Litigators in Virginia who devote any of their practice to representing insurers, or insureds, in disputes over insurance coverage are intimately acquainted with the declaratory-judgment action, one of the most useful tools available for resolving thorny insurance questions. If a “dec action” is filed in state court, Virginia law mandates that all parties having a potential interest in the outcome must be joined as parties; failure to do so results in a jurisdictional defect under Virginia’s Declaratory Judgment Act. See Erie Ins. Exch. v. Hughes, 240 Va. 165, 170, 393 S.E.2d 210, 212 (1990) (“Courts cannot afford [declaratory] ‘relief’ when they lack the power to bind all parties to the controversy. Actions or opinions are denominated ‘advisory’ where, by reason of inadequacy of parties defendant, the judgment could not be sufficiently conclusive”); Blue Cross & Blue Shield v. St. Mary’s Hosp., Inc., 245 Va. 24, 36, 426 S.E.2d 117, 124 (1993) (same). See also Va. Code Ann. § 8.01-184.
If a declaratory judgment lawsuit is filed in federal court, however, Virginia’s requirement for joining all interested parties no longer applies, as in federal court such actions are governed by the Federal Declaratory Judgment Act, 28 U.S.C. § 2201 (the “Act”). As no controlling federal decisions have held that joining all interested parties is a jurisdictional prerequisite under the Act, the determination of who should be joined in a declaratory judgment action is controlled by Rule 19 of the Federal Rules of Civil Procedure, which sets forth the well-known “necessary and indispensable” standard. In federal “dec actions,” therefore, only those parties deemed necessary and indispensable to the action are required to be joined.
So what does this seemingly academic distinction mean for casualty insurers? In the context of commercial auto insurance, it can mean that if the insurer disputes coverage for a third party’s claim against an insured’s employee who caused a collision while operating his employer’s motor vehicle, then if the insurer institutes a declaratory judgment action in state court the insurer must join the employee, the claimant, and the insured itself as parties. If the lawsuit is filed in federal court, however, the requirements are less clear.
Federal courts around the country have reached different conclusions in this regard. Some have held that in such lawsuits the claimant, at least, must be joined along with the employee or other individual seeking defense and indemnity benefits. See, e.g., Am. Standard Ins. Co. of Wisc. v. Rogers, 123 F. Supp.2d 461, 467 (S.D. Ind. 2000); Fathers of the Order of Mt. Carmel, Inc. v. Nat’l Ben Franklin Ins. Co. of Ill., 697 F. Supp. 971, 973 (N.D. Ill. 1988); Western World Ins. Co. v. Frieden, No. 4:16cv4038, 2018 WL 9880230, *1 (C.D. Ill. Apr. 12, 2018). Other courts, however, have rejected the notion that the claimant is always a necessary party in a declaratory judgment lawsuit. See O. M. v. Orange County, N.C. Bd. of Ed., No. 1:09cv692, 2013 WL 664900, *8 (M.D.N.C. Feb. 22, 2013); Arch Spec. Ins. Co. v. Go-Mart, Inc., No. 2:08cv285, 2008 WL 4879683, *3 (S.D. W.Va. Nov. 12, 2008).
This is a question that the U.S. Court of Appeals for the Fourth Circuit has not had occasion to address. Recently, however, the Eastern District of Virginia considered this question in passing and concluded without opinion that the absent claimant was not a necessary party in an insurance “dec action.” See Penn National Sec. Ins. Co. v. Davis, No. 2:20cv157, slip op. at 2 n.1 (E.D. Va. Aug. 21, 2020) (Doumar, J.). In that lawsuit, the insurer had named only its insured’s employee as a defendant. The defendant failed to appear in the case after being served, and the insurer then moved for default judgment. The record shows that the Court sua sponte raised the question of whether the claimant was a necessary party, and after briefing on that issue held that the claimant was not necessary. See id. The Court then considered the merits of the insurer’s position, granted its motion, and entered default judgment in its favor. See id. at 2-13. Davis thus stands for the proposition that declaratory judgment lawsuits in federal court do not necessarily require the joinder of a third-party claimant.
What might be the benefit of seeking declaratory judgment against fewer than all potentially interested parties? While each case must be evaluated based on its own particular circumstances, in the case of an auto-accident claimant who presents a commercial insured with a settlement demand based on the negligence of the insured’s employee, one possible benefit could be that the claimant would not be present to “muddy the waters” over what is insured and what is not. The claimant’s interest is in obtaining compensation from the insurer for the act or omission of the insured’s employee or agent, an interest grounded in tort law. The question of insurance coverage, however, is based on contract law and the jurisprudence governing insurance contracts, in particular. Avoiding the tort claimant’s involvement in the latter could remove the “broken plaintiff” element from an equation in which it has no place, and with fewer parties in the mix it may also result in a more expeditious resolution of the coverage dispute. There might be any number of additional benefits to omitting the claimant from the action, as well, including instances in which a claimant’s joinder we destroy federal diversity jurisdiction. The list could go on.
There may also be circumstances in which an insurer would prefer to involve the tort claimant as a party, such as to remove the possibility of a claimant attempting to argue after-the-fact that he had claimed an interest in the declaratory-judgment lawsuit’s subject matter which was not adequately protected, and that he should not be bound by the judgment on that basis. Another potential benefit to joining the claimant would be to better position the insurer and its insured for settlement negotiations with the claimant if there is already a tort lawsuit pending against the insured. Here, too, there are many other possible advantages to joining the claimant, and there is no “one size fits all” approach to the question of joinder. Whether to do so is therefore a question an insurer should weigh carefully based on each claim’s particular circumstances, and with the advice of experienced counsel.
Again, the option of not naming a claimant as a co-defendant in a declaratory judgment action exists only in federal court in Virginia. If a case does not fall within the federal court’s jurisdiction, then the litigation must proceed in state court where joining all interested parties is a jurisdictional requirement. See Erie Ins., 240 Va. at 170, 393 S.E.2d at 212. Weighing an insurer’s best options in these situations requires careful thought, planning, and advice. If you have questions regarding situations such as these, please contact Kevin Streit (email@example.com) at (804) 377-1270 or Steve Setliff (firstname.lastname@example.org) at (804) 377-1261.