Second Circuit Affirms Dismissal of Insurer’s Race to the Courthouse

Mar. 08, 2024

Tae Andrews & Jeffrey L. Schulman

Insurers sometimes race to the courthouse to file declaratory judgment actions against their insureds. Under the guise of simply seeking a declaration of its contractual obligations, an insurer can be motivated by the desire to “forum shop” or to otherwise “jump” the insured at a time and place of its choosing. In Starr Indemnity & Liability Co. v. Exist, Inc., the Second Circuit recently affirmed a district court’s decision to dismiss an insurer’s declaratory judgment action because the insurer filed suit before denying coverage.

The Facts

The insured apparel company filed a claim under its marine cargo policy for theft losses from one of its warehouses. Before denying coverage, the insurer filed a declaratory judgment action in the Southern District of New York.

Key Takeaways

The district court granted the insured’s motion to dismiss, holding that the insurer did not properly seek a prospective determination of its rights and responsibilities under the policy. Instead, it sought a declaration that it was not liable for the insured’s damages that were already sustained. The Second Circuit affirmed, holding that the district court acted within its discretion to decline jurisdiction over the declaratory judgment action. In particular, the Court of Appeals noted that the insurer’s action was “procedural fencing” because the insurer’s notice of the coverage denial came via the filing of its complaint. The decision reaffirms that Courts will not tolerate procedural fencing, particularly when it precedes the good faith investigation of the claim that is the subject of the subsequent litigation.

Practice Pointers

Insureds should remember that courts can dismiss a case for lack of jurisdiction or stay a case that is filed prematurely or is otherwise not yet ripe for adjudication.