Third Circuit Ruling Resolves Conflicting Decisions with Respect to Whether a State Court Action Parallels a Federal Action

09.05.17

In a recent ruling by the United States Court of Appeals for the Third Circuit Kelly v. Maxum Specialty Insurance Group et al., No.15-3618, decided August 21, 2017, the Court reversed a District Court's order declining jurisdiction over a lawsuit seeking only a declaratory judgment to determine an insurer's liability to defend and indemnify its insured in an underlying State Court matter. The District Court had abstained from hearing the matter under the Declaratory Judgment Act, largely because it had determined that the State Court action and the Declaratory Judgment action were parallel proceedings.

The coverage dispute arose from an underlying dram shop action brought against the Princeton Tavern by the plaintiffs. Princeton Tavern settled with the plaintiffs after the tavern's insurance broker allegedly failed to notify the tavern's liability insurer of the litigation. Lacking notice, the insurer declined coverage for the tavern. Subsequently, Princeton Tavern assigned its rights to the plaintiffs to sue the broker in State Court for negligence and breach of contract. While the case was proceeding, the plaintiffs filed a separate State Court action against the broker and its professional liability insurance carrier, Maxum Specialty Insurance, seeking a declaration that Maxum was obligated to defend and indemnify the broker against the tort action claims. Maxum removed the Declaratory Judgment action to the District Court, asserting diversity jurisdiction. The plaintiffs moved to remand the Declaratory Judgment action to the State Court. The District Court declined to hear the case, finding that insurance coverage questions would "necessarily arise" in the underlying negligence suit. The Third Circuit, in reversing the District Court, rejected the notion that a District Court may decline to hear a Declaratory Judgment action simply because coverage issues may surface in an underlying State Court action.

The Court further explained that the determination of whether a federal case is "parallel" to a State Court action is just the first step in the analysis. A District Court must further assess the factors set forth in Reifer v. Westport Insurance Corp. 751 F.3rd 129, 143-46 (3rd Cir. 2014), which include the likelihood that the federal forum declaration would likely resolve the controversy, the convenience of the parties and other factors. Here, the Third Circuit found that none of the Reifer factors outweighed the determination that the federal coverage action was not parallel to the State Court action. The decision of the District Court was therefore reversed, and the case was remanded back to the District Court for an initial determination on diversity jurisdiction. This ruling resolves conflicting decisions among Federal Courts within the Third Circuit regarding the requirements for a finding that proceedings are parallel.

Comment: This ruling clearly establishes that simply because an underlying state tort case may have coverage implications, this does not mean that a federal action to resolve a coverage dispute is necessarily parallel, nor would it foreclose a Federal Court's exercise of jurisdiction under the Declaratory Judgment Act, particularly when the lack of parallel proceedings is not outweighed by the opposing factors cited in the Reifer decision. It is anticipated that this decision will provide insurers with additional support in removing Declaratory Judgment actions to Federal Court in the Third Circuit. 

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