A Kentucky federal court has held that a claimant has no standing to bring a declaratory judgment action against her alleged tortfeasor’s insurer where the claimant has yet to obtain a judgment in the underlying action. Summers v. Scottsdale Indem. Co., No. 1:15-cv-0092 (W.D. Ky. March 31, 2016). The court also held that, even if there was standing, the insurer did not waive any coverage defenses by initially providing a defense to the alleged tortfeasor before discovering misrepresentations in the application that ultimately served as the basis for rescinding the policy. Wiley Rein represented the insurer.
The claimant was an employee of the insured, which operated an auto-racing facility and amusement park. In 2014, she filed an action in state court against her employer alleging that she was sexually harassed at work. The employer tendered the action to its insurer under an employment practices liability insurance policy. The insurer agreed to defend the employer before discovering two prior undisclosed lawsuits against the employer that involved allegations of sexual harassment. The insurer then sought to rescind the policy in a separate declaratory judgment action in federal court. Ultimately, the insurer and the insured reached a settlement, which provided, among other things, that the policy was void ab initio and that the insured was to withdraw its tender of the claimant’s action.
The claimant then proceeded to file the instant declaratory judgment action against the insurer in a Kentucky federal court, seeking a declaration of coverage under the policy in order to recover damages arising from the alleged sexual harassment. The court granted the insurer’s motion for summary judgment.
First, the court held that the claimant had failed to show standing to bring the suit either under the Constitution or Kentucky law. Kentucky law, as the court explained, requires a plaintiff to obtain a judgment against an insured before seeking enforcement of that judgement against the insurer, which in this case had not yet happened. The court rejected the claimant’s argument that such a judgment is not necessary where a claimant only seeks a declaratory judgment regarding coverage, noting that the act of seeking a declaration that an insurer must indemnify the insured does not establish a case or controversy under Kentucky law. The court also noted the similar shortcomings as to constitutional standing, pointing to the fact that the claimant had failed to establish the existence of an injury, causation, and redressability. According to the court, the claimant’s only claimed injury, which was that she may obtain a judgment from her employer which the insurer may refuse to pay, “is simply too conjectural to meet the injury requirement.”
Second, the court agreed with the insurer that even if the claimant could establish standing, the claimant could not establish coverage because the policy between the insurer and the claimant’s employer had been rescinded. In so concluding, the court rejected the claimant’s contention that the insurer had waived its coverage defenses by initially providing a defense to the claimant’s employer before the insurer had a basis to suspect any misrepresentations had been made in the application. The court held that Kentucky law does not require “an affirmative duty to investigate coverage defenses prior to partaking in the insured’s defense,” rather insurers are required to perform reasonable care based only on their “actual knowledge.” According to the court, the insurer had no duty to investigate until it had actual knowledge of irregularities in the insured’s application.