September 13, 2016

Insurance Recovery Law: History’s Best Decisions: The Brillhart Decision

The next case in our series Insurance Recovery Law: History’s Best Decisions turns back the clock to 1942 for the Brillhart decision.  Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942).  Although decided in 1942, Brillhart is extremely valuable today..

Nowadays, corporate policyholders are facing an all-to-common scenario.  When a business tenders a claim, an insurance carrier should evaluate the claim, and provide a defense.  Many insurers have abandoned this approach for a more adversarial route.  With those insurers, rather than providing a defense, they sue seeking a declaration of no coverage.  Their strategy is to sue when the corporate policyholder is weakest, and that time is typically just after the corporate policyholder has been sued in an underlying lawsuit.  Favorite forum for these insurers, Federal Court.

If the rash of insurer-filed declaratory judgment lawsuits are the epidemic, Brillhart is the cure.  In reality, insurance coverage lawsuits have no business in federal court, and Brillhart sets the standard for the doctrine of abstention, which provides a mechanism for dismissing insurance company filed federal Court declaratory judgment actions.

In today’s video, Mark Miller explains how this often overlooked doctrine can be used to help policyholders.

We have included a transcript of the video below:

Insurance Recovery Law: History’s Best Decisions: The Brillhart Decision

Continuing on our best insurance decisions of all time, the Brillhart Decision. That is Brillhart vs. Excess Insurance Company of America, 316, US 491 (1942). This is one of these decisions that falls into a strategy tool that policy holders can use. It’s very seldom that an insurance decision gets up to the Supreme Court, but this is one of those decisions. It’s an important decision so let me set the stage.

Policyholders have been facing a problem with insurance companies and that is some insurance companies, when you tender the claim, they respond by filing a dec action. What’s a dec action? Declaratory judgment action. It’s under a federal statute that gives them the right to file these. There’s also state statutes that allow it.

Insurance companies love being in federal court because they feel that they don’t have the possibility of a state judge holding against them. They think that they have more control over federal litigation and they just love federal court. What they’ll do is they’ll file a dec action saying, “Look, we might have an obligation, we might not. We really don’t know, but here, Court, you decide.”

Why do they do that? Well, some states law says they should do that. It doesn’t say they should file in federal court, but it says they should, if they’re unsure about their obligation to defend, they should file a dec action and get a court to decide it. Many insurance companies have basically used this as a tool to file suits and clog up the federal court system. I don’t know think the court in Brillhart knew this in 1942. It may have.

Why is Brillhart important for strategy? Well, for this reason. Brillhart says that it analyzed the federal declaratory judgments statute, the statute that gives authority for the federal courts to hear cases, declaratory judgement cases, and it looked at that statute and it said, “You know what? It’s not an automatic in. You don’t automatically get to the federal court.”

Federal court jurisdiction is zealously guarded. Federal courts have important stuff to do. They deal with really difficult things. Claims that deal with federal statutes, many federal statutes. Federal courts are good to deal with those. Federal courts can deal with diversity cases between companies of a different state. That’s called diversity action. That’s what insurance companies fall under when they try to get into federal court.

The bottom line is, federal court jurisdiction is limited. They’re not supposed to take every case. Well, with declaratory judgments, there’s a statue out there that tells them what they can take. Brillhart was the first to analyze that statute and say, “Hey, not every insurance case that comes in should be in federal court.”

What did Brillhart say? Brillhart says that the district court has discretion. Discretion meaning it can take the case, but it doesn’t have to. It has discretion to take the case and it’s up to the court to exercise that discretion and to not take unnecessary insurance cases that are not validly before the court.

Now, what’s interesting about Brillhart is it started the ball rolling, but there’s federal court cases in all the different circuits, which expand on what this role is and they’re all quite favorable. They all follow Brillhart because Brillhart’s still good law. They say that it’s not a really good use of federal court time to be hearing these insurance cases.

Let me tell you what Brillhart said. This is right during World War II. They said, “Ordinarily, it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in state court presenting the same issues, not governed by federal law, between the same parties. Gratuitous interference with the orderly and comprehensive disposition of state court litigation should be avoided.”

What are they saying? They’re saying if you, policyholder, get sued in federal court, and you don’t want to be in federal court and you follow a state court action against the insurance company, which would be the same parties and the same dispute, i.e., you’re sued, you go out and file a suit in state court because state court’s a better place to be, Brillhart says the federal court should back out and dismiss the case. That’s what the federal courts generally do. Unfortunately, we think that this 1942 decision is not being used enough by policyholders as a strategy tool to prevail in litigation.

That’s the Brillhart decision, 1942. It’s been followed by many federal courts. It’s an important strategy decision. It sets a roadmap for how policy holders can proceed when they’re sued by an insurance company in a declaratory judgment action. Again, these declaratory judgment actions are unnecessary we believe, but they’re happening every single day. Insurance companies are suing clients in federal court where they should not be, where the cases should not be, and they’re pursuing those cases and clogging up the court’s docket.

Brillhart says, “No, not where the cases should be. Cases should be in state court if another state court case is filed. You as a federal court, you should exercise discretion. It’s your choice. Exercise discretion, though, and let these cases go into state court where they belong because us federal courts, we’ve got more important things to do.”

Let me give you an example that we faced. Client tenders claim to the insurance company under general liability insurance policy. The insurance company responds and says, “We’ll cover it under reservation of rights.” Client says, “Good job, looks great. We’re getting this thing covered.” The insurance company knew when they were doing this they had a complaint going. Within two weeks, they file a lawsuit in federal court against our client saying, “No, we don’t have a right. We said we did, but here’s a dec action in federal court saying we don’t have that right.”

What did we do? Well, we immediately filed in state court and used Brillhart to tell the federal court, “You don’t have to look at this case. If you’ve got more important things to do like Brillhart says you might, you don’t have to take this case.” Sure enough, the federal decision was dismissed and we ended up in state court, which is a better place to be.

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