A common strategy of declaratory judgment defendants is to move to dismiss and/or stay an insurer's declaratory judgment action on the ground that the insurance coverage issues are more appropriately resolved in the underlying action.  Halloran & Sage successfully defended such a motion in the case of Mount Vernon Fire Ins. Co. v. Linarte, et al, 2010 U.S. Dist. LEXIS 20710 (D. Conn. March 8, 2010) (Bryant, J.). 

The genesis of that action was a state court action in which the minor plaintiffs brought suit through their mother against the owner and operator of a day care center and her son alleging sexual assault.  Id. at *2-3.  A stipulated judgment entered in that case in the amount of $730,000.  Id. at *3.  The plaintiffs, as judgment creditors, notified the defendants' insurer, Mount Vernon, of the stipulated judgments and threatened to commence a direct action lawsuit to collect the judgments if Mount Vernon did not promptly pay the judgments.  Id.  Four months later, the plaintiffs still had not brought suit.  Consequently, on March 19, 2009, Mount Vernon filed a declaratory judgment action in federal court pursuant to 28 U.S.C. Sections 1332 and 2201 ("the federal action") against the plaintiffs, the owner and operator of the day care center and her son.  The federal action alleged that the commercial general liability policies of insurance it issued to the day care center did not afford coverage for the allegations of sexual assault at issue.  Id. at *3-4.

Three weeks later, the plaintiffs filed their direct action lawsuit against Mount Vernon in state court, claiming that the Mount Vernon policies did provide coverage for the alleged assaults ("the underlying action").  Id. at 4.  They also filed a motion to dismiss and/or stay the federal action.  In particular, the plaintiffs argued that the District Court should decline to exercise jurisdiction over the federal action pursuant to Wilton v. Seven Falls Company, 515 U.S. 277 (1995) because the coverage issues could be better addressed and resolved in the underlying action.

On March 8, 2010, the United States District Court for the District of Connecticut, (Bryant, J.) issued a Memorandum of Decision denying the plaintiffs' motion to dismiss/stay.  The Court began its discussion by noting that under Wilton, "district courts possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act."  Id. at *4.  In exercising that discretion, the Court was guided by the Second Circuit Court of Appeals' decision in Dow Jones & Co. v. Harrods, Ltd., 346 F.3d 357 (2d Cir. 2003), which set forth five factors for determining whether a district court should entertain declaratory relief:  (1) whether the judgment will serve a useful purpose in clarifying or settling the legal issues involved; (2) whether a judgment would finalize the controversy and offer relief from uncertainty; (3) whether the proposed remedy is being used merely for "procedural fencing" or as a "race to res judicata"; (4) whether the use of a declaratory judgment would increase friction between sovereign legal systems or improperly encroach on the domain of a state or foreign court; and (5) whether there is a better or more effective remedy.  Id. at *5-6.

Upon reviewing the Dow Jones factors, the Court found that every factor weighed in favor of exercising jurisdiction over Mount Vernon's declaratory judgment action.  First, the Court held that "there is no doubt that this action will serve a useful purpose by clarifying and settling issues relating to the extent of Mount Vernon's obligations to the Defendants."  Id. at *7.  The Court also held that "resolution of Mount Vernon's declaratory judgment action would finalize the pending dispute between the parties and cease uncertainty regarding the payment of the stipulated judgments."  Id.  The Court further held that the federal action had progressed further than the underlying action and, unlike the underlying action to which Mount Vernon was not a party, the federal action included "all individuals whose rights are implicated by the coverage dispute."  Id. at *7-8.

Additionally, the Court noted that there was no evidence of "procedural fencing," or a "race to res judicata" by Mount Vernon, or that it otherwise acted in bad faith.  Id. at *8-10.  To the contrary, the Court admonished the judgment creditors for bringing a parallel action in state court after Mount Vernon had already filed its federal action:  "[T]he [judgment creditors'] initiation of the later state court action amounts to an abuse of forum selection procedures, particularly given the fact that the choice of a federal forum will provide Mount Vernon with no substantive advantage, as Connecticut law will still apply."  Id. at *8.  Finally, the Court noted that there was no indication that exercising its jurisdiction would increase friction or improperly encroach on the state court because the federal action did not "involve novel or complex state law issues" but rather "[t]he issue to be litigated, whether allegations of sexual assault and battery are covered under certain insurance policies, is a question of contract interpretation that is well within the competency of [the District] Court."  Id. at *11.  In fact, the Court felt that to dismiss the federal action in favor of the underlying action would have the opposite effect in that it would unnecessarily permit the state court to encroach upon what was unquestionably within the District Court's domain due to diversity jurisdiction.  Id.

The Court's decision illustrates that a declaratory judgment defendant should not be able to preclude an insurer from its choice of forum based on the mere assertion that the insurance coverage issues can also be litigated in the underlying action.