Nat'l Union Fire Ins. Co. v. Rite Aid S. Carolina

• Decision Date: 02 March 2000
• Docket Number: No. 99-1539,CA-97-2056-0-19,99-1539
• Citation: 210 F.3d 246
• Parties: (4th Cir. 2000) NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Plaintiff-Appellant, v. RITE AID OF SOUTH CAROLINA, INCORPORATED, Defendant-Appellee, and GABRIELLE HUNDLEY, Gabrielle Hundley, a minor under the age of 14 years, by and through her Guardian ad Litem, Peggy W. Hundley; RONALD HUNDLEY; PEGGY HUNDLEY, Defendants. (). . Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 246

210 F.3d 246 (4th Cir. 2000)

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Plaintiff-Appellant, v. RITE AID OF SOUTH CAROLINA, INCORPORATED, Defendant-Appellee, and GABRIELLE HUNDLEY, Gabrielle Hundley, a minor under the age of 14 years, by and through her Guardian ad Litem, Peggy W. Hundley; RONALD HUNDLEY; PEGGY HUNDLEY, Defendants.

No. 99-1539 (CA-97-2056-0-19).

UNITED STATES COURT OF APPEALS, FOR THE FOURTH CIRCUIT.

Argued: March 2, 2000.

Decided: April 20, 2000.

Appeal from the United States District Court for the District of South Carolina, at Rock Hill.

Dennis W. Shedd, District Judge.

COUNSEL ARGUED: Joel Wyman Collins, Jr., COLLINS & LACY, P.C., Columbia, South Carolina, for Appellant. James C. Gray, Jr., NELSON, MULLINS, RILEY & SCARBOROUGH, L.L.P., Columbia, South Carolina, for Appellee. ON BRIEF: Eric G. Fosmire, COLLINS & LACY, P.C., Columbia, South Carolina, for Appellant. Elizabeth Scott Moise, William C. Wood, Jr., NELSON, MULLINS, RILEY & SCARBOROUGH, L.L.P., Columbia, South Carolina, for Appellee.

Before WILKINSON, Chief Judge, and WILLIAMS and MICHAEL, Circuit Judges.

Affirmed by published opinion. Judge Williams wrote the opinion, in which Chief Judge Wilkinson and Judge Michael joined.

OPINION

WILLIAMS, Circuit Judge:

National Union Fire Insurance Company of Pittsburgh (National Union) appeals the district court's dismissal of its complaint against Rite Aid of South Carolina (RASC). National Union sought a declaration that the commercial general liability policy it issued to Rite Aid Corporation (Rite Aid), RASC's parent company, did not obligate National Union to provide coverage to RASC in two consolidated product liability lawsuits. The district court concluded that dismissal was appropriate because Rite Aid was a necessary and indispensable party to the declaratory judgment action under Federal Rule of Civil Procedure 19 whose joinder would destroy complete diversity of citizenship, the only basis for subject matter jurisdiction. We hold that the district court did not abuse its discretion in finding that Rite Aid was a necessary and indispensable party. Accordingly, we affirm the district court's dismissal of National Union's complaint for lack of subject matter jurisdiction.

I.

Rite Aid is a Delaware corporation that has its principal place of business in Pennsylvania. Rite Aid negotiated with National Union, also a Pennsylvania citizen, to obtain commercial general liability coverage for itself and its subsidiaries, including RASC.¹ As a result of these negotiations, National Union issued to Rite Aid Policy No. RMGL0174087 (the policy), with effective dates of January 1, 1995 to January 1, 1996. The policy was delivered to Rite Aid in Pennsylvania and Rite Aid made all premium payments on the policy from Pennsylvania.

The policy provides for general liability coverage for Rite Aid and its subsidiaries with an aggregate limit of $4,750,000 and a per occurrence limit of the same amount.² Under the policy, Rite Aid has a selfinsured retention obligation of $250,000 per occurrence, and National Union's insurance applies in excess of the retention amount. In other words, if a Rite Aid subsidiary suffers a loss covered by the policy, Rite Aid is required to cover the first $250,000 of the loss and National Union is responsible for the subsidiary's loss in excess of $250,000, up to the $4,750,000 policy limits.

Rite Aid manages all aspects of the policy for itself and its subsidiaries through its Department of Risk Management, which is located at Rite Aid's corporate headquarters in Pennsylvania. To help with the claims handling process, Rite Aid engaged a third-party administrator, The MacDonald Companies, Inc. (MacDonald), which was selected with the approval of National Union. At all times relevant to this action, Rite Aid would report a claim to MacDonald, and MacDonald would report certain claims as required to National Union. Rite Aid also employed in-house counsel and a Director of Claims; RASC had neither.

The policy sets forth certain notice requirements that Rite Aid is required to follow in the event of an occurrence, claim, or suit. By endorsement, the policy explicitly states that knowledge of an occurrence by anyone other than the Corporate Risk Manager of Rite Aid does not constitute notice of such occurrence to any insured, including RASC. Collateral agreements between Rite Aid and National, set forth in memoranda between MacDonald and AIG Risk Management (AIG),³ the authorized representative of National Union for claims administration and analysis, further define the reporting procedures Rite Aid is required to follow. National Union takes the position that these agreements are supplemental in nature, while Rite Aid contends that the reporting requirements in these agreements supersede the reporting requirements in the policy.

In 1995, during the policy period, RASC allegedly misfilled a prescription, and a customer suffered serious injuries as a result. The customer, who was a minor, and her parents sued RASC for her injuries in two separate actions in the Court of Common Pleas of York County, South Carolina. These actions were referred to Rite Aid's inhouse counsel and to its Department of Risk Management, which in turn referred the actions to local South Carolina counsel. According to AIG, it was notified of the underlying claim by telephone on October 1, 1996, less than a week before the consolidated cases were scheduled for trial. In letters addressed to Rite Aid's Director of Claims dated October 8, 1996 and October 9, 1996, National Union reserved its right to deny coverage. While the jury was deliberating, National Union denied coverage by letter addressed to Rite Aid's Director of Claims dated October 10, 1996. The jury subsequently returned verdicts for the customer and her parents totaling $5,020,000 in actual damages and $11,000,000 in punitive damages. RASC appealed the judgment, which was affirmed by the Court of Appeals of South Carolina. See Hundley v. Rite Aid of South Carolina, Inc., No. 3126, 2000 WL 225531 (S.C. Ct. App. Feb. 28, 2000).

On July 9, 1997, National Union commenced this action in the United States District Court for the District of South Carolina seeking a declaration that RASC failed to comply with the notice provisions of the policy and other established reporting procedures, that this failure substantially prejudiced National Union, and, therefore, that National Union had no obligation to provide coverage in the underlying lawsuits. The complaint alleged jurisdiction based upon diversity of citizenship between the parties.⁴ On January 16, 1998, Rite Aid and RASC filed a parallel action in the Court of Common Pleas of Cumberland County, Pennsylvania, against National Union for breach of contract, for a declaratory judgment that National Union was obligated to defend and indemnify Rite Aid and RASC with respect to the underlying lawsuit, and for bad faith. Four days later, RASC moved to dismiss the instant suit pursuant to Federal Rules of Civil Procedure 12 and 19 on the ground that Rite Aid was a necessary and indispensable party to the action whose joinder would destroy complete diversity of citizenship.

On RASC's motion, the district court first concluded that Rite Aid was a necessary party under Federal Rule of Civil Procedure 19(a) because it possessed at least two important interests that it should be entitled to protect. Because joinder of Rite Aid would destroy complete diversity, the district court then proceeded to determine whether under Rule 19(b), Rite Aid was an indispensable party without whom the court could not in equity and good conscience proceed. After concluding that Rite Aid was such an indispensable party, the district court granted RASC's motion to dismiss for lack of subject matter jurisdiction. National Union filed a timely notice of appeal.

II.

On appeal, National Union argues that Rite Aid is not a necessary party under Federal Rule of Civil Procedure 19 because its interests are adequately represented by RASC, an additional named insured under the policy. In particular, National Union argues that Rite Aid has no interest in the litigation separate and distinct from that of RASC because both parties desire a finding of coverage under the National Union policy, and that to the extent Rite Aid's testimony and documents are relevant to the notice issue, it may fully and adequately contribute to the resolution of this issue as a witness rather than as a party. National Union also contends that Rite Aid is not an indispensable party under Rule 19 because a judgment rendered in its absence would be adequate and dispositive and would not prejudice Rite Aid. Specifically, National Union contends that regardless of whether Rite Aid is joined in the action, the lone issue for the district court to resolve is whether there is coverage or not; Rite Aid's interest in managing the aggregate limits of the policy is not impeded by its exclusion from this suit because the judgment against Rite Aid exceeds those limits.

Federal Rule of Civil Procedure 19 sets forth a two-step inquiry for a district court to determine whether a party should be joined in an action. First, the district court must determine whether the party is "necessary" to the action under Rule 19(a). ⁵ If the court determines that the party is "necessary," it must then determine whether the party is "indispensable" to the action under Rule 19(b).⁶ See Teamsters Local Union No. 171 v. Keal Driveaway Co., 173 F.3d 915, 917-18 (4th Cir. 1999). Because Rite Aid's joinder would destroy complete diversity of citizenship, we must affirm the district court's dismissal of this action for lack of jurisdiction if we agree with the district court that Rite Aid is a necessary and indispensable party. See OwensIllinois, Inc. v. Meade, 186 F.3d 435, 440 (4th Cir. 1999); Schlumberger Indus. v. National Sur. Corp., 36...