A federal court in Oklahoma denied an insurer’s motion to dismiss, finding that it could not rely on the policy’s “no action” clause to dismiss an insured’s declaratory judgment action seeking judgment on the insurer’s duty to defend and indemnify. Wilbanks Securities, Inc. v. Scottsdale Ins. Co., 2016 WL 6109312 (W.D. Okla. Oct. 19, 2016).

The insured had a financial services professional liability errors and omissions policy and sued its insurer for breach of contract and bad faith for failing to defend an arbitration. The insurer moved to dismiss, contending the insured failed to satisfy a condition precedent of the policy as the underlying arbitration was ongoing:

Suits Against Us. No suit or other action may be brought against us unless, as a condition precedent thereto, there has been full compliance with all terms and conditions of this policy and the obligation of the insured to pay “damages” has been finally determined either by judgment against the insured, after trial or arbitration or by written agreement signed by the insured, the claimant and us. Anyone who has obtained such a judgment or written agreement will be entitled to recover under this policy to the extent of the insurance then available to the insured under this policy. No one has the right to make us a party to a suit to determine the liability of an insured; nor shall we be impleaded by an insured or his/her/its legal representative(s).

The court found that the “no action” clause was enforceable under Oklahoma law. However, it held that the effect of the “no action” clause proposed by the insurer would eliminate any obligation by an insurer to fulfill its duty to defend until such time as an insured had failed to prevail in the underlying action and that the no action clause is not a condition precedent. Rather, the court held, it is a provision that applies to third parties, not the insured, where the issue is the duty to defend, and “no action” clauses do not bar an insured’s claims for declaratory relief against an insurer, at least where coverage is denied by the insurer.