Members of the Insurance Coverage Litigation Committee often field calls from insurer clients looking for advice on the handling of claims that involve a dispute over coverage. The focus of discussions is and has always been what state law exists interpreting the exclusion or condition at issue, and whether the claim against an insured should be defended pending resolution of the coverage dispute. In the past, there was little discussion about where to file a declaratory judgment seeking a coverage decision. Most insurers and their counsel preferred federal court, with its more lenient summary judgment standard and streamlined procedures. If possible, that is where insurers filed such claims. The insured rarely objected, and the federal courts proceeded to adjudicate those disputes.
That is no longer the case, as many federal courts now routinely dismiss coverage cases—either on the insured’s objection or sua sponte—on the grounds that such claims should be resolved by state courts because of federalism, comity, and judicial economy. Increasingly, coverage counsel must now counsel their clients as much about the forum where their dispute should be filed as about the merits of the dispute itself.
This article focuses on the statutory basis for the federal court’s discretionary jurisdiction over insurance coverage disputes, the factors the federal circuits consider when deciding whether to retain or decline jurisdiction, and some specific cases discussing the issues. The article provides some helpful hints to coverage counsel on what factors to consider in making the decision on whether to file their declaratory judgment action in federal or state court.