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Web.Com, Inc. v. Federal Insurance Co.

December 11, 2007

WEB.COM, INC., F/K/A INTERLAND, INC., PLAINTIFF,
v.
FEDERAL INSURANCE COMPANY AND CHUBB INSURANCE COMPANY OF NEW JERSEY, DEFENDANTS.



The opinion of the court was delivered by: David Stewart Cercone United States District Judge

Electronic Filing

MEMORANDUM OPINION

Plaintiff commenced this diversity action seeking a declaratory judgment defining its rights and obligations under insurance policies issued to a third-party with whom plaintiff entered into a contract calling for professional services. Specifically, plaintiff seeks a declaration pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202, that (1) it is an insured under the policies issued to Rapp Collins, Worldwide, L.P., because Rapp Collins was contractually bound to provide coverage for its clients, which allegedly included plaintiff, and (2) the claims against plaintiff in a lawsuit in the Court of Common Pleas of Allegheny County are covered by the insuring agreement of the policies.

Plaintiff, Rapp Collins and Omnicom have been named as defendants in a lawsuit instituted in the Court of Common Pleas of Allegheny County, Pennsylvania, captioned Pairnetworks, Inc., Pax 69, Inc., and Apple Marine, Inc., v. Interland, Inc., Rapp Collins Worldwide, LP, RCWPG, LLC, Rapp Partnership Holdings, Inc., Rapp Collins Worldwide, Inc., Diversified Federal Services, Omnicom Group, Inc., and John Does 1-16, Case No. 01-23240 (the "underlying action"). The plaintiffs in the underlying action sought monetary damages alleging that plaintiff, along with Rapp Collins, violated the Telephone Consumer Protection Act ("TCPA") by sending unsolicited facsimile advertisements to the plaintiffs. They also sought class certification and the recovery of statutory damages on behalf of each individual or entity likely to have received the alleged unsolicited facsimile advertisement in violation of the TCPA. Judge Horgo ruled that the case would not be certified as a class action. The underlying plaintiffs appealed, but thereafter entered into a settlement. The settlement expressly was without prejudice to pending cross claims between the defendants, which includes a cross claim by plaintiff Web.com (formerly Interland, Inc.) against Rapp Collins for breach of a professional service agreement by failing to maintain insurance coverage for Web.com.

Through Omnicom, a request for defense and indemnity coverage was made to defendants on plaintiff's behalf under policies of insurance assertedly covering Rapp Collins on the ground that Web.com is an additional insured as a result of the Professional Services Agreement. Defendants denied the request for coverage from Omnicom and thus in turn plaintiff.

In the instant action plaintiff seeks defense costs incurred in the underlying action, recovery for any liability imposed or settlement paid, and concomitant damages for bad faith insurance practices. Plaintiff initially contended that a proper construction of the policy by this court is necessary to resolve the controversy. In a recent letter to this court, it has abandoned that contention and now asserts that its breach of contract, bad faith insurance practices and breach of fiduciary duty claims may proceed without such relief.

A case management conference was held on January 12, 2007. After review of the complaint, counsel were advised that the court would decline to exercise jurisdiction in accordance with State Auto Ins. Co. v. Summy, 234 F.3d 131 (3d Cir. 2001). Plaintiff's counsel requested time to review Summy and advise the court on any objections plaintiff might have to the court's preliminary decision. Plaintiffs filed a brief contesting the court's preliminary decision to exercise its discretionary authority under the Declaratory Judgment Act and decline jurisdiction. For the reasons set forth below, plaintiff's objections will be overruled, the declaratory judgment counts will be dismissed without prejudice, and the remaining counts will be stayed until plaintiff returns with a state court adjudication of its rights under the policies of insurance at issue.

After considering the various factors governing the exercise of this Court's discretionary jurisdiction under the Declaratory Judgment Act as reflected in State Auto Ins. Co. v. Summy, 234 F.3d 131 (3d Cir. 2000), Allstate Insurance Co. v. Seelye, 198 F. Supp.2d 629 (W.D. Pa. 2002) and Atlantic Mutual Insurance Co. v. Gula, 84 Fed. Appx. 173 (3d Cir. 2003), this Court must respectfully decline plaintiff's invitation to entertain the Declaratory Judgment counts in this action. As Judge Weis observed in Summy, the applicable Third Circuit and Supreme Court "precedents counsel hesitation by federal courts in exercising jurisdiction over declaratory judgment actions when the state law involved is close or unsettled." Summy, 234 F.3d at 135. And where the state law is firmly established, there is even less reason for resort to the federal courts. Id. at 136. Furthermore, where no federal interests are promoted by entertaining the declaratory judgment action and there is a state court decision in existence that directly involves the coverage dispute, entertainment of the federal declaratory judgment suit boarders on the "vexatious" and "gratuitous interference" descriptions used by the Supreme Court in Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942). Such circumstances readily support a decision to decline jurisdiction sua sponte, particularly where there are state court decisions bearing on the dispute and ongoing underlying litigation that will inform the outcome of the parties' disagreement.

Moreover, as Judge Sloviter reiterated in Gula, where a declaratory judgment action is premised on the potential availability of insurance coverage, "[t]he central question is whether the controversy may better be settled in the state court." Gula, 84 Fed. Appx. at 174 (quoting United States v. Pennsylvania Dep't of Envirtl. Res., 923 F.2d 1071, 1075 (3d Cir. 1991)). Relevant considerations include a general policy of restraint when the same issues have been raised in state court and avoidance of duplicative litigation. Gula, 84 Fed. Appx. at 174-175 (quoting Summy, 234 F.3d at 134). In addition, "the state's interest in determining issues of state law also weighs against exercising jurisdiction in [such] declaratory judgment actions." Id.

(citations omitted).

Here, the same factual issues that will inform a proper construction of the terms and conditions of coverage under the policies are in the process of being litigated in the cross claims pending in the underlying action in the Court of Common Pleas of Allegheny County. That court will be intimately familiar with the factual issues as they evolve during the course of the litigation and resolution of those factual issues will directly impact the claim that plaintiff was a named insured under the applicable policies. Revisiting those issues in this court will amount to piecemeal and duplicative litigation, a factor strongly weighing against the exercise of jurisdiction by this court. See Summy , 234 F.3d at 135 ("A federal court should also decline to exercise its discretionary jurisdiction when doing so would promote judicial economy by avoiding duplicative and piecemeal litigation.").

It is also readily apparent that the coverage issues and requested legal construction of the insurance policies in question raised by plaintiff's complaint do not present any matter of federal concern and will be governed by well-settled state law. This is particularly true now that the main claims in the underlying litigation have been settled. As the Summy court observed, a strong factor militating against the exercise of jurisdiction is created where no federal interest will be promoted by the litigation. Summy, 234 F.3d at 136. In addition, where an action will be governed exclusively by state law that is well-established, there is even less reason for a federal district court to exercise jurisdiction over the controversy.

Here, the issue of whether plaintiff was a named insured, should it be necessary to reach that issue after plaintiff's cross claim against Rapp Collins has been resolved, is controlled by well settled principles of state law. When such circumstances are presented the district courts should rarely accept the invitation to exercise their discretionary jurisdiction under the Declaratory Judgment Act. Summy, 234 F.3d at 136; Seelye, 198 F. Supp.2d at 631. Thus, the lack of any federal interest at stake in the instant litigation and the presentation of threshold issues governed by an area of well-developed state law present factors that weigh heavily against entertaining the declaratory judgment counts in this action.

Against this backdrop plaintiff's objections are unavailing. First, its contention that Summy and its progeny are dependent upon the existence of a parallel insurance coverage dispute or some form of a declaratory judgment action in state court is without merit. Summy and Gala would be stripped of their precedential holdings were the court to ingraft such a requirement into their application. The "parallel state court proceeding" referenced in Summy and it's progeny is sufficiently presented by the proceeding which plaintiff's complaint identifies as "the underlying litigation." It is this litigation that informs a court's assessment of defendants' duty to defend in the first instance and ultimately, depending on the factual development in the litigation of the underlying cross claims, their duty to indemnify. And the use of that forum to resolve the coverage disputes raised by the declaratory relief counts "will promote the efficient resolution of both the declaratory judgment action and the underlying [liability] action, thereby conserving ...


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