Insurers routinely turn to Federal declaratory judgment actions in an effort to secure what they perceive as a friendly forum. Doing so can be appropriate in certain circumstances when an actual coverage dispute is present and the request for a declaratory judgment is pursued on a timely basis.
Less common and certainly less appropriate is an insurer’s pursuit of a Federal declaratory judgment to obtain an order that the insurer has no extra-contractual liability for underlying claims that have been made against an insured which are clearly covered by the insurer’s policy. While this practice is less common, it is not unheard of and an insurer will normally pursue this course after it has rejected a settlement offer within the limits, a subsequent excess judgment has been entered against an insured but the excess judgment has not yet become final. The Fifth Circuit recently called foul on a carrier’s attempt to extinguish its extra-contractual liability via a DJ and how it is a misuse of the Federal Declaratory Judgment Act.
Golden Bear Ins. Co. v. 34th S&S, LLC, 2025 WL 817588 (5th Cir. Mar. 14, 2025)
On New Year’s Day 2019, Clemens and Chapel were patrons at the Concrete Cowboy bar. They were involved in an altercation with a bouncer employed by the Concrete Cowboy in which both sustained significant injuries. Police were called and the bouncer was ultimately arrested.
The Concrete Cowboy was a d/b/a for 34th S&S, LLC and the LLC was owned by Daniel Wierck. Wierck and 34th S&S, LLC will be referred to as Concrete Cowboy. At the time of Clemens and Chapel’s injuries, Concrete Cowboy was insured by Golden Bear Insurance Company. The Golden Bear policy provided a $1,000,000 limit for assault and battery with the indemnity amount reduced by defense costs.
Underlying Lawsuit and Settlement Demand
After the altercation, Clemens and Chapel sued the Concrete Cowboy and Wierck in a Texas state court for their injuries. After filing, Clemens and Chapel sent a purported ‘Stowers’ demand to an attorney representing Concrete Cowboy. The demand offered to settle Clemens and Chapel’s claims for the “payment of all policy limits of any and all insurance contracts” but did not specifically state a dollar amount that Golden Bear needed to pay to accept the offer. This would later be an issue raised by Golden Bear given the indemnity amounts or “policy limits” were reduced by defense costs and thus Golden Bear would claim the amount demanded was not specific. Golden Bear rejected the demand.
The underlying lawsuit proceeded to a jury trial. Clemens received a verdict of $960,000 and Chapel received a verdict of $2,800,000. Golden Bear paid out its remaining policy limits to Clemens and Chapel to in partial satisfaction of their judgments. After this payment, $2.24 Million of the judgments remained unsatisfied and Golden Bear refused to make any additional payments.
Golden Bear’s Declaratory Judgment and Parallel State Proceeding
Shortly after the verdicts were returned, Golden Bear filed a federal declaratory judgment action naming Chapel, Clemens and Concrete Cowboy as defendants. Golden Bear sought an order that it owed no further obligations under the Golden Bear policy after its payment of the policy limit to Clemens and Chapel. Golden Bear’s primary argument was that it could not have extra-contractual liability as Clemens’ and Chapel’s demand did not comply with the requirements of a Stowers demand.
A short time later, Chapel, Clemens and Concrete Cowboy sued Golden Bear in State Court alleging that Golden Bear had breached its duty to settle in good faith. This state court action sought collection of the remaining excess judgment from Golden Bear and also included a malpractice count against the Concrete Cowboy’s retained counsel. This state court action was not removable as complete diversity did not exist.
Chapel, Clemens and the Concrete Cowboy moved to dismiss Golden Bear’s declaratory judgment on abstention grounds given the pending parallel state court action. Additionally, Chapel, Clemens and the Concrete Cowboy requested dismissal of the declaratory judgment action on the basis that a Golden Bear’s filing failed to state a claim as a request for a declaration of non-liability for a tort was an improper use of the Declaratory Judgment Act.
The District Court chose to reject the chance to abstain and rejected the argument that Golden Bear was misusing the Declaratory Judgment Act. Instead, after summary judgment briefing, the District Court determined that Clemens’ and Chapel’s offer to settle did not trigger Golden Bear’s Stowers duties. As a result, the District Court determined that Golden Bear could not be liable for the excess judgment entered in favor of Chapel and Clemens. Clemens, Chapel and the Concrete Cowboy timely appealed.
Fifth Circuit’s Opinion
The Fifth Circuit strongly disagreed with the District Court’s decision to entertain Golden Bear’s declaratory judgment action. In doing so, the Court noted that the Federal Declaratory Judgment Act is intended for parties to adjudicate their rights before their misconduct (tort liability) occurs. The act was not intended to allow alleged tortfeasors to obtain a declaration of non-liability for past actions.
The Court correctly determined that Golden Bear’s declaratory judgment was geared toward resolving its tort liability under Texas law for its past failure to accept Chapel’s and Clemen’s settlement offer. Further, Golden Bear’s arguments were really just affirmative defenses to the State Court Action that Golden Bear had repackaged and filed as a declaratory judgment action. This was improper and the District Court should not have allowed the declaratory judgment action to proceed. The Fifth Circuit remanded the matter back to the District Court with instructions to dismiss Golden Bear’s action.
Additionally, the Fifth Circuit strongly implied that the District Court also should have abstained from hearing the declaratory judgment action altogether. This was due to the parallel state court action that was essentially identical to Golden Bear’s declaratory judgment action. In such circumstances, the Supreme Court and the Courts of Appeal have cautioned district courts from hearing unnecessary declaratory judgment actions when parallel state proceedings are pending.
Concrete Cowboy is not going to end insurers’ zeal to preemptively file declaratory judgment actions in Federal court. However, the Fifth Circuit opinion clarifies the type of declaratory judgment actions that are appropriate and reinforces a district court’s discretion to abstain from hearing declaratory judgment actions when a state court is already in a position to resolve the dispute.
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