All in Good Time: Another Court Refuses to Allow Plaintiff to Force an Early Resolution of Insurer’s Rights Under a Liability Policy

Like insurance companies, plaintiffs’ class action attorneys do better when they know how to manage risk.  Bringing a case to trial can involve an enormous investment of time and resources, and most firms can’t afford to do it if there’s a significant chance the defendant will not be entitled to liability coverage at the end of the day.  For that reason, avoiding an early resolution of coverage issues can sometimes help an insurer negotiate a more favorable settlement.  In two recent cases, attempts by plaintiffs’ counsel to change that dynamic have come up short.

In January, this article reported about a novel attempt to strengthen the plaintiff’s hand:  In CE Design Ltd. v. American Economy Ins. Co., No. 12-11106-FDS (D. Mass. Dec. 21, 2012), the plaintiff in a pending class action in Illinois state court brought a separate declaratory judgment suit in Massachusetts against the defendant’s insurer, which was defending the underlying suit subject to a reservation of rights.  In that case, the tactic didn’t work.  The court dismissed for lack of standing, because, under Illinois law, the plaintiff had no rights against the insurer before it obtained a judgment against the insured defendant.  Until that time, the plaintiff could not claim to have been injured by the insurer’s denial of coverage to the defendant.

As it turns out, the attorneys who brought the CE Design case had more than one iron in the fire.

Last month, in Byer Clinic & Chiropractic, Ltd. v. State Farm Fire & Casualty Co., No. 1-11-3038 (Ill. Ct. App. March 12, 2013), they were rebuffed for a second time—but for a different reason.

Like CE Design, the plaintiff in Byer filed a class action alleging a violation of the Telephone Consumer Protection Act of 1991.  State Farm defended the action against two of the defendants, subject to a reservation of rights.  Byer then brought a separate action, seeking a declaration “concerning the rights and obligations under the commercial general liability policies issued by State Farm.”

An Illinois Appellate Court affirmed the trial court’s dismissal of the declaratory judgment action, on the ground that the dispute was not yet ripe for adjudication.  Because State Farm was providing a defense to its insured, the court held, there was no actual controversy respecting the insurer’s duty to provide a defense.

That holding was far from inevitable, since, as the plaintiff pointed out, courts routinely hear declaratory judgment cases between insureds and insurers under identical circumstances.  It cannot be the case that one party’s decision to seek a declaratory judgment is sufficient to create an “actual controversy.”  In fact, the Appellate Court essentially recognized that fact, because Byer sought leave to file an amended complaint, in which State Farm’s insured would be added as a plaintiff.  The court held that the trial court had properly denied leave to amend:  “SinceState Farm is presently providing a defense . . ., a controversy over State Farm’s duty to defend in the class action suit will not arise until State Farm withdraws that defense.

But that’s as far as the court’s analysis went.  The court ruled that the issue of State Farm’s duty to defend was not ripe, because “[w]e have found no case . . . [holding] that an injured plaintiff may file a claim seeking a declaration of coverage when the insurer is defending the tortfeasor subject to a reservation of rights.”

Byer also pointed out that there are some circumstances (which were discussed in a recent post on this blog) in which a reservation of rights creates a conflict of interest between the insured and its insurer.  Rather than argue that such a conflict constituted an “actual controversy,” however, the plaintiff contended that it rendered the reservation of rights “ineffective”—that State Farm, by reserving its rights, had “waived its policy defense and is estopped from raising its policy defenses.”  The court rejected that argument in a footnote.

The court also found that the issue State Farm’s obligation to indemnify its insured was not yet ripe—because the insured’s liability had not yet been determined.