The opinion of the court was delivered by: Judge Caputo
Presently before the Court is Plaintiff-Counterclaim Defendant Scottsdale Insurance Company's Motion for Summary Judgment. (Doc. 18.) Scottsdale Insurance Company ("Scottsdale") moves for summary judgment against Defendant-Counterclaim Plaintiff City of Hazleton ("Hazleton") as to all Counts of Scottsdale's complaint (Doc. 1) as well as Hazleton's counterclaims for breach of contract and bad faith. Scottsdale's complaint includes three (3) Counts, each requesting declaratory judgment regarding its coverage liability on a public entity policy of insurance issued to Hazleton. For the reasons stated below, the Court will dismiss Count I of Scottsdale's complaint for lack of subject matter jurisdiction and grant Scottsdale's motion as to Counts II and III. The Court will, therefore, enter declaratory judgment as to Counts II and III. In addition, the Court will grant Scottsdale's motion as to Hazleton's counterclaims for breach of contract and bad faith. Hazleton also raises a third counterclaim, requesting declaratory judgment in its favor, mirroring the declaratory relief requested by Scottsdale in Counts I, II, and III of its complaint. In light of its disposition of Scottsdale's complaint, the Court will dismiss Hazleton's third counterclaim for declaratory relief as moot.
This Court has jurisdiction over the claims of Scottsdale and counterclaims of Hazleton pursuant to 28 U.S.C. § 1332 based on diversity of citizenship.
Scottsdale issued a public entity policy of insurance, effective January 1, 2005, to Hazleton, a political subdivision organized and existing under the laws of Pennsylvania. (Pl.'s Statement of Material Facts ¶¶ 5, 13, Doc. 19) (hereinafter "Pl.'s Statement").*fn1 The present coverage dispute arose out of a civil rights suit instituted against Hazleton in 2006. The parties do not dispute that the policy provided insurance to the city at that time. (Id. ¶ 6.)
I. The Underlying Litigation
On August 15, 2006, a civil complaint was filed against Hazleton by fourteen (14) plaintiffs, consisting of both individuals and non-profit entities, challenging the validity of certain ordinances adopted by city officials ("the underlying action"). The underlying action was docketed in this Court, under docket number 3:06-cv-1586. (Id. ¶ 7.) The complaint raised claims for federal constitutional, state constitutional, and federal statutory violations and included a prayer for compensatory damages, declaratory and injunctive relief, and attorney's fees. (Pl.'s App., Ex. B, Doc. 20.)*fn2
Hazleton sent notice of the underlying action to its insurance carrier, Scottsdale. On August 21, 2006, a Scottsdale claims specialist, James Lavigne, was assigned to handle the city's insurance claim. Lavigne assigned the law firm of Deasey, Mahoney, & Bender, Ltd. ("the Deasey firm"), to represent the city. (Pl.'s Statement ¶¶ 1, 8.) During the course of the litigation, several other legal organizations assisted in the city's defense on a volunteer basis. (Def.'s App., Ex. 4, Ex. A, HS-10, Doc. 39.) In addition, Hazleton retained the services of attorney Kris Kobach, who billed the city directly. (Pl.'s Statement ¶¶ 66-68.)
On October 30, 2006, plaintiffs in the underlying action filed an amended complaint. (Pl.'s Statement ¶ 9.) By letter dated November 9, 2006, Lavigne notified Hazleton that Scottsdale was providing a defense to the city in the underlying action pursuant to a reservation of rights. (Id. ¶ 10.)
On January 12, 2007, plaintiffs in the underlying action filed a second amended complaint ("SAC"). (Id. ¶ 11.) Unlike prior pleadings, the SAC did not include an explicit prayer for monetary damages, but retained a prayer for declaratory and injunctive relief as well as attorney's fees. (Pl.'s App., Ex. E.) After the SAC's filing, Scottsdale continued to provide a defense to the city through its assigned counsel, the Deasey firm. (Pl.'s Statement ¶ 12; Def.'s Responsive Statement of Material Facts ¶ 12, Doc. 32.)
Following a bench trial on the underlying action from March 12, 2007 through March 22, 2007, before Judge Munley of this Court, the Court, on July 26, 2007 ruled in favor of plaintiffs on several claims, dismissed several claims, and determined that several plaintiffs lacked standing. (Dkt No. 06-cv-1586, Doc. 409 at 190-92.) The Court issued a permanent injunction enjoining Hazleton from enforcing any provision of the disputed ordinances. (Id. at 190.) The Court's verdict afforded no other relief. (Id. at 190-92.)
Hazleton, through the Deasey firm, appealed the verdict to the U.S. Court of Appeals for the Third Circuit. Scottsdale approved the filing of the appeal and continued to fund the city's representation by Deasey through briefing and oral argument. (Def.'s App., Ex. 4, Ex. E, HS-202, Doc. 43.) The matter is currently awaiting decision by the Court of Appeals.
After entry of judgment by this Court, Plaintiffs submitted a petition for an award of costs and attorney's fees, pursuant to 42 U.S.C. § 1988. (Dkt. No. 06-cv-1586, Doc. 416.) That petition is currently stayed pending outcome of the appeal. (Dkt. No. 06-cv-1586, Doc. 420.)
The sections of Scottsdale's public entity policy with Hazleton relevant to the present coverage dispute are as follows:
We will pay on behalf of the insured all "loss" resulting from "public officials wrongful act(s)" but only with respect to "claims" first made against the insured during the "policy period" or Extended Reporting Period. The "public officials wrongful act(s)" must occur within the "coverage territory."*fn3
2. DEFENSE AND SUPPLEMENTARY PAYMENTS ...
The insured, except at its own cost and for its own account, will not, without our written consent, make any payment, admit any liability, settle any "claim," assume any obligation, or incur any expense. We will have the right, but no duty, to appeal any judgment.
Subject to the [policy limit] as applicable to each "public officials wrongful act," we will pay all costs taxed against the insured in any "suit" defended by us. ...
We will not be obligated to make any payment nor to defend any "suit" in connection with any "claim" made against the insured:
9. For "claim(s)," demands, or actions seeking relief or redress in any form other than monetary damages, or for any fees, costs or expenses which the insured may become obligated to pay as a result of any adverse judgment for declaratory relief or injunctive relief; however, we will afford defense to the insured for "suit(s)" in which monetary damages are requested if not otherwise excluded; ...
SECTION VI -- PUBLIC OFFICIALS LIABILITY -- DEFINITIONS
Whenever used in this Coverage Form, the following words have these meanings:
1. "Claim" means a written notice from any party that it is their intention to hold an insured responsible for "loss" resulting from a "public officials wrongful act" covered by this Coverage Form.
3. "Loss" means any monetary amount which the insured is legally obligated to pay as a result of "public officials wrongful act(s)" covered by this Coverage Form and will include, but not be limited to, judgments and settlements, but "loss" will not include fines imposed by law, or matters which may be deemed uninsurable under the law pursuant to which this Coverage Form will be construed.
4. "Loss adjustment expense" means all expenditures including, but not limited to, costs of investigations, experts, adjustment services, legal services and court costs incurred by us as a result of coverage afforded by this Coverage Form. "Loss Adjustment Expense" will not include salaries of our employees.
6. "Suit" means a civil proceeding in which monetary damages are alleged because of a "public officials wrongful act" to which this Coverage Form applies.
(Pl.'s App., Ex. A) (hereinafter "Policy").
III. The Reservation of Rights Letter
By letter dated November 9, 2006-after the first amended complaint was filed in the underlying action and prior to the second amendment-Scottsdale notified Hazleton that it would continue to defend the city pursuant to a reservation of rights to later assert defenses to coverage under the policy. The reservation of rights letter directed Hazleton's attention to the above-quoted policy language and stated, in relevant part:
Pursuant to Exclusion 9, there is no coverage for any fees, costs or expenses, which the City of Hazleton may become obligated to pay as a result of any adverse judgment for declaratory relief or injunctive relief. ...
It is our understanding that the City of Hazleton has agreed to pay Kris Kobach, Esquire, for his services.
Scottsdale Insurance Company respectfully declines to contribute to paying for the cost of the services of Kris Kobach, Esquire. The cost of his services do not meet the definition of "loss adjustment expenses" of the Public Officials Liability Coverage Part.
In addition, the payment of the City of Hazleton for the cost of the services of Kris Kobach, Esquire, is without the consent of Scottsdale Insurance Company. Thus, the payment by the City of Hazleton to Kris Kobach, Esquire, will be at the cost of the City of Hazleton and for its own account. ...
Scottsdale Insurance Company is reserving the right to assert all defenses to coverage under the policy. In investigating the claim, defending any suit, or attempting any compromise settlement, Scottsdale Insurance Company is not waiving any rights nor admitting any obligation under the policy.