Atl. Specialty Ins. Co. v. Blue Cross & Blue Shield
| Decision Date | 08 September 2020 |
| Docket Number | 1:19cv343 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | ATLANTIC SPECIALTY INSURANCE COMPANY, Plaintiff, v. BLUE CROSS & BLUE SHIELD OF NORTH CAROLINA, and FEDERAL INSURANCE COMPANY, Defendants. |
This is a dispute over insurance coverage. Plaintiff Atlantic Specialty Insurance Company ("Atlantic") and Defendant Federal Insurance Company ("FIC") issued separate insurance policies to Defendant Blue Cross and Blue Shield of North Carolina ("BCBS-NC"). When BCBS-NC sought coverage under those policies in connection with its defense of a multi-district litigation action, Atlantic and FIC initially came to a defense-sharing agreement but Atlantic then brought this action for a declaration of its rights. (Doc. 36.) BCBS-NC and FIC now move to dismiss Atlantic's complaint, and Atlantic seeks to file supplemental briefing. (Docs. 39, 41, 49.) For the reasons set forth below, BCBS-NC's motion to dismiss or in the alternative to stay (Doc. 39) will be denied, and FIC's motion to dismiss (Doc. 41) will be granted in part and denied in part.
Atlantic provided a primary Managed Care Errors and Omissions Liability Policy ("E&O Policy" or "the Atlantic Policy") to BCBS-NC with limits of $10 million in excess of a $5 million retention. (Doc. 36 ¶ 8.) FIC provided a primary Directors and Officers Liability Policy ("D&O Policy" or "the FIC Policy") to BCBS-NC with limits of $15 million in excess of a $1.5 million retention per antitrust D&O claim. (Id. ¶ 9.) BCBS-NC and other Blue Cross Blue Shield affiliates ("the Blues") were subsequently sued in class actions alleging antitrust violations; these class actions have been consolidated into a multi-district litigation action that is currently pending in the Northern District of Alabama ("the MDL Action"). (Id. ¶ 11.) BCBS-NC sought coverage for the MDL Action from both Atlantic and FIC for reimbursement of defense expenses and indemnity. (Id. ¶¶ 11-12.) Both insurance companies initially agreed with BCBS-NC that their respective policies provided coverage for the MDL Action.
Atlantic's and FIC's policies ordinarily require their respective retentions to be paid directly by BCBS-NC. (Id. ¶¶ 16, 18.) However, Atlantic and FIC came to an agreement that altered this arrangement. According to the alleged terms of this agreement, once BCBS-NC exhausted FIC's $1.5 million retention, triggering FIC's obligation to reimburse BCBS-NC's reasonabledefense costs in the MDL Action, FIC's payments under its D&O Policy would erode Atlantic's $5 million retention ("Defense Agreement"), subject to a reservation of both parties' rights under their respective policies with BCBS-NC. (Id. ¶¶ 16, 113, 172.) In exchange, Atlantic and FIC agreed that once BCBS-NC incurred reasonable defense expenses in excess of Atlantic's $5 million retention, Atlantic and FIC would advance future reasonable defense expenses on a pro-rata basis: Atlantic would pay 40 percent and FIC would pay 60 percent, based on their respective limits of liability on their policies -- $10 million for Atlantic and $15 million for FIC. (Id. ¶ 15.) Atlantic alleges that, at the time the complaint was filed, it has reimbursed FIC $600,000 under the Defense Agreement and reimbursed BCBS-NC at least $2.1 million for incurred defense expenses in the MDL Action. (Id. ¶ 19.)
Atlantic's complaint alleges that, in October 2018, FIC unilaterally repudiated the provision of the Defense Agreement regarding the pro-rata sharing of defense expenses and reduced its contribution to BCBS-NC's defense costs retrospectively and prospectively because it believed it had paid for loss not covered under its D&O Policy. (Id. ¶ 20.) FIC has refused to advance additional defense costs to BCBS-NC until BCBS-NC incurred defense expenses covered by FIC's Policy in excess of $5,879,126 -- the amount FIC claims it has overpaid. (Id.) BCBS-NC has not challenged FIC's decision regarding its repudiation of the DefenseAgreement. (Id. ¶ 23.) However, BCBS-NC now has begun relying entirely on Atlantic for reimbursement of 100 percent of its defense costs in defending the MDL Action, since it believes that it has exhausted Atlantic's $5 million retention. (Id. ¶ 22.) In order to protect its interests and avoid allegations of bad faith, Atlantic has agreed to continue to reimburse 100 percent of BCBS-NC's reasonable defense expenses. (Id. ¶ 25.) Atlantic emphasizes, however, that it believes it is no longer bound by the terms of the Defense Agreement and, as a result, it argues that BCBS-NC has failed to exhaust Atlantic's $5 million retention absent the contribution FIC has renounced. (Id.)
Atlantic filed an original complaint in March 2019. (Doc. 1.) All named Defendants filed motions to dismiss in August 2019. (Docs. 24, 26, 28.) On September 16, 2019, Atlantic filed an amended complaint ("complaint"). (Doc. 36.) BCBS-NC and FIC filed motions to dismiss on September 30, 2019.1 (Docs. 39, 41.) Atlantic filed responses to both motions (Docs. 44, 45), and BCBS-NC and FIC filed reply briefs. (Docs. 47, 48.) On May 20, 2020, Atlantic filed a motion for leave to file supplemental briefing. (Doc. 49.) BCBS-NC then filed a response opposing Atlantic's request for supplemental briefing. (Doc. 51.)
Atlantic's complaint contains nine counts against BCBS-NC. (Doc. 36 ¶¶ 128-163.) Three counts relate to whether terms of Atlantic's E&O Policy bar coverage for the MDL Action (Counts I, II, and III). Two counts relate to whether BCBS-NC has exhausted its retention under the E&O Policy (Counts IV and V). Three counts relate to BCBS-NC's compliance with a clause in the E&O Policy that requires BCBS-NC to provide Atlantic with requested information (Counts VI, VII and VIII). The final count relates to whether Atlantic is entitled to reimbursement for defense expenses paid to BCBS-NC (Count IX). BCBS-NC moves to dismiss or, in the alternative, stay the lawsuit under the court's discretionary authority to determine when to hear a declaratory judgment action. (Doc. 39.)
Atlantic seeks a declaration that there is no coverage for the MDL Action because the claims asserted against BCBS-NC fall under either the "Related Claims" exclusion or the "Prior or Pending Litigation" exclusion in the E&O Policy.2 (Doc. 36 ¶¶ 128-136.) In response, BCBS-NC argues that Atlantic's lawsuit is premature and that permitting it to proceed, before the MDL Action is resolved, would encourage piecemeal litigation, risk contradictory factual findings between this court and the MDL court, and prejudice BCBS-NC in its defense of the MDL Action. (Doc. 40 at 2.)
The Declaratory Judgment Act permits a federal court to "declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). The Act gives federal courts "unique and substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995). District courts have "great latitude" in deciding whether to exercise jurisdiction in a declaratory judgment action. See Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co., 139 F.3d 419, 422 (4th Cir. 1998) (per curiam). The Fourth Circuit has enumerated several factors that a district court should consider in determining whether to exercise its discretion to entertain a declaratory judgment action. See id. These include whether "the declaratory relief sought: (1) 'will serve a useful purpose in clarifying and settling the legal relations in issue,' and (2) 'will terminate and afford relief from the uncertainty,insecurity, and controversy giving rise to the proceeding.'" Id. (quoting Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir. 1937)). Furthermore, the district court should consider (3) principles of federalism, efficiency, comity, and procedural fencing, id., and (4) whether "allowing [the] case to go forward would produce piecemeal litigation," id. at 424.3
After considering these factors, the court finds that it is appropriate to exercise its jurisdiction to hear this action. As to the first two factors, it is clear that a declaration in this case would serve the "useful purpose" of clarifying Atlantic's coverage obligations to BCBS-NC as to the MDL Action under the E&O Policy and would "afford relief from the uncertainty" currently clouding the issue. See Ind-Com, 139 F.3d at 422. Under the terms of the E&O Policy, once its $5 million retention is exhausted as to a covered claim, Atlantic is obliged to defend BCBS-NC as to that claim. (Doc. 36 ¶¶ 93-94; Doc. 36-1 at 13, 27-28.) Just last year, the Fourth Circuit noted the appropriateness of duty-to-defend cases for declaratory judgments because they did not risk the court rendering a purely advisory opinion as to"hypothetical and contingent" injuries. See Trustgard Ins. Co. v. Collins, 942 F.3d 195, 200 (4th Cir. 2019). Atlantic is allegedly bearing an ongoing injury: advancing defense costs to BCBS-NC in an MDL Action that has been pending for over seven years and that, as BCBS-NC acknowledges, does not have a definite end in sight. (See Doc. 40 at 3.) Atlantic understandably wants to resolve its coverage obligations to BCBS-NC as to the MDL Action.
The third factor is less relevant and at best neutral. There is no pending state court proceeding for considerations of federalism or comity. Nor is there any indication that one party is engaging in procedural fencing, e.g., as a race for res judicata. The fourth factor, the risk of piecemeal litigation, also favors Atlantic. "Piecemeal litigation occurs when different tribunals consider the same issue, thereby duplicating efforts and possibly reaching different results." Gannett Co....
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