Often, we will receive a telephone call from an insured advising us they have been sued by the insurance company. The insurer has filed a lawsuit seeking a declaration that their denial of the insured’s claim was appropriate. But is it appropriate for an insurer to seek a “stamp of approval” from the court for their denial?
In federal court, the Declaratory Judgment Act is designed to afford parties threatened with a liability, but otherwise without a satisfactory remedy, a means of early adjudication of the controversy.1 The existence of a controversy is crucial, because the “case or controversy” requirement of Article III of the Constitution applies to declaratory judgments.2
To show an “actual controversy” as required by 28 USC §2201, the plaintiff in a declaratory action must show he has sustained, or is in immediate danger of sustaining, a direct injury as the result of the defendant’s conduct.3 Stated differently, there must be a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.4
But, where an insurer has already made a decision and seeks a court to “approve” its decision, that may not be an appropriate controversy for resolution. The primary purpose of a declaratory judgment is to permit a plaintiff to obtain a declaration of its rights and liabilities before proceeding with a course of conduct for which it might be held liable, not to declare nonliability for past conduct.5 Declaratory judgment is not available where the judgment cannot guide and protect the petitioner regarding future acts.6 Declaratory judgment cannot be used solely to adjudicate past conduct and not to affect future behavior.7
Following this line of cases, by waiting to file a declaratory judgment action until after it has denied the claim, the insurer is not seeking guidance on future acts, but asking the court to render an advisory opinion on its past conduct, which is not the purpose of a declaratory judgment action and may result in dismissal. Thus, an insured and its counsel should think twice about allowing a declaratory judgment action to proceed where the insurer has already denied the claim.
1 Northland Ins. Co. v. Gray, 240 F.Supp.2d 846, 847 (N.D. Ind. 2003).
3 Foster v. Center Twnshp. of LaPorte County, 798 F.2d 237, 239 (7th Cir. 1986).
4 Golden v. Ziwckler, 394 U.S. 103, 108 (1969).
5 Global Parking System of Ind., Inc. v. Parking Solutions, Inc., No. 1:13-cv-00284, 2015 WL 1186787, *11 (S.D. Ind. March 16, 2015) quoting 22A Am.Jur.2d Declaratory Judgments §129 (2012).
7 Troya v. Wilson, No. 2:17-cv-0162, 2017 WL 1346993, *3 (S.D. Ind. April 12, 2017).