Nautilus Ins. Co. v. KC Diamond Sports Studio, LLC

• Decision Date: 22 July 2022
• Docket Number: Civil Action 21-63-DLB
• Parties: NAUTILUS INSURANCE COMPANY PLAINTIFF v. KC DIAMOND SPORTS STUDIO, LLC and JANE DOE DEFENDANTS
• Court: U.S. District Court — Eastern District of Kentucky

NAUTILUS INSURANCE COMPANY PLAINTIFF v. KC DIAMOND SPORTS STUDIO, LLC and JANE DOE DEFENDANTS

Civil Action No. 21-63-DLB

United States District Court, E.D. Kentucky, Northern Division, Ashland

July 22, 2022

MEMORANDUM OPINION AND ORDER

David L. Bunning United States District Judge

I. INTRODUCTION

This matter is a declaratory judgment action filed by Nautilus Insurance Company (“Nautilus”), in which Nautilus seeks a declaration of rights under 28 U.S.C. § 2201 with respect to an insurance contract. In addition to the Complaint for Declaratory Relief (Doc. # 1), there are two pending defensive Motions before the Court. A Motion to Dismiss, or in the alternative, Motion to Stay, has been filed by Defendant KC Diamond Sports Studio, LLC (“KC Diamond”) (Doc. # 20), and has been fully briefed. (Docs. # 23 and 25). Additionally, Defendant Jane Doe has filed a Motion to Dismiss (Doc. # 22), which has also been fully briefed (Docs. # 24 and 28), and both Motions are now ripe for the Court's review. For the reasons stated herein, the Motions to Dismiss (Docs. # 20 and 22) are granted, and the Court declines to exercise its discretionary jurisdiction over this declaratory judgment action under 28 U.S.C § 2201.

II. FACTUAL AND PROCEDURAL BACKGROUND

KC Diamond Sports Studio is a small business in Ashland, Kentucky that provides a training location for baseball, softball, gymnastics, and tumbling. (Doc. # 1-1 ¶ 6). Jane Doe is an Ohio resident who suffered a sexual assault while training at KC Diamond in 2017. (See, e.g., Doc. # 1 ¶ 15). Jane Doe's assailant was Joey Payne, a softball coach that she trained with at the KC Diamond practice facilities. (Id.). In 2018, Mr. Payne was charged and pled guilty in state court to Third Degree Sodomy and First-Degree Sexual Abuse, stemming from his misconduct toward Jane Doe. (Id.). One year later, in 2019, Jane Doe filed a civil action in Boyd Circuit Court against Mr. Payne and KC Diamond, alleging negligence, negligent hiring and supervision, premises liability and vicarious liability against KC Diamond; and sexual assault, assault, battery, and false imprisonment against Mr. Payne. (Doc. # 1-1 at 5-8). That case is still pending in Boyd Circuit Court, and notably, Nautilus Insurance Company is not a party to the case. (See id.). However, Nautilus is nonetheless involved in the case, as it holds a commercial insurance policy issued to KC Diamond, and Nautilus has been defending KC Diamond in the state court case since its inception, subject to a reservation of rights. (Doc. # 24 at 1).

After two years of defending KC Diamond in state court, Nautilus filed this case in federal court, seeking a declaratory judgment with respect to its obligations and liabilities under its insurance policy. (Doc. # 1 ¶¶ 28, 33, 40). The Nautilus policy at issue provided general liability coverage to KC Diamond at a $1,000,000 limit per occurrence and a general aggregate limit of $2,000,000 from January 28, 2017 to January 28, 2018, which includes the period during which Jane Doe suffered sexual abuse at the studio. (Id. ¶ 20). However, as is the case with most insurance policies, the Nautilus policy contained several exception and exclusion clauses, and it now seeks to use those clauses to excuse it from a duty to defend, and to avoid liability for a judgment that may be entered against KC Diamond in the state court action, (see generally id.).

More specifically, Nautilus' Complaint for declaratory relief turns on three clauses contained in the insurance contract: an Abuse or Molestation Exclusion, a Punitive or Exemplary Damages Exclusion, and a Bodily Injury Definition. (Id. ¶¶ 22, 30, 35). In citing these clauses in the contract, Nautilus asks the Court to declare that the contract bars coverage and liability for the claims asserted in the state court lawsuit, and that Nautilus has no duty to defend or indemnify KC Diamond. (E.g., id. ¶ 33). The clauses specifically state as follows, in relevant parts:

ABUSE OR MOLESTATION EXCLUSION

. . . This insurance does not apply to “bodily injury,” “property damage” or “personal and advertising injury” arising out of:

(1) The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or

(2) The negligent

(a) Employment;

(b) Investigation;

(c) Supervision;

(d) Reporting to the proper authorities, or failure to so report; or

(e) Retention;

Of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by Paragraph 1 above. (Doc. # 1-2 at 32).

EXCLUSION - PUNITIVE OR EXEMPLARY DAMAGES

This insurance does not apply to punitive or exemplary damages. (Id. at 40).

COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY

(1) Insuring Agreement

(a) We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result....

(b) This insurance applies to “bodily injury” and “property damage” only if:

(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;

(2) The “bodily injury” or “property damage” occurs during the policy period; and . . .

(e) Damages because of “bodily injury” include damages claimed by any person or organization for the care, loss of services or death resulting at any time from the “bodily injury.” . . .

(36) The Nautilus Policy defines “bodily injury” as follows:

SECTION V - DEFINITIONS

(3) “Bodily injury” means bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time. (Id. at 12, 24).

In July 2021, KC Diamond filed an Answer to the Complaint (Doc. # 8), in which it makes various affirmative defenses in addition to requesting a jury trial. KC Diamond's Motion to Dismiss followed in September 2021 (Doc. # 20), and Jane Doe filed her Motion to Dismiss shortly thereafter. (Doc. # 22). At the time of this Order's entry, Jane Doe has not filed an Answer to the Complaint. The state court action remains set for jury trial on August 22, 2022 in Boyd Circuit Court. See Jane Doe v. KC Diamond Sports Studio, LLC, et al., No. 19-CI-299 (filed Apr. 12, 2019).^[1] While the two Motions to Dismiss are both pending before the Court, they address the same issue: whether the Court should exercise jurisdiction over this matter under the Declaratory Judgment Act. (See Docs. # 20 and 22). Accordingly, the Court will address the jurisdictional questions by the same analysis.

III. ANALYSIS

A. Standard of Review

The Declaratory Judgment Act provides that in “a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may 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). In situations where an insurance company seeks a declaration of rights in relation to a concurrently proceeding state court tort action, federal courts are not required to hear a declaratory judgment action. Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494-95 (1942); Bituminous Cas. Corp. v. J & L Lumber Co., Inc., 373 F.3d 807, 812 (6th Cir. 2004). Rather, the Declaratory Judgment Act “confer[s] on federal courts the unique and substantial discretion in deciding whether to declare the rights of litigants.” Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995); accord W. World Ins. Co. v. Hoey, 773 F.3d 755, 758 (6th Cir. 2014).

In the Sixth Circuit, the exercise of jurisdiction in a declaratory judgment action is guided by five factors, known as the Grand Trunk factors, after the case from which they originate:

(1) Whether the declaratory action would settle the controversy;

(2) Whether the declaratory action would serve a useful purpose in clarifying the legal relations in issue;

(3) Whether the declaratory remedy is being used merely for the purpose of ‘procedural fencing' or to ‘provide an arena for a race for res judicata;'

(4) Whether the use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction;

(a) Whether the underlying factual issues are important to an informed resolution of the case;

(b) Whether the state trial court is in a better position to evaluate those factual issues than is the federal court;

(c) Whether there is a close nexus between underlying factual and legal issues and state law and/or public policy, or whether federal common or statutory law dictates a resolution of the declaratory judgment action; and

(5) Whether there is an alternative remedy which is better or more effective.

Cardinal Health, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 29 F.4th 792, 796-97 (6th Cir. 2022) (citing Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984)); see also White Pine Ins Co. v. McIntosh, No. 5:21-238-KKC, 2022 WL 2512771, at *2 (E.D. Ky. July 6, 2022) (listing the factors with all sub-factors included) (citing Hoey, 773 F.3d at 759). The factors are not weighted in any way, and they “are not always considered equally,” as the factors are instead used to broadly conduct “a reasoned analysis of whether issuing a declaration would be useful and fair.” Cardinal Health, 29 F.4th at 797 (quoti...