Insurance Services – Coverage & Bad Faith Litigation

Key Points:

• Federal courts are reluctant to consider novel insurance coverage issues.
• A decision to deny jurisdiction in an insurance coverage action is likely to be affirmed.

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The story usually unfolds like this: the facts of the loss suggest that a policyholder may not be entitled to indemnity or a defense under the terms of the insurance policy. However, the law on the particular issue is not well settled in the jurisdiction. Therefore, the prudent decision is to file a declaratory judgment action. The state court venue is not seen as desirable, so the option of filing the case in federal court is suggested. There is diversity of citizenship among the parties and the amount in controversy is sufficient for federal jurisdiction, so there should be no obstacle to filing the action in federal court, right? Well, before charging forward in federal court and incurring the associated expenses, we should take a closer look. 

A scenario similar to the one outlined above was recently considered in Admiral Insurance Co. v. Fire-Dex, LLC, 2023 WL3963623 (6th Cir. June 13, 2023). Fire-Dex is a manufacturer of firefighting products, including clothing worn by firefighters. Many of its materials contain the chemical polyfluoroalkyl, also known as PFAS. There is some evidence suggesting that PFAS causes cancer. A number of lawsuits have been filed against Fire-Dex and similar companies by the end-users of clothing containing PFAS. Fire-Dex turned to its liability insurer, Admiral Insurance, for defense and indemnity. Admiral believed that coverage did not apply under the terms of the policy and filed a declaratory judgment action in the United States District Court for the Northern District of Ohio. 

Specifically, Admiral argued the federal court should declare that it owed no duty to defend or indemnify Fire-Dex because the alleged injuries fell under the policy’s “occupational disease” exclusion. That exclusion states that there is no coverage for a “…disease arising out of any insured’s operation, completed operation or products.” Rather than addressing this issue, the federal district court dismissed the action, declining to exercise jurisdiction over the case. Believing that was an error, Admiral filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. 

The Court of Appeals began its analysis by explaining that, even when a litigant has satisfied all of the traditional elements establishing federal jurisdiction, a district court’s decision to accept a declaratory judgment action is still discretionary. District courts in the Sixth Circuit are required to apply the factors set forth in Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984) when deciding whether to keep a declaratory judgment action. These factors are whether:

• the declaration will settle the controversy;
• the declaration will serve a useful purpose in clarifying the legal relations in issue;
• the declaration will be used merely for the purpose of “procedural fencing”;
• the declaration will improperly encroach upon state jurisdiction; or
• there is a better alternative remedy.

The parties to the Fire-Dex case agreed that most of these factors were satisfied. The declaratory judgment action would settle the controversy and would be useful in clarifying the legal relations. There was no evidence that the action was filed for an improper motive, or “procedural fencing.” In addition, a declaration of Fire-Dex’s rights under the policy seemed to be the best remedy. 

However, the parties could not agree on the fourth factor, which formed the basis for dismissal by the district court. Specifically, the lower court concluded that retaining the declaratory judgment action would encroach on the jurisdiction of the state courts, because the specific coverage issue had not been decided by the state courts previously. Admiral disagreed and challenged the district court’s ruling on appeal, arguing that similar insurance policy exclusions had been applied in the workers’ compensation setting and that those decisions provided the federal courts with the necessary guidance on state law.

The Sixth Circuit did not find Admiral’s argument persuasive and explained that “states…are the masters of their own law, subject to certain federal constitutional and statutory restraints.” The court also stated, “[b]y and large, insurance rules and regulation are reserved to the states for crafting.” Because there are no Ohio state court decisions applying this specific policy exclusion to the same or similar facts, it was concluded that the district court was correct in declining to exercise jurisdiction. The court further explained that it was reluctant to reverse the lower court’s decision absent an abuse of discretion. The court explained, “It is enough that the district court has ‘taken a good look at the issue and engaged in a reasoned analysis of whether issuing a declaration would be useful and fair.’” 

At first glance, the decision in Fire-Dex might seem counterintuitive. After all, in the context of insurance coverage, litigants file declaratory judgment actions for the purpose of seeking clarification of novel coverage questions. If the coverage decision is clear, there is no need to file a declaratory judgment suit. However, the lesson to be taken from Fire-Dex is that if the issue at hand is truly, or even arguably, one of first impression in the state, the federal courts will probably not welcome the case. Further, if the federal court denies jurisdiction, that decision is very likely to be affirmed on appeal. Therefore, litigants should proceed cautiously when considering filing a declaratory judgment action in federal court that involves a novel insurance coverage question.

*Vincent is a shareholder in our Cleveland, Ohio, office. He can be reached at 216.912.3821 or vecononico@mdwcg.com.

 

_{Defense Digest, Vol. 29, No. 3, September 2023, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}