Free Memorandum in Opposition - District Court of California - California

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DAVID B. GOODWIN (State Bar No. 104469) [email protected] MARGARET D. WILKINSON (State Bar No. 244965) [email protected] COVINGTON & BURLING LLP One Front Street San Francisco, California 94111 Telephone: (415) 591-6000 Facsimile: (415) 591-6091 Attorneys for Plaintiff THE TALL TREE INSURANCE COMPANY

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA Case No. CV 08-01060 (MMC) THE TALL TREE INSURANCE COMPANY, Plaintiff, v. MUNICH REINSURANCE AMERICA, INC., formerly known as AMERICAN RE-INSURANCE COMPANY, Defendant PLAINTIFF'S OPPOSITION TO MOTION OF MUNICH REINSURANCE FOR JUDGMENT ON THE PLEADINGS Date: August 1, 2008 Time: 9:00 a.m. Courtroom 19

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TABLE OF CONTENTS

I. II.

INTRODUCTION................................................................................................... 1 FACTUAL BACKGROUND ................................................................................. 2 A. B. C. D. HP's Insurance Program .............................................................................. 2 The Reinsurance Agreements: Munich Re's Reinsurance of Tall Tree's Liability to HP................................................................................... 3 The "Starter Cartridge Suits" Against HP.................................................... 4 Tall Tree's Obligation to Reimburse HP's Defense Costs and Munich Re's Denial of Its Obligation to Reimburse Tall Tree ................... 4

III.

ARGUMENT .......................................................................................................... 5 A. B. Legal Standards Governing Motion for Judgment on the Pleadings Based on Lack of Subject Matter Jurisdiction............................. 5 An "Actual Controversy" Sufficient to Invest This Court with Jurisdiction to Consider Tall Tree's Claims for Relief Exists Here ............ 5 1. The Legal Standards Governing the Existence of an "Actual Controversy" Under the Declaratory Judgment Act ..................................................................................................... 6 Tall Tree Has Pleaded an Actual Controversy Sufficient to Invest this Court with Subject Matter Jurisdiction Over Tall Tree's Claims for Declaratory Relief ........................................ 7 a) The Dispute Between Tall Tree And Munich Re Concerning Munich Re's Coverage Obligations to Tall Tree Is an "Actual Controversy" .................................... 8 Tall Tree's First Requested Declaration Would Resolve a Dispute Between Tall Tree and Munich Re, Making It an Appropriate Request for Relief in This Action................................................................................... 11

2.

b)

3. IV.

At a Minimum, the Court Should Grant Leave to Amend.............. 13

CONCLUSION ..................................................................................................... 13

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PLAINTIFF'S OPPOSITION TO MOTION OF MUNICH REINSURANCE FOR JUDGMENT ON THE PLEADINGS Case No. CV 08-01060 (MMC)

TABLE OF AUTHORITIES Page(s) CASES United Food & Commercial Workers Local Union Nos. 137, 324,770, 899, 905, 1167, 1222, 1428, & 1442 v. Food Employees Council, Inc., 827 F.2d 519 (9th Cir. 1987) ......................................................................................... 7 Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937)............................................................................................ 1, 6, 7,8 Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir. 1937) ................................ 7 Allendale Mut. Ins. Co. v. Kaiser Eng'rs, Div. of Henry J. Kaiser Co., 804 F.2d 592 (10th Cir. 1986) ....................................................................................... 9 Am. Bankers Ins. Co. v. Northwestern Nat'l Ins. Co., 198 F.3d 1332 (11th Cir. 1999) ..................................................................................... 1 Am. States Ins. Co. v. Kearns, 15 F.3d 142 (9th Cir. 1994) ........................................................................................... 1 Atlanta Gas Light Co. v. Aetna Cas. & Sur. Co., 68 F.3d 409 (11th Cir. 1995) ....................................................................................... 11 Atlanta Int'l Ins. Co. v. Atchison, T. and S.F. Ry., 938 F.2d 681 (7th Cir. 1991) ....................................................................................... 11 Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677 (7th Cir. 1992) ................................................................................... 9, 10 Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 590 F. Supp. 187 (S.D.N.Y. 1984) .............................................................................. 10 British Ins. Co. of Cayman. v. Safety Nat'l Cas Corp., 335 F.3d 205 (3d Cir. 2003) .......................................................................................... 1 Brown v. Rumsfeld, 211 F.R.D. 601 (N.D. Cal. 2002)................................................................................. 13 Cahill v. Liberty Mutual Insurance Co., 80 F.3d 336 (9th Cir. 1996) ........................................................................................... 3
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Century Indem. Co. v. McGillacuty's Inc., 820 F.2d 269 (8th Cir. 1987) ....................................................................................... 11 Certain Underwriters at Lloyd's London v. St. Joe Minerals Corp., 90 F.3d 671 (2d Cir. 1996) .......................................................................................... 11 Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268 (2d Cir. 1992) .......................................................................................... 1 Colonial Am. Life Ins. Co. v. Comm'r, 491 U.S. 244 (1989)................................................................................................... 1, 2 Eureka Fed. Sav. & Loan Ass'n v. Am. Cas. Co., 873 F.2d 229 (9th Cir. 1989) ................................................................................... 9, 10 Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542 (9th Cir. 1990) ....................................................................................... 5 Ins. Co. of Pa. v. Associated Int'l Ins. Co., 922 F.2d 516 (9th Cir. 1991) ......................................................................................... 1 Laguna Publ'g Co. v. Employers Reins. Corp., 617 F. Supp. 271 (C.D. Cal. 1985) .............................................................................. 11 Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270 (1941)................................................................................................... 1, 6 Metro. Transp. Comm'n v. Motorola, Inc., No. C-06-2302, 2007 WL 323244 (N.D. Cal. Jan. 31, 2007) ....................................... 5 NBA v. SDC Basketball Club, Inc., 815 F.2d 562 (9th Cir. 1987) ......................................................................................... 6 Newcal Indus., Inc. v. IKON Office Solution, 513 F.3d 1038 (9th Cir. 2008) ....................................................................................... 7 O'Bannon v. Friedman's, Inc., 437 F. Supp. 2d 490 (D. Md. 2006)............................................................................... 7 Provident Life & Accident Ins. Co. v. Transamerica-Occidental Life Ins. Co., 850 F.2d 1489 (11th Cir. 1988) ................................................................................... 12 Riehl v. Travelers Ins. Co., 772 F.2d 19 (3d Cir. 1985) ............................................................................................ 8 Sec. Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974 (10th Cir. 1976) ....................................................................................... 1
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Société de Conditionnement en Aluminium v. Hunter Eng'g Co., 655 F.2d 938 (9th Cir. 1981) ......................................................................................... 6 Spivey Co. v. Travelers Ins. Cos., 407 F. Supp. 916 (E.D. Pa. 1976).................................................................................. 8 Travelers Ins. Co. v. Obusek, 72 F.3d 1148, 1155 (3d Cir. 1995) .............................................................................. 13 Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049 (2d Cir. 1993) ............................................................................................ 1 United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) ............................................................................... 13 Ventress v. Japan Airlines, 486 F.3d 1111 (9th Cir. 2007) ....................................................................................... 5 Zenith Ins. Co v. Employers Ins. of Wasau, 141 F.3d 300 (7th Cir. 1998) ......................................................................................... 1

STATUTES 28 U.S.C. § 2201(a)............................................................................................................. 6 Cal. Ins. Code § 620 ............................................................................................................ 1

OTHER AUTHORITIES Charles Alan Wright, Law of Federal Courts (4th ed. 1983) ............................................. 7 Federal Rule of Civil Procedure 15(a) .............................................................................. 13 Cal. Ins. Law Handbook (rev. ed. 2007) ............................................................................. 3

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I.

INTRODUCTION More than 70 years ago, the United States Supreme Court held that the federal

courts have jurisdiction to issue declaratory relief in a dispute between an insurance policyholder and its insurer if the policyholder has submitted an insurance claim and the insurer has denied coverage. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241 (1937). As the Ninth Circuit subsequently explained, if the insurer has denied coverage, a court can issue a declaration of the parties rights and obligations in the liability insurance context even if the policyholder is not yet liable in the underlying proceeding, and thus has not yet suffered a loss. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 144 (9th Cir. 1994); see also Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273-74 (1941). Insurance companies buy insurance too. That type of insurance ­ insurance that backs the insurer's obligations to its policyholder and thereby spreads the risks of losses ­ is called "reinsurance." See Cal. Ins. Code § 620 ("A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance."); see generally Colonial Am. Life Ins. Co. v. Comm'r, 491 U.S. 244, 247 (1989). When an insurance carrier is the policyholder in a contract of reinsurance and seeks coverage from a recalcitrant reinsurer, the same rules that apply to declaratory relief actions involving other types of insurance govern. For that reason, federal courts entertain declaratory relief actions to determine a reinsurer's rights and duties when a reinsurer denies coverage for a claim by an insurer that has purchased a policy of reinsurance. 1

See, e.g., British Ins. Co. of Cayman. v. Safety Nat'l Cas Corp., 335 F.3d 205 (3d Cir. 2003); Am. Bankers Ins. Co. v. Northwestern Nat'l Ins. Co., 198 F.3d 1332 (11th Cir. 1999); Zenith Ins. Co v. Employers Ins. of Wausau, 141 F.3d 300 (7th Cir. 1998); Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049 (2d Cir. 1993); Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268 (2d Cir. 1992); Ins. Co. of State if Pa. v. Associated Int'l Ins. Co., 922 F.2d 516 (9th Cir. 1991); Sec. Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974 (10th Cir. 1976).
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Ignoring this established law and without citing any apposite authority whatsoever, defendant Munich Reinsurance America ("Munich Re") asks the Court to enter judgment on the pleadings on the ground that its denial of coverage to its policyholder, plaintiff Tall Tree Insurance Company ("Tall Tree"), is insufficient to create an "actual controversy" under the Declaratory Judgment Act ("Act"). Munich Re so argues even though: (a) Tall Tree's insured, Hewlett-Packard ("HP"), has suffered a loss of sufficient magnitude to trigger Tall Tree's coverage; (b) Tall Tree has admitted coverage for the portion of HP's claim that exceeds the attachment point of the Tall Tree coverage; (c) Tall Tree is ready and willing to pay the claim; but (d) Munich Re has unequivocally denied coverage; and (e) Munich Re did so solely on the ground that Munich Re does not believe that Tall Tree should pay HP's claim. The Court should deny this motion. As we show, a declaration of an insurer's rights and obligations to its policyholder after the insurer has denied coverage (or of a reinsurer's rights and obligations to its reinsured after the reinsurer has denied coverage) is the very type of dispute that the Act confers jurisdiction on this Court to address. Under long-established law, Munich Re's denial of coverage to Tall Tree has created an "actual controversy" over which this Court has subject matter jurisdiction. II. FACTUAL BACKGROUND A. HP's Insurance Program During the years that are relevant to this insurance dispute (1999-2002), Tall Tree issued two excess liability insurance policies to HP: (a) Policy No. 470-ILX0002-E, with a policy period of September 30, 1999 to September 30, 2000, and (b) Policy No. 470-ILX0002-F, with a policy period of September 30, 2000 to September 30, 2002 (collectively, the "HP Policies"). Complaint ("Compl.") ¶ 12. For purposes of the "Advertising Injury" claims that underlie this case, the HP Policies provide coverage in excess of a specific retained limit. Id. ¶ 13.

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B.

The Reinsurance Agreements: Munich Re's Reinsurance of Tall Tree's Liability to HP

Tall Tree, in turn, spread its risks by purchasing "facultative reinsurance" ­ that is, reinsurance that "is negotiated . . . for a particular policy or insured," see John K. DiMugno & Paul E.B. Glad, Cal. Ins. Law Handbook 1860 (rev. ed. 2007) ­ from Munich Re. See Compl. ¶ 15. As part of the process of underwriting the reinsurance agreements with Tall Tree ("Reinsurance Agreements"), Munich Re negotiated directly with HP to set the definition of "Advertising Liability" in Tall Tree Policy No. 470-ILX0002-E. Id. ¶¶ 1824. Tall Tree agreed in that insurance policy to pay HP's "Ultimate Net Loss," which the policy defined to include defense costs, on account of "Advertising Liability." Id. ¶ 13. Munich Re also agreed that Tall Tree could broaden the definition of "Advertising Liability" in the wake of the Ninth Circuit's decision in Cahill v. Liberty Mutual Insurance Co., 80 F.3d 336 (9th Cir. 1996), which gave a restrictive interpretation to the standard definition that term. Thus, instead of using the relatively narrow "Advertising Injury" language that the Ninth Circuit had construed in Cahill, the HP Policies use a very broad definition of the term, which includes coverage for "injury arising from a third party's reliance upon the content of material disseminated by [HP] or with their permission." Compl. ¶ 14. Munich Re also agreed to reinsure the Tall Tree renewal policy, No. 470-ILX0002-F, on the same terms. See id. ¶ 24. Munich Re then issued facultative reinsurance policies to Tall Tree. In one reinsurance contract, Munich Re agreed "to indemnify [Tall Tree] against losses or damages which [Tall Tree] is legally obligated to pay . . . ." Id. ¶ 16. In the second, Munich Re promised that its "liability [to Tall Tree] . . . shall follow that of [the insurance policies that Tall Tree issued to HP], and shall be subject in all respects to all of the terms, conditions, limit(s), general and special stipulations, clauses, modifications and pre-loss waivers of [Policy No. 470-ILX0002-F]. [Munich Re] shall, in every claim

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to which this Agreement applies involving amounts that the Reinsured is legally obligated to pay . . . follow the fortunes of [Tall Tree] . . . ." Id. ¶ 17. C. The "Starter Cartridge Suits" Against HP

Beginning in 2000, HP was named as a defendant in several class action lawsuits (the "Starter Cartridge Suits") in which plaintiffs alleged that HP had engaged in unfair and deceptive advertising practices through its marketing and sale of printers that were advertised to include a printer cartridge, but in fact had a printer cartridge that contained less ink than a standard cartridge. Id. ¶ 26. The suits alleged, among other things, that third parties had detrimentally relied upon HP's advertising concerning the cartridges. Id. HP successfully resolved all of the suits through either di minimis settlements or adjudications in its favor. Id. ¶ 27. However, the cost of defending all of the class action lawsuits was quite high, and HP incurred defense costs well above the retained limit in the HP Policies. Id. D. Tall Tree's Obligation to Reimburse HP's Defense Costs and Munich Re's Denial of Its Obligation to Reimburse Tall Tree

HP tendered the Starter Cartridges Suits to Tall Tree, and Tall Tree, in turn, gave notice of the lawsuits to its reinsurer, Munich Re. Id. ¶¶ 4, 28-29. HP asked Tall Tree to indemnify HP for the portion of the defense costs that exceeded the policies' retained limit. Id. ¶ 28. Tall Tree concluded that the broad language of the HP Policies encompasses the claim and that Tall Tree therefore had a duty to reimburse HP for the latter's loss. However, before paying the claim, Tall Tree asked Munich Re to confirm that reinsurance would be available for any such payments and that Munich Re would reimburse Tall Tree for the amounts that Tall Tree pays to HP in good faith. Id. ¶ 29. But Munich Re denied that it has any obligation to Tall Tree, asserting that the HP Policies do not provide coverage for the defense costs that HP seeks and, therefore, that Munich Re has no obligation at all to reimburse Tall Tree. Id. ¶ 30. This lawsuit followed.
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III.

ARGUMENT A. Legal Standards Governing Motion for Judgment on the Pleadings Based on Lack of Subject Matter Jurisdiction

Munich Re faces a very heavy burden in this motion for judgment on the pleadings. As the Ninth Circuit has explained, judgment on the pleadings is not
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appropriate unless, "taking all the allegations in the non-moving party's pleadings as
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true, the moving party is entitled to judgment as a matter of law." Ventress v. Japan
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Airlines, 486 F.3d 1111, 1114 (9th Cir. 2007); Hal Roach Studios, Inc. v. Richard Feiner
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& Co., 896 F.2d 1542, 1550 (9th Cir. 1990) (a court must deny a motion for judgment on
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the pleadings unless "the moving party clearly establishes on the face of the pleadings
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that no material issue of fact remains to be resolved and that it is entitled to judgment as
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a matter of law"). Also, as this Court has noted, in the event a motion for judgment on
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the pleadings is granted, "a district court should afford the non-prevailing party the
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opportunity to amend its pleading, unless leave to amend would be futile." Metro.
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Transp. Comm'n v. Motorola, Inc., No. C-06-2302, 2007 WL 323244, at *11 (N.D. Cal.
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Jan. 31, 2007).
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B.

An "Actual Controversy" Sufficient to Invest This Court with Jurisdiction to Consider Tall Tree's Claims for Relief Exists Here

Munich Re makes two principal arguments, which demonstrate its misunderstanding of the scope of subject matter jurisdiction under the Declaratory Judgment Act. First, Munich Re asserts that this Court cannot issue declaratory relief concerning Munich Re's obligations under the reinsurance contracts because Tall Tree has not yet paid HP's claim or been adjudged liable to HP. Defendants' Motion for Judgment on the Pleadings ("Mot.") 9. As we show, however, a court has jurisdiction to issue declaratory relief in an insurance case before the insurance policyholder's liability is fixed. Munich Re's denial of coverage to Tall Tree creates an actual controversy which Tall Tree may seek declaratory relief to resolve. Second, Munich Re claims that a declaration of Tall Tree's coverage obligation to HP is improper in this action because Munich Re is not a party to the insurance contract between Tall Tree and HP. See id. at
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6. This argument also fails. Munich Re denied coverage to Tall Tree on the ground that Tall Tree does not provide coverage for HP's claim; and the resolution of Munich Re's legal obligation to Tall Tree depends upon the resolution of Tall Tree's legal obligation to HP. Thus, this Court has jurisdiction to consider both of the declarations Tall Tree seeks. We address these issues in turn below. 1. The Legal Standards Governing the Existence of an "Actual Controversy" Under the Declaratory Judgment Act

The Act provides that in a case presenting an "actual controversy," the district court may declare the "rights and other legal relations of any interested party seeking
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such declaration, whether or not further relief is or could be sought." 28 U.S.C. §
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2201(a). The Act's "actual controversy" requirement is the same as Article III's "case or
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controversy" requirement, so "the Act requires no more stringent showing of
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justiciability than the Constitution does." Société de Conditionnement en Aluminium v.
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Hunter Eng'g Co., 655 F.2d 938, 942 (9th Cir. 1981). In determining whether an actual
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controversy exists, "the question in each case is whether the facts alleged, under all the
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circumstances, show that there is a substantial controversy, between parties having
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adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a
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declaratory judgment." Pacific Coal, 312 U.S. at 273; NBA v. SDC Basketball Club,
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Inc., 815 F.2d 562, 565 (9th Cir. 1987). "Where there is . . . a concrete case admitting of
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an immediate and definitive determination of the legal rights of the parties in an
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adversary proceeding upon the facts alleged, the judicial function may be appropriately
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exercised although the adjudication of the rights of the litigants may not require the
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award of process or the payment of damages." Haworth, 300 U.S. at 241.
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As applied to contract disputes like the one at issue here, the Act permits the
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federal courts to issue a declaration of a contracting party's rights and obligations even
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before performance is due or the contract has been breached. As the Ninth Circuit put it,
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the Act "`permits actual controversies to be settled before they ripen into violations of
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law or a breach of contractual duty and it helps avoid multiplicity of actions by affording
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an adequate, expedient, and inexpensive means for declaring in one action the rights and obligations of litigants.'" United Food & Commercial Workers Local Union Nos. 137, 324, 770, 899, 905, 1167, 1222, 1428, & 1442 v. Food Employees Council, Inc., 827 F.2d 519, 524 (9th Cir. 1987) (citation omitted); see also O'Bannon v. Friedman's, Inc., 437 F. Supp. 2d 490, 495 (D. Md. 2006) (the Act "should be liberally construed to accomplish its intended purposes, those being `to afford a speedy and inexpensive method of adjudicating legal disputes . . . and to settle legal rights and remove uncertainty and insecurity from legal relationships without awaiting a violation of the rights or a disturbance of the relationships'") (quoting Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir. 1937)). Declaratory relief thus is available whenever such relief would "`clarify or settle the legal relations in issue'" or "`afford relief from the uncertainty faced by the parties.'" Newcal Indus., Inc. v. IKON Office Solution, 513 F.3d 1038, 1057 (9th Cir. 2008) (citation omitted), petition for cert pending. Litigation addressing whether a contract of insurance provides coverage thus is a classic example of a dispute that is appropriate for declaratory relief. See Haworth, 300 U.S. at 241; Charles Alan Wright, Law of Federal Courts 672 (4th ed. 1983) ("Declaratory judgments are probably sought most often in insurance and patent litigation"). 2. Tall Tree Has Pleaded an Actual Controversy Sufficient to Invest this Court with Subject Matter Jurisdiction Over Tall Tree's Claims for Declaratory Relief

Because declaratory relief actions are appropriate to resolve insurance disputes, no question exists that an insurer may sue its reinsurer for declaratory relief to establish the extent of the reinsurer's duty to indemnify the insurer. Although the widespread use of mandatory arbitration clauses in reinsurance contracts has limited the extent of reported reinsurance litigation, a search of the reinsurance cases that have reached the federal courts reveals many instances of declaratory relief actions arising out of disputes between an insurer and its reinsurer. See, for example, the cases cited in footnote 1 supra. Yet Munich Re never tells the Court about any of these cases. And it never
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addresses the fact that HP's claim for coverage from Tall Tree, Tall Tree's request for coverage from Munich Re, and Munich Re's ensuing denial of coverage to Tall Tree establish the existence of an actual controversy that this Court may resolve. a) The Dispute Between Tall Tree And Munich Re Concerning Munich Re's Coverage Obligations to Tall Tree Is an "Actual Controversy"

As noted, "[t]he extent of an insurer's liability concerning insurance coverage may properly be resolved in a declaratory judgment action." Spivey Co. v. Travelers Ins. Cos., 407 F. Supp. 916, 918 (E.D. Pa. 1976) (citing Haworth, 300 U.S. 227). In the insurance context, a declaratory relief action may require a court to "decide a case based on events that have not yet and may not occur," but such an action is justiciable "[w]here . . . the essential facts establishing a right to relief . . . have already occurred." Riehl v. Travelers Ins. Co., 772 F.2d 19, 22 (3d Cir. 1985). Here, all of the facts necessary to establish Munich Re's obligation to reimburse Tall Tree have occurred. HP has settled or won all of the Starter Cartridge Suits, fixing the amount of the loss for which it seeks coverage from Tall Tree. The amount of the loss exceeds the retained limit underlying the HP Policies and thereby triggers Tall Tree's coverage. 2 HP has requested reimbursement for this loss from Tall Tree, and Tall Tree has admitted coverage. In turn, Tall Tree has asked Munich Re to acknowledge coverage for the sums that Tall Tree pays to HP. But Munich Re has denied coverage. Compl. ¶¶ 4-5, 29-30. Thus, Tall Tree requests resolution of a straightforward legal controversy "of sufficient and immediate reality": whether Munich Re must provide reinsurance to Tall Tree equal to the amount of HP's defense costs that Tall Tree is liable to pay under the HP Policies. Id. ¶¶ 28-30.

Because, on a motion for judgment on the pleadings, the Court must accept all of the plaintiffs allegations as true, this allegation (in paragraph 27 of the Complaint) eliminates Munich Re's argument in its moving papers (see Mot. at 10 n. 4) that HP's claim is of insufficient magnitude to reach Tall Tree's coverage.
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That Tall Tree has not yet paid HP and that its liability to HP has not been adjudicated by a court does not affect the result. In the insurance context, "[t]he contingent nature of the right or obligation in controversy will not bar a litigant from seeking declaratory relief when the circumstances reveal a need for present adjudication." Allendale Mut. Ins. Co. v. Kaiser Eng'rs, Div. of Henry J. Kaiser Co., 804 F.2d 592, 594 (10th Cir. 1986) (quoted with approval in Eureka Fed. Sav. & Loan Ass'n v. Am. Cas. Co., 873 F.2d 229, 232 (9th Cir. 1989)). Whether an actual controversy exists when an action to determine an insurer's liability is brought before a determination of the insured's liability to a third party is a question "of degree." Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 680-81 (7th Cir. 1992); see also id. at 680 (noting that in Eureka, the Ninth Circuit took the "more liberal view" that the determination of an insured's liability is not required before an action to determine the insurer's liability). In Bankers Trust, an injured third party sued the insured tortfeasor's excess insurer for a declaration that if the third party prevailed in its underlying lawsuit against the insured, the insurer had to indemnify the insured up to the policy limits. Id. at 679-80. While it was possible that the declaratory relief action could become moot depending on the outcome of the underlying suit, the court found that third party's "probabilistic injury" supported subject matter jurisdiction. Id. at 680-81. The chance of the third party winning a sufficient judgment against the insured "[was not] so slight that [the third party] ha[d] nothing practical at stake in this case. Were there only a 10 percent chance of its obtaining [such a] judgment . . . the actuarial value of its claim against [the insurer] would still be substantial." Id. at 681. Because the excess insurer might become liable to the third party, the court concluded an actual controversy existed over which the court had jurisdiction. See id. at 680-81. Here, the probability that Tall Tree will become liable to HP, triggering Munich Re's liability to Tall Tree, is much stronger than the probabilities that the Seventh Circuit noted in Bankers Trust. Tall Tree alleges such liability; and on a motion for judgment on the pleadings, that allegation must be accepted as true. As the Complaint
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alleges, HP has made a claim for coverage to Tall Tree, and Tall Tree has concluded that it provides coverage under the broad non-standard language of its "Advertising Injury" insuring agreement. Thus, there is no underlying dispute that must be resolved before Tall Tree's liability to HP is determined; rather, Tall Tree's liability to HP is only in question because Munich Re contends that Tall Tree is not liable. In other words, the probability that Tall Tree is liable to HP, and thus that a declaration of Munich Re's liability to Tall Tree will become necessary, is the same as the probability that this Court will declare that Tall Tree is liable to HP. On the record here, the prospect that this Court will find in Tall Tree's favor is not such a "slight" probability that an actual controversy is lacking. See id. at 681. Munich Re relies on six cases. See Mot. at 9-10. All are easily distinguishable. Munich Re's leading case, Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 590 F. Supp. 187 (S.D.N.Y. 1984), does not support Munich Re's position at all. In Bellefonte, a reinsurer sued its reinsured for a declaration of the reinsurer's liability to the reinsured. Id. at 188. In the meantime, the reinsured had denied coverage to its policyholder, and was litigating the extent of its liability to its policyholder in another action. Id. at 18990. The district court ruled that because the question of the reinsured's liability to its policyholder was not yet resolved, and the eventual resolution of that liability in the underlying suit could render the district court's decision in the reinsurance case moot, there was no actual controversy supporting jurisdiction under the Act at that point. Id. at 191-92. Bellefonte does not help Munich Re. Most fundamentally, as noted above, in the Ninth Circuit, a district court may declare whether a liability insurer provides coverage before the policyholder is actually liable in the underlying proceeding. See Eureka, 873 F.2d at 231-32. To the extent that Bellefonte stands for a different rule, the Ninth Circuit authority would of course be binding in this Court. Moreover, Bellefonte was particularly concerned with the fact that the reinsured's liability to its policyholder remained to be determined in another action in which the reinsured was contesting
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coverage, and that the declaratory relief action would turn on the result of the underlying insurance coverage case. Here, in contrast, there is no other pending litigation. HP and Tall Tree both acknowledge Tall Tree's liability to HP, and the resolution of Tall Tree's dispute with Munich Re depends only upon what this Court decides in this case. Munich Re's other cases fare no better. See Certain Underwriters at Lloyd's London v. St. Joe Minerals Corp., 90 F.3d 671 (2d Cir. 1996) (no actual controversy where excess insurers sought declaratory relief against insured but it was unlikely that insured would ever exhaust its primary coverage and reach the excess policies); Atlanta Gas Light Co. v. Aetna Cas. & Sur. Co., 68 F.3d 409 (11th Cir. 1995) (no actual controversy where insured had made no demand for coverage); Atlanta Int'l Ins. Co. v. Atchison, T. and S.F. Ry., 938 F.2d 681 (7th Cir. 1991) (same); Century Indem. Co. v. McGillacuty's Inc., 820 F.2d 269 (8th Cir. 1987) (issue was whether the court should exercise its discretion to hear an action under the Act, not the existence of an actual controversy conferring subject matter jurisdiction); Laguna Publ'g Co. v. Employers Reins. Corp., 617 F. Supp. 271 (C.D. Cal. 1985) (no actual controversy where third party sued excess insurer for declaratory relief, but question of extent of primary coverage was pending in another action). Here, as noted, the Starter Cartridge Suits have been resolved, and HP's defense costs are a fixed amount that exceeds the retained limit of the HP Policies. There is no pending litigation of Tall Tree's liability to HP, and the existence of that liability may be determined in this action. Tall Tree has demanded that Munich Re provide coverage, and Munich Re has denied coverage. In short, Munich Re has failed to cite any case in any jurisdiction that supports its argument against the existence of subject matter jurisdiction here. b) Tall Tree's First Requested Declaration Would Resolve a Dispute Between Tall Tree and Munich Re, Making It an Appropriate Request for Relief in This Action

Munich Re also tries to find fault with Tall Tree's request for a declaration that Munich Re erred when it denied coverage on the ground that the HP Policies do not insure the Starter Cartridge Suits. Mot. at 6-7.
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The fact that Munich Re is the only party contesting Tall Tree's liability to HP disposes of Munich Re's argument that Tall Tree cannot properly seek this requested declaration. To begin with, Munich Re has it backwards: the actual controversy between Tall Tree and Munich Re that conveys subject matter jurisdiction is the extent of Munich Re's obligation to Tall Tree, which in turn conveys jurisdiction to determine the predicate legal issue of whether Tall Tree provides coverage to HP. Cf. Mot. at 8 ("Since the Court does not have subject-matter jurisdiction to make [the] first and threshold declaration [regarding Tall Tree's liability to HP], the predicate for the second declaration [regarding Munich Re's liability to Tall Tree] fails."). This Court's jurisdiction to make Tall Tree's first requested declaration rises or falls upon the existence of jurisdiction to make Tall Tree's second requested declaration, and Munich Re's contentions to the contrary miss the point. Moreover, while the HP Policies alone do not create a legal relationship between Tall Tree and Munich Re, the HP Policies govern the legal relationship (created by the Reinsurance Agreements) that does exist between Tall Tree and Munich Re. (In fact, the HP Policies are incorporated by reference into the Reinsurance Agreements.) Because Munich Re's legal duties to Tall Tree in this situation depend upon Tall Tree's legal duties to HP, a declaration of Tall Tree's liability to HP does in fact implicate Munich Re's legal relationship to Tall Tree. Provident Life & Accident Ins. Co. v. Transamerica-Occidental Life Ins. Co., 850 F.2d 1489, 1491 (11th Cir. 1988), the case on which Munich Re relies for its argument, does not help its cause. There, the court held that there was no actual controversy when one insurer sued another insurer for a declaration as to which of them was liable for an insured's medical expenses, because there was no legal relationship between the insurers but only between each insurer and the insured. Here, in contrast, Tall Tree and Munich Re do have a legal relationship, and both of the declarations sought by Tall Tree would help to determine that relationship. Finally, the dispute as to whether Tall Tree is liable to HP is between Tall Tree and Munich Re, not Tall Tree and HP, making a declaration of Tall Tree's liability to HP
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against Munich Re entirely appropriate. Munich Re suggests that the declaration sought here would not be "`conclusive'" because "`the legal status of the parties [would not] be changed or clarified by the declaration.'" Mot. at 6 (quoting Travelers Ins. Co. v. Obusek, 72 F.3d 1148, 1155 (3d Cir. 1995)). Munich Re is wrong. If this Court declares that Tall Tree is liable to HP, then Munich Re must pay Tall Tree's claim; and if this Court finds that Tall Tree is not liable to HP, then Munich Re may not be required to pay Tall Tree's claim. 3. At a Minimum, the Court Should Grant Leave to Amend.

Under Federal Rule of Civil Procedure 15(a), a party may amend its complaint with the court's leave, which is to be "freely give[n] . . . when justice so requires." Rule 15(a) "`should be applied with extreme liberality.'" Brown v. Rumsfeld, 211 F.R.D. 601, 605 (N.D. Cal. 2002) (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) (internal quotation marks omitted)). If this Court concludes that Tall Tree has not alleged facts that demonstrate the existence of an actual controversy, Tall Tree respectfully requests leave to amend the Complaint. IV. CONCLUSION For the foregoing reasons, Tall Tree's Complaint establishes the existence of an actual controversy over which this Court has subject matter jurisdiction, and Munich Re's motion for judgment on the pleadings should be denied. At a minimum, the Court should grant Tall Tree leave to amend. Dated: July 11, 2008 Respectfully submitted, DAVID B. GOODWIN MARGARET D. WILKINSON COVINGTON & BURLING LLP By___________/S/_________________ DAVID B. GOODWIN Attorneys for Plaintiff The Tall Tree Insurance Company
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