A California federal court recently refused to stay a coverage action brought by an additional insured against its insurer for coverage for underlying lawsuits arising out of a large forest fire. Sierra Pacific Industries v. American States Insurance Company, 2012 U.S. Dist. LEXIS 87012 (E.D. Cal. June 21, 2012). 

In September 2007, a large forest fire, dubbed the “Moonlight Fire,” broke out in Plumas County, Calif., allegedly caused by Sierra Pacific Industries and its subcontractor’s logging operations.  Various parties brought seven lawsuits against Sierra, with aggregate claims of $1 billion.  Subsequently, Sierra tendered its defense of the lawsuits to American States Insurance Company, per its subcontractor’s commercial general liability policy, which named Sierra as an additional insured. 

When American States failed to respond to the tender of defense, Sierra hired its own counsel and sued the insurer in the U.S. District Court for the Eastern District of California, seeking declaratory relief and alleging breach of contract and bad faith.  Subsequently, Sierra moved to stay its declaratory judgment action for six months. 

Relying on Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993), Sierra argued that the issues in the coverage action overlapped with the issues in the underlying action, and that it was “compelled to fight a two front war on the eve of trial in the underlying action which jeopardizes the defense of the underlying action.”  Sierra further argued that the interests of justice favored a stay. 

The court disagreed, finding that none of the Montrose factors favored a stay of the coverage action.  In rejecting Sierra’s motion to stay, the court held that Sierra failed to meet its burden of showing the necessity of a stay.  In this regard, the court noted that Sierra did not show how alternatives to a stay were insufficient to protect it from the potential prejudice in simultaneously preparing for trial in the underlying action. 

The court reasoned that staying the coverage would impose an undue hardship on the insurer.  Because American States had not reserved its rights in connection with defending Sierra, a stay would “place on hold” its coverage defenses asserted in the coverage action.  The court further noted that American States’ potential prejudice was great, given the massive defense costs involved in defending the underlying suits.