How to Fight Back Against Insurer Declaratory Judgment Suits

Insurers often file lawsuits against their insureds seeking a declaration that they have no duty to defend or indemnify the insured in an underlying lawsuit for which the insured seeks coverage. Insurer declaratory judgment lawsuits can put tremendous pressure on insureds because they force the insureds to fight a two-front war, simultaneously mounting a defense of the underlying case and defending the insurer’s suit seeking a declaration of no coverage. Courts are not required to entertain these lawsuits, and insureds can often successfully stay or dismiss them.

Insurer Declaratory Judgment Lawsuits 

Insurers file declaratory judgment lawsuits claiming to seek a judicial declaration of their coverage obligations under both first-party and third-party policies. First-party policies cover the insured’s own property, for example, fire or property insurance. Third-party policies cover losses stemming from the insured’s alleged liability to a third party. In that instance, coverage is often triggered by the filing of the underlying suit or other demands made upon the insured.

Insurers may claim that the purpose of a declaratory judgment action is to determine their coverage obligations or, in other words, to ask a court to ratify the insurer’s denial of coverage. There can be other tactical purposes for doing so. Insurers may “race to the courthouse” to commence suit in forums they perceive to be advantageous. Courts recognize the position in which an insured is placed, that is, having to simultaneously defend an underlying case while the insurer is seeking a declaration of no-defense duty. Many states will award an insured the attorneys’ fees incurred by the insured in defending a declaratory judgment action if the court finds that the insurer had a duty to defend the underlying case.

Declaratory Judgment Acts 

Both state and federal declaratory judgment acts allow parties to file declaratory judgment lawsuits under which trial courts may issue declaratory judgments establishing the rights and obligations of the parties regarding contracts like insurance policies. The key word to remember here is “may.” Courts may entertain declaratory judgment lawsuits, but they are not required to do so. In fact, courts have broad discretion to decide whether or not to entertain such lawsuits. Critically, before a court may issue a declaratory judgment, the dispute must be ripe, meaning that there must be an actual dispute, and the facts must be sufficiently developed to allow the court to render a decision. Courts will also stay or dismiss a declaratory judgment action to prevent the insured from litigating the merits of the underlying claim in the coverage action.

An Insured’s Options 

As several recent decisions, including Utica Mut. Ins. Co. v. Crystal Curtain Wall Sys. Corp., and Union Mut. Fire Ins. Co. v. Morningstar Richmond LLC, have made clear, the insured can seek a stay or dismissal of an insurer’s declaratory judgment action on a number of procedural, jurisdictional, and factual grounds. An action that is not yet ripe for adjudication filed in lieu of a formal coverage denial or filed for purposes of procedural gamesmanship may be subject to dismissal or stay. Moreover, an insured may ultimately recover its coverage action attorneys’ fees if the insurer unsuccessfully seeks a judgment declaring that it has no defense obligation.