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Declaratory Judgment Actions When an Underlying Action Is Pending

01255484 and Julia Janet Nierengarten


  • Timing of filing the declaratory judgment action.
  • Necessary parties to the declaratory judgment.
  • Where to file the declaratory judgment action.
Declaratory Judgment Actions When an Underlying Action Is Pending

Policyholders and insurers alike use declaratory judgment actions to settle disputes over insurance coverage. Declaratory judgment actions are a powerful tool that can clarify not only an insurer’s current coverage obligations to the insured but also whether an insurer may have to indemnify an insured for a future judgment. The Federal Declaratory Judgment Act provides:

(a) In a case of actual controversy within its jurisdiction, except with respect to Federal taxes . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

Likewise, most states have their own similar statutes. Many states have adopted some version of the Uniform Declaratory Judgments Act, which provides, in part:

Courts of record within their respective jurisdictions shall have power to declare rights, status, and other legal relations whether or not further relief is or could be claimed. No action or proceeding shall be open to objection on the ground that a declaratory judgment or decree is prayed for. The declaration may be either affirmative or negative in form and effect; and such declarations shall have the force and effect of a final judgment or decree.

When an insurer has denied a policyholder defense or indemnity for a pending claim, a controversy exists that may result in either the policyholder or insurer initiating a declaratory judgment action to resolve the coverage dispute. When initiating a declaratory judgment action, consideration must be paid to the status of the underlying action. Specifically, decisions must be made regarding the timing of the declaratory judgment action to the underlying action and whether the claimant in the underlying action needs to be made a party to the declaratory judgment action. Issues will invariably also arise regarding where to file the declaratory judgment action and the interplay in discovery between the two actions. This article discusses some of the issues attorneys for both insurers and policyholders should consider when seeking declaratory relief is appropriate.

Timing of Filing the Declaratory Judgment Action


The federal courts require a “case of actual controversy” in order for a declaratory judgment to proceed. State courts will also consider whether a declaratory judgment action is “ripe” for consideration.

When a policyholder or insurer disputes whether there is a duty to defend the insured against a lawsuit, courts generally find that an action seeking a declaratory regarding the duty to defend is ripe for adjudication.

The ripeness of a dispute over the duty to indemnify, however, is a more complicated issue. Where an insurer has denied both a defense and indemnity to its policyholder, other courts have held that a declaratory judgment action is ripe for determination regardless of the status of the underlying action. Other courts have held that a declaratory judgment regarding the duty to indemnify is not ripe until the insureds’ liability has been determined in the underlying action. Further, courts are generally unwilling to decide whether an insurer has a duty to indemnify when the issues in the declaratory judgment action and the underlying action are identical. The courts conclude that the declaratory judgment action should not proceed until the underlying case is resolved.

On the other hand, if the issues in the underlying liability case and the declaratory judgment case are different, the declaratory judgment action should be allowed to proceed while the liability action is pending. For example, if a coverage dispute exists over lost policies for a claim involving damages or injuries occurring over a number of years, the issue of the existence of policies is separate from any liability issues in the underlying litigation. In cases involving injury or damage that occurred over a number of years and an insurer who allegedly issued numerous policies to the policyholder, the insurer may have evidence of some years of coverage, but a dispute may exist regarding the existence of all policies alleged to have been issued to the policyholder. Because the existence of the policies is necessary for determining the insurer’s indemnity obligation, but irrelevant to determining the policyholder’s liability for the damage, the two cases may proceed at the same time. If the issue in the underlying litigation is simply a matter of the amount of damages owed by the policyholder (i.e., the policyholder admits liability but disputes the amount of damages sought), it actually may be advantageous to any potential settlement of the underlying litigation to have a determination regarding the existence of policies while the underlying litigation is pending so that the amount of insurance available is known.

Statute of limitations.

In some cases, it may be necessary for the policyholder to initiate a declaratory judgment action to avoid a statute of limitations defense regarding the duty to defend, even while the underlying action is pending. While there is often no specific statute of limitations for a declaratory judgment action, in the context of an insurance coverage dispute, courts typically apply the statute of limitations for breach of contract actions.

The statute of limitations begins to run when a cause of action accrues. The question of when a cause of action regarding the duty to defend accrues varies by state. States typically apply one of three accrual tests. The first group of states holds that the statute of limitations begins to run once the underlying action is finally resolved. Some of these states find that the statute of limitations “accrues” when an insurer denies that it has a duty to defend, but that the statute of limitations is tolled until the underlying lawsuit is finally resolved. The states that apply equitable tolling have held that it is unfair to require an insured to both defend itself in one lawsuit and then also prosecute another. Other states hold that a claim for breach of the duty to defend does not accrue until the final judgment in the underlying case. A second group of states holds that each defense cost has its own statute of limitations. Under this approach, the statute of limitations could bar recovery for older expenses but not for more recent ones. Finally, the third group of states holds that a claim for the breach of the duty to defend accrues at denial and does not apply equitable tolling.

When the statute of limitations is a concern, the parties may wish to enter into a standstill agreement regarding the coverage issues. Under a standstill agreement, the parties may agree not to file suit until the underlying claim is resolved.

Necessary Parties to the Declaratory Judgment

Another issue that needs to be evaluated in the context of the decision of when to file a declaratory judgment is who should be made a party to the action. Specifically, whether or not the claimant needs to be made a party to the action, an issue that is much debated among practitioners, and courts around the country have reached different conclusions regarding it.

The Uniform Declaratory Judgment Act, which has been adopted by the majority of states, reads, “when declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding.” Under the terms of the act, a plaintiff who fails to join a necessary party to the declaratory judgment action may face a dismissal.

The typical categories of potentially necessary parties may include the following:

  • underlying claimants
  • other insureds under the policy
  • other primary insurers
  • excess insurers
  • agents or brokers who procured the insurance policy
  • successors-in-interest to the insureds
  • the insured (in a dispute between insurers)

While experienced practitioners may argue that a declaratory judgment action typically proceeds to judgment without a dispute as to whether the necessary parties have been joined, analysis of who should be joined as a necessary party is nonetheless important for four reasons.

First, several states strictly construe the mandatory joinder rule and will dismiss a declaratory judgment action where the underlying claimant or another interested party has not been joined. Once a challenge has been made in those states, which include Illinois, Nebraska, North Carolina, Pennsylvania, and Ohio, the courts tend to dismiss any action that is missing a required party. Arguments that the missing party’s interests are sufficiently represented by another party currently in the litigation or that the missing party will not be prejudiced by the litigation are not likely to succeed.

Second, even if no challenge is made regarding necessary parties, joining all potentially interested parties will mean that they are bound by the judgment and can prevent potential re-litigation of the same coverage issues. Re-litigating the same coverage issues is inefficient and expensive. If an underlying claimant or another insurer could be affected by a determination of no coverage but will not be bound by a declaratory judgment to that effect, duplicative litigation may be unavoidable if those parties are not joined in the declaratory judgment.

Third, the decision of which parties to join can affect whether your case proceeds in the forum of your choosing. For example, federal jurisdiction can be lost by destroying diversity. On the other hand, joining all potentially interested parties can help prevent the dismissal of the action if a forum battle ensues. When determining which of two competing cases should proceed, courts often favor allowing the more “complete” action to proceed while staying the less comprehensive action. Once you have chosen the most favorable forum, the declaratory judgment action should be crafted in a way that tries to ensure it remains in that most favorable forum.

However, other factors may weigh against joining multiple parties who are only potentially interested: Litigation with fewer parties can be easier and less expensive to manage, and joining additional parties adverse to the insurer could weaken the insurer’s case.

To balance these competing interests, before filing a declaratory judgment action, it is important to indemnify all potentially interested parties, as well as the costs and benefits of joining each party.

Where to File the Declaratory Judgment Action


Assuming a coverage action involves parties who are diverse, a choice will need to be made regarding whether to file the declaratory judgment action in federal or state court. Even if a case can be filed in federal court, it is not always possible to retain the coverage action in federal court. The U.S. Supreme Court held in Wilton v. Seven Falls Co., that a federal court may stay or dismiss a declaratory judgment action regarding insurance coverage, even if the jurisdictional prerequisites are satisfied.

The Wilton Court held that a (1) discretionary standard, and not an “exceptional circumstances” test, governs a district court’s decision to stay a declaratory judgment action during parallel state court proceedings, and (2) a district court decision about the propriety of hearing declaratory judgment action is reviewed for abuse of discretion. The Wilton decision rejected the application of the Colorado River abstention doctrine, which only allowed courts to abstain in exceptional circumstances.

As a result of Wilton, the federal courts are more willing to stay or dismiss a declaratory judgment action filed in federal court if there is a related case pending in state court. Federal courts have not necessarily required a parallel state court action when applying Wilton and have stayed or dismissed federal declaratory judgment actions where there is a related state court case, such as an underlying action. Some circuits have adopted a factor test for determining whether to retain jurisdiction over a federal declaratory judgment action where there is a related, but not parallel, state court action.

For example, the Fourth and Eighth Circuits consider:

  1. whether the declaratory judgment sought “will serve a useful purpose in clarifying and settling the legal relations in issue”;
  2. whether the declaratory judgment “will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the [federal] proceeding”;
  3. “the strength of the state’s interest in having the issues raised in the federal declaratory judgment action decided in the state courts”;
  4. “whether the issues raised in the federal action can more efficiently be resolved in the court in which the state action is pending”;
  5. “whether permitting the federal action to go forward would result in unnecessary ‘entanglement’ between the federal and state court systems, because of the presence of ‘overlapping issues of fact or law’”; and
  6. “whether the declaratory judgment action is being used merely as a device for ‘procedural fencing’[]”

In Travelers Indemnity Co. v. Bowling Green Professional Associates, PLC, the circuit court examined whether the district court should have retained jurisdiction while the underlying liability action was pending in state court. The insurers for an outpatient drug rehabilitation clinic sought a declaration that they had no duty to provide coverage for the clinic in a wrongful death suit that was pending in state court. On appeal, the court raised the issue of absention sua sponte at oral argument and invited briefing. The circuit court then applied the following factors to determine whether the trial court abused its discretion in retaining jurisdiction over the declaratory judgment action:

  1. whether the declaratory action would settle the controversy;
  2. whether the declaratory action would serve a useful purpose in clarifying the legal relations in issue;
  3. whether the declaratory remedy is being used merely for the purpose of “procedural fencing” or “to provide an arena for res judicata;”
  4. whether the use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and

    [Including the following sub-factors:
    1. whether the underlying factual issues are important to an informed resolution of the case;
    2. whether the state trial court is in a better position to evaluate those factual issues than is the federal court; and
    3. whether there is a close nexus between the underlying factual and legal issues and state law and/or public policy, or whether federal common law or statutory law dictates a resolution of the declaratory judgment action]
  5. whether there is an alternative remedy which is better or more effective.

In applying these factors, the Travelers court found that the district court had abused its discretion in retaining jurisdiction over the declaratory judgment case because

  • the declaratory judgment would resolve only the insurance coverage issues and would not resolve the underlying wrongful death controversy;
  • the underlying plaintiffs were not party to the federal lawsuit and would not be bound by its judgment;
  • the Kentucky state court would be in better position to decide legal issues for which there was no clear precedent under Kentucky law;
  • underlying fact issues in the state and federal court actions were intertwined; and
  • Kentucky state court provided a viable and better forum for issues raised by the declaratory judgment action.


Regardless of whether a choice exists to file in either state or federal court, the venue may be one of the most significant issues in a coverage dispute. The location  to commence a declaratory judgment is often governed by a determination of which state’s law will be applied to the coverage dispute. The states apply a wide variety of tests to determine which state’s law governs when there is a conflict of law. Among these tests are the lex loci contractus doctrine, the choice influencing test, and the test of the Restatement (Second) of Conflict of Laws.

Under the lex loci contractus doctrine, the law of the state where the contract was entered into applies to an insurance coverage dispute. This doctrine was the dominant approach for many years; however, the number of states currently applying this test has dwindled. Today, it appears that Alabama (subject to a contrary statutory provision), Florida, Georgia, Kansas, Maryland, New Mexico (some question exists), Oklahoma, Rhode Island, South Carolina (subject to a contrary statutory provision), Tennessee (subject to a contrary statutory provision), Virginia (subject to a contrary statutory provision), and Wyoming continue to follow the lex loci contractus rule.

Two other widely used tests are the “most significant contacts” test and the “most significant relationship” test of the Restatement. These two tests are similar, requiring the court to examine all of the state contacts involved in a case to determine which state has the most significant contacts or relationship to the dispute. Currently, Alaska, Arizona (subject to a contrary statutory provision), Arkansas, Colorado (subject to a contrary statutory provision), Connecticut (some question exists), Delaware, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Michigan, Mississippi (also the “center of gravity” test, see below), Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Ohio, South Dakota, Texas (subject to a contrary statutory provision), Utah, Vermont, Washington, West Virginia, and Puerto Rico apply one of these tests.

New York, Mississippi, and Wisconsin apply the center-of-gravity test, which is somewhat similar to the most significant contacts and relationship tests. Under this test, a court considers all of the significant factors that might logically influence the determination of which law to apply, with the goal of choosing the law of the state that has the greatest contacts with the case.

Finally, one of the least commonly used tests, the “choice influencing consideration test,” adopted from Professor Robert Leflar’s five-factor choice-of-law test in contract cases, is used in Minnesota and North Dakota. This test requires the court to consider the following five factors to determine which state’s laws apply: (1) predictability of result, (2) maintenance of interstate and international order, (3) simplification of judicial task, (4) advancement of the forum’s governmental interest, and (5) application of the better rule of law. The first two factors are generally considered the most significant. In contract disputes, predictability of result is of particular importance because, in consensual transactions, parties to the contract desire advance notice of which state law will govern in future disputes.

Finally, several states and the District of Columbia apply more than one choice-of-law test, providing even less certainty to litigants. Commentators have dubbed this the “combined modern approach” to choice-of-law issues. California, the District of Columbia, Hawaii, Louisiana, Maryland, New Hampshire, New York, North Dakota, Oregon, and Pennsylvania have applied a combined approach to the resolution of conflicts-of-law issues.

Under all of these tests, quite frequently the substantive law of the policyholder’s domicile, which is typically where the insurance contract was entered into, will apply to an insurance coverage dispute. But the application of the choice-of-law factors is nonetheless difficult to predict on any given issue. A careful consideration of each potential forum state’s choice-of-law test is an important step in deciding where to file a declaratory judgment action.

Discovery Issues

The scope of discovery in the declaratory judgment action depends on the issue. In a duty to defend case, typically, the only relevant documents are the complaint in the underlying litigation and any applicable policies. Discovery of extrinsic evidence may be relevant in a case involving the duty to defend when there are also issues such as lost policies, reformation of the policy, or ambiguity in the policy language.

When the issue is one of indemnity and the underlying case is still proceeding at the same time as the declaratory judgment action, questions will inevitably arise as to the extent of discovery available to the insurer. Where the insurer is providing a defense, it is typically a party to the attorney-client privilege and can share in communications between the policyholder and defense counsel. The insurer should be entitled to discovery of anything that has been discovered in the underlying lawsuit.

Problems may arise when an insurer seeks information relevant to a coverage issue that is not privileged but potentially damaging to the issue of liability. When the insurer seeks evidence in the coverage litigation that could be damaging to the liability case, the parties should agree to a protective order so that the insurer can obtain information necessary to the coverage dispute without fear of its being disclosed to the claimant’s counsel in the underlying litigation.

A separate issue involves what type of discovery may be obtained when the underlying litigation is resolved and a determinative coverage issue was already litigated in the underlying case. Obviously, there may be a question about whether that issue can be re-litigated in the coverage dispute. The answer may depend on whether or not the insurer did provide a defense in the underlying action rather than simply denying coverage. In addition, the court will weigh the issue of whether the facts are material to and were fully litigated in the underlying coverage dispute.


Policyholders and insurers commonly use declaratory judgment actions to seek legal determinations regarding their rights and obligations under insurance policies. When commencing such actions, insurance coverage litigants—both policyholders and insurers—must remember to give significant consideration to the status of the underlying litigation and any potential effect of the declaratory judgment action on that litigation.