In its recent decision in Capitol Specialty Ins. Corp. v. IKO, Inc., 2013 U.S. Dist. LEXIS 167933 (E.D. Ky. Nov. 26, 2013), the United States District Court for the Eastern District of Kentucky had occasion to consider whether an insurer’s declaratory judgment action satisfied the threshold requirements for diversity jurisdiction under 28 U.S.C. § 1332.

Capitol insured IKO, which owned a bar, under a general liability policy.  While the policy was subject to a general limit of liability of $1 million per occurrence, the policy contained an Assault Limitation endorsement setting forth a $25,000 sublimit applicable to loss arising out of assault or battery.  IKO was named as a defendant in an underlying state court lawsuit brought by a patron alleging that she was sexually assaulted by several of the bar’s patrons.  Capitol subsequently brought suit against IKO in federal court, seeking declarations: “(1) that the Assault Limitation ‘is the exclusive liability coverage form applicable to the claims asserted … in the underlying Complaint;’ (2) that Capitol's duty to indemnify IKO in the underlying state action is limited to the Assault Limitation's sub-limit of $25,000; and (3) that Capital has no duty to defend and indemnify IKO upon the exhaustion of the Assault Limitation's sub-limit of $25,000. “

IKO moved to dismiss, contending that Capitol failed to establish diversity jurisdiction under 28 U.S.C. § 1332.  IKO conceded that it and Capitol were not citizens of the same state, but it asserted that the amount in issue did not exceed the $75,000 jurisdictional threshold.  In particular, IKO contended that the object of the coverage action was the policy’s $25,000 sublimit of liability, and that because this amount was less than $75,000, Capitol failed to establish federal court jurisdiction.

In considering the issue, the court observed that the Sixth Circuit had “yet to decide whether the amount in controversy in a declaratory judgment action should be measured by the policy limits or by the value of the underlying claim.”  The court nevertheless drew from its own prior decision in Grange Mutual Casualty Co. v. Safeco Insurance Co., 565 F. Supp. 2d 779 (E.D. Ky. 2008), where it followed the rule applied by other circuit courts that “the policy limits are controlling in a declaratory action . . . as to the validity of the entire contract between the parties, but that when the applicability of an insurance policy to a particular occurrence is the question, the amount in controversy is measured by the value of the underlying claim.” 

While IKO argued that the sole issue in the declaratory judgment action was the validity of the sublimit, the court disagreed, reasoning that the issue was the application of the Assault Limitation endorsement to the underlying loss.  The court therefore concluded that the amount in controversy in the underlying action was the proper consideration for establishing diversity jurisdiction.  As such, and because plaintiff in the underlying lawsuit sought a recovery in excess of $2 million, the court agreed that Capitol successfully established the threshold requirements for diversity jurisdiction and that its lawsuit could proceed in federal court.