Hunton Insurance Recovery Blog

The Eleventh Circuit confirmed in First Mercury Insurance Company v. Excellent Computing Distributors, Inc., No. 15-10120 (11th Cir. Apr. 20, 2016), that policyholders need not await adjudication of underlying liability litigation before obtaining a confirmation of coverage. The decision arose from a declaratory judgment action concerning the availability of insurance coverage for an underlying negligence suit against the policyholder. The district court dismissed the declaratory judgment action, finding it "inappropriate to exercise jurisdiction over an action seeking a declaration of the plaintiff's indemnity obligations absent a determination of the insureds' liability.” The court also noted that "significant factual questions necessary for a resolution of [the] declaratory judgment action are at issue in the state [court] action, and have yet to be resolved.” But the court did not identify the factual questions.

On appeal, the Eleventh Circuit held that the district court abused its discretion by dismissing the case based on what the district court considered to be the possibility that liability would never arise. The appellate court acknowledged that whether a judgment in federal declaratory judgment action would settle the controversy is one factor to be considered in deciding whether to exercise its discretion to entertain the action. However, the appellate court concluded that standing alone, that factor is insufficient to foreclose a coverage action. Instead, it must be weighed against the potential that an insurance coverage determination could "serve a useful purpose in clarifying the legal relations at issue.” But because the district court failed to consider any potential benefit of a prompt liability determination, the court abused its discretion. Likewise, because the district court failed to identify any factual issues from the underlying lawsuit that were necessary to adjudicate the declaratory judgment action, the court could not conduct a meaningful appellate review.

Policyholders should remain mindful of First Mercury when facing potentially protracted underlying litigation. In such a case, a prompt determination of coverage may be necessary to permit intelligent decision making regarding settlement. It also could be the difference between a policyholder conceding liability to end the liability litigation, simply because the cost of defense is too great, or vigorously defending itself against unwarranted claims. While First Mercury does not guarantee that a federal court will exercise its discretion in favor of a declaratory judgment action before resolution of the underlying litigation, it does preclude dismissal without at least weighing the pertinent factors.