Insurance Litigation Update: Eleventh Circuit Clarifies Standard for Courts Confronting Merits- and Coverage- Based Claims Simultaneously Pending in State and Federal Courts
Almost everyone loves insurance in lawsuits. Plaintiffs love the potential pocket to pay the claim; defendants love the safety net of their insurer funding the defense and potentially the damages that may flow from an adverse result. Everyone but the insurers that is, whose business model revolves around taking in more premiums from their insureds than the amounts they pay for defense and claims. To be sure, insurance contracts are specifically to provide a narrow window for covered claims, with broad exclusions sweeping away coverage of anything not squarely included within the four corners of coverage.
Keeping those limitations in mind, demands and lawsuits are often prepared with an eye towards coverage. When defendants forward these claims to their insurance carriers, coverage teams review them to discern whether the facts fall within the policy coverage or whether an exclusion might end the analysis. In addition to the claims themselves, insurance coverage determinations are also a breeding ground for litigation. This is true for every form of coverage, including commercial disputes, professional liability disputes, and automobile disputes.
Consider the following example. A lawsuit is filed in state court seeking to redress a claim. Pursuant to the terms of the insurance policy, the defendant notifies its insurer, who must promptly provide a defense so that a response may be filed before a default is entered. The insurer will usually provide such a defense under a reservation of rights, which affords it the time to meticulously review the facts of the complaint against the terms of the policy.
Furthering the hypothetical, as the lawsuit moves forward against the defendant in the state court, the insurer concludes that the claim either does not fall within the four corners of coverage or is excluded by the policy’s exclusions. However, the insurer cannot easily abandon its insured during an ongoing lawsuit or it risks breaching its insurance contract with the insured and becoming exposed to all the damages that the plaintiff seeks. Accordingly, while providing a defense, the insurer files a new lawsuit in a federal district court – i.e. a Declaratory Judgment Action pursuant to 28 U.S.C. § 2201 and Rule 57 of the Federal Rules of Civil Procedure – asking the court to declare whether and to what extent coverage applies, and names all the first-filed litigants as necessary parties. Accordingly, there are now two separate lawsuits in two separate courts that the parties must simultaneously litigate.
With two competing lawsuits pending, the result is frequently a race to the finish. If the first-filed “merits-based” lawsuit finishes first, the insurer can be left bearing the cost of a full defense, even though the policy might not actually require one. Likewise, with mandatory mediation required in most courts, the insurer may be obligated to sit for a mediation before the first case is tried. Conversely, if the second-filed case (the insurer’s Declaratory Judgment action) finishes first with a favorable result for the insurer, the defendant in the merits-action might find itself with no funds to pay for its defense, and the plaintiff with no pocket to pay the judgment.
The question of whether the insurer’s Declaratory Judgment action can proceed at the same time as the plaintiff’s merits-based claim falls within the federal district court’s sound discretion. When exercising this discretion, courts have been instructed to undertake a careful balancing of comity principles permitting states to resolve issues in their own courts against the efficiency and certainty provided by Declaratory Judgment actions. Thus, while a federal district court maintains an “unflagging obligation” to exercise its jurisdiction, this imperative “yields to considerations of practicality and wise judicial administration” in determining whether to accept jurisdiction in a second-filed Declaratory Judgment action. Wilton v. Seven Falls Co., 515 U.S. 277, 284 and 288 (1995). Keeping in mind that Declaratory Judgment actions often raise the same disputed issues at issue in the merits-based claims, determining “the propriety of declaratory relief” requires federal district courts to develop “a circumspect sense” of the entire matter. Wilton, 515 U.S. at 287 (quotation omitted). Naturally, putting this into practice has proved difficult for the courts.
In 2005, the Eleventh Circuit held that federal district courts considering these issues must evaluate the “totality of circumstances” based on nine nonexclusive “guideposts” which elucidate whether the federalism and comity concerns created by a Declaratory Judgment outweigh the efficiency gains associated with resolving the insurers’ claims in federal court. See Ameritas Variable Life Ins. Co. v. Roach, 411 F.3d 1328, 1331 (11th Cir. 2005). The “guideposts” include:
- the strength of the state’s interest in having the issues raised in the federal declaratory action decided in the state courts;
- whether the judgment in the federal declaratory action would settle the controversy;
- whether the federal declaratory action would serve a useful purpose in clarifying the legal relations at issue;
- whether the declaratory remedy is being used merely for the purpose of “procedural fencing”—that is, to provide an arena for a race for res judicata or to achieve a federal hearing in a case otherwise not removable;
- whether the use of a declaratory action would increase the friction between our federal and state courts and improperly encroach on state jurisdiction;
- whether there is an alternative remedy that is better or more effective;
- whether the underlying factual issues are important to an informed resolution of the case;
- whether the state trial court is in a better position to evaluate those factual issues than is the federal court; and
- whether there is a close nexus between the underlying factual and legal issues and state law and/or public policy, or whether federal common or statutory law dictates a resolution of the declaratory judgment action.
Ameritas, 411 F.3d at 1331.
Nevertheless, in spite of these guideposts, federal courts have struggled with the Ameritas analysis, particularly on the manner and weight to be provided to each factor.
Recently, however, the United States Court of Appeals for the Eleventh Circuit clarified the analysis, confirming that “totality of circumstances” required that every fact and factor be analyzed. See James River Ins. Co. v. Rich Bon Corp., USCA Case No: 20-11617, *11 (11th Cir. May 23, 2022) (quoting National Trust Ins. Co. v. S. Heating & Cooling, Inc., 12 F.4th 1278, 1285 (11th Cir. 2021)).
The Eleventh Circuit’s decision in James River involved a negligent security lawsuit against a nightclub where an employee and a patron were shot. After receiving the claim from the nightclub, the insurer sought declaratory relief in federal district court against the nightclub, the employee, and the patron. It raised two claims: (1) whether the insurance policy’s coverage limits of $50,000 had been reached, thus relieving the insurer of providing any further funds towards the defense of the action; and (2) whether the policy’s worker’s compensation and employee-injury exclusions barred coverage. See James River, at 3. The district court, in dismissing the Declaratory Judgment action, addressed each Ameritas guidepost to the employee-exclusions policy claim. However, the court largely gave “the silent treatment” to the $50,000-policy-limit claim. James River, at 14. According to the Eleventh Circuit, “[t]hat lopsided analysis was unreasonable.” Id. Instead, the district court should have focused on both claims, and then ruled based upon the “totality of the circumstances,” decide the entire issue. Id.
Finding that the district court “overlooked the significant gains in efficiency the declaratory judgment action would generate,” the Eleventh Circuit remanded, reasoning that if the district court’s analysis had applied the Ameritas guideposts to the policy limits claim, and not just the employee-exclusions claim, the district court would likely have allowed the declaratory judgment action to proceed notwithstanding the existence of the state claim. Id.
The lesson from James River is that “[a] totality-of-the-circumstances analysis only works when a court considers all the relevant details.” Id., at 16. The district court must weigh all factors, for all claims, and determine whether to exercise its jurisdictional discretion based on the totality of the circumstances.
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