Sears, Roebuck and Co. v. Zurich Insurance Company

• Decision Date: 16 February 1970
• Docket Number: No. 17529.,17529.
• Parties: SEARS, ROEBUCK AND CO., Plaintiff-Appellant, v. ZURICH INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

422 F.2d 587 (1970)

SEARS, ROEBUCK AND CO., Plaintiff-Appellant, v. ZURICH INSURANCE COMPANY, Defendant-Appellee.

No. 17529.

United States Court of Appeals, Seventh Circuit.

February 16, 1970.

Burton Y. Weitzenfeld, Arthur L. Klein, Chicago, Ill., for plaintiff-appellant; Arnstein, Gluck, Weitzenfeld & Minow, Chicago, Ill., of counsel.

John M. Moelmann, Thomas J. Weithers, Chicago, Ill., for defendant-appellee; Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., of counsel.

Before DUFFY, Senior Circuit Judge, KERNER, Circuit Judge, and GRANT,^* District Judge.

GRANT, District Judge.

This is an appeal from a District Court's dismissal, sua sponte, of a diversity declaratory judgment action instituted by Sears, Roebuck and Co. (Sears), a New York corporation with its principal place of business at Chicago, Illinois, against Zurich Insurance Company (Zurich), a Swiss corporation with its principal place of business at Zurich, Switzerland.

Sears had been sued in the Superior Court of Suffolk County, Massachusetts, by John and Elizabeth Malone, and that suit was subsequently removed to the Federal District Court at Boston. The essence of the Malones' complaint was that a television set purchased by them from Sears exploded and burned in their home, causing property damage in the amount of $45,500. The television set in question had been manufactured by Warwick Electronics, Inc. (Warwick), Zurich's principal insured. The Malone complaint in six counts alleged that the television set had been defectively manufactured and in two counts alleged that the television set had been improperly serviced by Sears. The latter two counts are exclusions in the Zurich policy for which Zurich is not liable. Neither Zurich nor Warwick are parties to the Malone action.

Although tendered the defense of that action, Zurich refused to defend on behalf of Sears in the Malone suit. Sears thereupon brought this declaratory judgment action in the United States District Court for the Northern District of Illinois, Eastern Division, seeking a declaration of rights under a policy of insurance issued by Zurich to Warwick and extended to Sears by vendors endorsement. Sears sought a declaration that by virtue of the insurance policy and its extension to Sears, defendant was obligated to defend and indemnify Sears in the Malone action.

Following a hearing in the Illinois District Court, it was determined that the declaratory judgment action should not be transferred to the Massachusetts District Court under 28 U.S.C. § 1404(a). The learned District Judge then dismissed the declaratory judgment action, sua sponte, stating that, "As a matter of policy, this Court is of the opinion that questions of this nature belong more properly in the state courts."

The sole issue presented to us for review is whether the Illinois District Court abused its discretion in so dismissing this declaratory judgment action.

Title 28 U.S.C. § 2201 reads:

In a case of actual controversy within its jurisdiction, except with respect to Federal taxes, 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. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

It is agreed by all concerned that a district court has discretion whether to entertain an action for a declaratory judgment. Public Affairs Associates, Inc. v. Rickover, 369 U.S. 111, 82 S.Ct. 580, 7 L.Ed.2d 604 (1962); Brillhart v. Excess Insurance Co. of America, 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942); Sears, Roebuck and Co. v. American Mutual Liability Insurance Co., 372 F.2d 435 (7th Cir., 1967); Gill v. Iowa-Illinois Gas and Electric Company, 233 F.2d 145 (7th Cir., 1956); Chicago Furniture Forwarding Co. v. Bowles, 161 F.2d 411 (7th Cir., 1947). A district court's discretion is not, however, unbridled; arbitrariness or the personal whim of the district court may not enter into its decision whether to grant or deny declaratory relief. Mutual Life Insurance Co. of New York v. Krejci, 123 F.2d 594 (7th Cir., 1941); Standard Acc. Ins. Co. v. Leslie, 55 F. Supp. 134 (E.D.Ill., 1944).

An immediate and actual controversy between Sears and Zurich exists in this case. Specifically at issue in the Illinois litigation are the questions whether Zurich is obligated to defend on behalf of Sears notwithstanding the Malones' allegations concerning servicing and repair; whether Sears gave timely notice of the occurrence as soon as practicable; and whether Sears failed to cooperate with Zurich. Sears alleges that the defense of the Malone lawsuit was tendered to and refused by Zurich and that Zurich is obligated to defend that lawsuit, to pay its costs of defense and to pay any judgment rendered therein. Zurich denies this obligation on the grounds (1) that the policy excludes coverage if the occurrence arose out of Sears' servicing or repair and the Malones' complaint alleges improper servicing and repair in addition to defective product; (2) that notice of the occurrence was not given by Sears as soon as practicable; and (3) that Sears did not cooperate with Zurich.

The question of an insurance company's duty to defend plainly presents a present controversy ripe for declaratory relief. United States Fidelity & Guaranty Co. v. Millers Mutual Fire Ins. Co. of Texas, 396 F.2d 569 (8th Cir., 1968); Globe Indemnity Co. v. St. Paul Fire & Marine Ins. Co., 369 F. 2d 102 (3rd Cir., 1966); Bruce v. United States Fidelity & Guaranty Co., 277 F.Supp. 439 (D.S.C., 1967). This same District Judge earlier recognized this principle in Gulf Insurance Company v. Dooley, 286 F.Supp. 16 (N.D.Ill., 1968) in which he held that a suit for declaratory judgment filed by the Gulf Insurance Company to determine whether it had an obligation to defend a lawsuit pending against one of its insureds was indeed "ripe for declaratory relief". In that case, the insurance company was precluded under Illinois law to raise the question of its policy's coverage in the state suit which the insurance company claimed it did not have to defend. The case at bar is analogous. Zurich is not a party to the Malone action and accordingly is not able to raise the question of its policy's coverage in that suit. It is raising here those issues which will...