Federal Magistrate Judge Applies Wilton/Brillhart Abstention Doctrine and Recommends Denial of Motion to Stay in Insurance Declaratory Judgment Action

| Sep 28, 2013 | Firm News

A federal magistrate judge has applied the federal Wilton/Brillhart abstention doctrine under which federal courts can decline to exercise federal jurisdiction in an insurance coverage declaratory judgment action when there is a parallel state court proceeding. After considering five factors the magistrate judge recommended that the court deny the insured’s motion to stay and retain federal jurisdiction.

The coverage dispute arising in the context of a fatal car accident that followed a visit to a Providence nightclub by several patrons, one of whom became intoxicated and allegedly caused the subsequent accident while driving the car in which all the patrons were traveling. Other passengers were injured. The decedent’s estate and two injured passengers sued the owner of the nightclub, the driver of the car and his mother, the car’s owner in Superior Court (“the Superior Court tort claim”).

The owner submitted the claim to the insurer that had issued a policy of liability insurance for the nightclub. The insurer accepted the defense of the claims subject to a reservation of rights while it sought a declaration that the policy excluded coverage for claims for “causing or contributing to the intoxication of a person.” The insurer filed an action in federal court seeking a declaration that the policy did not provide coverage for the claim. The insurer named as defendants all the parties in the Superior Court tort claim.

The owner responded by filing a declaratory action in Superior Court naming as defendants the insuer and the insurance agent that had procured the insurance policy for the nightclub. The owner alleged that the agent had breached a contract and a fiduciary duty by failing to advise him that the policy did not cover dram shop claims. The owner then filed a motion to stay the federal court action while the Superior Court cases were pending pursuant to the so-called Wilton/Brillhart doctrine under which a federal court can abstain from hearing a declaratory judgment matter over which it has jurisdiction while another action in state court addressing the same issues is pending.

The magistrate judge identified five factors that the Rhode Island federal district court has considered when applying the Wilton/Brillhart doctrine:

•(1) Whether the same parties are involved in both cases;

•(2) Whether the claims made in the declaratory judgment action can be adjudicated in the state court case;

•(3) Whether resolution of the declaratory judgment action turns on factual questions that will be adjudicated in the state court case;

•(4) Whether the issues presented are governed by state or federal law; and,

•(5) What effect the declaratory judgment action is likely to have on potential conflicts of interest between the insurer and the insured.

The court also reviewed general “considerations” that effect the application of the doctrine. The federal court should avoid piecemeal litigation. On the other hand, the insurer may need an expeditious resolution of its coverage issue, particularly in light of its duty to defend. If the coverage issue rests on purely legal grounds, it may be quickly and clearly resolved in federal court. However, if it depends on factual issues to be addressed in the state court litigation, then abstention may be appropriate.

In this case, the first Wilton/Brillhart factor, identity of the parties, cuts in favor of exercising federal jurisdiction. The federal action includes all the parties that might have a claim against the policy, directly or indirectly. Moreover, the state court declaratory judgment action includes claims against the insurance agent that would seem to raise factual questions not in the federal action.

While the coverage issue can be adjudicated in the state court action, it appears it may take longer due to the potential factual complexity of the claims involving the insurance agent. In contrast, the coverage issue appears to revolve a pure issue of law.

Addressing the coverage issue in federal court will not prevent piecemeal litigation. The tort plaintiffs will still have their other claims for breach of contract and the covenant of fair dealing in state court. However, where discovery has not begun in the state court action, the insurer’s interest in avoiding prejudice and a quick resolution of the coverage issue tips the balance in favor of federal jurisdiction.

The court recommended denying the motion to stay.

Essex Insurance Co. v. Gilbert Enterprises, Inc., d/b/a Club Fantasies, No. 13-432ML, 2013 WL 5347435 (D.R.I. Sept. 23, 2013).

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