Federal Court Declines to Put Coverage Litigation on Hold

A federal district court in Washington has denied two insureds’ motions to abstain or stay a declaratory judgment action brought by their insurer, finding that concurrent adjudication would not require duplicative factual or legal determinations nor prejudice the insureds’ underlying defense.  Evanston Ins. Co. v. Workland & Witherspoon, PLLC, 2014 WL 4715879 (E.D. Wash. Sept. 22, 2014). 

A lawyer and his firm sought coverage under a legal malpractice insurance policy for two state court actions that alleged their involvement in a fraudulent real estate purchasing scheme.  While providing a defense subject to a reservation of rights, the insurer brought a declaratory judgment action to determine coverage in federal court.  On the grounds that the federal court proceeding would require duplicative and potentially conflicting factual determinations that could prejudice their state court defense, the insureds filed motions to abstain or, in the alternative, stay the litigation pending resolution of the state court proceedings.  The insurer argued that adjudication should proceed on the application of the policy’s “Specific Incidents Exclusion.”

In exercising its discretion under the Declaratory Judgment Act, the court first rejected the insureds’ argument that allowing the coverage action to proceed would result in “needless determinations of state law,” finding that a presumption of abstention “only applies when parallel proceedings exist.”  The court also found that the insurer had not engaged in forum shopping because it was not a party to nor could it be joined in the state court actions.

The court next determined that abstention would not avoid duplicative litigation because it found that the insurer could state its coverage case based on the policy’s broad Specific Incidents Exclusion without presenting any duplicative evidence at issue in the state court actions.  Further, in finding no additional factors that justified abstention, the court noted that it would be “equally inconvenient” to force the insurers to defend state court claims that may not be covered under the policy.

Based on similar reasoning, the court also denied the insureds’ motion to stay.  Upon weighing the parties’ competing interests, the court anticipated no need to make factual or legal determinations in construing the Specific Incidents Exclusion that would affect the state proceedings.  Finally, the court noted that although a stay could nullify the need for the declaratory judgment action, such a “simplification of the issues would come at the expense of requiring [the insurer] to represent [the policyholders] in that action without any determination regarding its obligation to do so.”