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Evanston Insurance Co. v. Workland & Witherspoon, Pllc

United States District Court, E.D. Washington

September 22, 2014

EVANSTON INSURANCE COMPANY, Plaintiff,
v.
WORKLAND & WITHERSPOON, PLLC, a limited liability company; and ERIC SACHTJEN, an individual, Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS OR ALTERNATIVELY STAY DECLARATORY ACTION

ROSANNA MALOUF PETERSON, Chief District Judge.

Before the Court is Defendant Workland & Witherspoon, PLLC's Motion to Dismiss, or Alternatively, Stay Declaratory Action. ECF No. 7. Defendant Eric Sachtjen properly joined the motion. ECF Nos. 13, 15. This motion arises from a diversity action involving insurance coverage.

Defendants filed this motion pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6), but in their motion they address abstention and stay, not dismissal. Therefore, this Court treats Defendants' motion as a request for this Court to abstain or stay the action pending completion of the companion state proceedings in order to avoid unnecessary interference with those proceedings and to avoid potential prejudice to the parties. The Court has reviewed the motion, the memoranda filed in opposition and support, all other relevant filings, and is fully informed.

FACTS

Plaintiff Evanston Insurance Company ("Evanston") is an Illinois insurance corporation that issued two legal malpractice insurance policies to Defendant Workland & Witherspoon, PLLC, a Washington state law firm and Professional Limited Liability Company. ECF No. 1 at 1-3. Defendant Eric Sachtjen (together with Defendant Workland & Witherspoon, collectively "Defendants") was an attorney-employee of Workland & Witherspoon. ECF No. 1 at 2.

On April 2, 2014, James Darling and others filed two state tort actions against Defendants in Spokane County Superior Court concerning Defendants' alleged involvement in a fraudulent real estate purchasing scheme. ECF No. 1 at 2-3; 1-1. The plaintiffs in that state proceeding seek damages and other remedies from Defendants. ECF No. 1-3.

Later in April 2014, Defendants tendered defense and indemnity of both lawsuits to Evanston under the policies valid through January 2015. ECF No. 1 at 3. Evanston agreed to represent Defendants in the state court action, subject to a reservation of rights to deny coverage, including any duty to defend or indemnify Defendants. ECF No. 1 at 3.

PROCEDURE

In June 2014, Evanston filed a suit in this Court, seeking a declaration of non-coverage and lack of duty to defend Defendants in the state action. ECF No.

1. Diversity of the parties provides the basis for jurisdiction. 28 U.S.C. ยง 1332; ECF No. 1 at 2.

In its complaint, Evanston argues six grounds for lack of coverage: (1) that a policy exclusion pertaining to specific incidents, claims or suits disclosed in the insurance application applies ("Specific Incidents Exclusion"); (2) that a policy exclusion regarding multiple insureds, claims, and claimants applies; (3) that a policy exclusion concerning recovery by plaintiffs of amounts in return or restitution of fees or any multiplied or punitive damages applies; (4) that the policy does not cover bodily injury or sickness, (5) that there is no coverage for persons or entities not insured under the policy, and (6) that there is no coverage for intentional misconduct. ECF No. 1 at 3-4.

Defendants move this Court to abstain, or in the alternative to stay, Evanston's declaratory judgment action pending the outcome of the state court proceeding. ECF No. 7. Defendants make two primary arguments: (1) that adjudication of the declaratory judgment action concurrent with the state court proceeding will require duplicative and potentially conflicting determinations of factual allegations, and (2) that making these factual determinations prior to resolution of the state court proceeding will prejudice their defense in state court. ECF No. 7. Defendants contend that all six coverage defenses pose these two harms, and seek abstention or stay on all six defenses. See ECF No. 7 at 2.

Evanston concedes that five of the six coverage defenses warrant a stay, see ECF No. 11 at 2, 17, but does not concede that those defenses warrant abstention. Moreover, Evanston opposes Defendants' motion to abstain or stay on the basis that the Specific Incidents Exclusion will be dispositive of its non-coverage claim without requiring a determination of factual allegations presently before the state court and without prejudicing Defendants' state court defense. ECF No. 11 at 1-2.

Defendants respond that consideration of the Specific Incidents Exclusion will nevertheless require factual determinations also at issue in the state court action and will consequently prejudice their defense in state court. ECF No. 14. Lastly, Defendants seek attorney fees as reimbursement for costs incurred in defending against this declaratory action. ECF No. 7 at 13.

Because Evanston concedes that five of the six coverage defenses warrant a stay, see ECF No. 11 at 2, 17, this Court grants Defendants' motion in part and orders that determination of the following coverage defenses be stayed pending completion of the underlying state action:

(1) No coverage by operation of the Multiple Insureds, Claims and Claimants condition;
(2) No coverage because "Damages" does not include any amounts in return or restitution of fees or any multiplied or punitive damages;
(3) No coverage for bodily injury or sickness;
(4) No coverage for any person or entity that is not an "insured" ...

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