In a recently filed brief in the Ninth Circuit, Cottage Health argued in support of the federal district court’s stay of Columbia Casualty’s lawsuit against Cottage Health in favor of Cottage Health’s parallel state court lawsuit against Columbia Casualty.

Cottage Health operates hospitals in California. In 2013, it suffered a data breach resulting in the disclosure of patients’ private medical information. Columbia Casualty had issued a “NetProtect360” policy to Cottage Health that provided coverage for privacy injury claims and privacy regulation proceedings. After the patients filed a class action against Cottage Health, Columbia paid $4.125 million to settle the lawsuit, $170,000 in defense costs, and $900,000 in expenses for responding to the data breach, including costs for notifying the patients and retaining forensic experts to identify the cause of the breach. Columbia paid all of those amounts subject to a reservation of rights to recoup its payments from Cottage Health. The reservation was based on Columbia’s position that Cottage Health had misrepresented compliance with risk control procedures explained in the insurance application.

After the parties completed a mandatory alternative dispute resolution process, they filed competing lawsuits regarding coverage. Columbia filed in federal court and Cottage Health filed in state court. The federal court granted Cottage Health’s motion to stay the federal case given the ongoing state court case. It found that several factors applicable under the Colorado River doctrine weighed in favor of a stay, including avoiding piecemeal litigation, the applicability of California law, the adequacy of the state court proceeding, and the comprehensive nature of the state court suit. Columbia appealed and the parties are now briefing the proprietary of the federal court’s stay. The state court case is pending and a motion for summary judgment was recently filed.

The case is a good reminder of the many ways that coverage disputes can devolve into complex litigation – even after an insurer agrees to cover defense costs and pay a settlement, albeit under a reservation of rights. The expense of such disputes, on top of the experienced loss, can often be debilitating to an “insured” business. To avoid these problems (if possible), policyholders must pay careful attention to application-stage representations and the terms of the policies they purchase, as well as how the claim is presented to the insurer.