CLM 2017 Annual Conference
March 29-31, 2017
Nashville, TN
Declaratory Judgment Actions:
Deterrents to Fraudulent Claims
I.
Declaratory Judgment Actions
A declaratory judgment action can be commenced by an insurance carrier to seek a judicial order
declaring the rights of the insurance carrier as it relates to a claim and/or insurance policy.
The first discussion of declaratory judgments can be traced back to Law Journal articles from the
Yale Law Journal in 1918. Since then, most states have their own statute concerning declaratory judgment
actions. Actions under these statutes are rapidly becoming more and more numerous. It is becoming well
recognized throughout the country that declaratory judgment actions are becoming increasingly more
valuable and necessary. Most state statutes give the courts broad powers and discretion over issues ripe
for a declaratory judgment action.
Elements of a Declaratory Judgment Action
1. A bona fide justiciable substantial controversy exists;
2. The controversy must exist between parties with adverse legal interest as to their present
or prospective obligations related to the insurance agreement and/or contract;
3. A judgment would serve as a useful purpose in clarifying or settling the legal issues; and
4. A judgment will finalize the controversy and offer relief from uncertainty.
A declaratory judgment action will have the effect of a final judgment as to the rights and other
legal relations of the parties to a justiciable controversy. If the court declines to render a judgment, it shall
state its grounds. The court in a case of an actual controversy will declare the rights and other legal
relations of any interested party seeking such declaration. Any such declaration shall have the force and
effect of a final judgment or decree and shall be reviewable as such. 28 U.S.C.S. §2201(a) (2013) (Federal
“Declaratory Judgment Act”).
Types of Claims Ripe for a Declaratory Judgment
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In most jurisdictions, the reception by the courts of declaratory judgment actions have been quite
favorable. Declaratory judgment type actions are most useful when dealing with an insurance contract
and the interpretation of exclusions contained within the policy. Same will be said of involvement in an
automobile loss or accident. These actions are useful to determine one’s rights as it relates to the policy
of insurance. Specifically, concerning fraudulent claims and/or staged intentional actions.
Applying the elements to the types of claims we see and which we view as ripe for a declaratory
judgment action demonstrates that claims which SIU has found to be fraudulent and/or potentially staged
would fit elements of a justiciable controversy between involved parties with a need to clarify the
coverage. These claims would have been reviewed and analyzed through an SIU investigation reaching
the conclusion that the claim is not a covered loss as either an accident did not occur or the loss was
staged or in some way, fraudulent. In essence, a fraudulent presentation of the claim.
Upon concluding the investigation, if a reasonable basis exists to deny the claim, the claim can be
denied based upon fraud and misrepresentation at which point, a declaratory judgment action can be
commenced for such a claim eliminating the specter of multiple litigations and court proceedings. The
declaratory judgment wraps the whole matter into one action seeking a final result to the controversy.
These types of claims would require the action to be filed against all interested parties. Declaratory
judgment actions can also be utilized in claims concerning nonfraudulent related issues but which may
not be honored based upon exclusions and/or insurance coverage issues. We would see such claims ripe
for a declaratory judgment action that would include issues concerning policy exclusions, residency, the
use of vehicles, business use exclusions and other noncoverage related concerns.
II.
Deterrence Factor and Defenses
Declaratory judgment actions contain a broad discretion of the courts. The element of discretion
plays an unusually important part in the determination of whether or not the court will, in a given case,
consider the declaratory judgment action on its merits. The Courts may refuse to consider the merits in a
declaratory judgment action if for any reason, it deems the controversy inappropriate for a declaratory
judgment.
There are general rules to consider when determining the merits of a declaratory judgment and
the court’s discretion concerning same. Those general rules are as follows:
1. That the declaratory judgment statute of a specific jurisdiction does not extend the
jurisdiction of the court. By that, it is meant that if the court in question has no jurisdiction of
the particular subject matter of the parties involved, it cannot entertain a declaratory
judgment action involving the subject matter or those parties in question.
2. Another general rule is that no declaratory judgment suit will be entertained unless all the
interested parties are before the court. The question however of how many parties need to
be joined is often a close and difficult one to answer. In the solution of this problem, the
discretion of the court becomes more clear. If the defect is obvious, the court will dismiss the
action. No court will proceed to the adjudication of a matter involving conflicting rights and
interest until all persons directly concerned in the event have been actually or constructively
notified of the pendency of the declaratory judgment action. See Ackermann v. Union & New
Haven Trust Co., 91 Conn. 500, 508, 100 Atl. 22, 25 (1917).
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3. Another well recognized rule is that generally the courts will not declare future rights. Even
this rule however, has its limits and in cases where all the interested parties are before the
court and where a future event is certain to happen, the court will grant declaration of future
rights. See Shovelton v. Shovelton, 2 Beav. 143, 55 Eng. R. 56 (1863).
4. Another general rule is that the prayer for relief in the complaint shall specify the precise
rights and other legal relations of which a declaration is requested and whether further or
consequential relief is or could be claimed.
Declaratory judgment actions do deter and act as the deterrence factor in that they take your
adversary out of their comfort zone, place all the issues in one litigation and send a necessary message to
perpetrators of fraud and/or fraudulent claims that this carrier will not tolerate such behavior. The
resulting litigation may be brought either in Federal Court or State Court, outside the comfort zone of
your adversary resulting in a quick resolution and a finalization of the controversy.
Courts usually receive declaratory judgment actions in a favorable light and the courts have great
discretion with such actions. See “Declaratory Judgments in New York,” St. John’s Law Review: Vol. 1: Iss.
2, Article 2 by Louis S. Posner (2014).
While a deterrence factor and a clear tool to take your adversary out of their comfort zone,
there are defenses and those defenses consist of: statute of limitations, standing issues and alternative
remedies.
Statute of Limitations
It must be determined in the jurisdiction if there is a prescribed statute of limitation for a
declaratory judgment action. Some states, do not prescribe a general period of limitation for a declaratory
judgment action. Some courts look to the underlying claim and the nature of the relief sought to
determine the applicable period of limitation.
Stated another way, a court focuses on the substance of the action to identify the relationship
out of which the claim arises and the relief sought. When the rights of parties sought to be stabilized in a
declaratory judgment action are, or have been, open to resolution through a particular procedural route
for which a specific limitation period is statutorily provided, then that period generally governs the time
commencement for the declaratory judgment action.
Some jurisdictions have a catch all statute of limitations, usually six years. Such a limitation could
apply in a declaratory judgment action especially when considering the applicability of the declaratory
judgment to an insurance claim. See Vigilant Insurance Co. of America v. Housing Authority, 87 N.Y.2d 36,
40-41 (1995).
Motions to Dismiss
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You may be confronted with a motion to dismiss your declaratory judgment action. The sole
consideration in determining a pre-answer motion to dismiss a declaratory judgment action is whether a
cause of action for declaratory relief is set forth, and not whether the plaintiff is entitled to a favorable
declaration.
Standing
In order to commence a declaratory judgment action, one must have standing. You need to be
interested in the outcome of the claim. A declaratory judgment action thus requires an actual controversy
between genuine disputants that both have a stake in the outcome and may not be used as a vehicle for
an advisory opinion. See Lang v. Hanover Ins. Co., 3 N.Y.2d 350, 355 (2004).
Alternative Remedy
Although a court may dismiss a declaratory judgment action in a proper exercise of discretion, the
mere existence of other adequate remedies does not mandate dismissal. A cause of action for a
declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative
remedy in another form of action such as a breach of contract or injunctive relief. See Ithilien Realty Corp.
v. 180 Ludlow Development LLC, 140 A.D. 3d 621, 1 (1st Dept 2016).
Injunctive Relief
If a court order is required to prevent a party from doing something objectionable now, or in the
future, while the declaratory judgment action is pending, one can seek injunctive relief.
An injunction is a court order requiring a person or business entity to do or cease doing a specific
action. There are two types of injunctions: (1) A temporary restraining order and (2) a preliminary
injunction. It is an extraordinary remedy that courts utilize in special cases where preservation of the
status quo or taking some specific action is required in order to prevent possible injustice. The purpose of
both is to maintain the status quo by preventing a defendant from continuing to act in the manner
complained of. Injunctive relief is discretionary. An equitable remedy and failure to comply with an
injunction may result in being held in contempt.
Injunctive relief is discretionary power of the court in which the court upon deciding that the
parties rights are being violated balances the irreparability of the injuries in the inadequacy of damages if
an injunction were not granted.
III.
Conclusion
The declaratory judgment action by its very nature is a suit which was intended to be used broadly
and as often as possible. The use of this tool does not increase litigation. On the contrary, it results in less
litigation because the issue or controversy has been resolved and does not resurface. Therefore, such
actions can bring a close to litigation more rapidly than individual suits. They permit the resolution of
issues in one litigation that will have an overriding effect on the controversy at hand.
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