The federal district court granted the insured's motion to stay the coverage action while the construction defect case was pending in state court. Auto Owners Ins. Co. v. Essex Homes Southeast, Inc., 2014 U.S. Dist. LEXIS 133120 (D. S.C., Sept. 23, 2014).
The homeowners sued Essex Homes in state court for construction defects in a home built and sold to them by Essex Homes. The suit sought damages for property damage based on negligence, breach of implied warranty, and breach of express warranties arising out of the alleged construction defects. The complaint alleged that a water leak in the house caused water damage and resulted in mold growth that was not discovered for several years.
Auto Owners filed suit in federal district court, alleging that the CGL policy did not provide coverage for the underlying suit. Essex Homes filed a motion to dismiss or stay the coverage action until the underlying case was resolved. Essex Homes argued that the outcome of the factual issues in the underlying suit had a direct bearing on the determination of coverage issues in the federal declaratory judgment action.
The court granted the motion to stay the declaratory judgment action. The state of South Carolina had a strong interest in having insurance policy coverage issues decided in its courts. Further, what constituted an "occurrence" or "property damage" under the policy, and the applicability of any exclusions, were overlapping matters undoubtedly at issue in the related and ongoing state court proceeding. This created a potential for unnecessary entanglement between the federal and state cases because in order to make coverage decisions in the declaratory judgment action, the federal court would have to make several findings of fact concerning what damage occurred and when. These findings were at issue in the underlying suit.
Therefore, the federal coverage suit was stayed until the underlying state case was resolved, unless the court, in its discretion, decided to lift the stay at an earlier time.