Litigating the Declaratory Judgment Action

From DRI’s In House Defense Quarterly (Fall 2015)

Declaratory judgment actions are an important tool for insurers seeking to resolve insurance coverage issues. Does that exclusion preclude the insurer from having a duty to defend or indemnify the policyholder with respect to a loss? How much coverage is available under the policy? Is another insurer responsible for first layer of coverage? Did the insured engage in conduct that would allow avoidance of the policy altogether? The insurer can engage in a thorough and prompt investigation and analysis of the underlying facts, policy language, and applicable law to answer these questions. But, the insurer’s position alone does not have the force of law and cannot protect it from “bad faith” claims from policyholders and, in some jurisdictions, third parties  seeking to extra-contractual damages from the insurer, and the only way to settle the question of coverage is to obtain a ruling from a court.

At some point in handling the file, the adjuster, inside counsel, or outside counsel must make a decision: to file, or not to file? Should the insurer take a proactive position and initiate the declaration of rights action to establish its rights and responsibilities before suit is filed on the underlying claim? Or, should the insurer wait to see if the policyholder files suit first and seek a declaratory judgment in response?

Good trial attorneys use litigation to develop and tell his or her client’s story to the jury. In reality, though, the story begins well before outside counsel is involved or any papers are filed in a court system, and declaration of rights actions should involve continuous analysis from the very beginning. Coverage cases start when a claim file is opened. Remember: every diary entry, letter, and activity that is taken—and how each activity is documented—can potentially be used as exhibits before a jury. What has not been done will be scrutinized. Whether the diary shows that the insurer openly and objectively considered competing underlying facts or possibilities will be important on ECL claims. Even though many cases settle, settlement negotiations are made in light of what a jury is likely to do should the case go to trial.

This article is not intended to alter any existing company’s programs, procedures, or protocols. It is not intended to alter scorecards or other indicia of policy violations or exclusions. The discussion below is aimed to hit the highlights of common issues that arise in declaratory judgment actions and attempts to point out some pitfalls that can help the insurer’s representatives (including outside counsel) analyze and assess the risk sooner and develop a successful claim resolution strategy. The first section discusses considerations involved in an 3 insurer’s decision to file its own declaratory judgment action. The second section provides an overview of issues that can arise during the litigation itself.

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