I. Third-Party Claims: Injured Party Against a Tortfeasor’s Insurance Company
Third-party claims are suits by a non-party to the insurance contract to recover under the contract. This Article will touch on the most frequent methods used to make these claims, including equitable garnishment actions and declaratory judgment actions.
A. Equitable Garnishment ActionsJudgment creditors may pursue a judgment debtor’s insurance company provided the debtor was insured at the time of the accident and the accident was covered by the policy. In Missouri, recovery can be obtained through an equitable garnishment action. While the Missouri Supreme Court has not ruled, most courts have held that this is not an exclusive remedy for the judgment creditor. Judgment creditors can utilize normal garnishment actions under § 525.240, RSMo 2000, and Rule 90 as well. Successful defenses by garnishors, the insurance company, enable them to recover attorney’s fees in normal garnishment actions, while equitable garnishment actions provide no such award. Rule 90.18(b) includes attorney’s fees, while § 379.200 does not.
Equitable garnishment actions cannot be recovered immediately, and the judgment debtor must wait to bring the claim under the thirty-day rule. To proceed against the insurer, the judgment debtor’s insurance company, the injured party or judgment creditor only needs to have a judgment. An injured third party may not bring a direct action against the tortfeasor’s insurer because the third party is not an intended beneficiary of the insurance contract, and thus cannot bring suit until judgment is imposed against the tortfeasor, or in the alternative, the insured. After the judgment is entered against the insured and in favor of the injured party, then the injured party must wait thirty days to file its equitable garnishment action in Missouri courts. During this delay, many insurance companies bring suit in federal court under declaratory judgment actions.
The thirty days begin to run the day the judgment is entered. The insurer owes no duty to pay the injured third party until judgment is entered against its insured. The thirty-day rule may not actually be a rule, though. There are no Missouri cases that say filing an equitable garnishment action before the expiration of thirty days strips a Missouri court of subject matter jurisdiction. This could be because as Cronin v. State Farm Fire & Cas. Co. stated, an equitable garnishment action is not an exclusive, statutory remedy, rather it “authorizes an ‘equitable’ proceedings.” Thus, an equitable garnishment action is one in equity not at law. And as this is a suit in equity, specific statutory authorization is not required.
Additionally, the Eighth Circuit of the United States Court of Appeals has interpreted Missouri’s equitable garnishment proceeding to require the injured third party to bring suit against both the insured and the insurer. Insurance companies are citizens of the state of the insured and the insured may be a citizen of the state. This makes most actions non-removable. Injured third parties may bring suit against reinsurers of the original insurer, as well. There, as in all equitable garnishment actions, the issue will be whether the policy of the insurer, now the reinsurer, covered the tortious actions of the insured.
To recover in an equitable garnishment proceeding the plaintiff must prove she has obtained a judgment against the insurance company’s insured during the policy period and the injury is covered by the policy. The action hinges on whether the contract between the insured and the insurer covered the type of incident at issue. InHangley, the determination of liability by the insurer to a third party turned on whether late payments by the insured to the insurer rendered the contract null. Likewise inSlagle v. Minich, the proceeding hinged on the contractual impact when a blind man, the insured, claims to be well-sighted in his automobile insurance application.
As the injured third party seeks payment under the tortfeasor’s insurance policy with the insurer, the injured third party stands in the shoes of the insured. As such, the injured third party has the same rights the insured would have in an action against the insurer on the policy. This impacts the burden of proof, because typically the insured must demonstrate the accident is within the policy for purpose of indemnification, but when it is an equitable garnishment action, the injured third party subrogates to the rights of the insured and takes on this burden. If the insurer seeks to prove an exception to the policy making the accident fall outside of the insurance contract’s coverage, then the burden shifts to the insurer. Lastly, the insurer may defend in the equitable garnishment action with any defenses it could have used against the insured, including “no coverage.”
The amount the judgment creditor can collect in the equitable garnishment proceeding is limited to the amount owed under the policy, and § 379.200 does not exist to allow judgment creditors to collect above the policy limit.
B. Declaratory Judgment ActionsAnother manner to resolve a dispute regarding the existence of insurance coverage is through the filing of a declaratory judgment action. Rather than wait for a state court determination on the coverage issue, the insurer often will file a declaratory judgment action in federal court. This allows the insurer, facing a judgment against the insured by a third party, to anticipate the plaintiff’s equitable garnishment action. Declaratory judgment actions, in this context, focus exclusively on whether or not the policy covered the accident. Declaratory judgment actions filed in federal court potentially offer insurers strategic advantages over a declaratory judgment action in state court or a state equitable garnishment action.
The incentives of a federal declaratory judgment not only lead to insurers filing in federal court, but also spurs opposition to the state court action, which creates a clash of forums. Principally, the analysis of declaratory judgment actions will center on whether the federal court should abstain from exercising its jurisdiction. Thus, jurisdiction becomes the issue at the heart of determining the appropriate forum to adjudicate the dispute between the injured third party and the insurer. The Eighth Circuit has stated that “district court[s] are ‘under no compulsion to exercise’ their jurisdiction under the Declaratory Judgment Act.” In fact, “a federal court should, in the exercise of discretion, decline to exercise diversity jurisdiction over a declaratory judgment action raising issues of state law when those same issues are being presented contemporaneously to state courts.”
Federal declaratory judgments can provide insurers with meaningful adjudication of an unresolved issue. For instance, in Contract Freighters, the insurer brought suit in federal court after months of threatened action in state court. The Federal Court of the Western District in Missouri held that a declaratory judgment in such a situation is wholly appropriate for the federal court to exercise its limited jurisdiction.
Rarely, the injured third party will bring suit in federal court for a declaratory judgment action, but the Eighth Circuit has stated that their appropriate remedy is an equitable garnishment action in state court. Important considerations for either party are the increased costs associated with federal courts, review of decisions by the Eighth Circuit that can only predict what Missouri courts might do with a state law question of interpretation and the likelihood of a dismissal of the federal action to allow the state courts to address all of the issues at once.
Federal district courts are bound by the presumption that jurisdiction exists in a declaratory judgment action. In fact, if the district court decides not to exercise jurisdiction in a declaratory judgment action, then the Eighth Circuit will review such a decision under a de novo standard, as opposed to an abuse of discretion standard for instances where the district court chooses to exercise jurisdiction. However, often the federal declaratory judgment action is filed concurrent with the state equitable garnishment action, which the Eighth Circuit has interpreted as a distinct class of cases.
The Eighth Circuit has said federal courts are not compelled to exercise jurisdiction in declaratory judgment actions when there is a pending state action presenting the same issues between the same parties that is not governed by federal law. To convince the district court to refrain from exercising its jurisdiction, the party seeking the refrain, typically the injured party, must demonstrate to the district court “exceptional circumstances” exist under the Colorado River/Moses H. Cone factors. Under theColorado River/Moses H. Cone factor-test, the Eighth Circuit has held that federal courts should “decline to exercise diversity jurisdiction over a declaratory judgment action raising issues of state law when those same issues are being presented contemporaneously to state courts.”
The Supreme Court holdings in Colorado River Water Conservation District and Moses H. Cone Memorial Hospital created an additional type of abstention, which is when a federal court declines jurisdiction when a parallel pending state court action exists. Murphy (citing 424 U.S. 800 (1976); 460 U.S. 1 (1983)). Colorado Riverand Moses H. Cone did not deal with declaratory judgment actions, but the Eighth Circuit extended the test to the arena of declaratory judgments in Gov’t Employees Ins. Co. v. Simon.
The Eighth Circuit in Murphy Oil officially utilized the Colorado River/Moses H. Cone factor-test, and since then all cases in the Eighth Circuit analyze and apply these six factors to determine if a sufficiently exceptional circumstance exists to deny jurisdiction in a declaratory judgment action. The six factors, which are non-exhaustive and not to be applied mechanically, are:
(1) whether there is a res over which one court has established jurisdiction, (2) the inconvenience of the federal forum, (3) whether maintaining separate actions may result in piecemeal litigation, unless the relevant law would require piecemeal litigation and the federal court issue is easily severed, (4) which case has priority — not necessarily which case was filed first but a greater emphasis on the relative progress made in the cases, (5) whether state or federal law controls, especially favoring the exercise of jurisdiction where federal law controls, and (6) the adequacy of the state forum to protect the federal plaintiff's rights.
In analyzing these factors, the court needs to find the “clearest of justifications” to surrender jurisdiction. Each factor will be analyzed under the facts of each case. As such, the analysis provided here will be limited to the weight accorded each factor, and common law principles the Eighth Circuit has espoused in determining bright-line rules in defining which facts demonstrate such an “exceptional circumstance.”
1. Whether a Court has Jurisdiction Over a ResGenerally, declaratory judgment actions to recover money from insurance companies do not deal with properties. There is no guidance here by the courts, but likely this factor will always be moot in insurance coverage disputes. Most declaratory judgment actions brought by insurance companies relate to whether there is coverage under a policy for a particular claim or injury. Even rarer is when an insurance company will sue its own insured seeking a judgment that the insurance company does not have to even defend the insured.
2. Inconvenience of Federal Forum
Again, there is no guidance here by the courts, and this factor will likely be subject to an intensive factual analysis. Additionally, there is no evidence that this issue would be dispositive. Obviously, federal judges are unlikely to think of their court as “inconvenient.”
3. Whether Piecemeal Litigation Might ResultThe conflict between the state equitable garnishment and the federal declaratory judgment action is clearly embodied in this factor. Federated Rural referred to this factor as the most important and stressed determining which of the two actions was more comprehensive. Murphy Oil referred to this factor as having special importance and preferred the action that had jurisdiction over all of the parties.
4. Which Case has Priority
The fourth factor is the embodiment of the general rule “that the case filed first should proceed and the case filed second should be dismissed or stayed.” Commonly referred to as the first-filed rule, the Supreme Court has clearly stated that first is not exclusively measured by the filing date. Instead, courts may analyze which of the two cases has made more progress. Progress alone, however, is not a dispositive factor. In BASF, the Eighth Circuit found the federal court action to have made more progress than the contemporaneous state court action, and thus appear to have priority. Nevertheless, the Eighth Circuit dismissed the federal declaratory judgment action noting reliance on the fourth factor “would allow such refusals [to dismiss] to evade meaningful review.” Lastly, the court said reliance on the priority factor leads to absurd results.
Additionally, an exception to the first-filed rule applies if “compelling circumstances” exist. Anheuser-Busch identifies two factors when considering whether “compelling circumstances” exist. First, the insurance company, the federal plaintiff, is on notice that the injured party, the federal defendant, is about to bring suit in state court. Second, the federal plaintiff then brings a suit seeking declaratory relief, which is “more indicative of a preemptive strike than a suit for damages or equitable relief.” Contract Freighters factually distinguished itself from Anheuser-Busch because it allowed a federal declaratory judgment after repeated threats of state suit by the injured party with multiple un-acted upon deadlines over a nine-month period. In Anheuser-Busch, a first-time five-day offer to respond or face suit in state court was met with a quick filing in federal court, which the court dismissed as demonstrative of the “race to the courthouse” it is trying to avoid. Factually, there is a large gap between a five-day deadline and a nine-month offer that feature multiple deadlines that had come and gone without incident, as were the facts in Contract Freighters.
5. Federal versus State Law
Almost all cases involving insurance contracts involve state law. However, Federated Rural said that this factor favors abstention in only rare circumstances and likely should not be accorded any significant weight because the federal court proceeding can be stayed to resolve a complicated state law issue. The issue in Missouri is a disconnect between the Eighth Circuit and the Missouri Supreme Court. In Rodriguez v. General Accident Ins. Co. of Am., the Missouri Supreme Court criticized an earlier Eighth Circuit decision as “an example of a court creating an ambiguity in order to distort the language of an unambiguous policy.” Thus, the Missouri Supreme Court rejected the Eighth Circuit’s holding in Weber. Most coverage cases — whether a declaratory judgment action or an equitable garnishment — involve complicated facts, obscure insurance provisions, and little case law precedent. Federal trial courts should consider this issue when deciding if its decision over a state law question will actually follow the Missouri Supreme Court.
6. Adequacy of State Forum to Protect Federal Plaintiff’s Rights
Certainly most federal plaintiffs will assert that the state forum will inadequately protect their rights, but no case has used this factor to be dispositive. In fact, the analysis is disparate and facially seems to only exist to support the contention the court is advocating. Murphy Oil, which dismissed jurisdiction, said that the state forum was adequate because nothing in the record demonstrated lack of a fair trial. Federated Rural, which retained jurisdiction, said the state forum was inadequate because of its competence to hear the issue.
7. Additional Factors
As the factors are not exhaustive, courts may consider other factors. Federated Rural’s prudential seventh factor looks to whether either suit was “filed as for a vexatious, reactive or tactical reason.” The Eighth Circuit has utilized this factor to discuss venue shopping and whether federal declaratory judgment actions can be brought solely to assert affirmative defense to state actions. Generally, declaratory actions brought solely as affirmative defenses have been viewed as tactical maneuvers and dismissed. Venue shopping has not been ruled as falling within Federated Rural’s seventh factor because it looks to both state and federal actions, which means that each side is likely choosing the best forum for its interests thereby making the analysis moot. Another factor may be that federal courts are courts of limited jurisdiction. Since declaratory judgment actions are purely diversity claims, federal judges should not expand its limited jurisdiction. Finally, the lack of binding precedent on future cases when a federal court rules on Missouri State law issues should also discourage federal court involvement.
C. Dismiss or Stay Parallel ActionsAnother issue faced by the federal court when a concurrent state court action is pending is whether to stay the federal proceedings or to dismiss the federal claim. Often times, an insurance company may file its federal declaratory judgment action while the underlying liability case is still pending in state court in anticipation of a subsequent equitable garnishment action. In this scenario, the Eighth Circuit has set clear precedent that the federal district judge must abstain from exercising jurisdiction and either dismiss or stay the federal proceedings.
According to the Eighth Circuit, the district court must dismiss or stay a declaratory judgment action seeking a determination of insurance coverage when there is a parallel proceeding on the same issues and with same parties in state court. In deciding a motion to stay, the overarching question is whether the matter “can better be settled in the proceeding pending in the state court.” Therefore, the district court “must dismiss the federal action because ‘it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties.’” Further, the Eighth Circuit and United States District Courts of Missouri have concluded that abstention is required in numerous declaratory judgment insurance coverage cases.
For example, in Capitol Indemnity the decedent was fatally stabbed outside the insured’s bar on July 7, 1996. On February 27, 1998, the insurer filed a declaratory judgment in federal court seeking a declaration that claims arising from the decedent’s death were excluded from coverage by the insurance policy’s assault and battery exclusion. The insureds were found liable in Missouri court, and the Missouri court entered damages against the insured and in favor of the decedent’s family. The family then filed a Missouri state court petition to collect insurance. Nine months after the declaratory judgment action began, when “the case was nearly ready for trial,” the decedent’s family filed a federal abstention motion. The trial court declined to abstain because the insurer’s complaint for declaratory judgment was filed five months before the state court judgment was issued and six months prior to the decedent’s relatives filing the Petition to Collect Insurance.
However, the Eighth Circuit disagreed and reversed the matter with instructions to the district court to dismiss. The Eighth Circuit found “both actions involved the same parties, the same issue, the same insurance policies, and the same arguments.” The state and federal claims both involved the interpretation of an insurance policy governed by Missouri state law. The Eighth Circuit found the district court’s failure to abstain was an abuse of its discretion as “the state court was in the better position to adjudicate the matter, and permitting this federal action to proceed was unnecessarily duplicative and uneconomical.”
Even in cases where the tort victim’s state tort action is filed after the insurer’s declaratory judgment action seeking a decision on whether the policy covers thetortfeasor’s conduct, federal courts have decided to abstain. In American States Insurance Company, Judge Sippel of the U.S. District Court for the Eastern District of Missouri decided to abstain in a declaratory judgment action where the insurer sought a decision on insurance coverage. The interpretation of an insurance policy was purely a matter of state law with the same parties and issues in the state and federal cases. The state court action was filed after the declaratory judgment, but the District Court recognized this was not due to any dilatoriness on the part of the injured party, but rather necessitated by Missouri’s rule that requires the injured party to wait thirty days after a state court judgment is issued before an equitable garnishment can be filed. The District Court noted, “[the insurer’s]race to this courthouse should be tempered with permitting state law issues to be timely resolved in state court based on the facts of this case.” The District Court stayed the federal proceeding pending the resolution of the Missouri court garnishment case.
Once the federal court decides to abstain, the court may either stay or dismiss the case. A stay is the preferable action if there are concerns the federal action will be time-barred. The courts have explained that “where the basis for declining to proceed is the pendency of a state proceeding, a stay will often be the preferable course, because it assures that the federal action can proceed without risk of a time bar if the state case ... fails to resolve the matter in controversy.” The justification for the stay, the U.S. Supreme Court says, is that such an order “does not constitute abnegation of judicial duty” but rather “is a wise and productive discharge of it” and “[t]here is only postponement of decision for its best fruition.”
On the other hand, if the court sees “no reason for the case to return to federal court . . . dismissal rather than a stay is appropriate.” When the federal court is deciding whether to dismiss the case, it “should consider the ‘scope of the state proceedings, the possibility of delay or procedural inadequacy in the state proceedings, the possibility that another federal action will be time-barred should the instant suit be dismissed, and any other appropriate factor.’”