratuitous interference with
the orderly and comprehensive disposition of [the] state court litigation.’” (quoting Brillhart,
316 U.S. at 495) (alterations in original)); see also Alfa Laval, Inc. v. Travelers Cas. &
Sur. Co., No. 3:09-CV-733-HEH, 2010 WL 2293195, at *4 (E.D. Va. June 3, 2010)
(staying case where issues in lawsuit in a different State “closely parallel those in the
immediate case” because “[t]he potential exi[s]ts for conflicting decisions with respect to
not only scope of coverage and indemnity liability under the [insurer’s] policy, but also the
percentage of allocated obligation on the part of the other insurance carriers, individually

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and collectively”). The potential conflicts here include questions concerning the extent to
which Penn National is obligated to defend and indemnify Covil against asbestos suits
under the policies at issue. This potential for conflicting decisions weighs in favor of the
Court declining to exercise jurisdiction.
Fourth, the Court finds that this action appears to constitute procedural fencing by
Penn National. “Procedural fencing” occurs when “a party has raced to federal court in an
effort to get certain issues that are already pending before the state courts resolved first
in a more favorable forum.” Great Am. Ins. Co., 468 F.3d at 212. Penn National attempted
to remove the first-filed State Court Action and within days filed this federal action, which
is duplicative as to the coverage dispute between Covil and Penn National. The purpose
of this action appears to be to facilitate Penn National’s avoidance of a South Carolina
court that has previously considered similar questions and reached conclusions that, if
applied to this case, would be unfavorable to Penn National. (See Receivership Court
Order for Rule to Show Cause, ECF No. 11-5 (addressing trigger of coverage, the
distinction between “operations” and “completed operations,” insurers’ burden of proof,
“per occurrence” limits of liability, and allocation of losses under Covil’s insurance
policies).) Thus, the fourth Nautilus factor also weighs in favor of abstention
Because the Court finds it advisable to abstain from exercising jurisdiction over
this case under the Nautilus factors, analysis of the Colorado River abstention doctrine
raised by Covil would be extraneous. Accordingly, the Court declines to address that
second basis for abstention asserted by Covil.
CONCLUSION
For the reasons stated above, Defendant Covil Corporation’s motion to dismiss

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(ECF No. 11) is GRANTED and this action is dismissed with prejudice.
IT IS SO ORDERED.
/s/ Bruce Howe Hendricks
United States District Judge
March 31, 2021
Greenville, South Carolina

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