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Combating Abuse Of The Declaratory Judgment Action By Insurers

It has become fashionable in recent years for insurers to sue their own insureds in a declaratory judgment action seeking to avoid coverage under a policy of liability insurance or to support the insurer's denial of a first party claim by the insured. While the filing of a "dec action" is often required of an insurer by case law, there are several other reasons for the popularity of such litigation with insurers. The dec action is a method by which the insurer can take the offensive, rather than stay passive and wait for the insured to act. The insurer has the opportunity to pick and chose the venue and jurisdiction, and the parties to the litigation. In this manner the insurer steals the initiative away from the insured, can direct the litigation, and maximize its chances of winning. This article is about how to combat such tactics.

There are two statutory frameworks by which declaratory judgment actions may be brought in Georgia. The first is the Georgia Declaratory Judgment Act.1 The second is the Federal Declaratory Judgment Act.2 This article concentrates on the latter, although much of what appears here is equally applicable to the former.

Under the Federal Declaratory Judgment Act is clear that the granting of declaratory relief is a matter of trial court discretion.3

The court must look at the litigation situation as a whole in determining whether it is appropriate for the court to exercise jurisdiction over the declaratory judgment action before it. 4

One factor which supports the dismissal of a declaratory judgment action is the conduct of the insurer in filing such a declaratory judgment action to pre-empt the insured from having a choice of forum in a first party claim. In one case, the insured advised the insurer that it planned to file suit by May 15, 1992 if the insurer did not pay the insured's claim. The insurer declined to pay, and then filed a declaratory judgment action on May 11, 1992. The U. S. District Court granted the insured's Motion to Dismiss stating that "Federal declaratory judgment is not a prize to the winner of a race to the courthouse". 5

Another improper tactic would be if the insurer assigned the handling of the claim and the handling of the coverage question to the same person. The significance of this is that the insurer has the right under the insurance contract to compel the insured to give it information through the "cooperation clause" of the policy. When the insurer assigns one person to deal with the insured under the guise of acting on the behalf of the insured in the handling of the underlying tort claim, when in reality that person is gathering information for use to avoid coverage, this is a demonstration that the insurer was never acting in the best interest of its insured, but was setting up the insured for a no coverage position all along. If you catch an insurer doing this, point it out to the court in a Motion to Dismiss. Also, if you can show that confidential information was learned by the insurer in this fashion, and passed on to its dec action attorney, you may be able to get the insurer's dec action attorney disqualified from the case.

Omitting necessary parties when the insurer files its action is another form of misconduct. This is done by the insurer in an attempt to freeze the insured in a jurisdiction of the insurer's choosing. Other parties having an interest in the outcome of the underlying tort case should be parties to the declaratory judgment litigation as well. These would include the injured plaintiff in a personal injury claim, the owner of property damaged by the event (and via subrogation, its insurers), any additional defendants in the underlying tort action, as well as excess insurance carriers or U.M. carriers whose coverage might be triggered. However, the inclusion of such parties often destroys diversity of citizenship, preventing Federal diversity jurisdiction, or demonstrates that venue would be more proper in another court. If the insurer wants to stay in a particular court it may not want these other parties to be involved in the litigation. In such a situation, the insurer will often seek to litigate against its insured alone. A favorable decision, if obtained, becomes the legal basis to deny coverage of all other claims. This has the effect of depriving the other interested parties of their opportunity to contest the insurer's position.

The Declaratory Judgment Act was not designed to countenance such procedural manipulation of forums and actions. (Cites omitted). In fact, the misuse of the Declaratory Judgment Act to gain a procedural advantage and pre-empt the forum choice of the plaintiff in the coercive action militates in favor of dismissing the Declaratory Judgment Action. 6

The same court observed that even "if the basic requirements for A Declaratory Judgment Action are met, it is still within the discretion of the district court to decline a Declaratory Judgment Action."7

This is in accordance with appellate decisions as well:

Declaratory relief is a matter of district court discretion. See Mission Ins. Co. v. Puritan Fashions Corp., 706 F.2d 599, 601 (5th Cir. 1983) (noting that Declaratory Judgment Act bestows "a choice, not a command" on district court). The district court: may consider a variety of factors in determining whether to decide a declaratory judgment suit. For example, declaratory judgement relief may be denied [i] because of a pending state court proceeding in which the matters in controversy may be fully litigated, [ii] because the declaratory complaint was filed in anticipation of another suit and is being used for the purpose of forum shopping, [iii] because of possible inequities in permitting the plaintiff to gain precedence in time and forum; or [iv] because of inconvenience to the parties or the witnesses.8

Another court exercised its discretion in a similar manner, observing as follows:

The Declaratory Judgment Act provides that a court of the United States "may" declare the rights and other legal relations of any interested party seeking such a declaration...Considering the litigation situation as a whole in light of the principles of equity, the Court concludes that it should not exercise its discretion to entertain Plaintiff's action for declaratory judgment. Accordingly the Complaint is dismissed.9

This principle has also been recognized by the Supreme Court of the United States which has stated:

[A]lthough the District Court had jurisdiction of the suit under the Federal Declaratory Judgment Act, it was under no compulsion to exercise that jurisdiction.10

Another legal reason exists why the insurer's Federal Declaratory Judgment Action should be dismissed in these circumstances. As mentioned above, the insurer has intentionally refrained from naming parties which are necessary for complete relief to be afforded. F.R.C.P. 19 states as follows:

Rule 19, Joinder of Persons Needed for Just Adjudication.

  1. Persons to be Joined if Feasible. A person who is subject to service or process and whose joinder will not deprive the court of jurisdiction over the subject matter to the action shall be joined as party in the action if (1)in the person's absence complete relief cannot be accorded among those already parties, or (2)the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may(i)as a practical matter impair or impede the person's ability to protect that interest or (ii)leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reasons of the claimed interest. If the person has not been so joined, the court shall order that the person be made a party. If the person should join as a plaintiff but refuses to do so, the person may be made a defendant, or in a proper case, an involuntary plaintiff. If the joined party objects to venue and joinder of that party would render the venue of the action, that party shall be dismissed from the action.
  2. Determination by Court Whenever Joinder not Feasible. If a person described in subdivision (a)(1)-(2) hereof cannot be made a party, the court shall determine whether in equity and good conscience that action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.

The insurer intentionally has attempted to avoid having to deal with issues which would be presented by the inclusion of others affected by the litigation. With respect to the injured person in the underlying tort action, the insurer seeks to deprive him of access to the liability insurance coverage of the tort-feasor, without allowing him to be heard. With respect to co-defendants, the insurer seeks to force them to pay a disproportionately higher percentage of the loss. In the case of excess or U.M. insurers, the insurer seeks to have them pay instead of this insurer. All of these parties are vitally interested in the outcome of the declaratory judgment case and as such are "parties needed for just adjudication."11

There are four factors which should be taken into consideration when deciding whether or not to dismiss a case for absence of an "indispensable party".12 The first factor concerns the effect the judgment in the civil action would have on the absentee. Would the absentee be adversely effected and would the prejudice be immediate and serious or remote and minor. A consideration of the possible collateral consequences of the judgment on the parties already present in the litigation is in order, as well. Would any of these parties be exposed to continued litigation because of the absence of the absentee party? The second factor concerns the "shaping of relief" so as to avoid negative impact on the absentee. For example consideration should be given to whether the case was about money damages as opposed to specific relief where the absentee would be negatively impacted. The third factor is whether or not an adequate judgment can be rendered in the absence of the absentee. This calls attention to the extent that relief can be shaped which is sufficient without negatively impacting the absent entity. The fourth factor concerns looking at the practical effect of the dismissal of Plaintiff's case. The Court should consider whether there is any assurance that the Plaintiff, if dismissed, could sue effectively in any forum where a better joinder is available. A person is regarded as indispensable when he cannot be made a party and upon consideration of the four factors discussed previously herein, it would be preferable to dismiss the action rather than to continue on with it in that person's absence.

Following the analysis discussed herein as to this issue, applying each of the four factors, the injured party in the underlying tort case, any co-defendants of the insured tort-feasor, and any excess or U. M. insurers are all "indispensable" parties. (a) Regarding factor number one, the outcome of the instant litigation would have tremendous impact on any of them. The injured or damaged party could lose the ability to be able to recover from the policy insuring the tort-feasor. The co-defendant could be stripped of another source of liability insurance coverage to cover a judgment. The excess or U.M. insurer would not face exposure where none previously existed; (b) Regarding the second factor, the relief sought in such a case cannot be "shaped" because the issue presented, with respect to both the injured tort plaintiff and the co-defendant, is whether or not there will be liability insurance coverage under the tort-feasor's policy. It is not simply a question of monetary damages and an amount. There is no middle ground. (c) Regarding the third factor, whether an adequate judgment can be rendered to the parties presently in the litigation without the tort plaintiff and the co-defendants it is quite likely that the declaratory judgment litigation will not end with that case alone. (d) The fourth and final factor, looking at the practical effects of a dismissal, also seems to warrant dismissal. If such coverage litigation is dismissed, the insurer may simply re-file it naming all the necessary parties.

When you consider all of the factors it is clear that dismissal is not only right and proper, it is the correct action to take legally. In Travelers, et al. v. Dingwell, et al,13 Richard Dingwell operated a plant to clean petroleum and chemical storage tanks. He took out general liability insurance policies with Travelers and other companies. Environmental claims were made against Dingwell and other companies who either generated or transported these materials for Dingwell, and were additional insureds under Dingwell's policies. Dingwell and the 15 companies (collectively referred to as "the Group") settled the pollution liability claims and then sought indemnification from Travelers and the other insurers. Travelers and the other insurers filed a declaratory judgment action naming Dingwell and some but not all of "the Group" as defendants, because to include certain members of "the Group" in the litigation would have destroyed diversity and would have prevented Travelers from filing the litigation in the U. S. District Court. Pursuant to the provisions of F.R.C.P. 19, the U.S. District Court dismissed the declaratory judgment action for want of indispensable parties. In affirming the decision of the District Court, the U. S. Court of Appeals for the First Circuit stated: was possible that a judgment against Dingwell would not be able to protect the Group's interests because, inter alia, his interest were not the same as those of the Group---the Court observed that litigating the dispute in a state court, where all interested parties could be joined, would lead to the most complete and efficient settlement of the dispute. The Court also noted that the primary insurers had not suggested any means by which the Court could shape the relief so as to minimize prejudice to the Group. Based on this analysis, the Court concluded that the action should, in equity and good conscience, be dismissed.14

When confronted with tactics such as those described herein, fight! Just because the insurer believes it can get away with such activity (and perhaps has gotten away with it before) does not mean it will prevail. More and more judges are asking questions like the ones posed by this article. A declaratory judgment action is not a license for the insurer to run roughshod over the rights of the insured or anyone else.

1. O.C.G.A. §9-4 1 et seq.

2. 28 U.S.C. §2201 (a).

3. See Brillhart v. Excess Co. of American, 316 U.S. 491, 625 S.Ct. 1173, 86L.Ed. 1620 (1942); Torch Inc. v. LeBlanc, 947 F 2d 193 (5th Cir. 1991).

4. Great American Insurance Co. v. Houston General Insurance Co. 735 F. Supp. 581 at page 585 (S.D.N.Y. 1990); But see also Continental Casualty Co. v. Coastal Savings Bank, 977 F.2d 734 (2nd Cir. 1992); Nautilus Ins. Co. v. Winchester Homes Inc. 15 F.3d 371 (4th Circ. 1994).

5. Federal Insurance Co. v. May Department Stores, 808 F. Supp. 347, 350 (S.D.N.Y. 1992).

6. Great American Insurance Co. v. Houston General Insurance Co., 735 F.Supp. 581, 586 (S.D.N.Y. 1990).

7. Great American, supra. 735 F.Supp. at page 584.

8. Torch, Inc. v. LeBlanc, 947 F.2d 193, 194, (5th Cir. 1991).

9. Federal Ins. Co., supra. 808 F.Supp at page 349.

10. Brillhart, supra. 316 U.S. 491, 494, 62 S.Ct. 1173, 1175, 86L.Ed. 1620, 1622 (1942).

11. (11) F.R.C.P. 19(a); See also the commentary following F.R.C.P. 19(b).

12. See F.R.C.P. 19(b); See also commentary following that code section.

13. Travelers it al, v. Dingwell, et al, 884 F.2d 629 (1st Cir. 1989).

14. Travelers, supra. 884 F.2d at p. 636.

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