Chapter Eighteen

• Jurisdiction: New York

Chapter Eighteen

Actions Brought By and Against Insurers

Joseph P. DePaola, Esq.*

* Timothy J. Perry, Esq., previously updated this chapter.

I. Introduction

The declaratory judgment action is an effective device to determine whether an insurer is obligated to defend or indemnify an insured for liability arising from a particular incident.²³⁷³ New York statutory authority for a declaratory judgment is provided by N.Y. Civil Practice Law & Rules 3001 (CPLR) and Court of Claims Act § 9(9-a) and in federal procedure by 28 U.S.C. §§ 2201 and 2202, the Federal Declaratory Judgment Act. This chapter will discuss procedure and strategy in bringing “DJ” or “Dec” actions, proper and necessary parties to the action, and direct actions against insurers under the insurance contract.

II. Declaratory Judgment Actions Involving Insurance Coverage: Practice, Procedure and Strategy

A. Factors to Consider in Commencing Action

A declaratory judgment action provides an effective means of testing early an insurance carrier’s disclaimer of coverage. Such an action gives it some control over its ultimate exposure, and protects the carrier against an adverse judgment being entered and payable before it becomes aware that its disclaimer is invalid.

Factors to be considered by a carrier in deciding whether to bring a declaratory judgment action include the probability and size of a potential judgment in favor of the claimant, the identities and legal acumen of the parties affected by the disclaimer, including the insured and claimant, and the necessary incidental costs of commencing the action, particularly where the insurer has previously issued a reservation of rights. In the latter instance, the carrier may ultimately be faced with paying not only the attorney fees of its defense counsel and its coverage counsel, but those of its insured who ultimately prevails in the action.²³⁷⁴ Conversely, if the insured itself initiates the declaratory judgment action against the carrier, the insured cannot recover attorney fees even if the insured wins.²³⁷⁵ However, an insured may be awarded its attorney fees as part of its consequential damages in an action for breach of contract or bad faith.²³⁷⁶ A third-party claimant who is joined as a named defendant due to his interest in the coverage dispute cannot recover his attorney fees where the plaintiff insurer ultimately withdraws its disclaimer to the potential benefit of the claimant.²³⁷⁷

Choice of law and choice of forum are also factors to consider before instituting the action. Issues of insurance coverage are generally matters of state law, and policies often do not specify which state’s law will apply. Where an insurer’s headquarters or the location of the occurrence is in one state and the policies are issued or delivered in another state, courts will engage in a rather complicated choice-of-law analysis, prompting the potential plaintiff to analyze which forum is likely to apply the state law most favorable to its position.²³⁷⁸

Coverage actions in federal court are subject to diversity of citizenship subject matter jurisdiction pursuant to 28 U.S.C. § 1332, which requires that the controversy be between citizens of different states, or citizens of a state and citizens/subjects of a foreign state. Since no plaintiff can be a citizen of the same state in which any defendant is a citizen, and because a corporation is a citizen of the state in which it is incorporated and of the state in which it has its principal place of business,²³⁷⁹ it may be challenging to clearly establish jurisdiction over a large insurance carrier that has considerable business operations in several states.²³⁸⁰ A federal court may decline to exercise jurisdiction over a coverage dispute if the action is not a ripe “case or controversy” or if it may interfere with the underlying litigation.²³⁸¹

A court’s attitude toward third-party practice is yet another issue that needs to be analyzed when bringing a declaratory judgment action. While a coverage action may be brought in the context of a third-party action,²³⁸² it may be subject to severance from the main action,²³⁸³ or stayed pending resolution of common factual issues in the underlying suit that could determine the coverage obligations.²³⁸⁴

Timing of the declaratory judgment action is likewise a consideration. A carrier may not commence a declaratory judgment action on the eve of the underlying trial to avoid its defense obligation, although the carrier’s obligation to indemnify may be resolved at the trial.²³⁸⁵ If an insurance carrier believes that a claimant and the insured are cooperating to establish a covered claim in lieu of a noncovered claim so as to invoke the carrier’s coverage obligation, the carrier may seek to intervene in the lawsuit to protect its own interests and have the jury specifically consider both covered and noncovered claims.²³⁸⁶

For the insured, timing of the declaratory judgment action should be given due consideration as well. If the carrier disclaims coverage and provides no defense or indemnity, the insured should consider immediately commencing action.²³⁸⁷ However, if the carrier is defending under a reservation of rights, the insured may want to consider attempting to negotiate an agreement with the carrier that resolves their issues.²³⁸⁸

B. Elements of the Complaint

The complaint for a declaratory judgment should, like other civil complaints, clearly and specifically identify the parties (including the place of incorporation and principal place of business of each) and recite the jurisdictional bases for the suit (i.e., subject matter jurisdiction in federal diversity cases and in personam jurisdiction under the state long-arm statute). The complaint should then identify the insurance policy and recite the relevant policy terms and conditions, perhaps attaching the policy as an exhibit. Next, the complaint should recite the factual background of the claim, including the nature of the underlying claim for which coverage is sought, with reference to the attached underlying complaint. Where prompt notice of occurrence or claim or untimely disclaimer is an issue, the complaint should specify the date of the underlying event triggering coverage and the duty to give notice or the duty to timely disclaim and recite the notice given to the insurer and the insurer’s response thereto. Finally, the complaint should clearly state all demands for relief, equitable and legal, including declaratory judgment, breach of contract, reformation or rescission, or bad faith where applicable.²³⁸⁹

In opposing the relief sought, the answering parties may assert their own counterclaims (or cross-claims) for declaratory relief. A declaratory judgment action resolved in favor of the defendant does not result in a dismissal of the action, but rather in a judgment declaring the rights and obligations of the respective parties.²³⁹⁰

Whether a jury trial is available will be determined by comparing the action to that kind of suit that would otherwise be available and used to prosecute the claim in the absence of a declaratory judgment. If the action is essentially equitable, it will be tried before the court; if essentially legal, it will be tried before a jury.²³⁹¹

An insurer that wishes to disclaim after it has assigned defense counsel with a reservation of rights should not ask counsel to move to withdraw; rather, the insurer should continue to provide a defense until it has successfully secured a declaratory judgment.²³⁹²

III. Proper and Necessary Parties: Insurance Law § 3420(a)(2) and (b)

New York Insurance Law § 3420(a)(2) and (b) authorize an injured third party to bring a direct suit against an insurer to recover damages as a judgment creditor against the insured’s liability policy. Section 3420(b) identifies those persons who may bring such a direct action against that insurer. A party who has obtained a judgment against the insured which has not been paid for 30 days from service of notice of entry can sue the insurer directly for payment under the policy. But what if no judgment has yet been obtained? Because one of the major benefits of a declaratory judgment action is to fix the legal rights and obligations of the competing parties under a policy, should the entry of a judgment be a prerequisite to a claimant’s suit against the carrier for a coverage determination?

In Lang v. Hanover Insurance Co., the Court of Appeals held that a claimant who has not yet obtained a money judgment against an insured may not bring a declaratory judgment action against the insurer seeking a determination of the availability of insurance coverage.²³⁹³ This resolved a split among the Appellate Divisions on the question of whether a third-party (injured claimant or cross-claiming defendant) has standing to maintain a declaratory judgment action against the alleged tortfeasor’s insurer.²³⁹⁴

The Lang decision was abrogated by an amendment to CPLR 3001 and Insurance Law § 3420(a) on July 21, 2008, effective January 17, 2009.²³⁹⁵ The amendment permits a claimant in an action arising out of personal injury or wrongful death to file suit directly against the tortfeasor’s insurer for declaratory relief where the insurer’s denial of coverage is premised on late notice. The third-party claimant will not have the right to file suit directly against the insurer if the insured or the insurer itself brings a declaratory judgment action within 60 days of the denial. This same legislation further abrogates New York’s traditional “no-prejudice” rule with respect to a carrier’s right to deny coverage based upon the insured’s late notice of an occurrence or suit. This topic is discussed at length in Chapter 4.

There appears to be a continuing disagreement between the federal courts on the significance of § 3420 to the right of an injured party to intervene in a pending federal action brought by an insurer.²³⁹⁶

A party’s standing to participate in a declaratory judgment...