RLI Insurance Company v. ACE American Insurance Co.

Background

RLI sued ACE and RossDrulisCusenbery Architecture, Inc. (RDC), seeking declarations about which insurer owed RDC a duty to defend and indemnify it in a 2019 California state-court action. RLI also sought indemnity, subrogation, and reimbursement. Both ACE and RLI had issued professional-liability policies to RDC, but the policies covered claims made during different policy periods and contained provisions addressing related claims or wrongful acts.

In 2007, while ACE insured RDC, RDC notified ACE of a potential claim concerning its work on a courthouse project. In 2011, RDC and the County of Santa Clara litigated claims involving that project, including alleged design defects, and ACE defended RDC. That case settled with a release of liability. In 2019, the Judicial Council of California, as the County’s successor in interest, sued RDC over alleged defective designs for the same project. RDC tendered its defense to both insurers.

ACE declined to defend, deciding that the claims in the 2019 action were not interrelated with the earlier claims under the ACE policy. RLI disagreed, but it also determined that the 2019 action was related to the earlier action under the RLI policy, meaning the claim was made before RLI’s policy period. RLI therefore concluded that ACE owed the defense. RLI nevertheless defended RDC under a reservation of rights, including the right to seek reimbursement.

Motions and legal standard

RLI moved for judgment on the pleadings, which asks the court to decide a case based on the formal allegations and responses in the pleadings. RDC moved to stay, or pause, the federal case until the 2019 underlying state-court action was resolved. ACE filed a limited joinder in RDC’s stay motion.

The court applied the federal standard from Landis v. North American Co. because the case proceeded under diversity jurisdiction. Under that standard, a court may stay its proceedings while another proceeding that bears on the case is resolved. The court weighs possible harm to the party opposing the stay, hardship or unfairness to the party required to proceed, and whether the stay would promote the orderly administration of justice.

Analysis

The court found that a stay would cause RLI minimal harm. RLI’s continued defense payments did not constitute the type of clear hardship or unfairness required to deny a stay. The court also noted that RLI was defending RDC under a reservation of rights and could seek reimbursement, and that a delay in recovering damages was not sufficient prejudice to defeat the stay.

The court found that proceeding without a stay could prejudice RDC in two ways. First, RDC might have to take contradictory positions in the two cases. RLI’s federal case depended on treating the 2011 and 2019 actions as related under the insurance policies, while RDC’s defense in the 2019 state case included arguing that the earlier settlement released the claims. The court concluded that both proceedings could require consideration of how the two actions were related, even though the court would interpret the insurance policies and the state court would interpret the settlement release. The court was concerned that factual findings in the federal case could later be used against RDC in the state case, potentially through collateral estoppel, a doctrine that can prevent relitigation of an issue already decided.

Second, the court found that RDC would face hardship by having to fight a “two-front war”—simultaneously litigating against RLI in the federal case and against the Judicial Council in the underlying state case. The court rejected RLI’s argument that ACE would necessarily assume RDC’s defense if RLI prevailed, because ACE had asserted multiple defenses to RDC’s crossclaim and its duty to defend remained disputed.

Finally, the court found that a stay would promote the orderly course of justice. Findings in the state case about the relationship between the 2011 and 2019 actions could inform the federal court’s later analysis of whether the actions involved “Interrelated Wrongful Acts” under the ACE policy or “Related Claims” under the RLI policy. The state case therefore could simplify the federal issues and promote judicial efficiency.

Disposition

Because all three Landis factors favored a stay, the court granted RDC’s motion to stay the federal case pending resolution of the 2019 underlying state-court action. The court declined to decide RLI’s motion for judgment on the pleadings while the stay remained in place and denied that motion without prejudice. The clerk was directed to administratively close the file during the stay; the court stated that this administrative procedure did not affect the parties’ rights.