Policyholders and insurers regularly find themselves in protracted forum battles because the choice of forum can have a major impact on the choice of state law that will be applied to coverages issues. This is important because coverage law varies significantly among jurisdictions, and choice of law actually can be outcome-determinative in certain situations. When opposing such forum battles, policyholders can make the argument that insurers engaged in bad faith when they file pre-emptive declaratory judgment actions to attempt to seize control of forum selection.
At first, this argument may seem counterintuitive, because insurers often file declaratory judgment actions to avoid exposure to bad faith, particularly after they have agreed to defend their policyholders under reservations of rights. There are, however, circumstances in which an insurer's filing of a declaratory judgment action can give rise to a bad faith claim that a policyholder may use to its advantage in a forum battle.
It is well established that that an insurer owes a policyholder a duty of good faith and fair dealing. Part of this duty requires that an insurer does not place its own interests before those of its policyholder; meaning that at a minimum an insurer must equally consider the policyholder’s interest. Often, in an effort to satisfy its good-faith obligations, an insurer will defend its policyholder under a reservation of rights and contemporaneously file a declaratory judgment action to determine coverage questions. However, an insurer is not protected against bad faith claims automatically because it filed a declaratory judgment action. Depending on the facts, an insurer may be able to protect itself from bad faith claims by declaratory judgment action to resolve coverage issues in certain instances but it may expose itself to bad-faith allegations in others. For example, an insurer may expose itself to allegations of bad faith when it files a declaratory judgment action as a preemptive strike to deny a policyholder its choice of forum.
While the first-to-file rule still exists, courts are not inclined to follow this rule when there is evidence of a party acting in bad faith because doing so would be unjust. Courts are mindful that declaratory judgments should not be used defensively to deny a prospective plaintiff the choice of forum and they are hesitant to reward procedural gamesmanship or reward a party that wins a race to the courthouse through acting in bad faith the courts do not want.
This is particularly true in deciding forum disputes between insurers and policyholders. Courts have consistently held that an insurer acts in bad faith if it files the first action after inducing a policyholder to relying, in good faith, on representation the insurer that it would not file first in order simply to keep the policyholder from filing in its preferred forum.1
By placing its own interest above that of its policyholder, such as preemptively filing a declaratory judgment action in order to deprive the policyholder of its choice of forum, insurers risk a finding of bad-faith. While each case is unique, it is important to be cognizant of the impact that such bad-faith considerations can have on forum battles in order to provide the most effective representation in coverage litigation.