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Defense Digest

Novel Insurance Coverage Issue? File a Declaratory Judgment Action in Federal Court, Right? Well…

Defense Digest, Vol. 29, No. 3, September 2023

September 1, 2023

by Vincent E. Cononico

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.

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.

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Thought Leadership

Two Tracks, No Preclusion: Ohio Supreme Court Preserves Separate Damages Claims After Chapter 2506 Appeals

The Supreme Court of Ohio has clarified that an administrative appeal under Ohio Revised Code Chapter 2506 does not bar a separate action for damages and declaratory relief that could not have been pursued in the administrative appeal. The Ohio Supreme Court considered Sheetz, Inc. v. Centerville (2026-Ohio-3531) as a result of a certified question from the Southern District of Ohio. The question was whether Sheetz, the gas station/convenience store brand, was barred from seeking damages in a separate action since damages were not sought in their administrative appeal. Ultimately, the Ohio Supreme Court ruled that res judicata does not bar a separate action for damages after ruling on an administrative appeal because R.C. Chapter 2506 is limited to judicial review and cannot grant affirmative relief. The case arose after Centerville’s city council rejected a site plan proposed by Sheetz, Inc. that had received unanimous approval from the City’s planning commission. Sheetz filed an administrative appeal pursuant to R.C. 2506 in the Montgomery County Court of Common Pleas, and two months later filed a complaint for damages and declaratory relief under 42 USC § 1983 as a takings action with the city, city council, and other objectors as improper takings and a violation of due process, as well as interference with business and contractual relationship. The city and city council removed the § 1983 action for damages to federal court. Montgomery County Court of Common Pleas reversed the city council’s denial, and allowed the Sheetz project to move forward. Upon that ruling, the federal court issued a show-cause order questioning whether the § 1983 action was barred by the doctrine of res judicata via claim preclusion (which includes all theories of recovery).  Sheetz argued that Ohio courts of common pleas do not have authority to award damages or declaratory relief as party of the R.C. Ch. 2506 appeal, therefore res judicata could not be triggered to apply to the § 1983 action. Additionally, Sheetz moved to certify the issue to the Ohio Supreme Court, citing differing results between the second and sixth districts on this same issue. Centerville approached the question, not from a claim preclusion standpoint, but from the holding in Grava v. Parkman, Twp which states that a final judgment rendered on the merits bars all subsequent action based on the same transaction or occurrence.  In yet another approach, an objector argued that claim preclusion was satisfied because Sheetz could have raised its damages claims in the administrative appeal – Sheetz disagrees. In their analysis, the Supreme Court of Ohio broke down the elements of a claim preclusion analysis: 1) a prior final, valid decision on the merits by a court of competent jurisdiction; (2) a second action involving the same parties, or their privies, as the first; (3) a second action raising claims that were or could have been litigated in the first action; and (4) a second action arising out of the transaction or occurrence that was the subject matter of the previous action. The Court held that R.C. Ch. 2506 does not permit a party to argue damages as R.C. Ch. 2506 limits the common pleas jurisdiction as if it were sitting on appeal, and therefore can only affirm, reverse, vacate, or modify the appealed order, or can remand the case to the administrative body. Further, the Court held that Grava’s conclusion that a final judgment precludes additional litigation for different relief is inapplicable under this fact pattern because it was meant only to apply to those matters in which the plaintiff brings the exact same case twice, but for new relief. The Court found Grava was inapplicable because Sheetz could have requested damages or declaratory relief in the R.C. 2506 appeal. Therefore, Grava would be nothing more than dicta if it even did apply. Going further, the Ohio Supreme Court disavowed Sixth Circuit precedent which, in reliance on Grava and other district court decisions, permitted an owner to seeking relief under 42 U.S.C. § 1983 alongside an administrative appeal. See Moore v Hiram Twp., 988 F.3d 353 (6th Cir.2021). The Ohio Supreme Court found that the Sixth Circuit had disregarded a critical decision in Community Concerned Citizens, Inc. v. Union Twp. Bd. of Zoning Appeals, 1993-Ohio-115, which clearly held that a R.C. Ch. 2506 appeal cannot be combined with a complaint seeking other claims for relief. Id. at ¶ 11. To that end, the Ohio Supreme Court has determined that the decisions Moore relied on (outside of Grava) are no longer good law, and that Moore was wrongly decided. The decision draws a clear procedural boundary: Chapter 2506 provides judicial review of an administrative decision, not a forum for independent claims seeking affirmative relief. Although Grava may place claims arising from a single transaction within the potential scope of claim preclusion, those claims are not barred unless the complete claim-preclusion test is satisfied. Because Sheetz could not have pursued damages or declaratory relief in its Chapter 2506 appeal, the separate action was not precluded. The remaining question for practitioners looking to apply or defend against this exception is when does the statute of limitations begin to run on damages and declaratory relief claims related to an administrative decision on appeal? A takings action in federal court has a 2-year statute of limitations, or as a state claim, 4 years (like the other tortious claims raised therein). Correlating this case with others, an administrative appeal will not likely toll the statute of limitations on claims based on a final decision by a municipal authority. Therefore, practitioners should look for these cases to be brought simultaneously.

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Thought Leadership

Pennsylvania Supreme Court to Review Whether Legal Malpractice Claims May Be Recast as Breach of Contract Claims

The Pennsylvania Supreme Court recently granted allowance of appeal to consider whether a plaintiff may pursue a breach of contract claim against an attorney based on allegations that the attorney failed to provide competent legal services. The issue is significant in professional liability litigation because it concerns whether a plaintiff may avoid the statute of limitations applicable to professional negligence claims by characterizing the alleged misconduct as a breach of contract. Antoine Poteat retained attorneys Gary Asteak and Nino V. Tinari to represent him in a criminal matter. After his conviction was subsequently overturned through a Post Conviction Relief Act proceeding, Poteat filed suit against his former attorneys alleging that they breached their retainer agreements by failing to provide competent legal services. The attorneys argued that the claims sounded in professional negligence, rather than breach of contract, and were therefore time-barred. The trial court dismissed Poteat’s complaint, but the Superior Court, sitting en banc, reversed. The Superior Court held that the gist-of-the-action doctrine did not bar Poteat’s breach of contract claim because the alleged failure to provide competent legal services could constitute a breach of the parties’ agreement. The Court further held that a legal-services agreement contains an implied duty requiring an attorney to provide competent legal services, even where the agreement does not contain an express provision requiring such services. The Pennsylvania Supreme Court granted review in July 2026 and will consider whether the Superior Court’s decision conflicts with Pennsylvania precedent distinguishing contract and tort claims, including Bruno v. Erie Insurance Co. The Supreme Court will also address whether a plaintiff may maintain a breach of contract claim based on an implied duty to provide competent legal services without identifying a specific contractual provision that was breached. The Supreme Court’s decision could have significant implications for professional liability litigation in Pennsylvania, particularly where plaintiffs seek to characterize claims arising from alleged professional negligence as contractual claims.

Thought Leadership

The Search-Incident-to-Arrest Doctrine Does Not License Strip Searches

In Beatty v. Gardner, No. 25-2860 (3d Cir. Sept. 16, 2026), Kyle Beatty sued police officers Clinton Gardner and Calvin Irvin under 42 U.S.C. § 1983 after they stopped, arrested, and searched him three times during a drug investigation in Williamsport, Pennsylvania. The officers initially smelled marijuana coming from the car in which Beatty was sitting and observed marijuana residue, giving them probable cause to arrest him. Beatty consented to the first pat-down, and the second search was conducted incident to his lawful arrest; neither search uncovered weapons or contraband. The officers then transported Beatty to the police station solely to strip-search him, but the strip search also revealed nothing. The District Court granted the officers summary judgment, concluding that the initial stop, arrest, and first two searches were reasonable and that qualified immunity protected the officers from liability for the strip search. The Third Circuit affirmed, but held that the strip search itself violated the Fourth Amendment. The court concluded that the search-incident-to-arrest doctrine does not automatically permit officers to strip-search an arrestee outside the jail or prison setting. Because strip searches are highly intrusive and the traditional justifications for searches incident to arrest (officer safety and preservation of evidence) did not justify the search of Beatty, the officers generally needed either the arrestee’s consent, exigent circumstances, or a warrant supported by probable cause to believe that a search beneath the clothing would reveal weapons, contraband, or evidence. Here, the officers had none of those justifications. Nevertheless, the court held that qualified immunity barred damages liability because, at the time of the search, the right against a warrantless strip search of an arrestee outside the institutional setting was not clearly established by Supreme Court or Third Circuit precedent. The court likewise upheld qualified immunity on Beatty’s First Amendment retaliation claim and affirmed summary judgment for the officers.

business meeting photo

Result

Summary Judgment Obtained in Insurance Coverage Case