Posted In: Insurance Recovery
Insurance Blog: Sixth Circuit Affirms Federal Declaratory Relief In Insurer's Favor Despite Pending State Law Claim
By P. Wesley Lambert & Ethan W. Weber on January 2, 2020
Recently, the Sixth Circuit determined an insurer may seek declaratory relief from a federal court concerning indemnification and defense of an insured, even when state court litigation is pending. United Specialty Ins. Co. v. Cole’s Place, Inc., 936 F.3d 386 (6th Cir. 2019). Applying the five-factor test set forth in Grand Trunk Western R. Co. v. Consolidated Rail Corp., 746 F.2d 323 (6th Cir. 1984), the court determined the insurer could seek declaratory relief in federal court under the Declaratory Judgment Act. Id. at 395–96. The declaratory judgment action was prior to any state court verdict, yet dealt directly with the insured’s right to coverage. Id.
The insured, a bar in Kentucky, had a policy that exempted the insurer from defending or indemnifying the bar for any alleged assaults, batteries, or related injuries. After a shooting, several injured bar patrons sued in state court, alleging tort claims, and the insurer took up the bar’s defense. While the state tort claims were pending, the insurer asked the United States District Court for declaratory relief, claiming they were not required to defend or indemnify under the policy. The district court ruled for the insurer, and the bar appealed.
Upholding the district court, the Sixth Circuit applied the Grand Trunk five factor balancing test to determine if declaratory relief was appropriate under the circumstances. The factors are:
- whether declaratory relief would settle the controversy;
- if a declaratory action would serve “a useful purpose” to clarify the relationship of the parties;
- if declaratory relief is being used for as a tool for “procedural fencing”;
- whether declaratory relief would “increase friction” between the state and federal courts or if federal action would “improperly encroach” on the states; and 5) the availability of a more effective alternative remedy.
Id. at 396. The fourth factor is further broken down into three sub-factors: the importance of the factual issues, whether the state court is better suited to resolve those issues, and the “nexus between underlying factual and legal issues” as they relate to the state law or policy under which they arise. Id. The court instructed lower courts to take “a good look at the issue and engage in a reasoned analysis” to determine if declaratory relief “would be useful and fair.” Id.
Notably, the court acknowledged a split among lower district courts in their application of Grand Trunk and whether a declaratory judgment “settle[s] the controversy,” or merely clarifies “the legal relation between the parties.” Id. at 397. The court did not resolve this discrepancy, chiefly because the underlying state tort claimants were not parties to the federal declaratory judgment action. In the cases splitting the district courts below, the claimants in the underlying state court proceedings were parties to the federal action, whereas in Cole’s Place they were not. This seemingly minor difference allowed the district court to issue a declaratory judgment to “settle the controversy,” but only as it pertained to the insurance coverage issues. The federal declaratory judgment did not affect, or “determine,” the underlying state law tort claims.
Additionally, one of the considerations implied by Grand Trunk’s fourth factor, whether a federal court would have to engage in “difficult questions of state law,” often more heavily weighted than other factors. Id. at 400. Here, because, the coverage issue was dependent upon an exclusion expressly precluding coverage for alleged assault (rather than a jury’s finding that an assault had actually occurred), there was no potential for the federal court’s consideration of the issue to intrude upon the state court’s determination of the underlying merits of the allegation itself. Id. at 399, 408. This small policy distinction was enough to favor federal jurisdiction. The fifth factor, the availability of alternative remedies, cut against jurisdiction because declaratory relief was also available in Kentucky state courts, despite the insurer turning to federal court first.
The Sixth Circuit ultimately affirmed the declaratory judgment in favor of the insurer. The court reiterated its prior admonition that the Grand Trunk factors are not weighed, but analyzed, “in a reasoned” way. The result: summary judgment absolving the insurer from defense and indemnity duties based on a specific policy exclusion. Considering the Circuit’s fact-intensive review of the record and application of factors which hold uncertain weight, insureds faced with a state law claim implicating coverage are potentially exposed to simultaneous state and federal actions.
This raises a number of important questions for insureds. First, the state court plaintiffs were not parties to the federal action, even though the facts “overlapped.” The court’s discussion indicates this may make a material difference to the district court’s analysis, especially when the coverage question is simultaneously being litigated in state court. Second, the policy contained an exclusion for alleged assault, meaning factual findings in the federal coverage case were not relevant to the state court determining whether an assault occurred. Third, the court applied an abuse of discretion standard of review, which provides substantial deference to the district court on appeal. The court has continually declined to “delineate the outer boundaries of the district court’s discretion” when there are no parallel state court coverage proceedings; this just adds to the case-by-case nature of Grand Trunk’s application.
The result is unpredictability. An unfavorable outcome for an insured in one case may not mean a similar result in a different case presenting slightly different facts or policy language. State court proceedings to determine coverage may preclude a federal action. The wording of policy exclusions could result dramatically different outcomes because of necessary factual findings. Finally, it remains unclear how a case resolved when third parties, besides the insurer and insured, are involved in both the state and federal actions. Cole’s Place reserved many of these issues for a future case; each time the district court faces the Grand Trunk analysis, it does so with a seemingly clean slate.
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