Employers Reinsurance Corp. v. Karussos, 93-35950

Decision Date13 September 1995
Docket NumberNo. 93-35950,93-35950
Parties95 Cal. Daily Op. Serv. 7232, 95 Daily Journal D.A.R. 12,330 EMPLOYERS REINSURANCE CORPORATION, A Kansas Corporation, Plaintiff-Appellant, v. Michael KARUSSOS; and Transamerica Insurance Company, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

James M. Callahan, Callahan & Shears, Portland, OR, for plaintiff-appellant.

Timothy R. Volpert, Davis, Wright, Tremaine, Portland, OR, for defendants-appellees.

Appeal from the United States District Court for the District of Oregon.

Before: BROWNING, * CANBY, and Stephen REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

This appeal arises from a grant of summary judgment denying declaratory relief in a coverage dispute between two insurance companies. We vacate pursuant to Continental Cas. Co. v. Robsac Indus., 947 F.2d 1367, 1374 (9th Cir.1991), and American National Fire Insurance Co. v. Hungerford, 53 F.3d 1012, 1019 (9th Cir.1995), and remand with instructions to decline jurisdiction and dismiss.

I.

On January 28, 1991, Michael Karussos, an Oregon insurance agent, provided written notice to both the Employers Reinsurance Corporation (ERC) and the Transamerica Insurance Company regarding claims that had been made against him by the estate of Fred McNally, Fred McNally Enterprises, Inc., and Fred McNally's RV Super Stores. In February and March of 1992, creditors of the McNally claimants filed suit against Karussos in Oregon state court. ERC defended Karussos in the state court actions, but Transamerica refused to do so, claiming that its policy no longer covered him.

On June 15, 1992, ERC filed this diversity action in federal district court naming both Transamerica and Karussos as defendants. ERC seeks a declaratory judgment that (1) Karussos knew of the McNally claims before its policy went into effect and thus ERC had no duty to defend him; (2) if ERC is responsible for defending Karussos, then so, too, is Transamerica; and (3) ERC had no duty to indemnify Karussos for any judgment against him on certain claims in the McNally litigation.

ERC moved for partial summary judgment on the question whether Transamerica had a duty to join in defending Karussos in the state court litigation. ERC argued that Transamerica's policy covered Karussos for the McNally claims despite the fact that he gave notice of them after the Transamerica policy period had expired. ERC based its contention on a provision in Karussos' Transamerica policy that provides policyholders with extended coverage for up to one year after the expiration of the policy period.

Transamerica moved for summary judgment on ERC's request for a declaratory judgment. Transamerica argued that its normal policy coverage applies only to claims accrued during the policy period. Moreover, it contended that Karussos was not entitled to its extended policy coverage because of his subsequent purchase of the ERC policy.

The district court concluded that Transamerica had no duty to defend Karussos because his purchase of the ERC policy rendered him ineligible for extended coverage under the Transamerica policy. Accordingly, the district court granted Transamerica's summary judgment motion and denied ERC's. The district court then entered a final judgment pursuant to Fed.R.Civ.P. 54(b) so that ERC could appeal the grant of summary judgment to Transamerica. All other proceedings were stayed pending the appeal. Were we to rule on the merits, whatever the outcome, the district court would be left with a number of issues of state law to resolve.

II.

Although the parties contend that this partial appeal requires us to decide a single issue of Oregon insurance law, we conclude that it turns instead on concerns about the propriety of a district court's exercise of federal-court jurisdiction over state law questions under the Declaratory Judgment Act, 28 U.S.C. Sec. 2201(a) (1988 ed., Supp. V). In Hungerford, we reaffirmed the general rule that federal courts should:

'decline to assert jurisdiction in insurance coverage and other declaratory relief actions presenting only issues of state law during the pendency of parallel proceedings in state court' unless there are 'circumstances present to warrant an exception to that rule.'

Hungerford, 53 F.3d at 1019 (quoting Robsac, 947 F.2d at 1374). We explained that the rule serves a number of important policies such as "avoiding rendering opinions based on purely hypothetical factual scenarios, discouraging forum shopping, encouraging parties to pursue the most appropriate remedy for their grievance, preserving precious judicial resources, and promoting comity." Hungerford, 53 F.3d at 1019.

The traditional rule that "states ha[ve] a free hand in regulating the dealings between insurers and their policyholders," SEC v. National Securities, Inc., 393 U.S. 453, 459, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969), makes the comity concerns identified in Hungerford particularly weighty in insurance cases. As the Sixth Circuit has explained in declining to exercise its jurisdiction, "[t]he states regulate insurance companies for the protection of their residents, and state courts are best situated to identify and enforce the public policies that form the foundation of such regulations." Allstate Ins. Co. v. Mercier, 913 F.2d 273, 279 (6th Cir.1990); see also McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. Sec. 1012(a) ("The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.").

We note that the Supreme Court case that set forth the analysis that underlies our holdings in Robsac and Hungerford, involved an insurance controversy. See Brillhart v. Excess Ins. Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942). Moreover, both Robsac and Hungerford involved disputes about insurance coverage, as have most, if not all of the published cases in other circuits in which courts have declined to exercise their jurisdiction over requests for a declaration of state law because of a related state court proceeding. See Wilton v. Seven Falls Co., 41 F.3d 934, 935 (5th Cir.1994), aff'd --- U.S. ----, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995); Aetna Casualty and Surety Co. v. Jefferson Trust and Saving Bank of Peoria, 993 F.2d 1364, 1366 (8th Cir.1993); Mitcheson v. Harris, 955 F.2d 235, 237-241 (4th Cir.1992); Mercier, 913 F.2d at 275. Thus, the Hungerford rule is clearly applicable to insurance disputes such as the one before us.

III.

The Supreme Court recently made clear that a district court's decision whether or not to exercise jurisdiction over a declaratory judgment action should be reviewed for an abuse of discretion. See Wilton, --- U.S. at ----, 115 S.Ct. at 2144. Wilton did not set forth all of the factors that should guide a court in performing such a review. However, we believe it clear that the proper inquiry when the district court exercises its jurisdiction in cases of the type before us is whether it abused its discretion in determining that there are " 'circumstances present to warrant an exception' " to the general rule that the action belongs in state rather than federal court. Hungerford, 53 F.3d at 1019 (quoting Robsac, 947 F.2d at 1374).

Our application of the abuse of discretion standard here is complicated by the fact that the district court did not address the jurisdictional question before proceeding to decide the merits, and does not appear even to have considered it. Such an inadvertent omission, however, neither immunizes the district court's assumption of jurisdiction from appellate review nor requires us automatically to remand for consideration of the jurisdictional question.

Because the district judge in Wilton stayed the proceedings, the Supreme Court had no occasion to discuss the procedure to be followed when the district court exercises jurisdiction but fails to address the jurisdictional question. The Court stated only that the district court is generally entitled to exercise its discretion "in the first instance" because those facts that "bear[ ] on the usefulness of the declaratory judgment remedy" as well as the "fitness of the case for resolution" may be "peculiarly within [its] grasp." Wilton, --- U.S. at ----, 115 S.Ct. at 2144.

In this case, the parties have pointed to no facts or circumstances which would make the exercise of federal court jurisdiction appropriate. They have also failed to explain how the case before us may be distinguished from the general run of insurance coverage cases in which the exercise of a district court's jurisdiction would be unwarranted. Accordingly, any further proceedings in this case would be futile and would only frustrate the interest in judicial economy we identified in Hungerford. 1 For that reason, we not only vacate the district court's decision on the merits but also hold that its exercise of its jurisdiction constituted an abuse of discretion.

IV.

In reaching our holding, we reject three arguments advanced by the parties in support of their contention that an exception to the general rule set forth in Hungerford should be made in this case.

First, they contend that because the state court action is no longer pending, it would be wasteful to dismiss the case at this point in the litigation. That argument has no force. The purposes that underlie the Hungerford rule--the conservation of judicial resources, the avoidance of duplicative litigation, the avoidance of the needless resolution of state law questions in federal court--would be undermined if the termination of state court proceedings could retroactively justify the district court's unwarranted exercise of jurisdiction. The parties' approach would render most district court jurisdictional decisions essentially unreviewable, as the pending state court trial action is often concluded prior to the time that the...

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