U.S. Specialty Insurance Company v. Nationwide Mutual Insurance Company

Background

N. Pagano Heating and Plumbing Contractors, Ltd. was hired for a construction project. Nationwide Mutual issued Pagano a general liability policy that allegedly extended primary coverage to SMI Construction Management Inc. as an additional insured. Agreements between Pagano and SMI allegedly required Pagano to maintain insurance naming SMI as an additional insured and making that coverage primary to other insurance. Nationwide Mutual Fire allegedly insured Pagano for certain contractual liabilities under an umbrella policy. SMI separately obtained a general liability policy from U.S. Specialty.

An employee of Pagano was injured during the project and sued SMI, among others, in New York state court. Pagano was not named as a defendant in that action. U.S. Specialty alleged that it had been defending SMI and had incurred defense expenses, including attorney fees and other costs. It further alleged that Nationwide Mutual initially acknowledged a duty to defend SMI but later failed to defend and indemnify SMI. U.S. Specialty also alleged that Nationwide Mutual conditioned possible settlement payments on SMI’s release of Pagano from contractual liability.

U.S. Specialty asserted four causes of action: declarations that Nationwide Mutual had to defend SMI and indemnify SMI; contribution from Nationwide Mutual for defense costs; and a declaration that Nationwide Mutual Fire had to indemnify Pagano for contractual liability to SMI exceeding coverage under the Nationwide Mutual policy.

The Motion and Legal Standards

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim. Although the motion was labeled under Rule 12(b)(6), the defendants focused on whether the court had a real and sufficiently immediate dispute to decide and whether U.S. Specialty had standing. Standing requires a plaintiff to allege a concrete injury connected to the defendant’s conduct that a court decision can remedy. A declaratory-judgment claim also requires an actual controversy that is ready for adjudication, a requirement commonly called ripeness.

The court treated the complaint’s factual allegations as true at this stage and drew reasonable inferences in U.S. Specialty’s favor.

Claims Concerning Nationwide Mutual

The court held that the complaint adequately alleged a live dispute about Nationwide Mutual’s duty to defend SMI. U.S. Specialty alleged that a state-court lawsuit was pending against SMI, that Nationwide Mutual’s policy provided primary coverage to SMI, and that Nationwide Mutual had failed to defend SMI. Nationwide Mutual argued that it had acknowledged and was providing the defense, but the court found that position contradicted the complaint’s allegations and could not defeat the claims at the motion-to-dismiss stage. The court concluded that the parties’ disagreement about the defense was a real controversy.

The court also held that the claim concerning Nationwide Mutual’s duty to indemnify SMI was ripe. Although the duty to indemnify depended on the outcome of the state-court case, that contingency did not necessarily prevent a court from deciding the insurance dispute. The court found a sufficient practical likelihood of a judgment or settlement because SMI was already a defendant in a state-court action seeking to determine its liability and U.S. Specialty alleged that Nationwide Mutual’s policy covered SMI.

The court rejected the defendants’ standing argument. Although U.S. Specialty had informed SMI that its own policy did not require it to defend or indemnify SMI in the state-court action, U.S. Specialty alleged that it was nevertheless defending SMI and incurring defense expenses. The court also noted U.S. Specialty’s alleged status as an excess insurer and found that it had a personal stake in the outcome of the dispute over Nationwide Mutual’s obligations. The defendants did not make an argument in their brief for dismissing the contribution claim, so the court treated any such argument as waived.

Claim Concerning Nationwide Mutual Fire

The court reached a different result on the claim concerning Nationwide Mutual Fire’s alleged duty to indemnify Pagano. U.S. Specialty did not contend that SMI had sued Pagano for breaching either of the agreements between Pagano and SMI. The court therefore concluded that the requested declaration depended on a hypothetical set of facts and claims. U.S. Specialty’s interest in possible claims against Pagano, who had not been named in the state-court action, was speculative at that time.

The court acknowledged that Nationwide Mutual’s alleged refusal to settle without protecting Pagano and Nationwide Mutual Fire implicated U.S. Specialty’s interests as a co-insurer. But the court concluded that relief concerning Nationwide Mutual’s obligations could address U.S. Specialty’s alleged injury without requiring a decision about hypothetical contractual litigation involving Pagano.

Disposition

Judge Mary Kay Vyskocil denied the motion to dismiss the first, second, and third causes of action: the claim concerning Nationwide Mutual’s duty to defend SMI, the claim concerning Nationwide Mutual’s duty to indemnify SMI, and the contribution claim against Nationwide Mutual. The court granted the motion to dismiss the fourth cause of action, concerning Nationwide Mutual Fire’s alleged obligation to indemnify Pagano. The court ordered Nationwide Mutual to answer by May 28, 2020, and ordered the parties to file a joint letter and proposed case-management plan by June 4, 2020.