It is the tool of tools for resolving coverage disputes – the declaratory judgment action.  Yes, reservation of rights letters, in preserving insurers’ coverage defenses, play a very important role in various contexts, including resolution.  But they can only go so far.  The declaratory judgment action (or one for breach of contract) is where issues are decided

But sometimes, for procedural reasons, achieving the purpose of a declaratory judgment action is easier said than done.  Take this scenario that surely every insurer faces from time to time.

An insurer has a strong coverage defense.  As a result, it either disclaims coverage for a defense or undertakes its insured’s defense under a reservation of rights.  Either way, it is likely to face a demand to settle the underlying action – and especially as trial approaches.  But even if the case is one that should be settled, based on liability and damages considerations, the insurer will not be inclined to do so, on account of its strong coverage defense. 

And if, for this reason, the insurer does not settle, and the case goes to trial, and there is a verdict for the plaintiff (or there was a pre-trial settlement and assignment), the insurer can be expected to be on the receiving end of a demand (or coverage action) to fund the judgment or settlement -- and possibly an accusation of bad faith.   And if the verdict or settlement exceeds the policy limits, that adds a whole other layer of complexity to the insurer’s potential liability. 
    
The insurer here could have filed a coverage action, before all this transpired, seeking a determination of any policy obligations.  Indeed, courts routinely state that a declaratory judgment action is the tool available to insurers to have their coverage obligations determined.

But, despite this common judicial refrain, here is where the sometimes easier-said-than-done part comes in.  What if the declaratory judgment action is not resolved before the underlying action gets to trial?  And, in fact, there’s a reasonable chance of that being the case, since the coverage action may not have been filed until after the underlying action is underway – and maybe well underway.  In other words, the underlying action, with a big head start on the coverage action, may reach trial before there has been any resolution of the coverage issues.  And what if there’s an appeal to be taken the coverage action?

The logistics of parallel coverage and underlying actions was the subject of the Supreme Court of Missouri’s decision in McCrackin v. Mullen, No. SC100578 (Mo. Dec. 23, 2024).  Granted, other courts have addressed this issue.  But I chose McCrackin v. Mullen, as one of the year’s ten most significant coverage decisions, for a few reasons.

First, some decisions in this area are tied to their specific facts and procedure, making them less useful in resolving other scenarios.  McCrackin v. Mullen, on the other hand, addresses this issue using what seems to be a one-size-fits-all approach.  Second, the court expressly acknowledged the specific challenge that insures can face in this situation.  Third, the decision comes from a state high court.  For these reasons, the decision may serve as useful guidance for other courts confronting this issue.         
    
At issue in McCracken was coverage for Tynan Mullen, an individual who pleaded guilty to first degree involuntary manslaughter [after being indicted for first degree murder].  He shot and killed Jeremy McCrackin in a pool hall parking lot.  Mullen allegedly lived with his grandmother at the time of the incident and she had a homeowner’s policy with Safeco. 

McCrackin filed a wrongful death action against Mullen. Mullen sought coverage from Safeco, which denied the claim on the basis that Mullen’s actions were intentional.  McCrackin filed an amended complaint, this time throwing in some negligence argument.  Safeco again denied coverage.  Safeco then filed an action seeking a declaratory judgment that it had no obligation to defend or indemnify Mullen in the McCrackin action.

Putting aside some other procedural moves, Safeco moved to intervene in the underlying wrongful death action, for the limited purpose of seeking a stay until final resolution of its coverage action.

The trial court ordered additional briefing on the motion to intervene.  But, on the same day, it also held a bench trial in the wrongful death case.  The court found against Mullen and awarded McCrackin $16.5 million.  Yowza!  The court denied Safeco’s motion to intervene, finding that it had no such right. 

McCrackin filed a garnishment action against Safeco seeking coverage under Mullen’s policy.  The opinion is silent on this, but I suspect McCrackin, with a $16.5 million judgment in hand, was not looking for just the limits of the homeowner’s policy [probably $100,000 to $300,000 would be my guess].  The court had not yet ruled on the garnishment at the time of the supreme court’s opinion.

The case made it to the Missouri Supreme Court on the question whether the trial court erred in denying Safeco’s motion to intervene.  The court noted that, while Missouri courts have long favored allowing “insurers with coverage questions [to] seek intervention in the underlying tort action for the sole purpose of seeking a stay of the tort proceedings while coverage questions were litigated in a separate declaratory judgment action,” the state’s high court had never addressed it.

Following a discussion of the procedure and purposes of intervention, the court observed that “[a]n insurer faces a dilemma when it believes it has a valid defense to coverage.”  The court explained: “Even if the insurer has a good faith belief that the policy provides no coverage, the insurer risks being bound by the underlying tort action if the insurer wrongfully refuses to defend its insured or declines an opportunity to control the tort litigation.”

The court held that the trial court erred when it denied Safeco’s motion to intervene.  It explained its decision this way:

“Insurers that fail to protect their own interests must live with those consequences. An insurer ‘cannot have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of settlement in defense of an action it had refused to defend.’ (citation omitted) But that is not what Safeco sought. Following the recommendation of Missouri appellate courts, Safeco tried to protect its interest in the wrongful death action by filing a declaratory judgment action to determine coverage.

“Insurers with good faith coverage questions should file a declaratory judgment action simultaneous with the underlying tort action and seek a stay of the tort action until the declaratory judgment action is resolved.”

The court added further guidance: “In the future, it is advised that insurers file the declaratory judgment action in the same court as the tort action whenever possible. Such practice will ensure coverage questions can be determined in a consistent manner to prevent unnecessary delay of the underlying tort action.”

A Missouri coverage lawyer, steeped in this issue and its procedural tentacles, may say that I am oversimplifying all this.  But the overarching point to be made here is that the Missouri Supreme Court laid out an entirely sensible procedure for addressing the resolution of coverage disputes.

Plaintiffs will likely complain that a stay of their case, while coverage is being addressed in a separate action, results in an unfair delay.  But if the defendant’s insurance is the only realistic source of recovery, wouldn’t the plaintiff want to know, from the outset, if it’s worthwhile to pursue the action.  And, if coverage is found to be owed, that may lead to a settlement, thereby saving the plaintiff the burden of litigating the case.

But, by having the coverage issue unresolved, the plaintiff can place the insurer in the position, given its strong coverage defense, of possibly forcing the case to trial – and the potential consequences of a verdict, like one for $16.5 million.  And then the insurer is left to address the consequences of a determination that coverage was owed.