Carrier requests for stays have been all the rage recently with a recent Missouri decision granting an insurer the ability to intervene into tort lawsuits to seek a stay until the insurer litigates a coverage action. While that decision did not mandate a stay of a tort lawsuit while a coverage action is pending, some are interpreting the decision in this broad manner.
But stays can go both ways. Most commonly an insured and a claimant will not seek a stay or dismissal of a federal declaratory judgment action until AFTER a judgment has been entered against the insured in a tort action and after a state court action has been filed by the claimant seeking collection from the insurer of the judgment entered against an insured. In this situation, the federal and state actions are viewed as parallel proceedings and the federal court will defer to the state court action. This is often referred to as Brillhart Abstention.
While not unheard of, far less common is a stay of a federal declaratory judgment action during the pendency of the tort action against the insured and before any judgment has been entered against the insured. Generally, the tort action filed against the insured and the federal declaratory judgment action filed by the insurer aren’t viewed as parallel and not subject to the federal court’s broad discretion on whether to proceed with a declaratory judgment action. Even though the actions are not parallel/identical, certain issues in each may overlap. If that scenario is present, a stay may be appropriate as the Washington District Court has recently pointed out.
THE TRAVELERS INDEMNITY COMPANY v. MCKINSTRY CO., LLC, et al., No. 2:24-CV-01718-TL, 2025 WL 1089525, at *1 (W.D. Wash. Mar. 12, 2025)
Background
McKinstry stems from a construction project gone very wrong. Urban Visions was a real estate developer for a new complex in Seatle. Urban Visions hired Sellen as a general contractor to construct the complex. Sellen then hired McKinstry Co., LLC as a subcontractor to install an “exterior metal panel system” on the building.
Apparently, McKinstry’s work was not satisfactory and significant issues were discovered with the metal panel system. Apparently, the entire system of panels needed to be replaced and lawsuits soon followed.
Liability Action
Following discovery of the defective panels, Urban Visions sued Sellen for breach of contract and alleged that Sellen had failed to complete its work in accordance with industry standards and those specified in their contract. Additionally, Urban Visions alleged that Sellen failed to defend and indemnify Urban Visions for any liability arising out of Sellen’s actions.
In turn, Sellen filed a third-party petition against McKinstry for indemnity, breach of contract and warranty and negligence for McKinstry’s performance of installing the metal panels. Sellen further alleged that to the extent it was liable to Urban Visions, it was entitled to indemnity from McKinstry as Sellen’s liability arouse only as a result of McKinstry’ acts and omissions.
The Liability Action and the fault of Sellen and McKinstry to Urban Visions is pending.
Travelers’ Involvement
At the time of the construction project, McKinstry was a named insured under a series of policies issued by Travelers. McKinstry tendered the defense of Sellen’s third-party petition to Travelers.
While , Sellen was not a named insured under the McKinstry’s Travelers policies and was not explicitly identified as an additional insured, the Travelers policies contained an Additional Insured (Contractors) Endorsement. Under the endorsement, an entity would be considered an additional insured if a written contract required the entity to be named as an additional insured and the entity’s liability arose from the actions of the named insured sub-contractor. The entity would not be an insured for any of its own independent acts of negligence. Sellens believed its liability arose directly from the acts of McKinstry and tendered the defense of Urban Vision’s claims against it to Travelers.
Traveler’s Coverage Position and Declaratory Judgment
After receiving McKinstry and Sellen’s tenders, Traveler’s agreed to provide a defense to each under a reservation of rights. Travelers then filed a federal declaratory judgment action seeking an order that it had no obligation to defend or indemnify Sellen and McKinstry for the various claims made against them in the liability action.
Travelers raised numerous issues that it felt impacted coverage for Sellen and McKinstry. Of importance here, Travelers argued there was no coverage for either entity as the claims in the Liability Action did not allege “property damage.” As to Sellen, Travelers took the position that the claims against and Sellen’s liability to Urban Vision arose out of Sellen’s own conduct as opposed to solely the conduct of McKinstry. Because of this, Travelers didn’t believe Sellen could qualify as an insured under the Additional Insured (Contractors) Endorsement.
Motions for Stay and District Court Order
Both Sellen and McKinstry filed motions to stay Travelers’ declaratory judgment action pending resolution of the liability action. As their basis for a stay, Sellens and McKinstry argued the coverage issues could not be resolved until various factual issues were resolved in the liability action. Travelers opposed the motion for stay on the basis that it would be required to expend money defending Sellen and McKinstry in the Liability Action if the Declaratory Judgment Action was stayed.
In addressing the Motion to Stay, the District Court began by acknowledging federal courts have significant discretion to control their dockets including the power to stay proceedings. In deciding to stay the Declaratory Judgment action, the court weighed the potential prejudice to be suffered by each party if the case was or was not stayed.
Weighing significantly in favor of a stay were the overlapping issues contain in both the Declaratory Judgment and Liability Action. At issue in both cases was whether any property damage had occurred and how much damage had occurred at Urban Visions project. Additionally, an issue in both cases was whether Sellen had committed independent acts that caused damage to Urban Visions or whether Sellen was solely liable to McKinstry for Sellen’s actions. Each issue involved significant factual disputes and the potential need for Sellen and McKinstry to take contradictory positions in the Liability Action and Declaratory Judgment Action. Further, the courts could reach inconsistent findings on the issues or a finding in the Declaratory Judgment could result in collateral estoppel in the Liability Action. The court determined that these issues could result in significant hardships to Sellen and McKinstry.
The only issue weighing against granting a stay was that Travelers would be required to pay defense costs for Sellens and McKinstry in the Liability Action. However, the court noted that advancing defense costs was part of the insurer’s business. Moreover, part of the relief requested by Travelers in the Declaratory Judgment was to be reimbursed for the defense costs expended if the court found coverage did not exist. Because of this, the court determined that Travelers would suffer no or minimal prejudice if the Declaratory Judgment was stayed, especially when compared to the hardships that Sellen and McKinstry would suffer if the Declaratory Judgment were allowed to proceed.
McKinstry will not be applicable to every coverage dispute and a stay of an insurer’s federal declaratory judgment before a judgment has been entered against the insured will likely remain less common than stays based on Brillhart Abstention. Even though less common, McKinstry highlights that a stay of a coverage action even before a judgment has been entered against the insured may be prudent. This is especially true when coverage issues are dependent on and overlap with various factual issues that must be resolved in the tort action against the insured.
Need Assistance with a Bad Faith Situation?
Kirk Presley enjoys helping individuals and other lawyers with bad faith cases.
If you would like to speak with him about a bad faith case email him at [email protected] or call him at (816) 931-4611.