Illinois Federal Court Rejects Dismissal Based on Abstention Doctrine

In its recent decision in Hartford Cas. Ins. Co. v. Construction Builders In Motion, Inc., 2012 U.S. Dist. LEXIS 25240 (E.D. Ill. Feb. 28, 2012), the United States District Court for the Northern District of Illinois, applying Illinois law, considered whether a declaratory judgment action should be dismissed on the basis of the Wilton/Brillhart abstention doctrine.

The Construction Builders case involved coverage litigation arising out of allegedly defective construction of a single home in Chicago.  In the underlying action, the homeowner sued the general contractor, Kaiser, which in turn asserted third-party claims against several subcontractors, including Construction Builders. Hartford, as the insurer of Construction Builders, brought suit in the Northern District of Illinois, seeking a declaration that it had no duty to defend its own insured or Kaiser.  Hartford also named as defendants a number of other insurers under which Kaiser qualified as an insured or as an additional insured.  Hartford sought a declaration that if it did owe a defense obligation to Kaiser, then this obligation should be shared equally with each of the other insurers.

Among the insurers sued by Hartford were Rockford Mutual and Pekin Insurance, both of which were insurers of Kaiser’s subcontractors.  Kaiser claimed to be an additional insured under the policies issued by these insurers.  Rockford Mutual and Pekin had each brought separate lawsuits in Illinois state court seeking declarations that they owed no coverage obligations with respect to their own insureds or to Kaiser.  Rockford Mutual and Pekin Insurance, therefore, moved to dismiss Hartford’s lawsuit on the basis of the Wilton/Brillhart abstention doctrine, arguing that the court should abstain from hearing Hartford’s claims in light of their already filed state court actions.

The Construction Builders court acknowledged that as a general proposition, abstention pursuant to this doctrine is appropriate “in a diversity case where a declaratory judgment action is sought and a parallel state court proceeding also exists.”  Matters are considered “parallel” when “there is a substantial likelihood that the state court litigation will dispose of all claims presented in the federal case.”  With these principles in mind, the Construction Builders court rejected the argument that Hartford’s federal court action was parallel to the lawsuits pending in state court, explaining:

While this case includes some of the parties and issues that will be decided in the state court actions, at best the state cases will resolve the coverage dispute as to one or two of the insurers, leaving this case to decide remaining issues of contribution or allocation, as well as any of the coverage as to the insurers who have not brought a state declaratory action.  In short, this case is not parallel to the state court case and this litigation, not a web of state court cases, will be the best way to sort out the coverage obligations and, if necessary, apportion defense costs and damages.

In reaching its holding, the court rejected the argument that Rockford Mutual and Pekin would be forced to incur extra costs by litigating in multiple suits.  The court stated that Rockford Mutual and Pekin were free to dismiss their own state court litigations and prosecute their claims in Hartford’s lawsuit.  The court further reasoned that because the issues bearing on the duty to defend were relatively straightforward and required little discovery, there would be only minimal extra costs imposed on the insurers by having to litigate in multiple suits should they opt not to discontinue their state court claims.

Illinois Court Holds Abstention Doctrine Does Not Require Dismissal of Insurance-Related Declaratory Judgment Action

Under Illinois law, an insurer has two options when it is unsure as to whether an underlying claim triggers a defense obligation under a liability policy: it can provide a defense under a reservation of rights or it can seek a declaratory judgment as to its coverage obligations prior to trial.  Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999).  The recent decision by the United States District Court for the Northern District of Illinois in Cincinnati Ins. Co. v. Silvestri Paving Co., 2011 U.S. Dist. LEXIS 114273 (N.D. Ill. Oct. 4, 2011) addressed the appropriateness of a declaratory judgment action under such circumstances.

Cincinnati Insurance Company’s insured, Silvestri, was named as a defendant or third-party defendant in three consolidated lawsuits alleging dumping of waste in violation of the Illinois Environmental Protection Act.  After initially disclaiming coverage, Cincinnati agreed to defend Silvestri in these matters under a reservation of rights.  Cincinnati then brought suit against Silvestri in federal court pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that it had no duty to defend or indemnify Silvestri on the basis of several coverage defenses, including the application of its policies’ pollution exclusion, the lack of an occurrence, and Silvestri’s failure to comply with the policies’ notice provisions.

Silvestri subsequently moved to dismiss pursuant to the Wilton/Brillhart abstention doctrine, which provides a district court with the discretion to stay or dismiss a declaratory judgment action when a parallel case is pending in state court that involves the same parties and identical legal issues.  Where, however, the declaratory judgment presents an issue distinct from the state court proceeding, abstention is inappropriate.  Silvestri argued that abstention was proper since the issues presented for adjudication in Cincinnati’s declaratory judgment action would also be resolved in the underlying suits and because Cincinnati’s duty to indemnify necessarily required a finding of fact in the underlying suits.  Silvestri further argued that Cincinnati was engaging in improper forum shopping since the judges in the underlying consolidated cases had ruled on certain issues relating to the duty to defend and indemnify involving other defendants and their respective insurers.

The court rejected each of Silvestri’s arguments.  Most pertinently, the court held that the underlying state court cases could not be considered parallel actions for the purpose of the Wilton/Brillhart doctrine because Cincinnati was not a defendant in those suits and because the coverage issues would not be addressed in those suits.  While the underlying suits would be determinative of Silvestri’s liability under the Illinois statute, those suits would not address Silvestri’s right to coverage for its liability.  As the court explained, “[w]hether Silvestri dumped ‘waste’ in violation of the IEPA [and] is liable for damages to the State of Illinois, is … independent from the issue of whether the allegations in the underlying case are covered by Silvestri's insurance policies with Cincinnati.” The court further held that it was irrelevant that the underlying courts addressed insurance coverage issues as to parties other than Silvestri and Cincinnati under entirely different insurance policies.  Such would have no effect on the insurance coverage dispute between Silvestri and Cincinnati and, at the very least, did not merit abstention under the Wilton/Brillhart doctrine.