CHAPTER 18 FEDERAL OR STATE COURT FOR DECLARATORY RELIEF

• Jurisdiction: United States

To a policyholder's lawyer, Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942), is accepted as one of the best, if not the best insurance decision, of all time. It is embedded deeply in U.S. insurance law. This is one of the decisions that has become a strategy tool that policy holders can use. It is very seldom that an insurance decision is taken up to the U.S. Supreme Court, but this is one of those decisions.

Policyholders have, since the beginning of insurance, faced problems with insurance companies. Some insurance companies, when you tender the claim, respond by filing a suit seeking declaratory relief from a court. What's a declaratory judgment action (Dec Action)? It's a suit filed under a federal or state statute that gives the court the right and obligation to resolve contract disputes.

Insurance companies love being in federal court because they feel that they do not have the possibility of a state judge ruling against them. They think that they have more control over federal litigation and they just love federal court. When an insurer files a Dec Action it is saying, "Look, we might have an obligation, or we might not. We really don't know, but here, Court, you decide."

Why would an insurer do that? Well, some state law says they should do that. It doesn't say they should file in federal court, but it says the insurer should, if they're unsure about their obligation to defend, file a Dec Action and get a court to decide the dispute.

Why is Brillhart important for strategy? Brillhart analyzed the federal declaratory judgments statute, the statute that gives authority for the federal courts to hear declaratory judgment cases, and said, "It is not an automatic in. You don't automatically get to the federal court."

Federal court jurisdiction is zealously guarded. Federal courts have important things to do, and deal with really difficult claims that deal with many different federal statutes. Federal courts are good to deal with those. Federal courts can also deal with diversity cases between companies of a different state. That's called diversity action, and is what insurance companies fall under when they try to get into federal court.

The bottom line is, federal court jurisdiction is limited. They are not supposed to take every case. A federal statute directs which declaratory judgment actions courts can take. Brillhart was the first to analyze that statute and say, "Hey, not every insurance case that comes in should be in federal court."

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