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Lafarge Canada Inc. v. American Home Assurance Co.

United States District Court, S.D. New York

March 31, 2018

LAFARGE CANADA INC. AND LAFARGE NORTH AMERICA, INC., Plaintiffs,
v.
AMERICAN HOME ASSURANCE COMPANY, AIG INSURANCE COMPANY OF CANADA, and LEXINGTON INSURANCE COMPANY, Defendants.

          OPINION & ORDER

          RONNIE ABRAMS, United States District Judge

         Plaintiffs Lafarge Canada Inc. ("LCI") and Lafarge North America, Inc. ("LNA") (collectively, "Lafarge") bring this declaratory-judgment action against their insurers (collectively, the "Insurers"). Lafarge is Canada's largest provider of construction materials, and it filed this action seeking declaratory relief with respect to the Insurers' duty to defend and indemnify it against potential liability from a mass tort litigation currently pending in Quebec, Canada. Lafarge and the Insurers have now both moved for summary judgment, each asking for declarations regarding the Insurers' duties towards Lafarge. After reviewing the parties' submissions and the other filings in the case, the Court finds certain disputes to be unripe, declines to exercise its discretionary Declaratory Judgment Act ("DJA") jurisdiction as to the others at this time, and stays this case pending further developments in the underlying litigation.

         BACKGROUND[1]

         The facts underlying this action are complex and ongoing, and they began, and will eventually end, in the Canadian province of Quebec. A large group of Canadian plaintiffs brought suit against parties they allege were responsible for significant property damage to their homes. This damage eventually prompted approximately 240 lawsuits that became the ongoing Canadian mass tort litigation ("the Canadian litigation" or "the underlying litigation"). Specifically, the Canadian plaintiffs allege that concentrations of a mineral called pyrrhotite caused defects in the concrete used to build their homes, which in turn led to cracking and other serious damage. The parties in the underlying litigation later came to the consensus that oxidation of the pyrrhotite spurred the concrete's deterioration.

         The defendants in the Canadian litigation included entities such as B&B Quarry (the alleged source of the pyrrhotite), SNC-Lavalin (a construction company), and other participants in the construction of the damaged homes. In 2012, a Quebec court consolidated roughly 70 of the lawsuits into a so-called "First Wave." None of those suits named Lafarge-a company that primarily manufactures and distributes cement and other construction materials-as a defendant, and an attempt to insert Lafarge's Canadian business, LCI, into the First Wave was unsuccessful. In other words, Lafarge is not a party to the First Wave of the Canadian litigation. In 2014, the Quebec court issued an approximately $130 million judgment against the First-Wave defendants, holding them jointly and severally liable. The Quebec court found SNC-Lavalin liable for about 70% of the damages. All the First-Wave defendants have appealed the judgment.

         In 2012, well before the Quebec trial court rendered that First-Wave judgment, SNC-Lavalin and one of its geologists separately sued LCI for contribution for some of its First-Wave liability. Shortly after the First-Wave judgment, SNC-Lavalin expanded its claims in that suit, seeking to hold LCI liable for contribution for the First-Wave claims not raised in its earlier contribution action. All the contribution claims are still pending in the Quebec court, and the First-Wave judgment remains on appeal.

         Unfinished as those proceedings may be, they constitute only (as their name suggests) the first wave of lawsuits with claims relating to defective concrete in the Canadian litigation. A Quebec court is currently in the preliminary stages of consolidating the remaining lawsuits relating to the damages allegedly caused by pyrrhotite, as well as other related lawsuits that continue to be filed, into a "Second Wave." A number of the Second-Wave suits have named Lafarge as a defendant or third-party defendant. The plaintiffs in those suits contend that LCI wrongly informed one of the concrete-supplier defendants that the material containing pyrrhotite was suitable for use in concrete, that LCI failed to warn about the dangers posed by the materials, and that LCI failed to prevent the use of the materials. LCI denies all liability relating to any claims in the Canadian litigation and has not been found liable or entered into any settlement. The Quebec court has yet to set a trial date for the Second Wave.

         Lafarge's North American entity, LNA, is headquartered in Virginia and is the parent company of LCI, which is headquartered in Quebec. LCI took out a number of different types of insurance policies from 2001 to 2012 from the Insurers, which include Defendants Lexington Insurance Company ("Lexington"), American Home Assurance Company (American Home"), and AIG Insurance Company of Canada ("AIG Canada"). From April 1, 2001, to July 1, 2012, twelve consecutive "primary policies" issued by American Home and AIG Canada to LCI covered property-damage liability, applied to the first dollar of loss, and provided that the insurer would defend any suit against the insured that alleged covered damage. Notably, however, these policies were not true insurance policies, because they provided for no real transfer of risk from insured to insurer. Lafarge affiliates will reimburse American Home or AIG Canada for whatever costs those insurers are prompted to pay. The parties represent that this practice, known as "fronting, " is common in commercial insurance and was used here to satisfy Canadian statutory obligations.

         LCI also had genuine insurance coverage. From 2004 to 2012, LCI was provided umbrella general liability coverage by Lexington, which issued nine policies to LNA (in Virginia), and by AIG Canada, which issued two policies to LCI (in Quebec) (collectively the "umbrella policies"). Because LCI is a wholly-owned subsidiary of LNA, it is a named insured party in all 11 of the umbrella policies. The two policies issued directly to LCI were for the periods from April 1, 2004, to April 1, 2005, and from July 1, 2011, to July 1, 2012. For those periods, LCI was insured both under the policies issued to it directly and under the policies issued to LNA. The umbrella policies cover property damage, but only kick in when LCI pays more than C$2 million per occurrence for the type of loss-not counting defense costs-covered by the policies.[2] That sum, C$2 million, is what is known as the "retained limit" of the policies. This retained limit functions, as Lafarge puts it, essentially as an insurance deductible.

         American Home and AIG Canada are currently providing a defense to LCI in the Canadian litigation under the primary policies, even while they have been reserving their rights to argue that they are not obligated to do so. When Lafarge asked the Insurers to confirm that the umbrella policies covered LCI's potential liability in the Canadian litigation, the Insurers declined to provide such confirmation.

         On November 16, 2015, Lafarge filed this action seeking declaratory relief. Specifically, Lafarge's complaint seeks declarations (1) that the umbrella policies cover LCI's potential liabilities relating to the Canadian litigation; and (2) that, if LCI is liable at all in the Canadian litigation, its liability constitutes a single occurrence. The Insurers answered, alleging a variety of defenses. See Dkt. 23.

         After discovery, both Lafarge and the Insurers moved for summary judgment as to declaratory relief and, at the Court's request, filed supplemental briefing in support of their motions. Lafarge argues that Quebec law applies to interpreting all the insurance policies at issue, and that the Insurers owe it a duty to defend and to indemnify it in the Canadian litigation. Relating specifically to indemnification, Lafarge further contends that the claims against it in the Canadian litigation constitute only one occurrence, that it is entitled to coverage for each claim under each triggered policy, and that it is entitled to allocate defense costs between the primary and umbrella policies. The Insurers oppose Lafarge's requested declarations and seek a number of their own. They argue that Virginia law applies to the umbrella policies issued there and that they have no duty to defend or indemnify Lafarge because a "professional services exclusion" in the policies bars all coverage. Alternatively, they argue that the exclusion for "expected or intended damage" bars most coverage, that only one umbrella policy can apply to each underlying claim, and that the umbrella policies do not cover any defense costs that Lafarge incurs before Lafarge's liability reaches the retained limit and thereby triggers the umbrella policies. The Insurers also argue that the bulk of the relief requested by Lafarge would constitute an advisory opinion ruling on matters not yet ripe for declaratory judgment because of the ongoing and unsettled state of the Canadian litigation.

         At the heart of this dispute is the interpretation and interaction of the primary and umbrella policies: Lafarge seeks confirmation that it will be protected by more than just the primary policies' fronting arrangement-it wants the benefit of the genuine economic-risk transfer of the umbrella policies. The Insurers want just the opposite.[3] Given the state of the underlying Canadian litigation, this Court must confront whether this case presents any ripe disputes and, if so, whether the Court should exercise its discretionary DJA jurisdiction over those disputes. Only then can the Court turn to the substance underlying the parties' summary-judgment motions.

         LEGAL STANDARDS

         I. Summary Judgment

         To prevail on a motion for summary judgment, the movant must show "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). When deciding a motion for summary judgment, "a court must resolve all ambiguities and draw all reasonable inferences against the moving party." Abrams v. RSUI Indemnity Co., 272 F.Supp.3d 636, 639 (S.D.N.Y. 2017). The relevant substantive law will identify which facts are material. Id. "When both sides have moved for summary judgment, each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration." Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 468 (2d Cir. 2010) (internal quotation and citation omitted).

         II. Declaratory-Judgment Actions

         A. Ripeness

         Jurisdiction for declaratory-judgment actions "exists only if there is an 'actual controversy.'" E.R. Squibb & Sons, Inc. v. Lloyd's & Companies, 241 F.3d 154, 177 (2d Cir. 2001) (quoting 28 U.S.C. § 2201(a)). This requirement is coextensive with the Constitution's Article III case or controversy standard. See id.; U.S. Dep't of Treasury v. Official Comm. of Unsecured Creditors of Motors Liquidation Co., 475 B.R. 347, 357 (S.D.N.Y.2012). "A party seeking a declaratory judgment bears the burden of proving that the district court has jurisdiction." E.R. Squibb & Sons, Inc., 241 F.3d at 177. "It is well-settled that the party bearing this burden must prove that 'there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."' Fed. Ins. Co. v. Safe Net, Inc., 758 F.Supp.2d 251, 261 (S.D.N.Y. 2010) (quoting SR Int'l Bus. Ins. Co., Ltd. v. Allianz Ins. Co., 343 Fed.Appx. 629, 631-32 (2d Cir. 2009)).

         "In the context of an insurance dispute, a declaratory judgment action may be ripe even if the insured has not yet incurred any liability, " Id. at 262. "That the liability may be contingent does not necessarily defeat jurisdiction of a declaratory judgment action. .. . Indeed, litigation over insurance coverage has become the paradigm for asserting jurisdiction despite future contingencies that will determine whether a controversy ever actually becomes real." Assoc. Indem. Corp. v. Fair child Indus., Inc., 961 F.2d 32, 35 (2d Cir, 1992) (internal quotation and citations omitted). "[W]here liability is contingent, courts in this circuit traditionally examine the 'practical likelihood' that there will be some type of settlement or judgment against the insurer." Fed. Ins. Co., 758 F.Supp.2d at 262.

         B. Discretion

         Finding that a ripe, justiciable action exists does not end the inquiry. "Since its inception, the Declaratory Judgment Act has been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., 515 U.S, 277, 286 (1995). "On its face, the statute provides that a court 'may declare the rights and other legal relations of any interested party seeking such declaration."' Id. (quoting 28 U.S.C. § 2201(a)). "In the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration." Id. at 288. Thus, "[e]ven where the case or controversy requirement is met-that is, even when subject matter jurisdiction exists-a court may nevertheless decline to hear a declaratory judgment action in an exercise of discretion." Motors Liquidation Co., 475 B.R. at 358. District courts specifically are ...


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