APRIL 2014 CASE ON DECLARATORY JUDGMENT ACTIONS: THIRD CIRCUIT PUTS SOME BRAKES ON DISTRICT COURTS’ ABSTAINING IN FEDERAL DECLARATORY JUDGMENT ACTIONS INVOLVING INSURANCE COVERAGE (Third Circuit)
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)