Federal Court Retains Jurisdiction on Insurance Coverage Issue

Read the full article at https://www.linkedin.com/pulse/declaratory-relief-action-does-impinge-state-court-zalma-esq-cfe and https://zalma.com/blog plus more than 4050 posts.

Posted on January 26, 2022 by Barry Zalma

After an automobile collision in which James Bryant (“Bryant”) was driving a vehicle owned by RSS, LLC, and Steven Hughes (“Hughes”), and hit Glynn Allan Smith (“Smith”) (collectively “Defendants”) resulted in an insurance coverage claim. The vehicle was insured by Auto-Owners Insurance Company (“Auto-Owners” or “Plaintiff”), which claims there is no coverage because Bryant was not a permissive driver. Smith filed a Motion to Dismiss asking the Court to abstain from exercising jurisdiction over this matter pursuant to Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 377 (4th Cir. 1994) because among others reasons, there is a potential for unnecessary entanglement between this action and the personal injury action pending in State Court. The USDC, in Auto-Owners Insurance Company v. Glynn Allan Smith; RSS, LLC; Steven Hughes; and James Bryant, No. 4:21-cv-03693-JD, United States District Court, D. South Carolina, Florence Division (January 19, 2022), found it proper to resolve the insurance coverage issue.
BACKGROUND

The underlying State Court case arises from injuries suffered by Smith arising out of a motor vehicle collision. AutoOwners issued a Commercial Auto Policy (the “Policy”), to RSS, LLC, and Hughes with combined liability limits of $500,000.00 per accident. The 2005 pickup truck involved in the accident is insured under the Policy and appears as vehicle number 5 on the Declarations page. Plaintiff contends Bryant is not a scheduled driver on the Policy. Moreover, the insurer claims that “Bryant was not a scheduled driver for the subject vehicle or any vehicle [on the insurance policy] owned by the Named Insureds, nor was he authorized to drive the subject vehicle or any vehicle owned by RSS, LLC and/or Defendant Hughes.”

On August 4, 2020, Smith was hit by a vehicle driven by Bryant, when Bryant crossed the center line. The Complaint alleges Bryant was formally charged with, among other things, “Driving under suspension, license suspended for DUI – 1st offense; and . . . Driving under the Influence, less than 10, 1st offense.” Plaintiff, AutoOwners, is not a party in the State Court case as all the claims are based in tort. Plaintiffs sued seeking declaratory judgment contesting coverage to provide a defense or indemnification in the underlying State Court case.
DISCUSSION

Smith contends that facts weighs in his favor of the USDC abstaining from the case because the collision occurred in South Carolina, the Policy was issued in this State, and South Carolina has a strong interest in having its own courts interpreting South Carolina law.

This is an insurance coverage case that requires the Court to review the Policy and the applicable facts and issue a Declaratory Judgment as to the rights and responsibilities of the parties under the Policy. Federal Courts routinely adjudicate insurance policies governed by State.

Smith also asserted that this case can efficiently be resolved in the pending State Court case because the alleged coverage issue is being litigated in the underlying State Court case, which has been litigated for over a year. However, a review of the underlying State Court case indicates that resolution of this case in State Court would not be more efficient.

Plaintiff is not a party to the underlying State Court case. Additionally, as the underlying State Court case concerns tort issues while this case involves contract issues, the issues in each case are different.

Smith, in addition, contended that there exists the potential for entanglement between the State Court and this Court because AutoOwner’s obligations under the Policy will be addressed and litigated in the underlying State Court case. Entanglement occurs where many of the issues of law and fact sought to be adjudicated in the federal action are already being litigated by the same parties in the related state court action.

Entanglement is unlikely because the Auto-Owner’s contract dispute will not be adjudicated in the Underlying State Court case. Thus, no issues regarding AutoOwner’s rights or obligations are likely to be resolved in that action because the underlying State Court claims (i.e., negligence, vicarious liability etc . . .) do not relate to the USDC’S coverage determination. If the USDC determines during the course of litigation that it needs to wade into fact-finding in a manner that would impede upon the questions being considered by the State Court in the underlying case, the Court reserved its right to revisit this order and decide to abstain from hearing the case.

Lastly, in considering the last factor, the USDC found that this case is not being used merely as a device for procedural fencing. Accordingly, the Court found that the declaratory relief sought will serve a useful purpose in clarifying and settling the legal relations in issue, and will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.

For the foregoing reasons, the USDC decided to exercise jurisdiction over this case; and therefore, Smith’s Motion to Dismiss is denied.
ZALMA OPINION

A declaratory relief action has no relationship to a tort action. If AutoOwners is correct – and it appears so – that it owes neither defense nor indemnity to the defendant unlicensed driver it is entitled to seek a quick, simple and direct action in federal court to determine if it is correct in its conclusion that it owes neither defense nor indemnity to Byrant.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

Subscribe to “Zalma on Insurance” at https://zalmaoninsurance.locals.com/subscribe and “Excellence in Claims Handling” at https://barryzalma.substack.com/welcome.

You can contact Mr. Zalma at https://www.zalma.com, https://www.claimschool.com, [email protected] and [email protected] . Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

You may find interesting the podcast “Zalma On Insurance” at https://anchor.fm/barry-zalma; you can follow Mr. Zalma on Twitter at; you should see Barry Zalma’s videos on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; or videos on https://rumble.com/zalma. Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims–library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/