International Society of Primerus Law Firms

To Have Standing to Appeal a Declaratory Judgment Action, the Injured Party Must Have a Direct Interest in the Litigation

Written By: Thomas Paschos, Esq.

Thomas Paschos & Associates, P.C.

Haddonfield, NJ

In American Automobile Ins. Co. v. Murray, — F.3d —, 2011 WL 3966114 (3d. Pa. September 7, 2011), on March 23, 2006, nineteen-year-old Stephen Meloni drove his vehicle while intoxicated and struck a pole, killing his passenger, Jessica Easter. James S. Easter, Jr. individually and as the Administrator of the Estate of his daughter Jessica, filed a lawsuit on October 25, 2006, against Ennie and Steven L. Meloni in the Philadelphia County Court of Common Pleas (“Easter lawsuit”). Easter alleged that Ennie illegally sold alcohol to nineteen-year-old Gary Grato, who then supplied that alcohol to Meloni causing him to operate his vehicle negligently and recklessly.

In response to the lawsuit, Ennie sought a defense and indemnification from its general liability insurer, Century Surety Company (“Century”). Century provided Ennie with a defense under a reservation of rights and then filed a declaratory judgment action in the United States District Court for the Eastern District of Pennsylvania. The District Court granted summary judgment to Century, declaring that Century did not owe Ennie a defense or indemnification for the Easter lawsuit because the insurance policy in effect during the relevant time period contained a liquor liability exclusion.

On November 27, 2007, Ennie filed a lawsuit (“Ennie lawsuit”) against its insurance agent, Tyrone Murray, alleging that Murray negligently failed to place liquor liability insurance coverage for Ennie. Ennie claimed that it consulted with Murray through its principal Thai Poeng on August 23, 2000, with the purpose of obtaining insurance that would protect the company from any and all risks arising out of the business of operating a beer distributorship. Ennie alleged that in 2002, Murray sold it the Century insurance policy under the pretense that it protected Ennie from these risks. With this belief, Ennie renewed that policy annually through Murray. Murray confirmed that Poeng renewed the Century policy that was in effect during March 2006 in December 2005, and that the policy did not contain liquor liability coverage. Hence, Ennie alleged that Murray, as a licensed commercial insurance agent, breached his duty to advise it properly of the necessity or availability of liquor liability coverage. Ennie contended that due to this breach of duty, it was required to pay the costs of its own defense in the Easter lawsuit and has been subjected to a potential adverse judgment arising out of the lawsuit.

In response to the Ennie lawsuit, Murray sought a defense under his professional liability policy with AAIC.  Murray, as an insurance agent with The Agents & Brokers of Infinity Property Casualty Corp., enrolled online for his own insurance coverage through AAIC, which provided a “claims made and reported” errors and omissions liability policy. The first AAIC policy was issued to Murray on January 1, 2006, providing coverage from January 1, 2006 through January 1, 2007. The policy was properly renewed and Murray continued to receive coverage from AAIC for the period of January 1, 2007 through January 1, 2008.

Prior to his relationship with AAIC, Murray was covered under a liability policy from United States Liability Insurance Company (“USLIC”) from the period of November 24, 2004 through November 24, 2005. That policy had a retroactive date of November 24, 2004. Hence, Murray had a lapse in professional liability coverage from November 25, 2005 through December 31, 2005, immediately proceeding the January 1, 2006 effective date of the first AAIC policy.

Murray tendered his defense of the Ennie lawsuit to AAIC, and AAIC provided Murray with a defense under a reservation of rights to deny coverage and to seek recompense of all costs expended if it was determined that the AAIC policy did not provide Murray coverage. On May 8, 2008, AAIC filed the declaratory judgment action against Murray, Ennie, and Easter in the Eastern District of Pennsylvania, and subsequently filed a motion for summary judgment claiming that Murray’s actions that were the basis for the Ennie lawsuit were not covered under the AAIC policy. Ennie and Easter cross-moved for summary judgment. The main issues in dispute were the determination of the policy’s retroactive date, the date upon which the wrongful acts occurred, and whether the wrongful acts took place wholly after the retroactive date. Easter and Ennie argued that AAIC must provide coverage because the retroactive date for the policy was November 24, 2004, and Murray’s wrongful act of failing to insure Ennie for liquor liability insurance on March 21, 2006, occurred after the retroactive date. AAIC, on the other hand, maintained that Ennie was not covered under the policy because the retroactive date of the policy was January 1, 2006, and Murray’s wrongful act of failing to provide liquor liability insurance occurred in 2002 and continued at each policy renewal.

The District Court granted summary judgment to AAIC, finding that Murray’s wrongful act did not occur wholly after the AAIC policy’s January 1, 2006 retroactive date and, therefore, Murray was not covered under the policy. Ennie and Easter filed notices of appeal from the District Court’s judgment.

The Appeals Court raised the issue of standing sua sponte to determine whether Easter and Ennie are permitted to challenge the District Court’s order.  In a prior case, Federal Kemper Insurance Co. v. Rauscher, 807 F.2d 345 (3d Cir.1986), the court held that the critical determination for standing to sue in this scenario was “whether the rights of an injured party within the procedural context of a declaratory judgment action are truly derivative of the rights of the co-defendant insured.” If the rights of the injured party are derivative and not independent, then there would be no “case or controversy,” as there would be no “real dispute” between the injured party and the insurance company. The court recognized that a “case or controversy” must exist between the insurance company and the injured third party under such circumstances, since the insurance company brought the declaratory judgment action against the injured third party in the hope of attaining a binding judgment against both the insured and the injured party.

Applying the principles set forth in Rauscher, the court concluded that Ennie had standing to appeal the District Court’s order in this declaratory judgment action. The court found that Ennie was the directly injured party and that he had a particularized interest in the lawsuit because a determination of Murray’s coverage would dictate its ability to receive the full benefit of the Ennie lawsuit.

On the other hand, the court held that the holding in Rauscher did not extend to Easter, as he was an injured party twice removed. Unlike Ennie, Easter’s interests in this lawsuit are purely derivative of the injured third party’s interests. Essentially, the only interest Easter has in the lawsuit is the potential pecuniary gain that will flow to him through Ennie, since he has failed to make any claims directly against the insured.

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