Insurer Could Not Move Forward with a Declaratory Relief Action Against Its Insured When The Same Issues Would be Adjudicated in the Underlying Action
Allied Prop. & Cas. Ins. Co. v. Roberts, 2013 U.S. Dist. LEXIS 132239 (E.D. Cal. Sept. 12, 2013)
Allied Property & Casualty Insurance Co. v. Roberts considered the issue of whether an insurer may move forward with a declaratory relief action against its insured when the same issues will be adjudicated in the underlying action. The coverage dispute in Roberts arose from an underlying tort action brought against the insureds due to a fire that took place in a warehouse located on the insureds’ property, in which two individuals working at the warehouse were killed and property was destroyed. The claimants in the underlying action alleged, among other things, that the insureds were liable because they knew or should have known that the warehouse was being used for business purposes. The insureds, on the other hand, defended the underlying action by claiming that they had no knowledge of the business activities in the warehouse.
The insureds tendered the defense of the underlying tort action to their liability insurer under a Rental Dwelling Policy (“Allied Policy”), which covered the home located on the property but did not cover the warehouse. The liability insurer provided a defense subject to a reservation of rights and brought an action against the insureds for declaratory relief and rescission on the basis that the insureds did not disclose that business activities were taking place on the property. The insureds moved to stay the declaratory action pending resolution of the underlying tort action. The district court granted the insureds’ motion based in part on the fact that its determination of certain issues—namely, whether the insureds had knowledge of the business operations in the warehouse—could prejudice the insureds in the underlying action.
The insurer then filed a motion seeking to lift the stay for the limited purpose of filing a motion for summary adjudication of two coverage issues: (1) whether the warehouse where the fire took place was the “insured premises” under the subject insurance policy, and (2) whether the exclusion for “bodily injury” or “property damages” “that arises out of the business activity conducted on the insured premises” applies to bar insurance coverage. The insurer argued that the district court’s adjudication of these two issues would not result in prejudice to the insureds because these issues did not require the court to determine the insureds’ knowledge of the business activities.
The insureds, on the other hand, argued that the Allied Policy needed to be reformed because of alleged representations made by the insurer’s agent that coverage under the Allied Policy would be the same or better than their previous homeowners insurance policy. The insureds contended that their prior policy only excluded damages arising out of business activities if the insureds had knowledge of those business activities.
The district court denied the insurer’s motion seeking to lift the stay because the insureds’ reformation claim raised the same concerns that necessitated the stay in the action in the first place. The court found that if the insureds prevailed on their reformation claim, then the insureds’ knowledge of the business activities on the property would need to be determined, and since this was an issue in the underlying action, the coverage action could not proceed.
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