Eastern District of Pennsylvania Dismisses Declaratory Judgment Action Brought by Insurer to Determine Its Duty to Defend and Indemnify as Premature

In First Specialty Insurance Corp. v. Hudson Palmer Homes, Inc., the district court for the Eastern District of Pennsylvania considered a declaratory judgment action brought by an insurer to determine the scope of its duty to defend and indemnify the insured, a home builder, in connection with ten construction defect lawsuits brought against it. None of those cases had been ruled upon when the declaratory judgment action was filed. The insured filed a Motion to Dismiss on the basis that the insurer’s action was not ripe for adjudication. The court, applying the three factors set forth in Step-Saver Data Sys., Inc. v. Wyse Tech., 912 F.2d 643, 647 (3rd Cir. 1990) to determine the ripeness of a declaratory judgment action, held that the insurer’s declaratory judgment action did not present a ripe controversy over which the court had subject matter jurisdiction because there was no finding of underlying liability.

Under the Step-Saver test, courts must examine (1) the adversity of the interest of the parties; (2) the conclusiveness of the judicial judgment; and (3) the practical help, or utility, of that judgment. Regarding the first factor requiring adverse legal interests between the parties, the court determined that it fell against finding that the declaratory judgement was ripe. The court determined that the insurer was not disputing that it had a duty to defend the insured—which it was already doing—it was seeking a declaratory judgment only on the extent of its duty to indemnify under the Policy. The court noted that was well-settled under Pennsylvania law that an insurer is required to indemnify only where the insured is held liable for a claim actually covered by the policy. The court further recognized that “[t]he question of whether an insurer has a duty to indemnify is not ripe until there is an actual need for indemnification, that is, until liability has been determined in the underlying action.” Since the question of indemnification was at the heart of the insurer’s action, then it was not ripe for adjudication.

With respect to the second prong, the court also found that it fell against the ripeness of the action. Because there had been no ruling in the construction defect cases on the conduct for which the insured could be liable, the court determined that it had no way to determine what conduct, if any, would provide for liability under the Policy. Thus, the court held that the insufficient record rendered the issues inconclusive and inappropriate for judicial resolution by way of a declaratory judgment. The court then examined the third factor, and found that because it did not have an adequate record for ruling on the insurer’s indemnity obligations, it could not provide a declaratory judgment of “significant utility.” Accordingly, since all three factors fell against a finding of ripeness, the court held that the action was not ripe for adjudication and dismissed the action.

Clark & Fox is a firm of experienced lawyers with diverse international practices that focuses on representing the interests of the insurance industry. Information about all of Clark & Fox’s locations, attorneys, and practice areas is available on http://www.clarkfoxlaw.com/

For more information, please contact:

John M. Clark, CEO/President: jclark@clarkfoxlaw.com