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**Zarwin, Baum Legal Alert** Federal Court Declines Jurisdiction in Declaratory Judgment Action

February 14, 2011

If you are considering bringing a declaratory judgment for insurance coverage in the Federal courts, you may want to consider doing so as early as possible as the Federal court can decline jurisdiction over the suit.
In Liberty Mut. Group v. Thomas, 702 F. Supp. 2d 512 (E.D. Pa. 2010), the Federal Court was asked to determine whether it should keep jurisdiction over an insurance coverage dispute.
Claimant in this action was struck by a motor vehicle as she was attempting to enter a school bus. The vehicle that struck her was uninsured at the time of the accident while  the school bus was insured by Liberty Mutual. Claimant sought uninsured motorist coverage from Liberty Mutual and the parties agreed to arbitrate, at the very least, some aspects of the dispute. About two weeks before the scheduled arbitration, Liberty Mutual filed this action seeking a declaration that it had no obligation to provide uninsured motorist benefits to the claimant.  The claimant then moved to dismiss, arguing (1) that the court should exercise its discretion to decline jurisdiction over this declaratory judgment action and (2) that the court should dismiss the action because Liberty Mutual agreed to arbitrate the entirety of the dispute.  The Court granted the claimant’s motion and dismissed the action.
The court declined to assert its jurisdiction over the matter stating:
The Declaratory Judgment Act states that a court "may declare the rights and other legal relations of any interested party seeking such declaration." Federal district courts may decline jurisdiction over declaratory judgment actions "even when the suit otherwise satisfies subject matter jurisdictional prerequisites."  District courts should adopt "a general policy of restraint" when a declaratory judgment action is restricted to state law and the same issues are pending in state court. "A federal court should also decline to exercise its discretionary jurisdiction when doing so would promote judicial economy by avoiding duplicative and piecemeal litigation." (citations omitted)
The scope of the original arbitration agreement was contested.  But the court reasoned based on the record that for the two years prior, Liberty Mutual engaged in discovery connected to the arbitration without making any effort to seek a determination that coverage issues were outside the arbitration's scope. Portions of the discovery addressed insurance coverage issues.  But the court stated that even if discovery had avoided coverage issues, it was an obvious waste of the parties' resources for them to engage in discovery on fault and damages, only to challenge coverage on the eve of arbitration. According to the Court, the availability of insurance benefits is a preliminary question that Liberty Mutual should have raised at the outset of the proceedings.
***Practice Tip***
This case points out the necessity to identify and prosecute coverage issues early.  It also makes clear that while the carriers may prefer to have their contractual and extra-contractual matters heard in federal, rather than local courts, the federal courts do not have to accept the jurisdiction.  Therefore, in addition to bringing the issue to the fore immediately, careful consideration also needs to be given to choice of venue.

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