Geovera Specialty Ins. Co. v. Poulton, C.A. No. 16-432 WES

GEOVERA SPECIALTY INSURANCE COMPANY f/k/a USF&GSPECIALTY INSURANCE COMPANY, Plaintiff, v. KURT POULTON, Defendant.

C.A. No. 16-432 WES

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND

September 26, 2017

MEMORANDUM AND ORDER

WILLIAM E. SMITH, Chief Judge.

I. Background

Plaintiff GeoVera Specialty Insurance Company ("GeoVera") issued a homeowner's insurance policy to Defendant Kurt Poulton ("Poulton") in 2006 for his residence located in Tiverton, Rhode Island. The policy was effective from October 2006 through October 2007, and was renewed for one year thereafter, expiring in October 2008. The policy included a $500,000 limit for personal liability. In June 2016, Poulton asked GeoVera to defend and indemnify him in a civil action pending in Newport County Superior Court involving property he owned in Portsmouth, Rhode Island. The background of that lawsuit is as follows: In 2005, Sandy Point Farms, Inc. ("the Farm") initiated litigation against Sandy Point Village, LLC (controlled by co-members Poulton and Robert J. Kielbasa) about its alleged misuse of its real property in Portsmouth that abuts the Farm's property, and the resulting damage to the Farm's property ("state court action"). The Farm alleged that Sandy Point Village, LLC used impermissible drainage systems to drain effluent and water from the apartment complex located on the land and that this drainage caused erosion and a permanent change to the water table on the Farm's property, which in turn led to the delay of the development of the Farm's property. In 2010, the Farm amended its complaint to add Poulton and Kielbasa as individually named defendants, allegations about damage caused by a second lot of abutting land owned by Poulton and Kielbasa, and a count for negligence.

GeoVera replied to Poulton's request for defense and indemnification with a letter stating that, in order to finalize its investigation into Poulton's claim, it needed additional information and documents. GeoVera was clear that it was neither accepting nor rejecting Poulton's tender of the state court action for defense and indemnification. Poulton quickly responded to GeoVera's letter with another letter, claiming that GeoVera had a legal obligation to immediately accept his request to defend and indemnify and giving GeoVera an ultimatum: either agree to defend him or he would file a third-party complaint.GeoVera's response in early August asserted that, while its investigation thus far had not indicated that it had a duty to defend and indemnify Poulton, GeoVera was willing to provide a defense under a reservation of rights pending the completion of its investigation and/or a judicial determination of coverage. GeoVera also filed its complaint in this case, seeking a series of declaratory judgments that GeoVera's policy did not cover Poulton for his alleged wrongdoing to the Farm's property and GeoVera did not have a duty to defend or indemnify Poulton in the state court action.

Poulton filed a counterclaim, alleging that GeoVera's offer to defend him under a reservation of rights was made in bad faith in violation of Rhode Island General Laws § 9-1-33. Poulton seeks a declaratory judgment that GeoVera owes him a duty of defense and indemnification against the Farm's claims and that GeoVera is not entitled to recover any expenses it incurs under a reservation of rights.

There are four motions currently pending before the Court: (1) GeoVera's combined Motion for Judgment on the Pleadings declaring that Poulton is not entitled to insurance coverage and Motion To Dismiss Poulton's counterclaim (ECF No. 8); (2) Poulton's Motion for Judgment on the Pleadings that Poulton is entitled to a defense from GeoVera in the state court action(ECF No. 13); (3) Poulton's Motion To Dismiss or, in the alternative, to stay this case pending resolution of the state court action (ECF No. 14); and (4) Poulton's Motion To Certify a Question of Law to the Rhode Island Supreme Court (ECF No. 15).

II. Legal Standard

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Coll. Hill Properties, LLC v. City of Worcester, 821 F.3d 193, 195-96 (1st Cir. 2016) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. The Court may supplement the facts and inferences drawn from the complaint with information "gleaned from documents incorporated by reference into the complaint, matters of public record, and facts susceptible to judicial notice." Guadalupe-Baez v. Pesquera, 819 F.3d 509, 514 (1st Cir. 2016) (quoting Haley v. City of Boston, 657 F.3d 39, 46 (1st Cir. 2011)). In this case, GeoVera's complaint includes the complaints from the state court action, the insurance policy, and a series of letters itexchanged with Poulton, all of which the Court has considered in resolving the pending motions.

The legal lens through which the Court considers a motion for judgment on the pleadings is the same as that for a motion to dismiss for failure to state a claim. See Perez-Acevedo v. Rivero-Cubano, 520 F.3d 26, 29 (1st Cir. 2008) (citing Curran v. Cousins, 509 F.3d 36, 43-44 (1st Cir. 2007)). "Because [a Rule 12(c)] motion calls for an assessment of the merits of the case at an embryonic stage, the court must view the facts contained in the pleadings in the light most favorable to the nonmovant and draw all reasonable inferences therefrom . . . ." Id. (quoting R.G. Fin. Corp. v. Vergara-Nunez, 446 F.3d 178, 182 (1st Cir. 2006)).

III. Discussion

A. Whether GeoVera has a Duty To Defend Poulton in the State Court Action

GeoVera moves for judgment on the pleadings on three of its ten requests for declaratory judgment that it does not have a duty to defend or indemnify Poulton for any claim asserted by the Farm because: (1) the Farm's allegations in its Verified Amended Complaint ("Complaint") about the damage, the discovery of the damage, the communication of the damage to Poulton, and the initiation of litigation for the alleged damages caused by Poulton's use of his Portsmouth property, all predate the startof GeoVera's policy coverage, meaning that the Farm has not alleged "property damage" caused by an "occurrence" as defined in GeoVera's insurance policies (Count I); (2) the Farm's claims are precluded from coverage by the policy's "business exclusion" (Count V); and (3) the Farm's claims are precluded from coverage by the policy's "pollution exclusion" (Count VI). Poulton is moving for judgment on the pleadings that it is entitled to a defense from GeoVera in the state court action.

Insurance companies have two broad obligations to their insureds: the duty to defend and the duty to indemnify. Travelers Cas. & Sur. Co. v. Providence Washington Ins. Co., 685 F.3d 22, 25 (1st Cir. 2012). As the First Circuit has explained:

Whether an insurer's duty to defend arises from the inception of a lawsuit against its policyholder hinges 'on whether the complaint in the underlying tort action alleges facts and circumstances bringing the case within the coverage afforded by the policy. That question is resolved by comparing the complaint in that action with the policy issued by the insurer; if the complaint discloses a statement of facts bringing the case potentially within the risk coverage of the policy the insurer will be duty-bound to defend irrespective of whether the plaintiffs in the tort action can or will ultimately prevail.'

Id. (quoting Flori v. Allstate Ins. Co., 388 A.2d 25, 26 (R.I. 1978)); see also Emhart Indus., Inc. v. Century Indem. Co., 559 F.3d 57, 65 (1st Cir. 2009), as amended on denial of reh'g and reh'g en banc (Apr. 17, 2009). Pursuant to this "pleadingstest," the Court must focus exclusively on the factual allegations in the pleadings. Emhart Indus., Inc., 559 F.3d at 65 (citations omitted). "In determining whether the allegations in a complaint are sufficient to create a duty to defend, [the Court] appl[ies] general rules of contract construction and give[s] words their 'plain, ordinary meaning.'" Narragansett Jewelry Co. v. St. Paul Fire and Marine Ins. Co., 555 F.3d 38, 41 (1st Cir. 2009) (quoting Allstate Ins. Co. v. Russo, 641 A.2d 1304, 1306-07 (R.I. 1994)). "Any doubts about the sufficiency of the allegations are resolved in favor of the insured." Id. "Rhode Island's pleadings test triggers the duty to defend only when the pleading allegations show the potential that property damage occurred during the policy period." Travelers Cas. & Sur. Co., 685 F.3d at 32. Once the duty to defend is triggered, the duty continues "until the coverage question is resolved either by the establishment of facts showing no potential for coverage or by the conclusion of the underlying lawsuit." Id. at 25 (citations omitted).

1. "Occurrence" of "Property Damage"

The personal liability section of the policy issued by GeoVera states, in relevant part, that:

If a claim is made or a suit is brought against an 'insured' for damages because of . . . 'property damage' caused by an 'occurrence' to which this coverage applies, we will:

. . .

2. Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when our limit of liability for the 'occurrence' has been exhausted by payment of a judgment or settlement.¹

Property damage is defined in the policy as "physical injury to, destruction of, or loss of use of tangible property."² An occurrence is defined in the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in . . . property...