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New York Federal Court Rules Plaintiff May Not Seek Declaratory Judgment Against Insurer Before Obtaining Judgment Against Insured

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On November 21, 2014, the United States District Court for the Southern District of New York held that a plaintiff has no standing to bring a declaratory judgment action against a professional liability insurer before the plaintiff obtains a judgment against the insured.  See Zyburo v. Continental Casualty Co., No. 1:13-cv-06438-JSR (S.D.N.Y. Nov. 21, 2014). 

In Zyburo, the plaintiff filed a putative class action against NCSPlus, Inc. (“NCSPlus”), alleging violations of the federal Telephone Consumer Protection Act.  Thereafter, the plaintiff notified Continental Casualty Company (“Continental”) of the lawsuit and made a demand for the full coverage amount afforded under the professional liability policy, which Continental had issued to NCSPlus.  Continental rejected the plaintiff’s demand and declined to appear in the lawsuit as no claim had been submitted by NCSPlus itself.

As a result, the plaintiff commenced an action against Continental, seeking a declaration that Continental had an obligation to cover any judgment rendered against NCSPlus in the plaintiff’s previously filed action against that company.  In its motion to dismiss, Continental argued that, under N.Y. Ins. Law § 3420, the plaintiff had no standing to bring the declaratory judgment action against it.  The plaintiff countered by arguing that the federal Declaratory Judgment Act, 28 U.S.C. § 2201 (the “DJA”), provided a basis for standing and that the state statute cited by Continental was “procedural” in nature and, therefore, did not apply.

Judge Rakoff sided with the insurer.  More specifically, the Court noted that the New York Court of Appeals has “stated unequivocally that [N.Y. Ins. Law § 3420] is substantive in nature” and, thus, the Court was bound to apply it in this case.  In relevant part, § 3420 requires that policies issued or delivered in New York must contain a provision that: 

in case a judgment against the insured . . . in an action brought to recover damages for injury sustained or loss or damage occasioned during the life of the policy . . . shall remain unsatisfied at the expiration of thirty days from serving notice of entry of judgment upon the attorney for the insured, or upon the insured, and upon the insurer, then an action may . . . be maintained against the insurer under the terms of the policy . . . for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy . . . .

Applying § 3420 to the facts in the case before it, the Court determined that the plaintiff’s declaratory judgment action was premature and granted Continental’s motion to dismiss, without prejudice to refiling of the action if and when the plaintiff obtains a judgment against NCSPlus in the underlying action and that judgment is outstanding for at least thirty days after service of the notice of entry.

Click here to read the Court’s decision in its entirety.