Editor's note: Steven A. Meyerowitz, Esq., is a director of FC&S Legal. FC&S and PC360 are both owned by Summit Professional Networks.

When an insured is sued and the insured's carrier provides a defense, subject to a reservation of rights, the insurer may begin a declaratory judgment action seeking a coverage determination. If you ever have wondered what that is about, a decision by a federal district court in Illinois is quite illuminating.

The case

Linda Plumb alleged that after she bought a house built by Rick R. Plumb d/b/a Superior Home Improvement, she discovered that the building “had a defective basement” that caused the house to move from its foundation, becoming unhabitable. She alleged that, as a result, the home was declared unsafe for occupancy and repairs had to be completed. Ms. Plumb sought damages from Superior based on violation of the implied warranty of habitability.

Superior referred Ms. Plumb's claim to its insurance carrier, Secura Insurance Company. According to Secura, it initially agreed to defend Superior in the state court suit, while simultaneously reserving its right to refuse if Superior lacked coverage.

Secura then filed a suit in a federal district court in Illinois seeking a declaration that it had no obligation to Superior with respect to Ms. Plumb's lawsuit. Ms. Plumb moved for dismissal or stay of Secura's suit in light of the “parallel proceeding in state court which could dispose of all claims presented in this federal case.”

The court's decision

The court denied Ms. Plumb's motion.

In its decision, the court explained that the federal Declaratory Judgment Act (DJA) provides that district courts “may declare the rights and legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a). The court then observed that district courts had “substantial discretion” in deciding whether to grant declaratory relief, and that they could stay or dismiss an action seeking a declaratory judgment in favor of an ongoing state court case.

The court added that although there were no set criteria used to decline jurisdiction under the DJA, traditionally it occurred when parallel state proceedings were ongoing and only declaratory relief was sought in federal court. It said that proceedings were “parallel” when “substantially the same parties” were contemporaneously litigating substantially the same issues in two fora. The court added that suits were more likely to be “parallel” where both cases “would be resolved by examining largely the same evidence.”

The court stated that a decision to decline jurisdiction under the DJA was motivated by “concerns about comity, the efficient allocation of judicial resources, and fairness to the parties,” adding that courts should avoid “[g]ratuitous interference with the orderly and comprehensive disposition of a state court litigation.”

In this case, the court pointed out, the state proceedings between Ms. Plumb and Superior would establish Superior's liability, if any, for Ms. Plumb's alleged defective basement and uninhabitable home. By contrast, the court continued, the federal proceedings between Secura and Superior would establish Secura's responsibility to defend Superior and indemnify it if it were found liable to Ms. Plumb. Consequently, the court found, the state and federal suits did not involve “substantially the same parties or issues” and would “apply different legal principles.”

The court also found that Ms. Plumb had not established that there was a substantial likelihood that the state proceeding would determine Secura's obligation to defend and indemnify Superior and that it was unlikely to examine the same evidence or be called on to determine the same factual issues as the state court. As a result, the court declared, resolving Secura's claim in federal court would not duplicate state judicial efforts or interfere with the state court's disposition of Ms. Plumb's case, and “declining jurisdiction under the DJA and dismissing Secura's suit would be inappropriate.”

Finally, the court rejected Ms. Plumb's request to stay the DJ proceeding pending the outcome of the state suit, noting that a stay would have much of the effect of a dismissal, as Secura would have to continue to defend Superior through the conclusion of the state court proceeding or risk breaching its contract.

The case is Secura Ins. Co. v. Plumb, No. 4:13–cv–04054–SLD–JAG (C.D. Ill. March 26, 2014).

FC&S Legal Comment

Requests to dismiss or stay DJ actions are not as rare as one might think. The very same day that the court decided the Secura case, an appellate court in Iowa issued a decision affirming a trial court's decision denying the request of an insured sued in Indiana to dismiss or stay an Iowa declaratory judgment action filed by its insurers. Travelers Property Cas. Co. of America v. Flexsteel Industries, Inc., No. 12–2014 (Iowa Ct.App. March 26, 2014).

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