On a weekly basis, I confer with insurance company claims executives and in-house lawyers about whether taking the affirmative step of filing a declaratory judgment action in a coverage dispute is the best course of action. Sometimes, the answer is clear. Mostly, however, it is not.
As the title suggests, the decision to file an action seeking a declaratory relief is oftentimes far more art than science. The art of this decision should be based on consideration of a number of factors, including the following:
- Facts – Do the facts of the claim present a genuine question of coverage? More importantly, do the facts suggest, more likely than not, that an exclusion or coverage limitation likely applies? Are there clear indications from the claims investigation that a coverage exclusion, limitation, or other provision are implicated?
- Law – Does the jurisdiction in which we find ourselves have established precedent on the coverage question under consideration? Has the policy language in question been previously interpreted by the courts? Does that precedent tend to support a reasonable question of coverage, or, even better, support the likely conclusion that coverage under the circumstances is excluded or limited?
- Cost/Value/Scale – Insurance companies rarely want to spend money on even the most guaranteed-to-win declaratory judgment action if the costs of doing so dwarf the amount of money involved in the claim. It is sometimes in the best interest of both the insurer and the insured to cost-effectively resolve the underlying dispute if the dollars involved do not justify not only the expense, but the time involved in declaratory judgment litigation.
There is more to the decision to file declaratory judgment action than the mere existence of a coverage question, or an underlying insurance claim. A number of important factors should be weighed before a declaratory judgment complaint is prepared and filed. It could well be that there are more efficient and cost – effective ways to closing a disputed claim. If not, then declaratory judgment is always an option.
Declaratory judgment actions are an important tool in resolving insurance coverage issues, but like all tools, they are not right for all circumstances. The decision to proceed with a declaratory judgment action should be the product of careful consideration of all factors involved.