The United States District Court for the Eastern District of Pennsylvania has held that absent prejudice to the policyholder, an insurer that timely reserves its right to deny liability coverage is not precluded from seeking a declaratory judgment, even if the declaratory judgment is filed well after the insurer began providing a defense. Nationwide Prop. and Cas. Co. v. Shearer concerned a lawsuit alleging that several policyholders and other property owners discharged sewage and wastewater onto the underlying plaintiff’s neighboring property. The defendant insurer advised all of the policyholders that it would be defending the matter under a reservation of rights, as the underlying lawsuit may fall within the policies’ pollution exclusion and/or biological deterioration or damage exclusion. The insurer eventually instituted a declaratory judgment action against the policyholders, contending that it had no duty to provide coverage given these exclusions. The insurer and policyholders filed motions for summary judgment.
In deciding these motions, the Eastern District began by analyzing whether it should exercise jurisdiction over the case pursuant to the federal Declaratory Judgment Act. The Court noted that while in recent years, Pennsylvania district courts had frequently declined to exercise jurisdiction over insurance coverage declaratory judgment actions, the Third Circuit recently clarified in Reifer v. Westport Ins. Co. that federal courts should not automatically decline jurisdiction over such matters. Rather, the Third Circuit directed courts to analyze jurisdiction over such cases by applying a multi-factor test, focusing upon the existence of parallel state litigation. The Shearer court noted that no parallel state litigation existed here, as the underlying lawsuit against the policyholders did not concern the insurance coverage issues addressed in the declaratory judgment action. In light of the Third Circuit’s directive that the absence of a parallel state court proceeding “militates significantly in favor of exercising jurisdiction” over a declaratory judgment action, the Court held that it had jurisdiction over the matter.
The Court next rejected the policyholders’ argument that the plaintiff insurer failed to join all defendants in the underlying action as “necessary” parties to the insurance coverage lawsuit. The Court observed that as the declaratory judgment action would have no impact upon the rights or interests of the other defendants, these defendants did not have a “legally protectable” interest that would mandate their joinder.
Turning to the merits of the lawsuit, the Court observed that the defendant policyholders did not challenge the insurer’s arguments regarding coverage. Rather, the policyholders contended that the insurer was estopped from seeking declaratory judgment, as it had waited too long to do so. Examining case law on the topic, the Court determined that issuance of a reservation of rights letter makes it very difficult for policyholders to succeed upon an estoppel argument. To the extent that estoppel could be established at all, the Court held that it required a demonstration of “actual prejudice.” The Court found that the policyholders’ contention that they would have to retain new counsel if the insurer prevailed was insufficient to establish prejudice. The Court noted that the policyholders were presumably free to retain the same counsel, and if the policyholders were unable to afford their current attorney, this would have been true regardless of whether the insurer had withdrawn earlier or not defended at all.
The Court observed that the policyholders’ argument had some “emotional appeal,” as it was unclear why the insurer delayed its decision to institute the declaratory judgment action. However, absent actual prejudice, the insurer was not estopped from seeking declaratory judgment. The Court therefore granted the insurer’s motion for summary judgment and denied the plaintiff policyholders’ motions.
The Court’s decision emphasizes the importance of issuing prompt and thorough reservation of rights letters. While an insurer would ordinarily be well-served to institute declaratory judgment actions regarding coverage as soon as possible, Shearer indicates that given a timely reservation of rights, delays in seeking declaratory judgment will rarely prove fatal.
