Defense Digest

Declaratory Judgments Answer The Question, "Is It Covered?"

Florida insurance companies frequently file declaratory judgment actions to obtain a legal opinion of whether their policies provide coverage or require defense of disputed claims. Insureds can no longer challenge such declaratory judgment actions on the grounds that courts are not allowed to determine facts or interpret unambiguous policy provisions. The Florida Supreme Court’s recent opinion in Higgins v. State Farm Fire and Casualty Company, decided on September 30, 2004, has conclusively established that an insurer is entitled to a declaration of coverage, even if the trial court has to decide factual issues as they apply to the terms of the policy.

In Higgins, State Farm had issued a homeowners insurance policy to Charles Higgins, which excluded liability coverage for bodily injury "expected or intended by an insured" or "which is the result of willful and malicious acts of an insured." Cheryl Ingalls sued Higgins for damages, alleging that he "willfully, intentionally, and with malice" committed assault and battery on her. Ingalls subsequently amended her complaint to eliminate the allegations that Higgins’ actions were intentional or malicious and to claim that he "negligently injured" her during an argument. State Farm filed a declaratory judgment action, contending that it had no duty to defend and indemnify Higgins because his alleged conduct was not covered by the policy.

The Florida Supreme Court reviewed prior opinions that restricted the use of declaratory judgment actions to cases where the parties were in doubt about the meaning of a contract provision and disapproved the use of such actions only to determine whether certain conduct was covered by the policy. The Court held that those prior opinions were too limiting and endorsed the use of declaratory judgments to determine coverage and defense obligations, even when factual issues must be decided.

This is welcome news to insurers faced with coverage decisions that turn on disputed facts, which frequently arise in connection with many provisions, such as the intentional act exclusion, the business use exclusion, and many other policy provisions that are unambiguous and enforceable if they apply to the true facts of the claim. Declaratory judgment actions now are unquestionably available to obtain a legal opinion concerning coverage in these situations.

Although the primary holding in Higgins is generally favorable to insurers, the Court also reaffirmed that a liability insurer’s duty to defend is determined solely from the allegations in the underlying complaint, stating that Ingalls’ allegation that Higgins "negligently injured" her clearly triggered State Farm’s duty to defend under the homeowners policy. Because of this bright-line rule, the Court noted that, when suit has been filed, there generally is no need for a declaratory judgment action to determine the insurer’s obligation to defend the insured. However, if suit has not been filed, a declaratory judgment action can be used to determine both the obligation to defend and the duty to provide coverage.

If the insurer is obligated to defend - based on allegations of the complaint - until coverage has been determined, the time for filing a declaratory judgment action becomes more important. Insurers are justifiably reluctant to initiate a coverage action when no tort litigation has been filed. However, once a liability complaint has been filed, if there are any factual allegations that would bring the case within the policy’s coverage, no matter how transparently false or improbable, according to Higgins, the insurer will be obligated to defend or risk the consequences.

According to Higgins, if a coverage action is subsequently filed, the trial court has the discretion to stay the coverage case until the underlying tort case is concluded. Some factors the trial court should consider in deciding whether the liability or coverage case should go first include the situation where the factual determination will resolve the coverage issue. The Florida Supreme Court approved the trial court’s decision in Higgins to try the coverage issue before the tort case because of this factor - if Ingalls’ injuries were intentionally and maliciously caused by Higgins, coverage would be excluded.

Trial judges also should consider whether early determination of the coverage issue may promote settlement, such as when the defendant does not have significant assets outside of any available insurance coverage. The hardship of delaying the injured party’s day in court while coverage is determined also may be considered. The Florida Supreme Court concluded there are too many circumstances to make a "one size fits all" rule concerning the priority of trying coverage or liability cases.

Declaratory judgment actions are the judicially-recommended method for insurers to determine their policy obligations. As soon as a claim representative becomes aware that there may be a factual issue as to whether coverage for a claim is available, legal counsel should be consulted to evaluate the feasibility and advisability of initiating a declaratory judgment action.

*Susan is a shareholder in the Jacksonville, FL office. Her telephone number is (904) 354-0624, and her e-mail address is soosting@mdwcg.com.