Procedural hurdles to maintaining cases in certain courts, or in a certain configuration of parties, can sometimes affect the outcome of litigation as much as the underlying merits. For a class action plaintiff (and especially for class counsel), the ability to resolve disputes over the defendant’s insurance coverage can be an immense boost in formulating a litigation and settlement strategy. For an insurer disputing coverage, access to federal court might be what makes a declaratory judgment worth pursuing.
Three cases decided in the waning days of 2012 featured creative attempts to overcome procedural obstacles. None, it appears, was quite creative enough.
The plaintiff in CE Design Ltd. v. American Economy Insurance Co., No. 12-11106-FDS (D. Mass. Dec. 21, 2012), brought a putative class action in Illinois state court against a company called Ernida, LLC, which allegedly sent junk faxes in violation of the federal Telephone Consumer Protection Act. Ernida’s insurer, American Economy, defended the case, subject to a reservation of rights. Then, while the class action was still pending, the plaintiff filed an action in the District of Massachusetts against American Economy, seeking a declaration that American Economy was obligated to defend and indemnify (but especially indemnify) Ernida, its insured. Ernida was not a party to the Massachusetts case.
The court indicated that it had subject matter jurisdiction, because there was an “actual controversy” between American Economy and Ernida, but it questioned whether the plaintiff had standing to seek a resolution of that controversy. Under Illinois law, the plaintiff would not be permitted to seek recovery from the insurer until after it had obtained a judgment against Ernida. Consequently, the court found that the plaintiff could not satisfy the “injury-in-fact” requirement of Article III standing, and it dismissed the declaratory judgment complaint.
In New Hampshire Indemnity Co. v. Scott, No. 8:11-cv-943-T-23MAP (M.D. Fla. Dec. 14, 2012), the child of a named insured was sued in state court in Florida for damages arising out of a felony battery and robbery. The insurer defended the claim under a reservation of rights, and it tendered the policy limit ($10,000) to the named insured. Then, a few days before the insured’s trial, the insurer brought an action in federal court, seeking a declaration that it had no duty to defend or indemnify.
The district court ordered the insurer to show cause why the action should not be dismissed for lack of subject matter jurisdiction—specifically, because the insurer had failed to demonstrate that the “amount in controversy” was greater than $75,000. The court explained that the $10,000 policy limit could not be considered “in controversy,” because the insurer had already tendered that amount to the insured. The cost of defending the underlying suit was also off the table, because, under Florida law, the insurer’s failure expressly to reserve its right to be reimbursed meant that it could not recover those costs, even if it were ultimately determined that the insurer had no duty to defend.
That left the insurer’s claim that it was prosecuting the declaratory judgment action to prevent a “potential” bad faith suit, in which the insurer might be held liable for the $69 million that the robbery victim was seeking in the underlying tort case. The court ruled that this amount could not be deemed to be “in controversy,” for two reasons. First, it was “entirely speculative” at the time the insurer’s action began, because the trial of the underlying case had not even begun. (Subject matter jurisdiction must be established as of the date on which a federal action is filed.)
Second, because a right to coverage is an element of a claim for bad faith in Florida, the insurer would have to lose its declaratory judgment action before the possibility of a bad faith action could even arise. In other words, resolving the declaratory judgment action would be necessary to put the amount of a bad faith claim into controversy. (Or, as the court memorably explained it: “[A] declaratory judgment’s attenuated, collateral consequence perforce res judicata, collateral estoppel, or stare decisis contributes nothing to the amount in controversy.”)
Bond Safeguard Insurance Co. v. Wells Fargo Bank, N.A., No. 11-15478 (11th Cir. Dec. 21, 2012), an unpublished decision by the Eleventh Circuit, involved an attempt by two insurers to avoid the consequences of an insured’s insolvency. Two sureties issued subdivision bonds to secure performance on certain property developments. The developers experienced financial difficulty and filed for bankruptcy protection, and the sureties were required to pay $16 million on the bonds. The sureties then attempted to assert lender liability claims against the banks that had allegedly precipitated the developers’ default.
The district court dismissed the complaint for lack of standing, and the Eleventh Circuit affirmed. The court found that the sureties claims, which were based on an indirect injury, would apply equally to all of the creditors and could have been brought by the debtors. Consequently, the claims were property of the bankruptcy estate, and the sureties lacked standing to assert them.
