In Evanston Insurance Company v. Dan Ryan Builders, Inc., No. 11-02366 (D. Md. Feb. 13, 2012), the Court granted the insureds' motion to dismiss an insurer's declaratory judgment action, finding in favor of abstention based on parallel litigation pending in state court.
The defendants were Maryland contractors who were sued in West Virginia concerning construction defects in a home they had built in Martinsburg, West Virginia. The West Virginia suit raised claims of negligence, breach of contract, and fraud or fraudulent concealment, based on allegations that the defendants had failed to disclose that the home was subject to flooding during major storm events, and that its septic system had failed.
The insurer filed a declaratory judgment action in the U.S. District Court for the District of Maryland, to establish that it has no duty to defend or indemnify. Three days after service of the federal suit, the West Virginia suit was amended, adding the insurer as a defendant, and adding an additional count for a declaratory judgment establishing coverage for the claims raised in the suit. Subsequently, the defendant insureds filed a motion to dismiss the federal declaratory judgment action, arguing that the same coverage issues will be decided in the West Virginia litigation, and that the federal court should abstain. (Such a procedure was authorized by the West Virginia Supreme Court of Appeals in 1989. See Christian v. Sizemore, 383 S.E.2d 810 (W. Va. 1989).
The rule in the Fourth Circuit is that when an insurer files a declaratory judgment action on coverage issues in a District Court while the underlying litigation against its insured is pending in the state courts, considerations of federalism, efficiency, and comity give the District Court the discretion to refuse to entertain the action, even when the declaratory relief sought would serve a useful purpose. The District Court is required to weigh four factors when considering whether to abstain from exercising jurisdiction over a declaratory judgment action during the pendency of a parallel state proceeding: (1) the strength of the state's interest in having the issues raised in the federal declaratory action decided in state court; (2) whether the issues can be more efficiently resolved in the court where the state claims are pending; (3) whether there are common factual and legal issues in the federal and state actions which would cause the federal action to be unnecessarily entangled with the state court action; and (4) whether the declaratory judgment action is being used merely as a device for procedural fencing, i.e., the provide another forum in a race for res judicata or to achieve a federal hearing in a case otherwise not removable. See Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 376 (4th Cir. 1994), abrogated on other grounds by Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257-78 (4th Cir. 1996).
Analyzing these factors, the District Court decided in favor of abstention. West Virginia had the stronger interest in resolving coverage issues concerning conduct in West Virginia that allegedly caused damage to property in West Virginia. Second, the West Virginia action could resolve all issues, which was more efficient. Third, resolution of the duty to indemnify in federal court would depend on resolution of the same factual and legal issues pending in state court. Finally, the Court rejected the insurer's argument that the addition of the coverage issues to the West Virginia action was procedural fencing, which should not be countenanced. The District Court accepted the insured's argument that they had not initiated either the West Virginia action or the federal declaratory action, and that the conduct of the plaintiffs in the West Virginia action was of no import.