Exceptionally Navigating Abstention: Northern District of Illinois Applies the Colorado River Doctrine to Stay Arbitration

An insurer and a policyholder entered into an agreement, or didn’t they? Either way, the Northern District of Illinois doesn’t have to decide because “exceptional circumstances” triggered the Colorado River abstention doctrine, allowing the court to stay the case asking it to determine whether the agreement existed.

A policyholder and one of its insurers began having disputes about who had to provide coverage for certain claims. As a result of those disputes, the policyholder and the insurer allegedly entered into an agreement in 2007, where each party took some responsibility for the claims.

In 2009, the policyholder stopped notifying the first insurer of disputed claims, choosing instead to “target tender” those claims to a second insurer. This way, the policyholder reasoned, it could pay nothing for the claims despite the agreement with the first insurer. Great in theory, but then the multi-state mess hit: while it understood the policyholder’s excitement over targeted tenders, the second insurer didn’t quite feel the same way.

In August 2014, it sued the first insurer, the policyholder and other insurers in Wisconsin, alleging that it had paid more than its fair share of defense and indemnity. In response, the first insurer sought to limit its liability based on its agreement with the policyholder. But the policyholder denied having entered the agreement at all! So what was the first insurer to do? File a federal suit in Illinois to compel arbitration under its agreement with the policyholder. In response to the Illinois suit, policyholder, among other things, asked that the Illinois case be stayed pending the resolution of the Wisconsin case.

Pursuant to Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), “a federal court may stay or dismiss a suit . . . when a concurrent state court case is underway, but only under exceptional circumstances and if it would promote wise judicial administration.” Since substantially the same parties were contemporaneously litigating substantially same issues in both Wisconsin and Illinois (including the existence of the agreement), the policyholder argued the Illinois case should be stayed. The Northern District of Illinois agreed.

The court found the arguments in favor of the stay were even more “exceptional” (practical) than just the two cases having identical issues, including: the Wisconsin case was filed first and that court had valid jurisdiction; Wisconsin law governed the dispute between the parties; and the Wisconsin lawsuit was closer to completion than the federal lawsuit in Illinois.

Allstate Ins. Co. v. A.O. Smith Corp., No. 15 C 6574, 2015 U.S. Dist. LEXIS 143995 (N.D. Ill. Oc.t 23, 2015)

 

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