Insurer’s Declaratory Judgment Action Stays in Federal Court Despite Parallel State Court Proceeding Initiated by Insured

A federal district court in Virginia has denied an insured’s motion to dismiss or stay an insurer’s declaratory judgment coverage action in favor of the insured’s parallel state court coverage action, citing the insured’s earlier praise of the federal court as the “superior forum” for the dozens of underlying suits filed against the insured. Liberty Mutual Fire Ins. Co. v. Lumber Liquidators Inc., No. 4:14-cv-00034 (E.D. Va. Sept. 4, 2015).

The insured, a retailer of hardwood flooring, was sued in multiple lawsuits by customers who alleged that the insured sold them laminate wood veneer flooring that contained toxic levels of formaldehyde. The lawsuits were consolidated in a multidistrict litigation proceeding in the United States District Court for the Eastern District of Virginia (EDVA). The insured tendered the matter to its insurers for coverage, but the insurers denied coverage because there were no allegations of “bodily injury” or “property damage” as defined in the policies. The insurers then filed a complaint in the EDVA seeking a declaration of no coverage, and requesting reformation of one of the insurance policies.

Five days later, the insured responded by filing its own complaint in Wisconsin state court, alleging that the insurers breached the terms of the policies and requesting a declaratory judgment that the insurers were obligated to defend and indemnify the insured in connection with the underlying lawsuit. The insured then filed a motion to dismiss the federal declaratory judgment action or, in the alternative, stay the action in favor of the insured’s parallel Wisconsin state court coverage action. The insured also moved to dismiss the insurers’ reformation claim for failure to state a claim.

In addressing the insured’s motion, the court first discussed the proper abstention standard to be applied. According to the court, where there are parallel federal and state court proceedings, the federal court must analyze the nature of the federal claims to determine which of two discretionary abstention doctrines identified by the Supreme Court of the United States should apply: Brillhart/Wilton or Colorado River.

The court explained that the Brillhart/Wilton standard should be applied where the sole relief sought in the complaint is declaratory in nature. The court noted that, under that standard, the court is given broad discretion whether to abstain from hearing the case. However, where the federal complaint is comprised of mixed claims—i.e., claims seeking both declaratory and non-declaratory relief—a federal court should apply the Colorado River standard, under which only the “clearest of justifications will warrant dismissal’ in favor of concurrent state court proceedings.”

After concluding that the insurers’ and the insured’s suits were parallel, the court determined that the insurers’ claim for reformation sought non-declaratory relief and that, accordingly, it would apply the Colorado River abstention standard. Under the Colorado River analysis, the court then considered six factors articulated under Fourth Circuit jurisprudence: whether real property was at issue; whether the federal forum was inconvenient; the desirability of avoiding piecemeal litigation; the relevant order of the actions; whether state law or federal law provides the rule of decisions on the merits; and the adequacy of the state proceeding to protect the parties’ rights. Analyzing these six factors under the Colorado River framework, which favors the exercise of jurisdiction, the court concluded that there were no “exceptional circumstances” sufficient to justify abstention. The court highlighted the fact that the federal forum could not be considered inconvenient as the insured had stated in the underlying action that the EDVA was the “superior forum” in light of the location of the insured’s headquarters and all company witness and documents.