OCTOBER 2018 CASES: NOT A BAD FAITH CASE, BUT YOU WILL FIND IT INTERESTING IF YOU ARE INVOLVED IN FEDERAL DECLARATORY JUDGMENT COVERAGE ACTIONS (New Jersey Federal)

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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.)

 

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