When Do You File a Declaratory Judgment Action’

One of the thorniest issues that an insurance adjuster may face is deciding to bring an affirmative declaratory judgment action following a denial of coverage or a decision to defend under a reservation of rights. The rules governing the declaratory judgment action vary significantly from jurisdiction to jurisdiction, but in Texas there are two general areas that must be evaluated in making this decision. The first is a practical consideration as to whether any particular claim warrants coverage litigation. The second consideration is whether it is the sort of claim where Texas law allows you to bring a declaratory judgment action.

Over the next two columns, I am going to address those two particular concerns. In this column, Part 1, we will address the first issue: What are the practical considerations for a carrier to bear in mind when making a decision whether to file a declaratory suit?

The dividing line
The main dividing line in this analysis is the nature of the position taken by the carrier. The considerations that go into filing a declaratory judgment action where the carrier has already decided to defend under a reservation of rights are, in my mind, a little more complex than when there is an actual denial of coverage. Obviously, in most circumstances, where there is a defense under a reservation of rights, coverage litigation is the farthest thing from the carrier’s mind. Nevertheless, there are many circumstances where in evaluating the duty to defend, the carrier is fairly certain that the alleged facts do not give rise to such a duty, but they make a personal call and hesitate to outright deny coverage. In addition, it may be that the carrier has sufficient knowledge of actual facts to know that there is very little or no possibility that there will be a duty to indemnify. In that case, the carrier should consider filing a declaratory judgment action, not only to cut off further defense costs but also to establish that there is no duty to indemnify.

To reach this decision, however, the carrier must consider several factors: one of which is simply timing. By that, I do not mean how fast the suit can be filed but, rather, how long will it take to litigate the underlying case, and how quickly can a determination of coverage be made in the declaratory action. In most circumstances, this will turn on the whether the duty to defend can be determined by summary judgment.

One consideration is whether you can bring the declaratory action in a jurisdiction that would usually grant summary judgments. In other words, if it is unlikely that the coverage action would be resolved prior to the resolution of the underlying case, a preemptive declaratory action may make little sense. This is true largely because Texas law, following the Texas Supreme Court’s decision in Texas Association of Counties: County Government Risk Management Pool v. Matagorda County, rejects the ability of carriers to recover defense costs from the insured following the determination that there is no coverage. Thus, if you defend under a reservation of rights and have litigated the underlying case to conclusion prior to the coverage action becoming final, you will not be able to recover any of those defense costs. The carrier, in conjunction with its coverage counsel, should carefully evaluate whether there is an appropriate jurisdiction where the courts are likely to grant a summary judgment and move on the matter quickly.

In the great majority of cases, the duty to defend should be decided by summary judgment. There is no fact issue because the duty to defend is determined by the eight corners test. In other words, the facts are set out in the underlying petition, so there is no need for a jury to make a factual determination. Rather, the court should decide as a matter of law whether the facts fall within the scope of coverage or fit within an exclusion to coverage. Consequently, determining coverage can usually be accomplished much faster than the resolution of the underlying case.

In addition, even if you decide to bring the duty to indemnify as part of the declaratory action, once you have obtained a partial summary judgment on the duty to defend, the carrier will normally feel comfortable in withdrawing from the defense of the underlying case. Certainly, no one can say that the carrier is acting unreasonably if the court has already agreed as a matter of law that there is no duty to defend.

A second consideration is whether it makes business sense to undertake the costs that go along with a declaratory judgment action. Even in a relatively simple case, it may take $10,000 to $20,000 to obtain a summary judgment on the duty to defend. If the claim could be settled for that amount, or if the defense costs in connection with the underlying case are not likely to be substantially more than that, it may make not make sense to file a declaratory judgment action. In other words, are the costs justified by the potential benefit of a ruling on coverage?

On the other hand, where there is a denial of coverage, the analysis is more straightforward. One of the first considerations is whether the insured will agree that there is no coverage and, therefore, will not likely bring a breach of contract or bad faith action. If the correspondence and actions of the insured make it clear that the insured does not dispute the carrier’s position, then a declaratory judgment action may be unnecessary.

However, keep in mind that if the stakes are high enough, the insured may, even if it recognizes that its case is weak, roll the dice and see if it can find a contingency fee lawyer willing to take the case.

Choice of venue
Another valid consideration is whether a venue choice by the insured could be outcome determinative. In other words, if the policy is issued to the insured in Texas or in any other particular state, there are many corporations that have many locations and it could be that the insured could viably file a breach of contract action in one or more jurisdictions. When an insured files a breach of contract action in another state, it is not only choosing a venue, but a set of choice of law rules. The venue will apply its own rules to determine the law applicable to the claim.

For instance, in many circumstances, if a suit is filed in Texas and Texas choice of law rules apply, it may be Texas law that the court applies to the claim. But in a sense it may be that Texas law will be favorable to your position. On the other hand, if the insured files a lawsuit in, say, Louisiana, it may be that their choice of law rules say that Louisiana law applies, or for that matter that the laws of Massachusetts apply. It may also be the case that the laws of Louisiana and Massachusetts are contrary to Texas law and the carrier will lose the case if it is litigated in Louisiana. In essence, the party that picks the forum decides how the case will come out.

Finally, and many of you will find this shocking, some venues are more favorable to carriers than others. It is not unreasonable, then, to consider venue as a factor in the decision to file a declaratory action.

One final point is that there are procedural advantages to being a plaintiff. Of course, the insured may move to realign, and where there are multiple carrier defendants, it may be that a court is inclined to realign the insured as the plaintiff and the carriers as defendants. Nevertheless, you greatly im-prove your chances of defeating the plaintiff when you have chosen the forum and filed the suit.

While these are certainly not all the considerations that should go into whether to file a declaratory judgment action, they are factors that should be considered. In any case, in Part 2, we will address the question as to when it is legally appropriate to bring a declaratory judgment action under Texas law.

Brian S. Martin is a partner in the Insurance and Coverage Section of the Houston office of Thompson, Coe, Cousins & Irons L.L.P. He has extensive experience in insurance coverage and defense matters, specializing in environmental, toxic tort and products cases. Martin is a frequent author and CLE speaker on insurance topics, including coverage and bad faith issues.

Topics Lawsuits Carriers Texas Louisiana