Our previous blog[2] focused on the California approach to this issue, which stems from the California Supreme Court case Montrose Chemical Corp. v. Superior Court.[3] The Montrose ruling permits policyholders to avoid the complications that would arise if the merits of the claims against them were litigated. Coverage benefits are not impaired by requiring the policyholder to forfeit its rights to protect its defense to the claims asserted against it in the underlying action.
Several states have adopted similar policies. Others have taken the exact opposite stance. They opt instead to grant stays in the underlying action, allowing the coverage suit to be resolved first. Additional factors are also implicated in the common scenario where a coverage suit for Declaratory Relief brought in federal court to address the insurer’s obligations to defend a policyholder in an underlying state court action.
Variations Analogous to the California Approach
While many states have not substantially addressed this issue, those that have weighed in adopt approaches like that in Montrose. They consider the extent of overlapping facts to be the primary concern.[4] An example is the “independent and separable” standard applied by Colorado[5] and Maryland.[6] The vast majority of such states prefer to stay the coverage case until the underlying action is fully resolved.
States Adopting Alternative Policies
Other states, however, take and approach deviating from the norm. For example, Missouri[7] and Wisconsin[8] pause the underlying action until the insurer bringing a Declaratory Relief action can establish the extent of its obligations at issue in the coverage suit.
Wisconsin’s “reverse approach” stems from its direct action statute,[9] where the insurer is a necessary party to the underlying action requiring its duties to provide policy benefits are adjudicated in the underlying action. Louisiana, the other state with a direct action statute, has not had occasion to adjudicate this issue.
Federal Court Complications
Frequently, an underlying action will be brought in state court, but typically, due to the presence of “diversity jurisdiction,” the declaratory relief action will unfold in federal court. To address those cases, federal courts have established tests for determining whether to exercise jurisdiction or stay the suit until the state court case is concluded.
The Fourth Circuit derives its test from Nautilus Insurance Co. v. Winchester Homes.[10] It considers four factors:
(i) the strength of the state's interest in having the issues raised in the federal declaratory action decided in the state courts; (ii) whether the issues raised in the federal action can more efficiently be resolved in the court in which the state action is pending; . . . (iii) 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 (iv) ] whether the declaratory judgment action is being used merely as a device for “procedural fencing” - that is, “to provide another forum in a race for res judicata” or “to achieve a federal hearing in a case otherwise not removable.”[11]
Although none are to be given more weight, some are accorded more significance than others. Id. (Granting the motion to stay after concluding that the first and fourth factors weighed in favor of denying the motion while the second and third weighed in favor of granting it.) Similar tests with more exhaustive lists of factors arise in the Third,[12] Fifth,[13] Ninth,[14] and Tenth[15] Circuits.
Conclusion
States agree that overlapping factual issues require a stay of the proceedings. Disagreement exists as to which case to halt. The discussion is complicated when the two suits are split between state and federal court as federal courts are wary of deciding matters of state law that govern insurance coverage where conflict would arise regarding fact issues germane to the analysis of both coverage the underlying dispute.
[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[3] Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 301 (Cal. 1993).
[4] See, e.g., Nautilus Ins. Co. v. Strongwell Corp., 968 F. Supp. 2d 807, 823–25 (W.D. Va. 2014) (Stating that Virginia law requires “that a decision on the question of whether an insurer which owes a duty to defend also owes a duty to indemnify must generally await the outcome of the underlying action.”)
[5] Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556, 563 (Colo. 1996) (Requiring that “the facts at issue in the underlying case d[o] not intertwine with the question of coverage” for a coverage case to avoid being stayed if the underlying action remains pending.)
[6] St. Paul Mercury Ins. Co. v. Am. Bank Holdings, Inc., 691 F. Supp. 2d 626, 631 (D. Md. 2010) (“In Maryland, the resolution of insurance coverage disputes should await the outcome of the underlying litigation where the issues in the coverage action are not independent and separable from those asserted in the underlying suit.”)
[7] U-Haul Co. v. Carter, 567 S.W.3d 680, 683 n.4 (Mo. Ct. App. 2019) (“Missouri courts have expressly advised that insurers with good faith coverage questions in similar scenarios should file a declaratory judgment action simultaneous to the underlying personal injury action and seek a stay of the personal injury lawsuit proceedings until the declaratory judgment action is decided.”)
[8] High 5 Sportswear, Inc. v. High 5 Gear, Inc., No. 3:15-cv-00401, 2016 U.S. Dist. LEXIS 101830, *4 (S.D. Ohio Aug. 3, 2016) (applying Wisconsin law) (“Under Wisconsin law, when an insurer disputes its duty to defend, it should intervene in the underlying lawsuit and request a stay of that proceeding so that the coverage issues can be adjudicated prior to any liability or damages issues.”)
[9] Wis. Stat. Ann. § 632.24 (“Any bond or policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the bond or policy, to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.”)
[10] 15 F.3d 371 (4th Cir. (Md.) 1994).
[11] Erie Ins. Prop. & Cas. Co. v. Shrewsbury, No. 1:07-00706, 2008 U.S. Dist. LEXIS 134700, *8–9 (S.D. W. Va. Aug. 6, 2008).
[12] Terra Nova Co. v. 900 Bar, 887 F.2d 1213. 1224 (3d Cir. (Pa.) 1989) (“(1) the likelihood that the declaration will resolve the uncertainty of obligation which gave rise to the controversy; (2) the convenience of the parties; (3) the public interest in a settlement of the uncertainty of obligation; . . . (4) the availability and relative convenience of other remedies; and (5) whether the same factual question lies at the heart of both an insurance coverage dispute and the underlying . . . action.”)
[13] St. Paul Ins. Co. v. Trejo, 39 F.3d 585, 590-91 (5th Cir. (Tex.) 1995) (“(1) whether there is a pending state action in which all of the matters in controversy may be fully litigated; (2) whether the plaintiff filed suit in anticipation of a lawsuit filed by the defendant; (3) whether the plaintiff engaged in forum shopping in bringing the suit; (4) whether possible inequities in allowing the declaratory plaintiff to gain precedence in time or to change forums exist; (5) whether the federal court is a convenient forum for the parties and witnesses; (6) whether retaining the lawsuit would serve the purposes of judicial economy; and (7) whether the federal court is being called on to construe a state judicial decree involving the same parties and entered by the court before whom the parallel suit between the same parties is pending.”)
[14] Gov't Emples. Ins. Co. v. Dizol, 133 F.3d 1220, 1225 n.5 (9th Cir. (Haw.) 1998) (“1. To avoid needless determination of state law issues; 2. To discourage the filing of declaratory actions as a means of forum shopping; 3. To avoid duplicative litigation; 4. To resolve all aspects of the controversy in a single proceeding if possible; 5. To avoid intervention unless the declaratory action will serve a useful purpose in clarifying the legal relations at issue; 6. To avoid procedural fencing or permitting one party to obtain an unjust res judicata advantage at the expense of the other; 7. To avoid entanglement between the federal and state court systems; and, 8. To avoid jeopardizing the convenience of the parties.”)
[15] State Farm Fire & Cas. Co. v. Mhoon, 31 F.3d 979, 983 (10th Cir. (N.M.) 1994) (“(1) whether a declaratory action would settle the controversy; (2) whether it would serve a useful purpose in clarifying the legal relations at issue; (3) whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata; (4) whether use of declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and (5) whether there is an alternative remedy which is better or more effective.”)
