August 28, 2015 Articles

Sparring over Forum Selection in Insurance Coverage Actions

A discussion of some of the procedural vehicles and legal doctrines affecting choice of forum and the ever-changing case law affecting forum disputes

by Richard D. Milone, Mindy B. Pava, John B. Mumford, Jr., Kathryn E. Kasper, Paul A. Rose, Caroline M. Marks, Alexandra V. Dattilo, Cyndie M. Chang, and Dan Terzian

Insurance coverage lawsuits, perhaps more than any other kind of litigation, frequently lend themselves to forum disputes. One reason for this is that complex insurance disputes often have their roots in more than one state. It is not uncommon for a policyholder to be based in one state, the insurer in another, the broker in another, and the facts giving rise to the loss or the underlying litigation in yet another. Frequently, the relevant insurance policies span many years (or decades), so it is not uncommon for a policyholder to purchase its insurance program over the years from different insurers in different states, or to move its own corporate headquarters or operations, or both, among different states. Moreover, it is not uncommon for the facts giving rise to the underlying liabilities in the largest insurance disputes, such as toxic tort, product liability, environmental, or cyber liability, to be spread among many different states. Indeed, the geographic footprint of many large insurance disputes contains enough twists and turns to serve as a law school exam question and, typically, to provide fodder for the parties to make endless arguments about the proper forum and applicable laws.

In addition to having the basis to make forum arguments, parties in insurance litigation often have strong incentives to make them. Insurance disputes are governed purely by state law, and the substantive laws vary from state to state as much as, if not more than, in any area of the law. Variances among the states often are not subtle or minor—rather, on many issues, the laws of different states are diametrically opposed and compel opposite outcomes from one state to the next. The filing of a lawsuit in a particular state (or in a federal court sitting in that state) hardly guarantees the application of that state’s law, but it often is a good start toward getting to that result. Therefore, if parties anticipate that a certain issue will be decided on the basis of choice of law, there is frequently a rush by both sides to have the suit heard in the state whose law they deem favorable.

In addition to the potential benefits or pitfalls of a certain state’s law, there are often perceptions—true or not—that certain courts, judges, or juries are more friendly to one side or the other in insurance disputes. For example, there is a perception among many practitioners and litigants that state courts are more favorable to policyholders, and federal courts to insurers, and that bankruptcy courts often favor the debtor when the favorable resolution of an insurance dispute will bring funds into the estate. There is also a perception that courts in certain states (Delaware, Ohio, Pennsylvania, and West Virginia, for example) tend to favor policyholders, while courts in other states (Connecticut, New York, and Virginia, to name a few) are perceived by some as favoring insurers. Even individual judges are sometimes perceived as a “good draw” for one side or the other, often to a greater degree that is seen in other contexts.

For all these reasons, there is frequent jockeying among the parties to complex insurance disputes over which court will hear the case. Indeed, the authors of this article all have been involved in cases in which the resources devoted to the “preliminary” battle over forum surpass the resources devoted to litigating the merits. Given the importance of being in an advantageous forum and avoiding a bad one, frequently the advocacy is more zealous, and the arguments more creative, in forum disputes than anywhere else. As a result, parties and counsel often consider their own maneuvering to be a careful, strategic approach to litigation, while the other side’s arguments are nothing more than shameless forum shopping. This article discusses some of the procedural vehicles and legal doctrines affecting choice of forum and the ever-changing case law affecting forum disputes in insurance coverage litigation.

Forum Selection and Mandatory Alternative Dispute Resolution Clauses

Insurance policies may contain provisions that appear to preclude forum selection battles. Such provisions include forum selection clauses and mandatory arbitration clauses or other clauses that purport to mandate different types of alternative dispute resolution. Additional policy provisions may integrate with these clauses and have an impact on whether forum selection battles would be worth having. Such additional clauses include choice-of-law provisions and service-of-suit clauses. Although such clauses may effectively determine where a coverage dispute must be heard and the body to which it must be presented, the clauses should be reviewed critically against the procedural and substantive law of the potential jurisdictions to determine whether they must be enforced as written. At times, a policy provision that on its face seems to mandate the forum for a coverage dispute may, in fact, have no such effect.

A recent case that illustrates many of the potential issues and complexities is Wingard v. Lansforsakringar AB.[1] In that case, a Swedish insurer provided general liability insurance coverage for a risk that arose in Alabama. The policy contained a forum selection clause that purported to mandate that coverage disputes be adjudicated in Sweden, and it contained a choice-of-law provision that purported to mandate that such disputes be determined under Swedish law. 

The underlying suit was brought against an additional insured, and the plaintiff in the underlying action was awarded $5.25 million in punitive damages under Alabama’s Wrongful Death Act. Under the circumstances of the case and Alabama’s laws and public policy, the court declined to enforce either the choice-of-forum or the choice-of-law provision.

The key factor was that Alabama’s Wrongful Death Act, which necessarily applied to the underlying action, deemed all damages awarded in a wrongful death action to be punitive damages. The court noted that under Swedish law, which would have been applied if the coverage case had been brought in Sweden, the policy provision precluding coverage for punitive damages would have been enforced. The court described the additional insured’s problem arising from these circumstances as follows: 

Under Swedish law then, there can never be a remedy for an insured whose insurance policy contains a punitive damages exclusion when the insured seeks indemnity under the policy for a judgment under the Alabama Wrongful Death Act. That is because under Alabama’s unique wrongful death statute, “the only recoverable damages are punitive damages intended to punish the tortfeasor for its actions.”[2] 

In making its determination, the court relied on the Supreme Court case of M/S Bremen v. Zapata Off-Shore Co.,[3] stating, “The Court . . . observed that a contractual forum selection clause is unenforceable ‘if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.’”[4] The court noted that Alabama had a strong, well-established public policy of precluding enforcement of insurance policy provisions that excluded coverage for punitive damages awarded under the state’s wrongful death statute, and it concluded that “the choice clauses work together not only to deprive Plaintiff of a remedy under the insurance contract, but also to violate the strong public policy of the forum state. Accordingly, the court finds . . . that both the forum-selection clause and the choice-of-law clause are unenforceable.”[5] In so holding, the court further noted that enforcing the policy’s forum selection and choice-of-law provisions, because they would deprive the insured part of any remedy, would be fundamentally unfair.

Another court similarly declined to enforce a choice-of-law provision, leading to the invalidation of a policy’s forum-related provision, in Sturgeon v. Allied Professionals Insurance Co.[6] In that case, a Missouri resident, who was a licensed massage therapist, was sued over a bodily injury claim and asserted coverage under her professional liability insurance policy. The insurer denied coverage and, when sued in Missouri, asserted that the coverage case had to be referred to arbitration under the applicable policy, which contained both a California choice-of-law provision and a mandatory arbitration provision.

The appellate court upheld the trial court’s determinations that Missouri law would apply and that Missouri law prohibited enforcement of such mandatory arbitration provisions. The court acknowledged that choice-of-law provisions generally are honored in Missouri, but it noted that such clauses would be enforced only if the chosen law would not be contrary to the fundamental public policy of Missouri. Because the Missouri Arbitration Act prohibited enforcement of mandatory arbitration provisions in insurance policies, and because the court found that the statute expressed the public policy of Missouri, the court determined that the arbitration provision in the insurance policy was invalid. In fact, the court went further and determined that California law was completely inapplicable to the case, choosing to apply instead the insurance coverage law of Missouri.

In reaching its decision, the Sturgeon court analyzed two federal statutory schemes, the Federal Arbitration Act and the McCarran-Ferguson Act, and the conflict between them. The court observed that under principles of preemption, Missouri’s statute prohibiting mandatory arbitration clauses in insurance policies would have been preempted by the Federal Arbitration Act, which generally renders enforceable arbitration provisions in contracts. The court held, however, that the McCarran-Ferguson Act, which exempts the insurance industry from various federal laws, applies to preclude the preemptive effect of the Federal Arbitration Act, preserving the enforceability of Missouri’s prohibition against mandatory arbitration provisions in insurance policies.

A very similar analysis was undertaken and a similar result reached in Continental Insurance Co. v. Equity Residential Properties Trust.[7] In that case, the policyholder filed a breach of contract action against its insurer, which moved to stay the action and to compel arbitration. The insurer relied on a mandatory arbitration provision in the policy, which would have been enforceable under the law of Illinois, which was the law specified in the policy’s choice-of-law provision. 

In rejecting the insurer’s arguments, the court held that Georgia’s choice-of-law provisions do not control procedural matters and that, further, in Georgia, the enforceability of an arbitration provision is a procedural matter. The court reasoned that the applicable Georgia statute “establishes the public policy of Georgia that insureds shall not be compelled by the terms of an insurance contract written by the insurer to give up their common law right to access the courts to resolve disputes arising under the contract” and that “Georgia courts will not enforce a contractual provision choosing the law of another state where to do so would contravene the public policy of Georgia.”[8] As did the court in Sturgeon, the court in Equity Residential found that the McCarran-Ferguson Act prevented the Federal Arbitration Act from having any preemptive effect that could bar the enforceability of Georgia’s law prohibiting enforcement of mandatory arbitration provisions in contracts between policyholders and insurers. 

Another policy provision sometimes implicated in forum disputes is the “Service of Suit” clause. Such clauses typically are found in policies issued by foreign insurers, such as the underwriters at Lloyd’s of London, “to assure potential policyholders that Lloyds and its underwriters would be amendable to service of process in the United States.”[9] In Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate, a policyholder sued a Lloyd’s syndicate for damages and declaratory relief under a professional liability policy. The insurers moved to dismiss, asserting lack of personal jurisdiction. 

The service-of-suit clause at issue provided that the insurers would “submit to the jurisdiction of any court of competent jurisdiction within the United States, and will comply with all requirements necessary to give such court jurisdiction. . . .”[10] The policy also contained a choice-of-law clause, which provided that New York law applied to all issues pertaining to the policy. In this context, the insurers moved to dismiss the action filed against them in the federal district court in Kansas on the basis of an alleged lack of personal jurisdiction.

The court denied the motion, holding that under New York law, a service-of-suit clause does not mandate litigation in any particular jurisdiction; rather, it operates as a general consent to jurisdiction by the insurer. Further, the court noted that a service-of-suit clause under New York law does not provide the policyholder the absolute right choose the forum, so that if an insurer wished to challenge the policyholder’s forum choice, such as through a motion to transfer based on forum non conveniens grounds, it was free to so. Because no such motion was pending before the court, however, it simply denied the insurers’ motion to dismiss.

These various forum issues and considerations become even more complicated when they arise in bankruptcy proceedings. An illustrative case is Seedor v. American Dynasty Surplus Lines Insurance Co.[11] In that case, directors’ and officers’ liability insurers moved to stay a coverage dispute adversary proceeding filed by the trustee and creditors’ committee and to refer the adversary proceeding to arbitration.

The court stated that bankruptcy courts have discretion as to whether to enforce “mandatory” arbitration provisions when they conflict with various bankruptcy principles and that such discretion was greater when the issues being addressed were “core.” The court described “core” proceedings as those that concern, among other things, “matters concerning the administration of the estate” or “confirmations of plans.”[12] The court found that the particular issues to be determined were not “core” proceeding issues because they concerned interpretation of insurance policies, not the reorganization plan. The court noted that the outcome of the coverage dispute could affect the assets available to the estate, but it determined this factor was not sufficient to invoke the court’s “core” jurisdiction.[13] 

In determining whether and how to give effect to the arbitration clauses in the policies at issue, the court applied the substantive law of Pennsylvania under applicable choice-of-law principles, and it considered various policy provisions, including arbitration clauses, service-of-suit clauses, and choice-of-law clauses. The court also considered whether certain clauses also were unenforceable as unconscionable terms in contracts of adhesion. 

The court found an inherent inconsistency between the applicable arbitration and service-of-suit clauses, but it also was persuaded by what it perceived to be a strong presumption in favor of arbitration clauses. After a detailed analysis, the court ultimately enforced the arbitration clauses and referred the matter to arbitration, but in so doing, it stripped from the arbitration clause of one of the insurers certain provisions it found to be unconscionable, including a choice of Delaware law and an attempted contractual abrogation of otherwise applicable pro-policyholder rules of contract interpretation. The court also bifurcated for separate determination a bad-faith claim asserted against the insurers by the policyholder plaintiffs in the coverage adversary proceeding.

The cases discussed above by no means provide an exhaustive analysis of the enforceability of forum selection and alternative dispute resolution clauses in insurance policies in all of the various jurisdictions or even in the jurisdictions in which the above-discussed cases were decided. They do, however, illustrate that policy provisions that appear on their face to mandate a particular forum or a particular alternative dispute resolution process may or may not be enforceable as written, depending on the outcome of policy interpretation analyses and the application of procedural and substantive law of the various potential forums.

Preemptive Declaratory Judgments Filed by Insurers

An insurer’s decision on whether to seek a preemptive declaratory judgment is generally guided by three considerations: Can it file a declaratory judgment action; where to file it; and should it file the action?

Can the insurer file? Whether an insurer can file a declaratory judgment action depends on the jurisdiction. Generally, each jurisdiction has its own rules governing the filing of these actions. Federal court, for instance, requires that “the declaratory action is justiciable,” such that “an ‘actual controversy’ exists between the parties to the action.”[14] 

Some jurisdictions, like Connecticut, have “unusually liberal” declaratory judgment rules that are “broader in scope than the statutes in most, if not all, other jurisdictions. . . .”[15] On the other end of the spectrum are jurisdictions with narrower rules, like Georgia, which does not allow declaratory judgment actions where the insurance “company denies coverage before it seeks . . . the declaratory judgment. . . .”[16] 

Where to file? The question of where to file is complex and multi-layered, basically regarding the governing law. The question is important, because where multiple “actions involving the same parties and issues are pending concurrently,” courts typically apply the first-filed rule; meaning, the action that was filed first has priority and decides the issues.[17] 

1. What law will the court apply to the insurance policy? 

Every jurisdiction has its own choice-of-law doctrine. This means that one jurisdiction could determine that California law applies to an insurance policy, while another jurisdiction could determine that Washington law applies to the same insurance policy. So, generally, if California law is more favorable to the insurer’s case, the insurer should file the declaratory judgment action in the jurisdiction that will apply California law.

2. What procedural rules will the court apply? 

Every jurisdiction has its own procedural rules that it applies to the cases before it. These can be just as important as the substantive law applied. They control what evidence gets in, how much discovery there will be, and whether there will be a jury trial, among other things. These rules also partly control bad-faith claims against the insurer.[18] And they may even control whether an insured is entitled to attorney fees if it prevails.[19] 

3 When will the case be adjudicated? 

Every jurisdiction has unique attributes, beyond differences in pretrial procedural rules, that affect the timeline for the case’s resolution. Some jurisdictions are busier than others, and some are more experienced with insurance coverage actions. Both affect how soon the court can decide a declaratory judgment action. 

4. Are the people favorable? 

Apart from the law, the people in the jurisdiction—the judges and the potential jurors—may generally possess ideological beliefs that align with either the insurer or the insured. All else equal, an insurer would want to file in a jurisdiction where the people’s interests generally align with the insurer’s.

5. What are the jurisdiction’s rules on stays and dismissals? 

Each jurisdiction has its own rules on stays and dismissals. These rules, while technically a subset of procedural rules, are so important they deserve their own discussion. Even if a jurisdiction can hear the case, its own rules may require staying the case until another case pending somewhere else is resolved. Or those rules may even require dismissing the case. Whether a case is stayed or dismissed, either result effectively undoes the insurer’s decision to file there in the first place. 

For example, if there is an ongoing third-party suit that risks “inconsistent factual determinations that could prejudice the insured,” California courts would probably stay the declaratory relief action.[20] As another example, a federal court may ultimately decline to hear a declaratory judgment case if it concludes the case was brought for the purpose of forum shopping—or for a number of other reasons.[21] As a final example, a court may elect to dismiss the case “based on the doctrine of forum non conveniens. . . .”[22] 

Should it file? Whether an insurer should file a preemptive declaratory judgment action is, like the decision on where to file, a multifaceted issue. As in all litigation, pursuing a declaratory judgment action has costs. Some of these costs are purely financial and easily measurable, like attorney fees. Other costs are indirect. For instance, bringing the declaratory judgment action may make the insurer vulnerable to a bad-faith claim by the insured.[23] Then, there are still more potential costs stemming from not filing a declaratory judgment action; namely, the possibility that the insured files first in an unfavorable jurisdiction and all litigation then proceeds there. All of these costs must be assessed and balanced against the size of the dispute and the likelihood of settling the dispute without protracted litigation. 

The Wilton/Brillhart Abstention Doctrine

Wilton/Brillhart abstention, a doctrine frequently asserted in insurance coverage actions, holds that a federal court has discretion to abstain from hearing a declaratory judgment action regarding interpretation of a contract when a parallel action is pending in state court between the parties regarding the same contract. 

While federal courts generally have a “virtually unflagging obligation” to exercise the jurisdiction conferred on them by Congress,[24] the Declaratory Judgment Act[25] employs a different standard. Under the Declaratory Judgment Act, courts may declare the rights and other legal relations of any interested party seeking such a declaration. Based on this permissive language, the Supreme Court held in 1942 that the Declaratory Judgment Act confers discretionary, rather than compulsory, jurisdiction, particularly when the same issue can be heard in state court. Therefore, when “the questions in controversy between the parties to a federal suit . . . can better be settled in the proceeding pending in the state court,” federal courts have discretion to abstain from deciding declaratory judgment actions.[26] 

In the context of insurance litigation—where the choice of forum can be critically important—a federal court’s abstention decision often becomes vital to the outcome of a case. The federal Wilton/Brillhart abstention doctrine discussed in this section allows federal courts to decline to exercise jurisdiction in insurance coverage declaratory judgment actions when a parallel state court proceeding exists. As described below, courts adopt the Wilton/Brillhart doctrine in an attempt to avoid piecemeal litigation or when a coverage dispute rests on factual issues to be addressed in the parallel state court litigation. 

Origins of the doctrine. Based on the permissive nature of the Declaratory Judgment Act, the Supreme Court determined in Brillhart v. Excess Insurance Co. of America that a district court has discretion to dismiss a federal declaratory judgment action when “the questions in controversy . . . can better be settled in” a pending state court proceeding. [27] Thus, the district court may abstain from deciding declaratory judgment actions addressing matters of state law, based on principles of efficiency and comity toward state courts, when the same dispute between the same parties also has been brought in state court. In Brillhart, the Court articulated three factors to be considered when analyzing the propriety of entertaining a declaratory judgment action: avoiding “needless determination of state law issues”; discouraging “forum shopping”; and preventing “duplicative litigation.” 

More than half a century later, in Wilton v. Seven Falls Company,[28] the Supreme Court held that a district court’s decision whether to abstain under Brillhart is governed by a discretionary standard, and not the “exceptional circumstances” standard developed with respect to other types of federal court abstention. In Wilton, a group of insurance underwriters sought a declaratory judgment in federal court that their policies did not extend to a liability related to certain oil and gas properties.[29] The respondents filed in state court and later moved for a stay or dismissal of the petitioners’ federal claims, in light of the parallel state court proceedings. After the district court issued a stay, the petitioners appealed and contended that Brillhart’s discretionary standard should not govern; instead, they argued, federal courts can only properly abstain under exceptional circumstances. The Supreme Court reaffirmed that district courts’ ability to render declaratory judgments is discretionary and that they maintain the right to abstain from cases brought under the Declaratory Judgment Act:

Congress sought to place a remedial arrow in the district court’s quiver; it created an opportunity, rather than a duty, to grant a new form of relief to qualifying litigants. Consistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment. . . .[30] 

The Wilton Court referred to Brillhart’s factors as “useful guidance” for courts to consider when exercising discretion to abstain if another proceeding is pending in state court. In reliance on Brillhart and Wilton, courts today generally consider the following factors when determining whether to invoke the doctrine of abstention in a declaratory judgment action: 

(1) the scope of the pending state proceeding and the nature of the defenses available there; 

(2) whether the claims of all parties in interest can satisfactorily be adjudicated in that proceeding; 

(3) whether the necessary parties have been joined; 

(4) whether such parties are amenable to process in that proceeding; 

(5) avoiding duplicative proceedings; 

(6) avoiding forum shopping; 

(7) the relative convenience of the fora; 

(8) the order of filing; and 

(9) choice of law. [31] 

Application of the doctrine to insurance coverage cases. District courts frequently invoke the doctrine of abstention in insurance coverage actions, which almost always turn on issues of state law. Despite the fact that insurance coverage is entirely a creature of state law, insurance carriers often file declaratory judgment actions against policyholders in federal courts. A common scenario is that an insurer will file a preemptive declaratory judgment in a federal court of its choosing, and then the policyholder (who may have been surprised by the insurer’s suit) will file its state court lawsuit as soon as possible thereafter. Or sometimes an insurer will file a declaratory judgment action in federal court even after the policyholder has filed its own breach of contract action on the same policy in state court. As noted above, the “order of filing” is one of the factors that federal courts consider when deciding whether or not to abstain, but this factor, standing alone, is not dispositive. 

The U.S. District Court for the Southern District of New York has developed a significant body of case law on Wilton/Brillhart abstention, and courts in that district have shown an overwhelming preference in favor of abstention. This district is a common choice of insurers filing declaratory judgment actions, presumably because they believe that federal court is a better forum for insurers than state court and that New York substantive law is insurer-friendly on certain issues. Insurers frequently file in the Southern District when the choice of forum is debatable (or perhaps even less than debatable), so it is not surprising that a body of Wilton/Brillhart case law favoring abstention has developed in that district. 

In arguing in a recent case that the Southern District of New York should dismiss an action under the controlling doctrine of the Wilton/Brillhart abstention, the policyholder in ACE American Insurance Co. v. GrafTech International Ltd.[32] asserted that the district court was frequently asked to abstain from deciding an insurer’s declaratory judgment action under the Wilton/Brillhart doctrine in favor of a parallel state court proceeding. The policyholder informed the district court that in reported cases filed in the Southern District in which the policyholder argued for Wilton/Brillhart abstention, the federal court chose to abstain in 14 out of 15 cases.[33] Relying on this research, and after applying the Wilton/Brillhart factors to the facts of the dispute, the court concluded that abstention also was warranted in that case.[34] 

An important factor frequently considered by district courts when deciding whether or not to abstain is the inclusion, in the state court action, of excess insurers that cannot be included in the federal declaratory judgment action without destroying diversity jurisdiction. In the GrafTech case, for example, the insurer’s declaratory judgment action in federal court included just one plaintiff, ACE, and one defendant, GrafTech. However, GrafTech’s parallel state court action included an additional party, XL Insurance Company, which would have destroyed diversity jurisdiction because its state of incorporation (Delaware) was the same as that of GrafTech. This is a common phenomenon because the inclusion of additional excess insurers (or other relevant parties, such as brokers or additional insureds) increases the odds that the inclusion of at least one such party will defeat diversity. Therefore, state court cases frequently include more parties, and are therefore more comprehensive, than competing federal actions. This factor, perhaps more than any other, is often persuasive to federal courts when deciding to abstain.[35] 

Notably, some courts have ruled that federal court abstention is proper even when coercive claims, as opposed to solely declaratory claims, are part of a suit. In Royal Indemnity Co. v. Apex Oil Co.,[36] an insurer sought a declaration of its responsibilities relating to a certain policy. The district court opted to abstain from exercising jurisdiction under the Wilton/Brillhart doctrine. The insurer appealed, arguing that some of its claims were coercive, and not declaratory, in nature.[37] The Eighth Circuit affirmed the district court’s decision in determining that because the lawsuit was “essentially” declaratory, the inclusion of some coercive claims did not foreclose the application of the Wilton/Brillhart doctrine to the claims.[38] Other courts, including the Third, Seventh, and Eleventh Circuits, rely on a similar test, which states that if the outcome of potential coercive claims “hinges” on the success of declaratory claims, then the Wilton/Brillhart doctrine is permissible because the suit is found to be declaratory at its heart.[39] 

Recent developments expanding the scope of the doctrine. Although the Supreme Court’s decision in Brillhart occurred more than 70 years ago, jurisprudence relating to the Wilton/Brillhart doctrine continues to evolve. In a noteworthy 2014 decision, the Third Circuit grappled with whether it was an abuse of discretion for a district court to decline to exercise jurisdiction under the Wilton/Brillhart doctrine when no parallel state court proceeding existed.[40] In Wilton, the court’s abstention was based on the existence of a parallel proceeding in state court, which “presents the opportunity to ventilate the same state law issues in the state courts.”[41] The Wilton court did not address the contours of declaratory judgment abstention in the absence of pending parallel state proceedings. In Reifer v. Westport Insurance Co., the district court declined jurisdiction, citing the trend of district courts adopting the same approach in declaratory judgment actions involving insurance companies “that are solely brought on diversity, and have no federal question or interest.”[42] The district court also expressed concern that requiring courts to retain jurisdiction simply because no parallel proceeding had been filed in state court could invite forum shopping. 

The Third Circuit upheld the district court’s decision, concluding that it is not a per se abuse of discretion for a court to decline to exercise jurisdiction when pending parallel state court proceedings do not exist.[43] The Third Circuit reasoned that a district court’s Declaratory Judgment Act discretion should not be tethered to “whether a party has or has not filed a parallel action in state court.”[44] According to the court, “holding otherwise would ‘be inconsistent with our longstanding belief that district courts should be afforded great latitude in determining whether to grant or deny declaratory relief.’”[45] The Third Circuit also cited relevant authority from other circuits, which addressed the issue and explicitly held that the existence or nonexistence of pending parallel state proceedings only serves as one factor for a district court to consider when determining whether to exercise jurisdiction in declaratory judgment actions.[46] 

Nominal Parties and Fraudulent Joinder in Disputes over Removal or Remand

Most litigators would agree that among the foremost concerns in any case are jurisdiction and venue. The court that hears a case can play a significant role in the path that the case will take during discovery, motions practice, and trial. It may affect the types of discovery permitted, the evidence allowed to support a motion for summary judgment, and the time frame within which the case will move to a conclusion. As discussed previously in this article, some courts are known to be more favorable toward policyholders (making them less desirable venues for the insurer), while others tend to fall on the side of the insurer (making them, in turn, less desirable venues for the policyholder). Each of these factors weighs heavily into one of the first major decisions to be made by each party to a lawsuit—where to file a complaint or whether an objection to jurisdiction or venue, or to attempt to remove the case from state to federal court, is appropriate. 

In insurance coverage actions, where a party seeks to gain jurisdiction of a federal court over a declaratory judgment, the only means to gain access to the jurisdiction of those courts is through diversity jurisdiction. And satisfying the bases for diversity jurisdiction can pose a challenge in such cases, which routinely involve multiple defendants—increasing the likelihood that complete diversity will not be found and diversity jurisdiction may appear out of reach.

In the past several years, the district courts seated in Virginia have twice had the opportunity to consider the removal of an insurance coverage declaratory judgment action from state to federal court. And in both cases, those courts held that the inclusion of non-diverse tortfeasors as defendants in such actions could not prevent a diverse insurance carrier from properly removing the lawsuit to federal court. But although the decisions handed down in Lloyd v. Travelers Property Casualty Insurance Company[47] and Trigo v. Travelers Commercial Insurance Company[48] give parties to insurance coverage declaratory judgment actions a strong foundation on which they may be able to choose a more favorable jurisdiction, those decisions certainly do not mean that insurance coverage declaratory judgment actions get a free pass at entry into federal courts. 

Both Lloyd and Trigo arose out of similar scenarios—insureds brought declaratory judgment actions against their own automobile insurance carriers seeking determinations that they could “stack” the underinsured motorist coverage limits available to them under their respective insurance policies. In bringing their lawsuits, both Lloyd and Trigo named not only their insurance carriers as defendants but also the tortfeasors allegedly responsible for the accidents giving rise to their injuries. In each case, the complaints were originally filed in Virginia’s state courts.

The monetary threshold that must be surpassed to enter federal courts was no issue in either case—both of which sought limits far greater than $75,000. The problem faced by Travelers, the insurer that hoped to remove the case to federal courts (a jurisdiction much more favorable to insurance carriers than Virginia’s state courts are known to be), was satisfying the complete diversity element of diversity jurisdiction. Under 28 U.S.C. § 1441(a)—the statute governing removal—a defendant may remove a matter from state to federal court only where the district court would have original jurisdiction over the claim presented. Because insurance coverage declaratory judgment actions rarely, if ever, involve a federal question or fall within the rare set of claims that are completely preempted by federal law, diversity jurisdiction is the only door available for these cases into the federal courts. But in both Lloyd and Trigo, although the Travelers entity named as the defendant was considered a citizen of a state other than Virginia, the plaintiffs and each of the tortfeasor-named defendants were citizens of Virginia—defeating complete diversity and, apparently, diversity jurisdiction. It is well established that in civil cases, diversity jurisdiction exists only where there is an amount in controversy of more than $75,000 and complete diversity between the parties—where the state of citizenship for each plaintiff differs from the state of citizenship for each defendant.[49] 

But the U.S. Supreme Court has repeatedly affirmed the rule that only real and substantial parties to a controversy, and not nominal or formal parties, should be considered when a federal court determines whether complete diversity exists and permits it to exercise jurisdiction over a case.[50] The idea behind this rule is that parties who have no control of, impact on, or stake in a lawsuit cannot affect the jurisdiction where it is brought.[51] As the Lloyd court explained, “[t]his requirement sensibly bars state-court plaintiffs from tactically naming nondiverse defendants solely in order to prevent the real and substantial defendant or defendants from exercising their statutory removal right.”[52] 

To show that a party has been fraudulently joined, the removing party must demonstrate either that “there is no possibility that the plaintiff would be able to establish a cause of action against the in-state defendant in state court; or that there has been outright fraud in the plaintiff’s pleading of jurisdictional facts.”[53] In cases such as those presented in Lloyd and Trigo, it is the first of these options, rather than the second, that is argued and proven. As in Lloyd and Trigo, in cases such as these, there is frequently no count, claim, or cause of action alleged against the tortfeasor who has been named as a defendant. And the plaintiff commonly does not seek any relief from the tortfeasor named as a defendant. Because of that, those tortfeasor defendants are considered to have been fraudulently joined to the action and their citizenship cannot be considered for purposes of determining whether complete diversity exists. In making such a determination, the court has the freedom to look outside the allegations made in the pleadings and is allowed to consider the entire record when determining whether a defendant has been fraudulently joined to an action.[54] 

A related idea is that those parties who are considered “nominal parties” also may not be considered when determining whether complete diversity exists in a lawsuit. There is no uniform standard applied by courts in determining whether they are dealing with a nominal party. Some courts apply the fraudulent joinder standard—looking to see whether there is any possibility that the plaintiff could establish a cause of action against the party at issue in state court.[55] Others apply different tests, such as whether there was a legal possibility for predicting that the party could be found liable for the claims made in the lawsuit.[56] Still others have asked “whether a court would be able to enter a final judgment favoring the plaintiff in the absence of the purportedly nominal defendant without materially affecting the relief due to the plaintiff.”[57] 

In an insurance coverage declaratory judgment action where both the insurance carrier and the underlying tortfeasors are named as defendants, the answer to these inquiries is fairly clear. Even if the complaint requests relief against “the defendants,” what is sought is a declaration as to the amount that the insurer—not the tortfeasor—is obligated to pay under the insurance policy at issue. Nothing is asked from the tortfeasor in the declaratory judgment action; in fact, more often than not a separate liability lawsuit has been brought against the tortfeasor. These actions are nothing more than a contract dispute between two parties, with anyone else being named simply because of their tangential involvement in the accident giving rise to the coverage dispute. 

But the Lloyd and Trigo holdings should not be read to suggest that, in each and every insurance coverage declaratory judgment action, parties other than the insurer and the insured are nominal parties or parties that have been fraudulently joined. As the Lloyd court pointed out, in these cases—which involved the stacking of underinsured motorists coverage limits—the statutory scheme at play had a hand in its decision. In these cases, “the possibility that the tortfeasor defendants’ liability depends on the scope of the insurance policy coverage appears foreclosed by” a Virginia statute that gives uninsured motorist coverage insurers subrogation rights against tortfeasors.[58] The court did not indicate whether the same decision would have been reached absent this statute.

And even if the diverse defendant is able to successfully argue that its codefendants are nominal parties or fraudulently joined, or both, there is still a remaining hurdle to cross. Federal courts may abstain from exercising jurisdiction over lawsuits in which “principles of federalism, comity, and efficiency” require that they do so, or where there is a risk of entanglement with an ongoing state court proceeding that would justify abstention. These arguments were made to the Lloyd court, which rejected them in that particular case. 

Under the principle known as Burford abstention, a federal court may refuse to exercise jurisdiction over a case otherwise properly before it where the case presents difficult questions of state law whose importance transcends the results in the case then at bar or where federal review would disrupt state efforts to establish a coherent policy on a matter of substantial public concern.[59] Both the Lloyd and Trigo courts considered the plaintiff’s argument that Burford abstention was appropriate in his case, but the courts refused to abstain from exercising jurisdiction. The Lloyd court explained that in contrast to the “relatively straightforward dispute over the proper interpretation of the terms of an insurance policy agreement” before it in Lloyd—the type of which, it noted, federal courts resolve on a regular basis—federal courts have exercised their abstention right where cases involved questions of receivership, insolvency, the structure and form of insurance companies, or “other heavily regulated matters that implicated complex and comprehensive regulatory schemes.”[60] Questions of insurance policy interpretation, the Lloyd court found, do not interfere with any complex administrative regime in the way that those other types of cases would. The Trigo court mirrored these holdings.[61] Each court determined that its exercise of jurisdiction over the insurance coverage matters presented to them was proper and warranted. 

Although the Lloyd and Trigo courts were outspoken in their belief that they properly had—and could exercise—jurisdiction over these cases being removed to their chambers, these cases should not lead insurers or insureds to believe that the federal courts have turned a blind eye to the importance of state courts. In fact, the Lloyd court was quite explicit in its belief that the opposite was true: 

Notwithstanding the result reached here, there is no doubt that plaintiff’s essential point is undeniably valid: issues of the sort presented in this declaratory judgment action are preferably litigated and resolved in state court so as to create a path for appeal, if necessary, to the Supreme Court of Virginia. Nonetheless, this general preference is insufficiently compelling to overcome well settled principles of removal, diversity jurisdiction, and abstention.[62] 

In other words, there is no one right home for insurance coverage declaratory judgment actions. But where one party wants to bring such lawsuits into the federal courts, the door may certainly be opened. 

Bad-Faith Considerations in Forum Disputes

Forum disputes arise, typically, because one side or the other perceives a tactical, strategic, procedural, or substantive advantage to litigating in a particular forum, as opposed to some other forum. Such views often are well founded. Insurance coverage law, and the law on related matters such as bad faith, can vary significantly from jurisdiction to jurisdiction. The outcome of a single insurance case can be very different depending on whether it is litigated in a particular courthouse or instead is litigated in a courthouse a few miles away that happens to be on the other side of a state line. In other words, the choice of forum can be outcome-determinative.

This reality gives rise to potential bad-faith considerations that, to date, have not been widely raised. The reasons why bad-faith assertions are not often raised in the context of forum battles may be many. Most fundamentally, there is something vaguely counterintuitive to asserting that an insurer, which may file a declaratory judgment action against its policyholder as a way of avoiding bad-faith exposure in a particular jurisdiction, may be engaging in bad faith by filing that very action, depending on the forum it chooses. Such bad-faith arguments, and even bad-faith actions, however, may be available to policyholders in many jurisdictions when they find themselves in forum battles, although the questions that arise in regard to such bad-faith assertions may present issues of first impression.

Regardless of the jurisdiction, an insurer owes a duty of good faith and fair dealing to its policyholder.[63] In many jurisdictions, this duty compels the insurer not to place its interests above those of its policyholder.[64] Given the duty of good faith and fair dealing, “at a minimum, an insurer must equally consider the insured’s interests and its own.”[65] “An insurer cannot escape liability for breach of the duty of good faith by acting upon what it considers to be its interest alone.”[66] 

As noted above, at times insurers may file declaratory judgment actions in attempts to insulate themselves from bad-faith liability.[67] Thus, because courts have recognized and permitted the use of declaratory judgment actions by insurers, an insurer’s decision to invoke its right to a declaratory judgment action “does not, in and of itself, support an action for bad faith.”[68] 

The Third Circuit and other courts have recognized the principle that “the essence of a bad faith claim must be the unreasonable and intentional (or reckless) denial of benefits.”[69] Despite this high standard, as observed by some courts, “[c]learly, one can envision factual situations where an insurer could abuse its legal prerogative in requesting a court to determine coverage issues.”[70] 

Applying these concepts may lead to the conclusion that an insurer has engaged in bad faith by taking the initiative to file an action against its policyholder to control the forum, depriving its policyholder of that opportunity. Generally, courts are “mindful of the general proposition that declaratory judgments are not to be used defensively to deny a prospective plaintiff’s choice of forums.”[71] Courts, in other words, do not encourage “procedural gamesmanship” or “reward a party for winning a race to the courthouse” when it has done so by acting in bad faith.[72] 

Hence, in a forum dispute between an insurer and its policyholder, a court may not be inclined to honor the forum selection of the first party to file when there is evidence of bad faith and when honoring a bad-faith forum selection would be unjust.[73] In particular, “[b]ad faith is evident when the plaintiff in the first action induces the other party to, in good faith, rely on representations made by the plaintiff that it will not file first in order to preempt the other party from filing a suit in its preferred forum.”[74] 

An example of these concepts is Sensient Colors, Inc. v Allstate Insurance Co.,[75] which centered on an insurer’s filing of a declaratory judgment action to secure its choice of forum. The policyholder, Sensient, was sued in the underlying action for allegedly contaminating property in New Jersey. The policyholder notified the appropriate insurers, one of which, Zurich, agreed to provide a defense under a reservation of rights. Months later, Zurich changed its position and filed a declaratory judgment action in New York. Approximately two months later, the policyholder filed a competing declaratory judgment action in New Jersey, asserting claims for breach of contract and bad faith. 

The Supreme Court of New Jersey determined that the policyholder’s second-filed action in New Jersey could proceed, reasoning as follows:

After Sensient notified Zurich of the [civil] suit and the EPA reimbursement demand, the insurer informed Sensient that it would participate in the defense of those matters under a reservation of rights. Without a denial of coverage by Zurich, Sensient had little reason to file an action in New Jersey for a declaration of its rights. In a preemptive move similar to the one condemned in [Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)], Zurich without warning filed suit in New York, thereby denying Sensient the opportunity to select its own forum for resolving the coverage dispute. An insurer has a duty to act in good faith with its insured. See Pickett v. Lloyd’s, 131 N.J. 457, 467, 621 A.2d 445 (1993). Here, Zurich engaged in a first-strike maneuver, filing suit in New York while a lulled Sensient sat on its rights. [76] 

The court surmised that “Zurich’s jockeying for the more hospitable insurance laws of New York best explain[ed] its selection of New York as its favored forum.”[77] Hence, the insurer’s decision to file a strike suit for its own benefit and to the disadvantage of its policyholder was influential in the court’s decision not to honor the insurer’s choice of forum.[78] 

In a forum battle, therefore, the widely recognized concepts that an insurer owes its policyholder a duty of good faith and fair dealing and that an insurer accordingly may not take actions for its own benefit to the disadvantage of its policyholder may be employed by the policyholder as it advocates for its preferred forum. In certain jurisdictions, an insurer’s conduct in filing a strike suit may even give rise to a cause of action for bad faith, although such an action would raise issues of first impression in many jurisdictions.

Keywords: litigation, insurance coverage, forum selection, mandatory arbitration clause, choice of law, declaratory judgment, Wilton/Brillhart abstention, nominal party, fraudulent joinder, bad faith

Richard D. Milone is with Jones Day in Washington, D.C. Mindy B. Pava is with Kelleye, Drye & Warren, LLP, in Washington, D.C.. Paul A. Rose, Caroline M. Marks, and Alexandra V. Dattilo are with Brouse McDowell in Akron and Cleveland, Ohio. John B. Mumford Jr. and Kathryn E. Kasper are with Hancock, Daniel, Johnson & Nagle, P.C., in Richmond, Virginia. Cyndie M. Chang and Dan Terzian are with Duane Morris LLP in Los Angeles.

This article is the result of the collaboration of lawyers at four different firms, who frequently take opposing positions with respect to the issues addressed herein. Therefore, the views expressed in this article should not be ascribed to any particular author or authors, nor to their law firms or to any of their clients.

[1] 2013 U.S. Dist. LEXIS 141572 (M.D. Ala. Sept. 30, 2013).

[2] Wingard, 2013 U.S. Dist. LEXIS 141572, at *29 (citations omitted).

[3] 407 U.S. 317, 92 S. Ct. 1907 (1972).

[4] Wingard, 2013 U.S. Dist. LEXIS 141572, at *20 (citation omitted).

[5] Wingard, 2013 U.S. Dist. LEXIS 141572, at *33.

[6] 344 S.W.3d 205 (Mo. Ct. App. 2011).

[7] 255 Ga. App. 445, 565 S.E.2d 603 (Ga. Ct. App. 2002).

[8] Equity Residential, 255 Ga. App. at 446 (citations omitted).

[9] Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, 2011 U.S. Dist. LEXIS 10728 (D. Kan. 2011) (citations omitted).

[10] Brecek, 2011 U.S. Dist. LEXIS 10728, at *4.

[11] 2001 Bankr. LEXIS 2285 (Bankr. E.D. Pa. 2001).

[12] Seedor,2001 Bankr. LEXIS 2285, at *12.

[13] Seedor,2001 Bankr. LEXIS 2285, at *17.

[14] See Orix Credit Alliance, Inc. v. Wolfe, 212 F.3d 891, 895 (5th Cir. 2000); Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 (9th Cir. 1990); see also Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240–42 (1937).

[15] New London Cnty. Mut. Ins. Co. v. Nantes, 36 A.3d 224, 232 (Conn. 2012) (internal ellipsis omitted).

[16] Adams v. Atlanta Cas. Co., 484 S.E.2d 302, 305 (Ga. Ct. App. 1997).

[17] See Reliance Ins. Co. v. Six Star, Inc., 155 F. Supp. 2d 49, 54 (S.D.N.Y. 2001); Exxon Research & Eng’g Co. v. Indus. Risk Insurers, 775 A.2d 601, 610 (N.J. Super. Ct. App. Div. 2001).

[18] See 215 Ill. Comp. Stat. 5/155(1) (permitting the assessment of various costs or fees against an insurer whose litigation conduct “is vexatious and unreasonable”).

[19] Compare Hayseeds, Inc. v. State Farm Fire & Cas., 352 S.E.2d 73, 80 (W. Va. 1986) (“[W]henever a policyholder must sue his own insurance company over any property damage claim, and the policyholder substantially prevails in the action, the company is liable for the payment of the policyholder’s reasonable attorneys’ fees.”), with Galiotti v. Travelers Indem. Co., 333 A.2d 176, 177–79 (Del. Super. Ct. 1975) (“[A] provision allowing an award of attorney’s fees to be assessed against an adversary should not be extended beyond the clear import of the statutory provision,” and the statute required that reasonable attorney fees be awarded to an insured prevailing “upon any policy of property insurance. . . .”).

[20] Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1162 (Cal. 1993).

[21] See Sherwin-Williams Co. v. Holmes Cnty., 343 F.3d 383, 388 (5th Cir. 2003); see also Travelers Ins. Co. v. La. Farm Bureau Fed’n, 996 F.2d 774, 777 (5th Cir. 1993).

[22] Vulcan Materials Co. v. Alabama Ins. Guar. Ass’n, 985 So. 2d 376, 380–84 (Ala. 2007).

[23] See Mut. of Enumclaw Ins. Co. v. Dan Paulson Const., Inc., 169 P.3d 1, 7–8 (Wash. 2007) (“The insurer may defend under a reservation of rights while seeking a declaratory judgment that it has no duty to defend, but it must avoid seeking adjudication of factual matters disputed in the underlying litigation because advocating a position adverse to its insured’s interests would constitute bad faith on its part.” (internal quotation marks and citation omitted)).

[24] See Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 813 (1976).

[25] 28 U.S.C. § 2201(a).

[26] See Brillhart v. Excess Ins. Co. of Am., 361 U.S. 491, 495 (1942).

[27] Brillhart, 316 U.S. at 495. 

[28] 515 U.S. 277, 286–88 (1995).

[29] Wilton, 515 U.S. at 279. 

[30] Wilton, 515 U.S. at 286. 

[31] See, e.g., Travelers Indem. Co. v. Philips Elecs. N. Am. Corp., 2004 U.S. Dist. LEXIS 1298 (S.D.N.Y. Feb. 3, 2004). 

[32] 2014 U.S. Dist. LEXIS 86682 (S.D.N.Y. 2014).

[33] The 14 cases are as follows: Mitsui Sumitomo Ins. USA, Inc. v. Gibson Guitar Corp., No. 11 Civ. 295 (LLS), 2011 U.S. Dist. LEXIS 101260 (S.D.N.Y. Sept. 8, 2011); TIG Ins. Co. v. Fairchild Co., No. 07 Civ. 8250, 2008 U.S. Dist. LEXIS 41452, at *7 (S.D.N.Y. May 27, 2008) (“Insurance disputes . . . generally present strong reasons for a federal court to abstain because such claims are intimately tied to matters of state law which are being litigated in state court.”); Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Turbi De Angustia, No. 05 Civ. 2068 (DLC), 2005 U.S. Dist. LEXIS 18141 (S.D.N.Y. Aug. 23, 2005); Travelers Indem. Co. v. Phillips Elecs. N. Am. Corp., No. 02 Civ. 9800 (WHP), 2004 U.S. Dist. LEXIS 1298, at *7 (S.D.N.Y. Feb. 3, 2004) (“district courts routinely invoke the doctrine of abstention in insurance coverage actions, which necessarily turn on issues of state law”) (collecting authorities); Winterthur Int’l Am. Ins. Co. v. Pepsico, Inc., No. 01 Civ. 9132 (WK), 2002 U.S. Dist. LEXIS 8511 (S.D.N.Y. May 13, 2002); Nat’l Union Fire Ins. Co. v. Warrantech Corp., No. 00 CIV 5007 NRB, 2001 U.S. Dist. LEXIS 1900 (S.D.N.Y. Feb. 27, 2001); Am. Motorists Ins. Co. v. The Glidden Co., 129 F. Supp. 2d 640, 641 (S.D.N.Y. 2001); Commercial Underwriters Ins. Co. v. Glowmaster Corp., 105 F. Supp. 2d 268, 271 (S.D.N.Y. 2000); Emp’rs Ins. of Wausau v. El Paso Tenn. Pipeline Co., No. 98 Civ. 4612 (JSR), 1998 U.S. Dist. LEXIS 18069 (S.D.N.Y. 1998); Commercial Union Ins. Co. v. Flagship Marine Servs., Inc., No. 97 Civ. 4552 (JSR), 1998 U.S. Dist. LEXIS 18069 (S.D.N.Y. Mar. 30, 1998) (rev’d on other grounds); Reliance Ins. Co. v. Multi-Financial Sec. Corp., No. 94 Civ. 6971 (SS), 1996 U.S. Dist. LEXIS 1503 (S.D.N.Y. 1996); Fireman’s Fund Ins. Co v. Chris-Craft Indus., Inc., 932 F. Supp. 618, 621 (S.D.N.Y. 1996); Royal Ins. Co. of Am. v. H.H. Brown Shoe Co., 1995 U.S. Dist. LEXIS 17494 (S.D.N.Y. Nov. 22, 1995); Hartford Accident & Indem. Co. v. Hop-On Int’l Corp., 568 F. Supp. 1569, 1575 (S.D.N.Y. 1983) (decided before Wilton articulated the lower discretionary standard, and nevertheless determined that abstention was warranted). GrafTech became the 15th case in which the Southern District chose to abstain. See GrafTech, No. 12 Civ. 6355 (RA), 2014 U.S. Dist. LEXIS 86682 (S.D.N.Y. June 24, 2014). 

[34] See GrafTech, 2014 U.S. Dist. LEXIS 86682, at *14 (“The scope of the pending state court proceeding, the nature of the defenses available there, and the ability of that proceeding to adjudicate the claims of all parties in interest weigh in favor of abstention.”).

[35] See, e.g., Am. Motorists Ins. Co. v. The Glidden Co., 129 F. Supp. 2d 640, 641 (S.D.N.Y. 2001) (Judge Rakoff wrote that “it makes no sense for this Court to take a piece of the meal when the full plate is pending before [the Ohio state judge.]”).

[36] 511 F.3d 788, 791 (8th Cir. 2008).

[37] Apex Oil Co., 511 F.3d at 793. 

[38] Apex Oil Co., 511 F.3d at 792. 

[39] See, e.g., Nissan N. Am., Inc. v. Andrew Chevrolet, Inc., 589 F. Supp. 2d 1036, 1041 (E.D. Wis. 2008); Lexington Ins. Co. v. Rolison, 434 F. Supp. 2d 1228, 1237 (S.D. Ala. 2006); ITT Indus., Inc. v. Pac. Emp’rs Ins. Co., 427 F. Supp. 2d 552, 556 (E.D. Pa. 2006). 

[40] See Reifer v. Westport Ins. Co., 751 F.3d 129 (3d Cir. 2014).

[41] See Reifer, 751 F.3d at 139 n.10 (citing Verizon New England, Inc. v. Int’l Bhd. of Elec. Workers, Local No. 2322, 651 F.3d 176, 187–88 (1st Cir. 2011)). 

[42] Reifer, 751 F.3d at 142. 

[43] Reifer, 751 F.3d at 144. 

[44] Reifer, 751 F.3d at 142. 

[45] Reifer, 751 F.3d at 142.

[46] The Fourth, Fifth, Eighth, and Tenth Circuits have addressed the issue of whether a federal court can decline to exercise jurisdiction without the existence of a parallel state court proceeding. See Reifer, 751 F.3d at 143–44. 

[47] 699 F. Supp. 2d 812 (E.D. Va. 2010).

[48] 2010 U.S. Dist. LEXIS 92913 (W.D. Va. Sept. 7, 2010).

[49] 28 U.S.C. § 1332(a).

[50] Lloyd, 699 F. Supp. 2d at 815 (citing Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 460–61 (1980)).

[51] Lloyd, 699 F. Supp. 2d at 816.

[52] Lloyd, 699 F. Supp. 2d at 816.

[53] Trigo, 2010 U.S. Dist. LEXIS 92913, at *9 (quoting Baltimore Cnty. v. Cigna Healthcare, 238 F. App’x 914, 920 (4th Cir. 2007)). 

[54] Trigo, 2010 U.S. Dist. LEXIS 92913, at *11. 

[55] Trigo, 2010 U.S. Dist. LEXIS 92913, at *11. 

[56] Trigo, 2010 U.S. Dist. LEXIS 92913, at *11. 

[57] Trigo, 2010 U.S. Dist. LEXIS 92913, at *11–12.

[58] Lloyd, 699 F. Supp. 2d at 816.

[59] Trigo, 2010 U.S. Dist. LEXIS 92913, at *23 (quoting Martin v. Stewart, 499 F.3d 360, 364 (4th Cir. 2007)).

[60] Lloyd, 699 F. Supp. 2d. at 816–17.

[61] Trigo, 2010 U.S. Dist. LEXIS 92913, at *24–25.

[62] Lloyd, 699 F. Supp. 2d at 818.

[63] See, e.g., Allstate Ins. Co. v. Miller, 212 P.3d 318, 324 (Nev. 2009); Kransco v. Am. Empire Surplus Lines Ins. Co., 2 P.3d 1, 8 (Cal. 2000); Zoppo v. Homestead Ins. Co., 644 N.E.2d 397, 399 (Ohio 1994). 

[64] Nat’l Sur. Corp. v. Immunex Corp., 297 P.3d 688, 691 (Wash. 2013) (“Because security and peace of mind are principal benefits of insurance, insurers must fulfill their contractual obligations in good faith, ‘giving equal consideration in all matters to the insured’s interests.’” (quoting Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133 (Wash. 1986) (emphasis in original)).

[65] Miller, 212 P.3d at 326.

[66] Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 786 (Fla. 1980).

[67] See, e.g., Cay Divers, Inc. v. Raven, 812 F.2d 866, 871 (3d Cir. 1987) (“In general, an insurer’s seeking of a declaratory judgment on potential coverage and on the duty to defend dependent thereon before the trial on the main action does not support a charge of bad faith.”) (citing 7C Appleman, Insurance Law and Practice § 4686, at 177–78 (Berdal ed., 1979)); Victoria Ins. Co. v. Li He Ren, No. 08-517, 2008 U.S. Dist. LEXIS 44674, at *10 (E.D. Pa. June 9, 2008) (rejecting a bad-faith claim, stating that “[the insurer] has proceeded as we expect a responsible insurer to proceed when it has a legitimate coverage question; it has assumed the defense of [the insureds] in the State Court action and filed a declaratory judgment action in this Court”); Emp’rs Mut. Cas. Co. v. Loos, 476 F. Supp. 2d 478, 496 (W.D. Pa. 2007) (determining that “the presence or absence of bad faith does not turn on the legal correctness of the basis for an insurer’s denial of an insured’s claim”).

[68] See State Farm Fire & Cas. Co. v. Trumble, 663 F. Supp. 317, 320 (D. Idaho 1987); accord Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674, 680 (9th Cir. 1993).

[69] UPMC Health Sys. v. Metro. Life Ins. Co., 391 F.3d 497 (3d Cir. 2004).

[70] Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Small Smiles Holding Co., LLC, 781 F. Supp. 2d 597, 601–2 (M.D. Tenn. 2011) (declining to dismiss insured’s claim for unfair or deceptive practices under the Tennessee Consumer Protection Act based on allegations that the professional liability insurer had attempted to avoid its contractual obligations by instituting a baseless declaratory judgment action); Guar. Nat’l Ins. Co. v. George, 953 S.W.2d 946, 949 (Ky. 1997); see Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 169 P.3d 1 (Wash. 2007) (holding that insurer acted in bad faith by pursuing a declaratory judgment action where its actions prejudiced its policyholder’s tort defense); see generally Great Sw. Express Co. v. Great Am. Ins. Co., 665 S.E.2d 878 (Ga. Ct. App. 2008) (“[T]he mere filing of a declaratory judgment action does not in and of itself absolve an insurer from being subject to a bad faith penalty under OCGA § 33-4-6.”).

[71] Prudential Ins. Co. of Am. v. Doe, 140 F.3d 785, 790 (8th Cir. 1998).

[72] White Light Prods. v. On the Scene Prods., 231 A.D.2d 90, 98 (N.Y. 1997).

[73] See Royal Ins. Co. v. Packing Coordinator, Inc., No. 00-CV-3231, 2000 U.S. Dist. LEXIS 14174, at *8 (E.D. Pa. Sept. 20, 2000); see also AmSouth Bank v. Dale, 386 F.3d 763 (6th Cir. 2004) (stating that the fact that the plaintiff participated in settlement negotiations and represented it was continuing to participate in the negotiations but instead filed a lawsuit weighs heavily against entertaining the declaratory judgment action filed by plaintiff).

[74] Nat’l Union Fire Ins. Co. v. Payless Shoesource, Inc., No. C-11-1892 EMC, 2012 U.S. Dist. LEXIS 112346, at *21 (N.D. Cal. Aug. 9, 2012); see also Zide Sport Shop of Ohio, Inc. v. Ed Tobergte Assocs., 16 F. App’x 433, 438 (6th Cir. 2001) (stating that because plaintiffs mislead the defendant by asking for an extension of time for negotiating a settlement and then filed a lawsuit before that time expired “[a] finding of bad faith is overwhelmingly supported by the record”); White Light Products, 231 A.D.2d at 100 (stating that “[d]efendants should not be rewarded for their precipitous filing, approximately a week after learning of plaintiffs’ intention to bring an action, placing venue in a distant forum”).

[75] 939 A.2d 767 (N.J. 2006).

[76] Sensient Colors, 939 A.2d at 778–79.

[77] Sensient Colors, 939 A.2d at 780.

[78] See, e.g., O’Loughlin v. O’Loughlin, 6 N.J. 170, 179, 78 A.2d 64 (1951) (finding that special equities grounded in principles of “fairness” become implicated when a first-filed action may not do “full justice” to a party). 

Copyright © 2015, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).