i2i Optique LLC v. Valley Forge Ins. Co.

515 F.Supp.3d 358

I2I OPTIQUE LLC

v.VALLEY FORGE INSURANCE COMPANY, a/b/a CNA

CIVIL ACTION NO. 20-3360

United States District Court, E.D. Pennsylvania.

Filed January 27, 2021

Daniel C. Levin, Arnold Levin, Fred S. Longer, Laurence S. Berman, Levin Sedran & Berman, Philadelphia, PA, D. Aaron Rihn, Peirce Law Offices, Pittsburgh, PA, for i2i Optique LLC.

Robert M. Runyon, III, Nelson Levine De Luca & Horst, Blue Bell, PA, for Valley Forge Insurance Company.

MEMORANDUM

McHugh, United States District Judge

This is another in a series of cases pertaining to what, if any, insurance coverage exists to protect businesses from income losses and expenses sustained during state-ordered shutdowns resulting from the COVID-19 pandemic. Plaintiff here, an Arizona business, seeks a declaration that coverage exists under its policy with a Pennsylvania insurer. No other claim is before the court. The parties agree that Arizona law controls, but no Arizona court has ever construed the controlling language here in any relevant context, let alone in the context of the current pandemic. Rather than decide this case based on general insurance principles from other jurisdictions, the most prudent course is to exercise my discretion under the Declaratory Judgment Act to decline jurisdiction and dismiss the case without prejudice.

I. Factual Background

Plaintiff, i2i Optique LLC, is an Arizona company that operates, manages, and owns an optical goods store in Scottsdale, Arizona. Compl. ¶ 9, ECF 1. Defendant, Valley Forge Insurance Company d/b/a CNA, a Pennsylvania corporation whose principal place of business is Pennsylvania, issued an insurance policy ("the Policy") to Plaintiff for the period of August 31, 2019 to August 31, 2020. Compl. ¶¶ 10-11. Plaintiff's optical goods store is covered under the Policy. Compl. ¶ 13.

In mid-March 2020, Plaintiff's store shut down to customers as a result of a string of executive orders issued by Arizona Governor Doug Ducey, which declared a Public Health Emergency in response to the COVID-19 pandemic, limited the operation of certain businesses, and mandated that non-essential businesses cease in-person operations. Compl. ¶¶ 2, 50-52, 59. As a result of these Orders, Plaintiff has incurred substantial loss of business income and additional expenses. Compl. ¶ 72. Plaintiff alleges such losses are covered under its "all-risk" Policy. Compl. ¶¶ 17, 72.

The Policy covers "loss of Business Income" when sustained under the following circumstances: (1) "due to the necessary ‘suspension’ of ‘operations’ during the ‘period of restoration’ " ("Business Income Coverage" provision); and (2) due to action of a civil authority ("Civil Authority" provision).¹ Def's Mot. Dismiss, Ex. A, at 36, 62, ECF 9. The applicability of both provisions depends upon a single triggering event: the losses and/or extra expenses must be caused by "direct physical loss of or damage to property." Id.

Based on its reading of these provisions, Plaintiff contacted its insurance agent to make a claim under the Policy but was informed that the Defendant would reject the claim. Compl. ¶ 39. Thereafter, Plaintiff brought this action, seeking a declaration "that the Orders trigger coverage under this Policy" and a declaration "that the Policy provides business income coverage in the event that Coronavirus has directly or indirectly caused a loss or damage at the Plaintiff's Insured Property or the immediate area of the Plaintiff's Insured Property." Compl. ¶ 76. In their briefs and at oral argument, both parties agreed that Arizona law governs this matter. See Def.’s Mot. to Dismiss 9-10 n.2; Pl.’s Resp. 7 n.3, ECF 11.²

II. Governing Legal Standard

Plaintiff's sole claim arises under the Declaratory Judgment Act. See 28 U.S.C. § 2201(a) ; Compl. ¶ 76. The Declaratory Judgment Act provides that district courts "may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." Id. (emphasis added). Given the statute's explicit "textual commitment to discretion," "[t]he Supreme Court has long held that this confers discretionary ... jurisdiction upon federal courts." Reifer v. Westport Ins. Corp. , 751 F.3d 129, 134, 139 (3d Cir. 2014) (citing Wilton v. Seven Falls Co. , 515 U.S. 277, 286-87, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) and Brillhart v. Excess Ins. Co. of Am. , 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942) ). District courts therefore "possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act, even when the suit otherwise satisfies subject matter jurisdictional prerequisites." Wilton, 515 U.S. at 282, 115 S.Ct. 2137. As part of that discretion, "Congress has afforded the federal courts a freedom not present in ordinary diversity suits to consider the state interest in having the state courts determine questions of state law." State Auto Ins. Companies v. Summy , 234 F.3d 131, 135 (3d Cir. 2000), as amended (Jan. 30, 2001) (citing Mitcheson v. Harris , 955 F.2d 235, 238 (4th Cir. 1992) ).

Courts may decline jurisdiction sua sponte under the Declaratory Judgment Act. See Reifer, 751 F.3d at 148 (affirming district court's sua sponte determination to decline jurisdiction for claim arising under the Declaratory Judgment Act given the nature of the state law issues raised); see also V&S Elmwood Lanes, Inc. v. Everest Nat'l Ins. Co. , No. CV 20-3444, 2021 WL 84066, at *3-4 (E.D. Pa. Jan. 11, 2021) (DuBois, J.) (declining jurisdiction under the Declaratory Judgment Act for COVID-related insurance claims sua sponte due to the public interest in resolution of novel state law issues and the existence of pending litigation in state courts).

III. Discussion

A threshold question is whether there are "parallel state proceedings" between the parties in this matter, and here there are not.³ See Kelly v. Maxum Specialty Ins. Grp. , 868 F.3d 274, 282 (3d Cir. 2017). The absence of parallel state proceedings is a significant factor weighing in favor of exercising jurisdiction. Id. When there are none, a district court must consider whether the lack of parallel state proceedings is outweighed by other non-exhaustive factors outlined in Reifer and Summy . Id. at 282-83 ; Reifer , 751 F.3d at 144, 146-47. "[S]ome factors may be weighed heavier than others based on the circumstances of each case." Mattdogg, Inc. v. Philadelphia Indem. Ins. Co. , No. CV206889FLWLHG, 2020 WL 6111038, at *4 (D.N.J. Oct. 16, 2020) (citing Reifer , 751 F.3d at 146 ). For example, the "nature of the state law issue raised" may itself be sufficient to decline jurisdiction. Reifer , 751 F.3d at 148 ("We conclude that declining jurisdiction was proper because the lack of pending parallel state proceedings was outweighed by another relevant consideration, namely, the nature of the state law issue raised").

A. The Reifer and Summy factors

In Reifer , the Third Circuit explained that "a district court should guide its exercise of sound and reasoned discretion by giving meaningful consideration to the following factors to the extent they are relevant":

(1) the likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy;

(2) the convenience of the parties;

(3) the public interest in settlement of the uncertainty of obligation;

(4) the availability and relative convenience of other remedies;

(5) a general policy of restraint when the same issues are pending in a state court;

(6) avoidance of duplicative litigation;

(7) prevention of the use of the declaratory action as a method of procedural fencing or as a means to provide another forum in a race for res judicata ; and

(8) (in the insurance context), an inherent conflict of interest between an insurer's duty to defend in a state court and its attempt to characterize that suit in federal court as falling within the scope of a policy exclusion.

751 F.3d at 146. In Reifer , The Third Circuit reiterated the caution it had previously expressed in Summy :

[W]hen applicable state law is ‘uncertain or undetermined, district courts should be particularly reluctant’ to exercise DJA jurisdiction ... Rather, the proper relationship between federal and state courts requires district courts to ‘step back’ and permit state courts to resolve unsettled state law matters.

Id. at 141 (citing Summy , 234 F.3d at 135-36 ). Moreover, "the state's interest in resolving its own law must not be given short shrift simply because [parties] perceive some advantage in the federal forum." Id. (citing Summy , 234 F.3d at 136 ).

B. Unsettled Arizona law relating to insurance coverage for COVID-19-related losses weighs against exercising jurisdiction.

Plaintiff contends that " ‘incorporeal’ damage ... trigger[s] property damage and civil authority coverage" under the provisions of the Policy. Pl.’s Resp. 11. It further argues that "physical loss does not require structural damage," but rather, the "inability to use the business is sufficient." Pl.’s Resp. 12. Meanwhile, in support of its motion to dismiss, Defendant argues that "courts around the country have roundly rejected such ‘loss of use’ claims due to government health orders in response to the pandemic." Def.’s Mot. Dismiss 2. Yet there is no controlling state court precedent in Arizona. That is true both with respect to the proper construction of the contractual terms generally, and their applicability to cover losses resulting from the COVID-19 related shutdowns. In ruling, I could only predict what Arizona courts might do, bringing this case squarely within the heart of Reifer : "The fact that district courts are limited to predicting—rather than establishing—state law requires ‘serious consideration’ and is ‘especially important in insurance coverage cases.’ " 751 F.3d at 148 (citing Summy, at 135 ).

Given this lack of precedential authority, the parties have submitted extensive case law from other...