Federal courts generally have a “virtually unflagging obligation” to exercise the jurisdiction that Congress has conferred to them. Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). But the Declaratory Judgment Act is different. It provides that in “a case of actual controversy … any court of the United States … may declare the rights and legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a) (emphasis added). Accordingly, it vests federal district courts with the discretion to decide whether to hear a claim seeking declaratory relief.
Federal appellate courts have developed various approaches in determining whether a district court properly exercised its discretion to hear, or not to hear, a declaratory judgment action. The United States Court of Appeals for the Eleventh Circuit has identified nine non-exclusive “guideposts” for a district court to consider when deciding whether to dismiss a federal declaratory judgment action that overlaps with a concurrent state court proceeding. Commonly referred to as the Ameritas guideposts, these include whether the state court is in a better position to evaluate the factual issues raised and whether there is a close nexus between the underlying issues and state law and/or public policy. Ameritas Variable Life Ins. Co. v. Roach, 411 F.3d 1328, 1331 (11th Cir. 2005).
But one question that has remained outstanding is how the Ameritas guideposts apply when a federal declaratory judgment action asserts multiple claims and only a few of these claims overlap with a pending state court case while the others do not.
The Eleventh Circuit recently answered this question in James River Ins. Co. v. Rich Bon Corp., --- F.4th ----, 2022 WL 1616872 (11th Cir. May, 23 2022). This case involved a shooting at a nightclub. A guest of the nightclub, Marquell Shellman, was shot and injured. An employee of the nightclub, David Hilbert, was shot and killed. James River Insurance Company insured the nightclub under a commercial general liability policy. The policy excluded coverage for worker’s compensation liability and employee-injury liability (collectively, the “employee exclusions”). The policy further imposed a $50,000 aggregate sublimit for claims arising out of an assault or battery.
Shellman first filed suit against the nightclub. James River settled that claim by paying its $50,000 sublimit. Hilbert’s estate subsequently filed a second lawsuit against the nightclub. James River accordingly filed a declaratory judgment action in the Southern District Court of Florida. The action sought a determination that James River owed no coverage because (1) payment of the Shellman claim exhausted the policy; and (2) the employee exclusions barred the estate’s claim.
In the underlying state court action, the estate argued that the nightclub’s actions triggered a statutory exception to worker’s compensation immunity. Consequently, both the estate’s tort action and James River’s federal declaratory judgment action required a decision on whether Florida’s worker’s compensation statute applied to Hilbert. The tort action, however, did not raise any issues regarding application of the assault and battery sublimit.
Nevertheless, the district court exercised its discretion to dismiss James River’s action. The district court concluded that it would interfere with the concurrent state court action if it analyzed application of the employee exclusions. Notably, the district court largely ignored the sublimit issue.
On appeal, the Eleventh Circuit concluded the district court abused its discretion. The Court began the analysis by acknowledging the many benefits of declaratory judgment actions, particularly in the insurance coverage context because they clarify an insurer’s liability quickly and directly. On the other side of the coin, the Court acknowledged the federalism and comity concerns raised when a federal court rules on disputed issues pending in state court.
The Court summarized that when district courts decide to proceed with declaratory judgment actions that also raise issues disputed in state court actions, “they are called to balance conflicting interests—to foster efficient dispute resolution while still preserving the States’ interests in resolving issues of state law in their own courts.” Id. at *2.
Applying these considerations to the facts presented, the Court explained by focusing entirely on the employee exclusions, the district court committed a “serious misstep.” Id. at *5. The court explained that “[e]very claim matters, because Ameritas requires a ‘totality-of-the-circumstances analysis.’” Id. The Court recognized the risk in allowing districts court to “cherry pick” claims for their Ameritas analysis. The court explained:
If the court only considers issues raised in both the state and federal cases, it will always underestimate the need to resolve the issues unique to the declaratory action. And if it only assesses the unique federal claims, the opposite result will follow; the court will underestimate the federalism concerns raised by the overlapping issues. Both approaches are unreasonable. Instead, to appropriately assess “the degree of similarity between concurrent state and federal proceedings,” a district court needs to look at the cases as a whole.
The Court acknowledged that the district court determined the employee exclusions claim bore a “close nexus” with Florida public policy and that the state court was in a better position to resolve overlapping factual issues. Id. at *6. But the Court explained the sublimits claim “largely received the silent treatment.” Id. The Court concluded this “lopsided analysis was unreasonable.” Id. Accordingly, the Court reversed the dismissal and remanded the matter for further proceedings consistent with its published opinion.
We have seen a trend where district courts are relying on their broad discretion to dismiss insurance coverage declaratory judgment actions. The Rich Bon decision places a limit on this discretion. Specifically, district courts are now required to give due weight to all of the claims asserted in a federal declaratory judgment action. This helps avoid a situation where a district court focuses only on a portion of the lawsuit to tip the scale in favor of declining jurisdiction. From an insurer perspective, this is an excellent decision that will help facilitate efficient resolution of coverage disputes in a federal forum.