Archive for the 'NJ - Declaratory Judgment' Category
This is a recent decision on the issue of discretionary abstention in federal declaratory judgment actions in the Third Circuit concerning insurance coverage cases. The key point is the court’s reiterating that there is a per se presumption that an insurer’s declaratory judgment action is distinct from an underlying state tort action against the insured, where the insurer is a not a party to that tort case.
The district court looks to the Third Circuit’s direction in Kelly v. Maxum Specialty Insurance Group, which amplified that Court’s 2014 Reifer decision, in giving district courts clarity on the standards governing their refusal to hear insurance coverage cases. The key directive involves the meaning of parallel proceedings.
Under Reifer, “a district court should first determine whether there is a parallel state proceeding.” While the presence of a parallel proceeding is one of many factors, “the absence of pending parallel state proceedings militates significantly in favor of exercising jurisdiction, although it alone does not require such an exercise.” “Relatedly, when a parallel proceeding does exist, ‘district courts exercising jurisdiction should be rigorous in ensuring themselves that the existence of pending parallel state proceedings is outweighed by opposing factors.’”
Following the 2017 Kelly opinion, “[t]o be considered parallel, there must be ‘substantial similarity in issues and parties’ between the pending proceedings.” This “means that the parties involved are closely related and that the resolution of an issue in one will necessarily settle the matter in the other.” A “mere potential or possibility that two proceedings will resolve related claims between the same parties is not sufficient to make those proceedings parallel.”
Insurance cases are parallel when they involve the same parties and claims. Getting to the essence of it, however, “the Kelly decision creates a per se presumption that an insurer’s declaratory judgment action is distinct from underlying tort actions in state court where the insurer is a non-party.”
In Pennsylvania, where coverage claims against the insurer are not joined with the underlying tort claim in the same case, this should have the practical effect of working against federal abstention. In New Jersey, where the insured may join the insurer in the tort case on the issue of coverage, this will depend on the procedural posture of the case. In the instant case, the insurer was not a party in the New Jersey state court tort action, and the presumption that there was no parallel action, and thus a presumption against abstention, applied.
After adopting the presumption in favor of jurisdiction in the absence of parallel proceedings, the court weighed the 8 Reifer factors in determining whether the insured could overcome that presumption. These include: “(1) the likelihood that a federal court declaration will resolve the uncertainty of obligation which gave rise to the controversy; (2) the convenience of the parties; (3) the public interest in settlement of the uncertainty of obligation; (4) the availability and relative convenience of other remedies; (5) a general policy of restraint when the same issues are pending in a state court; (6) avoidance of duplicative litigation; (7) prevention of the use of the declaratory action as a method of procedural fencing or as a means to provide another forum in a race for res judicata; and (8) (in the insurance context), an inherent conflict of interest between an insurer’s duty to defend in a state court and its attempt to characterize that suit in federal court as falling within the scope of a policy exclusion.”
Each of these factors will be unique to the specific case at hand. In this matter, the factors weighed in favor of retaining federal jurisdiction.
Date of Decision: September 28, 2018
Colony Insurance Co. v. Troensa Construction, Inc., U. S. District Court District of New Jersey Civil No. 17-03577 (RBK/KMW), 2018 U.S. Dist. LEXIS 167683 (D.N.J. Sept. 28, 2018) (Kugler, J.)
An insurer brought a declaratory judgment action seeking policy rescission based upon alleged misstatements concerning the insured’s business in the application process. The insured was subject to a liability suit in state court, and asked the federal court to abstain from hearing this federal action.
The federal court refused. It cited recent Third Circuit case law making clear that there is no policy favoring blanket abstention of insurance declaratory judgment actions; and focused on the fact that the two cases were not parallel proceedings and were not substantially similar.
Date of Decision: October 20, 2017
Scottsdale Indemnity Co. v. Collazos, Civil No. 16-8239 (RBK/KMW), 2017 U.S. Dist. LEXIS 173990 (D.N.J. Oct. 20, 2017) (Kugler, J.)
In Bukowiec v. Adamo, the case arose out of a one car accident resulting in a death and severe injury. The car had been provided to the driver’s mother as a courtesy car by a dealer. The insureds were successful in defeating a declaratory judgment against one of their potential insurers, i.e., the dealer’s insurer. The trial court found coverage was due from that insurer. The opinion makes repeated references to that insurer ultimately intending to appeal the trial court’s decision, which was interlocutory and not then appealable as of right.
One of the insurer’s law firm’s on the declaratory judgment claims later entered an appearance for the insureds as defense counsel, to defend the insureds against the underlying civil claims brought by the estate of one of the accident victims. That law firm withdrew as the insurer’s counsel as to the declaratory judgment aspect of the matter.
The insureds agreed to allow that counsel to serve as their defense counsel in the civil litigation. However, plaintiff’s counsel on the civil claims moved for disqualification. The appellate court ruled for the disqualification.
Among the various reasons discussed, the court stated: “[the insured’s and insurer’s] interests remained adverse after the [firm] withdrew from representing [the insurer]. It remained in [the insured’s] best interest to settle the case. [The insurer’s] only position of record — espoused by the … firm during earlier proceedings — was its intention to appeal. For these reasons and those we have previously noted, ‘there is a significant risk that the representation of [the insured] will be materially limited by [the …firm’s] responsibility to . . . a former client,’ namely, [the insurer]. R.P.C. 1.7(a)(2). In view of the … firm’s previous representation of [the insurer], it cannot now advocate the reasons [the insurer] should make a good faith effort to settle plaintiff’s claims, including avoiding a bad faith claim.”
Date of Decision: January 6, 2016
Bukowiec v. Adamo, DOCKET NO. A-4092-13T1, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2016 N.J. Super. Unpub. LEXIS 36 (App. Div. May 12, 2015) (Fisher, Nugent, Manahan, JJ.)
In Carolina Casualty Insurance Company v. Travelers Property Casualty Company, the plaintiff insurer brought a declaratory judgment action against two other insurers. It sought a judgment that it owed no defense or coverage obligations in connection with an underlying claim. The defendant insurers were successful in finding plaintiff owed coverage. The plaintiff insurer was required to pay reimbursement toward a prior settlement, paid fully by defendant insurers.
The defendant insurers sought attorney’s fees and costs under R. 4:42(9)(a)(6), as the prevailing parties in the coverage action. The parties agreed a successful carrier could recover under the rule, however, the plaintiff insurer argued the defendant insurers should not be allowed to recover, under the doctrine of unclean hands. It claimed that the defendant insurers were precluded from recovery for deliberate delays and failures to settle, and by bringing a claim against another insurer which they later abandoned; all of which allegedly increased the legal fees.
The court rejected this argument, finding that there was “no conduct so inequitable as to bar an otherwise appropriate recovery.” Rather, the defendant insurers had a “right to assert their case against a potentially liable insurer…, [and] [t]hat they subsequently chose to release their claims (which turned out to be worth $15,000) is not blameworthy.” Thus, they could still recover fees and costs under Rule 4:42-9(a)(6).
Moreover, even if these carriers were somehow “dilatory, these acts are not ‘directly related’ in the sense that they are inconsistent with the basic entitlement to costs.” The court analogized this to the recovery of attorney’s fees in insurance bad faith cases, such as breaching a fiduciary duty to settle claims, noting that the mere failure to settle a debatable claim does not give rise to bad faith. In this case, the defendant insurer’s position was not only debatable, it was correct; and its failure to accept the plaintiff insurer’s settlement offer was not inequitable.
Date of Decision: February 25, 2015
In Encompass Insurance Company v. Quincy Mutual Fire Insurance Company, the court addressed the standards for awarding counsel fees under Rule 4:42-9(a)(6) to a successful claimant in a declaratory judgment action. The court made clear that insurer bad faith is not a perquisite, but it is a factor trial courts may consider.
The trial court has broad discretion and may consider an insurer’s good faith refusal to pay demands, the excessiveness of a plaintiff’s demands, the bona fides of either party, the insurer’s justification for litigating the matter, the insured’s conduct in substantially contributing to the necessity for the litigation, the parties’ general conduct, and the totality of the circumstances.
The court also observed that fees can be awarded if the claimant is the insured or the insurer. In this case, the dispute was between insurers, and the court observed that in suits between insurers, as opposed to a claim between insured and insurer, it does no violence to the general principles of R. 4:42-9(a) to have each party bear its own legal fees, if the totality of the circumstances so suggests. Date of Decision: November 14, 2014
Encompass Ins. Co. v. Quincy Mut. Fire Ins. Co., DOCKET NO. A-3000-12T4, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 2684 (November 14, 2014) (Hayden and Leone, JJ.)
In The Travelers Property Casualty Co. of America v. USA Container Co., the insured was subject to suit over a spoiled overseas delivery of corn syrup to a European buyer. The carrier declined coverage, but during settlement negotiations between the insured and plaintiff, did make a limited offer to contribute to a settlement, subject to a right of reimbursement. The insured declined, and settled.
The insurer later claimed it should not have to reimburse the full settlement, in the context of its declaratory judgment action. The court found that the insurer failed to produce evidence that the settlement was entered in bad faith or was unreasonable, and thus it was liable for the full amount.
The court then analyzed the 7 factor test for determining whether the unsuccessful insurer in the declaratory judgment action was liable for attorneys’ fees under N.J. Ct. R. 4:42-9(a)(6), and observed that the insured need not establish bad faith to recover fees; rather, the presence of bad faith was only one factor to consider.
Date of Decision: July 21, 2014
In Strunk v. M&A Trucking, the court refused to award attorney’s fees under Rule 4:42-9(a)(6) in a declaratory judgment action between two insurers arguing coverage issues, where one insurer had defended and indemnified the insured in the underlying action; particularly where the trial court determined the issues were worthy of consideration.
Date of Decision: June 19, 2014
Strunk v. M&A Trucking & Edson L. Silva, DOCKET NO. A-2344-12T4 A-3195-12T4 , SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 1460 (App. Div. June 19, 2014) (Alvarez, Ostrer and Carroll, JJ.)
In Reifer v. Westport Insurance Corporation, the Third Circuit issued its most important decision on the exercise of federal jurisdiction in insurance declaratory actions since its 2000 decision in State Auto Ins. Co. v. Summy, 234 F.3d 131 (3d Cir. 2000).
For practical purposes, the most important statement in the new Opinion may be that: “While we sympathize with our district courts’ apparent frustration over the volume of such cases, we, like our sister circuit, ‘know of no authority for the proposition that an insurer is barred from invoking diversity jurisdiction to bring a declaratory judgment action against an insured on an issue of coverage.’”
The Court painstakingly went over the law in other circuits, and detailed the factors that District Courts should consider in weighing the abstention issue. The lesson is clear that there is no bright line rule permitting abstention by which the District Courts can forego this weighing of factors; and there is clearly no rule that would allow for automatic abstention in the absence of a federal legal issue, independent of whether the state law is settled.
The Third Circuit upheld the District Court’s abstention order in this case, which had been issued sua sponte after a Magistrate Judge had provided a lengthy Report and Recommendation solely on substantive issues. A key focus was the presence of a potentially important, but undecided, issue of substantive state law; which should be decided by a state court rather than a federal court in the first instance.
The Court’s Opinion thus indicates that the unsettled nature of the state law at issue is going to bode in favor of abstention; but that if the state law to be applied is settled, this can be as readily applied by a federal court as a state court. The Court made clear that the District Court’s decision was to be reviewed under an abuse of discretion standard, and any prior Third Circuit decisions requiring more stringent review had been overruled by the Supreme Court on this issue.
Date of Decision: April 29, 2014 (Issued as a Precedential Opinion)
Reifer v. Westport Insurance Corporation, No. 13-2880, 2014 U.S. App. LEXIS 8014 (3d Cir. April 29, 2014) (Van Antwerpen, J.)
