Understanding Declaratory Judgments

Texas law provides for a very helpful mechanism for insurance carriers and policy holders to get a final answer regarding whether there is coverage under an insurance policy for a particular claim or set of facts. That mechanism is a declaratory judgment.

As discussed above, if an insurance carrier determines that it does not have enough facts or information to make a clear decision whether a claim is covered, it often issues a reservation of rights letter notifying the insured of the coverage issues while it investigates further. Sometimes the investigation yields an answer so that the carrier either extends coverage unconditionally to the claim or denies the claim. Sometimes, the carrier determines that they will continue dealing with the claim as if it was covered, processing the claim, and perhaps defending a lawsuit, but doing so under the reservation of rights pending the development of further facts. Our law firm has defeated many of lawsuits that were being defended during its entire period under a reservation of rights situation.

The Declaratory Judgment Act allows the parties to a contract to submit to a court the insurance policy and often the lawsuit that is the subject of the claim, as well as various legal authorities on the point in controversy. The court will then make a declaratory judgment determining the coverage issues brought before it. The court can decide the rights of the respective parties under the contract before anyone takes actions that would rise to the level of breaching the contract.

This can be a fantastically helpful device. For instance, if the neighbor mentioned above with the sprinkler system said in his pleading that his neighbor, without consent and without authorization, reached over with a closed hand and negligently pushed his face causing him to fall and break his jaw, a coverage issue may exist. However if a declaratory judgment was filed to determine whether coverage exists, the likely result would be that the court would find that while the word negligence was used, indicating someone having an accident, that the actions themselves denote an intentional action and that the insurance company likely does not have a duty to defend or indemnify its policy holder for that conduct.

A declaratory judgment is started by either the insurance company or its insured filing a petition with the court and serving the other party with legal process consisting of the papers filed with the court and requesting that the judge make a determination of the respective rights of the parties before any undue harm occurs through a breach of the contract.

When we think of this situation in common sense, it's a wonderful mechanism. For any of us with children we can readily come up with an analogy that we have two people in dispute over a document. Let's say it's a five dollar bill sent by grandma to the children on Thanksgiving. The children are tugging on the five dollar bill and are in disagreement as to grandma's letter and thus who should have the five dollar bill. We as parents will read the letter and before the children tear the five dollar bill up or commit various infractions against one another we have the opportunity to give them guidance and interpretation on the letter (contract) that was sent and each party can then go on its way without becoming adversarial and feeling like they have been damaged by the unjust and improper actions of the other.

Declaratory judgments have the paperwork and trappings of a lawsuit. They do not, however, have to resemble a typical adversarial proceeding where someone sues the other person wanting to get a lot of money or their fence torn down, etc.

A declaratory does not have to be viewed as an insurance company suing its insured or for the policy holder, who brings a declaratory judgment as suing the insurance company. While there is a petition and service of process to make sure everyone plays by the correct rules, the effects of this process are different than a lawsuit. A lawsuit is a very open adversarial proceeding where the Plaintiff is trying to get something and take something away from the Defendant, money, property, rights of some sort, or attempting to be taken from and the Defendant will have to give up something that the Defendant already possesses.

By contrast, a declaratory judgment is a determination of what rights each of the parties have. It is a mechanism to gain definition and a determination on what is possessed as a right under the insurance contract for each of the parties. To look upon a declaratory judgment as adversarial action where one is taking something away from another party is in not accurate. It is simply a matter of determining what rights someone possesses before anyone makes a decision that would result in an adversarial situation.