Fed. Ins. Co. v. Alderson Broaddus Univ., Inc., CIVIL ACTION NO. 2:18-CV-52

• Decision Date: 11 September 2018
• Docket Number: CIVIL ACTION NO. 2:18-CV-52
• Parties: FEDERAL INSURANCE COMPANY, Plaintiff, v. ALDERSON BROADDUS UNIVERSITY, INC., a West Virginia Corporation; COLLINS MURPHY, as an employee of Alderson Broaddus and as an individual; KRISTINE BURNSIDE; CAYLA RHODES; ERICA BROOKS; and EMILY SARVER, Defendants.
• Court: U.S. District Court — Northern District of West Virginia

FEDERAL INSURANCE COMPANY, Plaintiff, v. ALDERSON BROADDUS UNIVERSITY, INC., a West Virginia Corporation;

COLLINS MURPHY, as an employee of Alderson Broaddus and as an individual;

KRISTINE BURNSIDE; CAYLA RHODES; ERICA BROOKS;

and EMILY SARVER, Defendants.

CIVIL ACTION NO. 2:18-CV-52

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF WEST VIRGINIA ELKINS

September 11, 2018

(BAILEY)

ORDER DENYING MOTION TO DISMISS THE COMPLAINT FOR DECLARATORY RELIEF

Currently pending before this Court is the Defendants, Kristine Burnside, Cayla Rhodes, Erica Brooks, and Emily Sarver's Motion to Dismiss the Complaint for Declaratory Relief [Doc. 20], filed July 27, 2018. This matter is now ripe for decision. For the reasons set out below, this Court hereby DENIES the Motion to Dismiss [Doc. 20].

I. BACKGROUND

A. Factual Background

1. Murphy's Underlying Acts

The following facts are undisputed and listed as finding of facts by the state court. In 2011, defendants in this federal action, Kristin Burnside, Cayla Rhodes, Erica Brooks, and Emily Sarver (collectively, the "claimants") were all members of the Women's Basketball team at Alderson Broaddus University ("ABU") [Doc. 1-7, p. 8]. They all resided in Kincaid Hall, a residence hall at ABU [Id.]. During the same 2011-2012 academic school year, defendant Collins Murphy was a volunteer assistant coach with the Women's Basketball team and a Resident Director [Id. at 4]. During the previous 2010-2011 academic year, Murphy had a paid position as Assistant Coach for the Women's Basketball team [Id.].

Over Christmas break of 2011, Murphy intentionally installed hidden cameras in the women's bathrooms and distributed nude images of Burnside, Rhodes, Brooks, and Sarver to third parties and pornographic web sites without their consent or knowledge [Id. at 8]. The women and ABU did not become aware of the hidden camera or the dissemination of the images until 2014. On September 17, 2014, Ms. Burnside received the pictures of herself from O'Dell Eargle, a former ABU student. Eargle told Burnside he received the pictures from Murphy. Ms. Burnside contacted the West Virginia State Police the same day, and the police began an investigation. The State Police contacted ABU's Department of Campus Safety regarding a search of a dorm room. Later that month, the other claimants also became aware of the pictures.

On October 18, 2014, Murphy was interviewed by the State Police. Murphy admitted to sending the pictures to Eargle and admitted to installing cameras in outlets of the dorm bathrooms. During a deposition for the state case, Murphy asserted his Fifth Amendment rights and refused to answer further questions.

2. Insurance

Federal Insurance Company ("FIC") issued the Forefront Portfolio for Not-For-Profit Organizations Policy (the "Policy") for the period from May 1, 2014 to May 1, 2016 [Doc. 1, ¶ 14]. The Policy contains two coverage sections: (1) Directors and Officers Liability andEntity Liability Coverage Section (the "D&O Section") and (2) Employment Practices Liability Coverage Section (the "EPL Section"). The coverage sections are subject to a maximum aggregate liability of $5,000,000.00 [Doc. 1-1, p. 10].

The part of the Policy most relevant to the instant motion to dismiss is Endorsement Rider No. 3 (14-02-21139) [Id. at 43-54]. Most relevant is Section 5 titled "ADD EXCLUSIONS APPLICABLE TO ALL INSURING CLAUSES." Under Section 5, the Policy was amended to read:

(B) The Company shall not be liable for Loss on account of any Claim:

. . .

(iv) based upon, arising from, or in consequence of any actual or alleged Sexual Behavior . . .

[Id. at 51]. In the Policy, Sexual Behavior is defined as "any verbal or non-verbal act, communication, contact or other conduct involving sexual abuse, intimidation, molestation, discrimination, harassment, or lewdness" [Id. at 49].

In October 31, 2014, FIC received a copy of a letter from Ms. Rhodes alleging violation of privacy as a result of Murphy's conduct and requested ABU put its insurance carriers on notice [Doc. 1-3, p. 1]. On January 25, 2015, FIC sent a letter to ABU stating that the matter did not rise to the level of a D&O Claim, Employment Claim, or Third Party Claim under the Policy [Id.]. FIC did accept the information as a Potential Third Party Claim, and FIC reserved all rights under the Policy and at law [Id. at 3].

After receiving the Complaints under the D&O Section of the Policy, FIC advised ABU that the Complaints did constitute a Claim under the Policy. FIC agreed to provide a defense to ABU under a full reservation of rights, including Exclusion 5(B)(iv), the SexualBehavior exclusion [Doc. 1-4, pp. 3-4].

On May 19, 2016, FIC sent a letter to Murphy in which FIC stated FIC had no duty to indemnify Murphy, but would defend him under a reservation of rights, including the right to assert additional terms and provisions under the Policy and at law [Doc. 1-5]. On December 20, 2017, FIC sent a letter to Murphy supplementing its previous letter and specifically asserted, among other coverage defenses, a defense based on Exclusion 5(B)(iv) [Doc. 1-6]. FIC also reserved the right to seek judicial determination of no coverage permitting FIC to withdraw its defense of Murphy [Id. at 2].

B. Procedural Background

1. State Court Motions for Summary Judgment

In or about June 2015, each Claimant filed separate Complaints against ABU, Murphy, and O'Dell Eargle [Doc. 23, p.1] in the Circuit Court of Barbour County, West Virginia. The Complaints were amended in March 2016 and eventually consolidated. A hearing was held upon ABU's Motion for Summary Judgment and Claimants' Motions for Partial Summary Judgment.

In the Circuit Court's Orders Regarding Motions for Summary Judgment [Doc. 1-7], submitted July 7, 2017, the court ruled on claims against both ABU and Murphy. The claims against ABU were for: (1) respondeat superior; (2) invasion of privacy; (3) tort of outrage; (4) negligent hiring; (5) negligent retention, supervision, and training; and (6) violations of West Virginia Code § 61-3C-1, et seq. The court found ABU was entitled to summary judgment on all counts except negligent retention, supervision, and training.

The claims against Murphy were for: (1) invasion of privacy (two separate counts); (2) intentional infliction of emotional distress; (3) violation of West Virginia Code § 61-3C-16; and (4) violation of West Virginia Code § 61-8-28. The court found the Claimants were entitled to summary judgment for both invasion of privacy counts, intentional infliction of emotional distress, and for West Virginia Code § 61-8-28. The § 61-3C-16 count was dismissed.

2. Federal Declaratory Judgment Action

On May 17, 2018, FIC filed a Complaint for Declaratory Relief [Doc. 1]. In the Complaint, FIC asks this Court to declare that it has no obligation to defend or indemnify Murphy or ABU pursuant to the Policy for the claims by claimants. On July 27, 2018, claimants filed the instant Motion to Dismiss the Complaint [Doc. 20]. In the Memorandum in Support [Doc. 21], Claimants argue that this Court should decline to exercise jurisdiction over the case. On August 10, 2018, FIC timely filed a Response to Claimants' Motion to Dismiss [Doc. 23]. Claimants did not file a Reply brief.

II. LEGAL STANDARD

The Federal Declaratory Judgment Act grants district courts the power, in any "case of actual controversy within its jurisdiction," 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; see Nautilus Ins. Co. v. Winchester Homes

, Inc., 15 F.3d 371, 375 (4th Cir. 1994). The Supreme Court has long acknowledged "federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress." Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996) (citations omitted). This duty to exercise jurisdiction is not absolute, as courts have some discretion to decline exercising jurisdiction over a declaratory judgment within its jurisdiction. SeeNautilus, 15 F.3d at 376. However, this discretion to decline jurisdiction may only be for "good reason." Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 324 (4th Cir. 1937). A District Court should entertain declaratory judgment actions if it finds that the declaratory relief sought will: (1) "serve a useful purpose in clarifying and settling the legal relations in issue"; and (2) "terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding." Nautilus, 15 F.3d at 376 (citations and internal quotations omitted).

Specifically in the insurance coverage context, the Fourth Circuit has frequently approved the exercise of jurisdiction for declaratory judgment actions. See, e.g., id.

at 375-76 ("[W]e have frequently approved the use of federal declaratory judgment actions to resolve disputes over liability insurance coverage, even in advance of a judgment against the insured on the underlying claim for which coverage is sought."); United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th Cir. 1998) (stating that a declaratory judgment is designed to address "exactly the sort of uncertainty that flows from the threat that ambiguous contractual rights may be asserted"). A declaratory judgment is especially appropriate and helpful in the insurance coverage context because it furthers the purpose of the Federal Declaratory Judgment Act and "allows the uncertain party to gain relief from the insecurity caused by a potential suit waiting in the wings." Kapiloff, 115 F.3d at 494.

In Nautilus, the Fourth Circuit articulated a four factor test for district courts to apply in determining whether to exercise jurisdiction in a federal declaratory judgment action while there is a pending state proceeding. See 15 F.3d at 376-77. The four factors are: (1) the strength of the state's interest in having the issues raised in the federaldeclaratory action decided in the ...