State Farm Fire & Cas. Co. v. Inevat, LLC, Case No. 2:17-cv-00901

• Decision Date: 08 June 2018
• Docket Number: Case No. 2:17-cv-00901
• Parties: STATE FARM FIRE & CASUALTY COMPANY, Plaintiff, v. INEVAT, LLC, MICHAEL GRANT JONES, STUCK & RENCHER, LLC, Defendants. INEVATE, LLC & MICHAEL GRANT JONES, Counterclaim Plaintiffs, v. STATE FARM FIRE & CASUALTY COMPANY, Counterclaim Defendants.
• Court: U.S. District Court — District of Utah

STATE FARM FIRE & CASUALTY COMPANY, Plaintiff, v. INEVAT, LLC, MICHAEL GRANT JONES,STUCK & RENCHER, LLC, Defendants.

INEVATE, LLC & MICHAEL GRANT JONES, Counterclaim Plaintiffs, v. STATE FARM FIRE & CASUALTY COMPANY, Counterclaim Defendants.

Case No. 2:17-cv-00901

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH CENTRAL DIVISION

June 8, 2018

MEMORANDUM DECISION & ORDER

Magistrate Judge Dustin Pead

INTRODUCTION

The parties consented to United States Magistrate Judge Dustin B. Pead conducting all proceedings, including entry of final judgment, with appeal to the United States Court of Appeals for the Tenth Circuit.¹ Oral argument was held on March 27, 2018, after which the court took the pending motions under advisement.² Now having considered the parties' arguments and briefing, along with the relevant legal authorities, the court rules as set forth herein.

BACKGROUND

Information Technology (IT) provider Inevat, LLC (Inevat) and its owner Michael Grant Jones (Jones) (collectively Defendants), obtained a business owner's insurance policy through State Farm Fire & Casualty (State Farm or Plaintiff) on September 23, 2013.³

On November 23, 2016, the law firm of Stucki & Rencher (Stucki) filed an action against Defendants in Utah's Third Judicial District Court of Salt Lake County ("the state action").⁴ In the state action, Stucki seeks damages stemming from a server crash that resulted in the loss of its electronic data.⁵ Stucki alleges that Defendants, as the law firm's IT provider, "failed to create or construct any sort of off-site backup to protect the Firm's electronic data, documents and records."⁶

Defendants tendered defense of their claims to State Farm.⁷ While providing a defense under full reservation of rights, State Farm concurrently filed this federal declaratory action to determine the scope of Defendants' coverage under the policy.⁸ Defendants and Stucki counterclaimed.⁹ State Farm motioned to strike, for dismissal of counterclaims and to staydiscovery.¹⁰ Defendants and Stucki moved to dismiss State Farm's indemnification claim and for appointment of independent counsel.¹¹

PENDING MOTIONS

The following motions are currently pending: (1) State Farm's motion to dismiss Stucki's counterclaims,¹² (2) State Farm's motion to dismiss the first cause of action of Defendants' counterclaim,¹³ (3) State Farm's motion to strike,¹⁴ (4) Defendants' amended motion to dismiss,¹⁵ (5) Stucki's amended motion to dismiss,¹⁶ (6) Defendants' cross motion to appoint counsel,¹⁷ and (8) State Farm's motion to stay discovery.¹⁸

The court's review of these matters is framed by an insurer's duty to its insured. Specifically,

[u]nder the typical liability insurance policy, the insurer has two duties. The sole source of these duties is the insurance contract. First, an insurer has a duty to indemnify the insured, up to the limits of the policy, for the payment of a judgment based on a liability claim which is covered. Second, the insurer has a duty to defend the insured against a liability claim which is covered or which is potentially covered. These are two distinct duties, with an insurer's duty to defend [being] broader than its duty to indemnify. This is because the duty to indemnify isdetermined by the underlying facts of the case, while the duty to defend [is] controlled by the allegations in the complaint against the insured. The duty to defend is a continuing duty that is triggered when the insured tenders the defense of an action against it which is potentially within the policy coverage. If the underlying complaint alleges any facts or claims that might fall within the ambit of the policy, the insurer must offer a defense.¹⁹

DISCUSSION

Defendants' Motion to Dismiss and Stucki's Amended Motion to Dismiss.²⁰

Initially, the court examines whether State Farm's declaratory judgment action is ripe. A case is ripe when "there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."²¹ A court has no obligation to entertain every justiciable controversy and the question of whether to address State Farm's declaratory action is within the sound discretion of the court.²²

Defendants and Stucki move for dismissal.²³ They argue Plaintiff's declaratory action is not ripe until the facts are determined in the state action.²⁴ Conversely, State Farm argues it isappropriate to seek guidance through a declaratory action while the underlying state case is ongoing.²⁵

An insurer's duty to defend and its duty to indemnify are separate and distinct in both time and scope.²⁶ The duty to defend arises when the claim is first asserted and is determined under "the language of the insurance policy and by the allegations in the complaint filed against the insured."²⁷ The duty to defend applies where the complaint contains any allegations or claims"that might fall within the ambit of the policy."²⁸ Because the duty to defend is broader, the duty may apply even in matters where the insurer is "ultimately not liable to indemnify the insured."²⁹

Unlike the duty to defend, the duty to indemnify takes shape after liability is established.³⁰ Indemnification relates to an insurer's obligation to pay for liability that is imposed under the terms of the policy.³¹

Because the duty to defend emerges when a claim is raised, it is properly addressed prior to indemnification. Often, courts employ a two-tier analysis; first adjudicating the duty to defend, then deferring issues of indemnification until after liability is established.³² State Farm argues against application of two-tiers, claiming policy exclusions may obviate coverage and therefore both duties are ripe for determination. The court disagrees. In the underlying state action, fact discovery is ongoing, the type and amount of damages remain unknown, and liability has not been imposed. Under these circumstances, it would be premature to address indemnification since the court cannot ignore "the possibility that the claim[s] may ultimately be established to be within policy coverage."³³ Moreover, State Farm fails to identify any harm or prejudice it would suffer by allowing the court to first consider the duty to defend while suspending discussion of indemnification.

At present, indemnification is not of "sufficient immediacy and reality" for purposes of adjudication.³⁴ As a result, Defendants and Stucki's motions to dismiss State Farm's declaratory indemnity claim are granted without prejudice.³⁵

State Farm's Motion To Dismiss Stucki & Rencher's Counterclaims,³⁶

State Farm's Motion To Dismiss the First Cause of Action in Defendants' Counterclaim,³⁷ Defendants' Cross Motion For Appointment of Independent Counsel³⁸ and State Farm's Motion To Strike Defendants Fourth and Sixth Affirmative Defenses.³⁹

On September 15, 2017, Stucki filed an answer and counterclaim seeking to affirm State Farm's duties under the policy and for the appointment of independent counsel to represent Defendants.⁴⁰ Shortly thereafter, Defendants filed their answer, asserting defenses and counterclaims for declaratory relief, bad faith and appointment of independent counsel. In support of their claim for bad faith, Defendants assert:

[State Farm] breached the obligations it owes to Inevat, including by failing to reasonably engage in settlement discussions, by stalling and hampering Inevat's defense, by failing to pay for Inevat's independent counsel, and by asserting baseless arguments in an effort to avoid coverage and/or exert undue pressure on Inevat.⁴¹

Collectively, the pending motions seek resolution of the following discrete issues: Is Stucki an appropriate party to enforce duties under Defendants' policy? Is Defendants' claim for bad faith ripe? Should State Farm provide independent counsel to represent Defendants in the state action? Is State Farm required to pay for Defendants' legal counsel in the declaratory action? These issues are addressed in further detail below.

Is Stucki The Appropriate Party To Enforce Duties Under The Policy?

Plaintiff asserts Stucki is without "standing" to bring counterclaims against State Farm. Yet, given Stucki's status as a named party, Plaintiff's characterization of the issue in terms of "standing" proves somewhat misleading. In the civil context, standing addresses whether the court has power under Article III to hear a matter.⁴² Here, State Farm does not argue that the court lacks power over the matter or the motions. Rather, the thrust of Plaintiff's argument appears to be that Stucki it is not the appropriate party to raise counterclaims on the behalf of Defendants. To this, the court agrees.

Stucki is neither a party nor an intended third party beneficiary of the State Farm insurance policy.⁴³ As a result, any future relief Stucki may have is contingent upon adetermination of liability and the entry of judgment. Thus, while possible that Stucki may incidentally benefit from the agreement, the clear intent of the policy "is to protect the financial well-being of the insured [Defendants], not to benefit the injured party."⁴⁴ Stucki counterclaims for a declaration of duties owed to Defendants and for the appointment of independent counsel for Defendants. These claims, however, belong to policyholder Defendants---not Stucki.⁴⁵ Indeed, these same claims are advanced through Defendants own counterclaims and defenses, and therefore Stucki's claims are redundant. Although Stucki argues redundancy will not be an issue if Defendants declare bankruptcy and default is entered, such claim is entirely speculative. At this point, Defendants are present and represented and Stucki's counterclaims are duplicative.

Stucki is not the proper party to bring a counterclaim seeking a declaration of the rights and duties owed to Defendants under the insurance policy, and State Farm's motion to dismiss Stucki's counterclaims is granted.⁴⁶

Is Defendants' Bad Faith Claim Ripe?

Defendants' counterclaim for...