When Can You File a Declaratory Judgment Action’

It bears repeating that one of the thorniest issues that an insurance adjuster faces is deciding when to bring an affirmative declaratory judgment action. No carrier enjoys suing its insured.

In my last column, I discussed several of the strategic considerations a carrier should review in weighing this decision. Specifically, when does filing a declaratory judgment action on coverage defenses make good business sense and what are the advantages, and disadvantages, of being the plaintiff.

In this column, I address the tactical considerations in making this decision. Simply put, when does Texas law allow you to bring a declaratory judgment action against the insured?

Not that long ago, the answer was anything but clear. Back in 1968, the Texas Supreme Court, in Firemans Fund Ins. Co. v. Burch, 442 S.W.2d 331 (Tex. 1968), held that you could bring a declaratory action only on the duty to defend during the pendency of the underlying tort suit. The idea was that while the duty to defend presented a ripe and justiciable controversy, the duty to indemnify was premature during the pendency of the underlying suit because the duty to pay may never arise. For instance, the insured could actually win the underlying trial so that there would never be a duty to pay.

In State Farm v. Gandy, 925 S.W.2d 696 (Tex. 1996), the Texas Supreme Court not only opened the door to filing declaratory judgment actions on the entire case, but actually insisted that carriers should attempt to a obtain declaratory judgment on both the duty to defend and indemnify prior to resolution of the underlying case under certain circumstances. The purpose of Gandy was to defeat collusive settlements between the insured and the claimant, which involved covenants not to execute and an assignment of the insured’s claims against the carrier.

Following Gandy, the Texas Supreme Court further outlined in Farmers Cas. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997), the circumstances under which an insured could obtain a declaratory judgment on both the duty to defend and the duty to indemnify prior to resolution of the underlying suit. In Griffin, the Court overruled Burch in part by observing that the restriction on the jurisdiction of state courts to issue declaratory actions has been removed by a constitutional amendment. Therefore, trial courts could resolve the issue of the duty to indemnify by declaratory judgment prior to the resolution of the underlying suit.

However, the Court did note that in some circumstances it was still premature to litigate the duty to indemnify during the pendency of the underlying case. The Court explained:

“In some cases, coverage may turn on facts actually proven in the underlying action. For example, the plaintiff may allege both negligent conduct and intentional conduct; a judgment based upon the former type of conduct often triggers a duty to indemnify, while a judgment based on the latter usually establishes the lack of a duty.”

The Court therefore set the following rule:
“Any attempt to indemnify is justiciable before the insured’s liability is determined in the liability lawsuit when the insurer has no duty to defend and the same reasons that negate the duty to defend likewise negate any possibility the insurer would ever have a duty to indemnify (emphasis in original).”

Consequently, the applicability of the Griffin exception ultimately depends on the nature of the facts relevant to the declaratory action. Coverage issues that involved factual questions material to the underlying case are premature. In other words, you cannot file a declaratory judgment action in those cases.

The Griffin exception, although frequently mentioned in opinions, has only occasionally been relied upon by the appeals courts as a basis for decision. See e.g., State Farm Lloyds v. Borum, 53 S.W.3d 877 (Tex. App. — Dallas 2001, writ denied) (holding that where insurer had no duty to defend insured against sexual abuse and battery claims alleged in petition, issue was dispositive of insurer’s duty to indemnify); Utica Lloyd’s of Texas v. Sitech Eng’r Co., 38 S.W.3d 260, 264 (Tex. App. — Texarkana, no writ) (holding that where allegations in petition fell within policy’s professional services exclusion, insurer had no duty to defend or indemnify insured); Reser v. State Farm Fire & Cas. Co., 981 S.W.2d 260, 264-65 (Tex. App. — San Antonio 1998, no writ) (holding that where claimant amended petition to remove covered claim and only alleged uncovered claims, insurer had no duty to defend or indemnify insured).

One learned commentator, Dallas’ Mike Huddleston, wrote that the scope of the Griffin exception suggests that its applicability will depend on the nature of the factual inquiry in the declaratory judgment action:

“Coverage issues that involve factual questions that are material issues in the underlying suit would be deferred. The reason is logical because the evidence could potentially be used against the interests of the insured and thus alter the basis for liability in the underlying suit. Moreover, there is still the possibility that the underlying suit may resolve the common material issues and thus avoid the need for a coverage determination. Truly independent issues, such as whether someone is an insured or not, typically do not involve material issues in the underlying suit. Another example would be the issue of the number of occurrences under a general liability policy.”

Mike has got it right. The standards set out in Gandy and Griffin allow for far greater use of declaratory actions than were previously allowed, but carriers must remain conscious of the limitations.

These rules give relatively clear guidelines as to when you can bring suit. With these guidelines in mind, you can evaluate the practical considerations and decide when it is the right decision to bring an affirmative suit.

Brian S. Martin is a partner in the Insurance and Coverage Section of the Houston office of Thompson, Coe, Cousins & Irons, L.L.P. He has extensive experience in insurance coverage and defense matters, specializing in environmental, toxic tort and products cases. Martin is a frequent author and CLE speaker on insurance topics, including coverage and bad faith issues.