Circuit Split: May a State Court Litigant against an Insured Intervene in a Federal Declaratory Judgment Action Brought by Insurer against Insured?

Am. Cas. Co. of Reading, Pa. v. Continental Properties, Inc., 2012 U.S. Dist. LEXIS 21949 (S.D. Ohio Feb. 22, 2012):

There is a split in circuit authority on the issue of whether a state court litigant against an insurance company's insured may intervene in a federal court declaratory judgment action brought by the insurance company against its insured. The Eleventh Circuit has held that a party seeking to intervene under Rule 24(a)(2) must have a "direct, substantial and legally protectable interest" in the subject matter of the litigation. Mt. Hawley Insurance Company v. Sandy Lake Properties, Inc., 425 F.3d 1308, 1311 (11th Cir. 2005) citing Georgia v. United States Army Corps of Engineers, 302 F.3d 1242, 1249 (11th Cir. 2002). Since the state court litigant suing the insurance company's insured had "no legally protectable interest in that insurance policy," his purely economic interest in the declaratory judgment action was insufficient to permit intervention. Id.

In contrast, the Seventh Circuit held in Security Insurance Company of Hartford v. Schipporeit, Inc., 69 F.3d 1377, 1380 (7th Cir. 1995) that a litigant suing an insurance company's insured has an interest in a declaratory judgment action that would be jeopardized if default judgment were entered against the insured.

The Sixth Circuit case law indicates that the circuit has an expansive notion of the interest sufficient for intervention under Rule 24(a)(2). Gutter v. Bollinger, 188 F.3d 394, 398 (6th Cir. 1999). Further, no specific legal or other equitable interest is required to support intervention. 188 F.3d at 399. A close case calls for intervention. Id. Finally, only a minimal showing of possible inadequate representation is required. Id.

Both the Southern District and Northern District of Ohio have held that a state court litigant against an insurance company's insured has a sufficient interest under Rule 24(a)(2) in a federal declaratory judgment action brought by the insurance company against its insured to intervene. Indiana Insurance Company v. Midwest Maintenance, 2000 WL 987829 (S.D. Ohio January 7, 2000); St. Paul Fire & Marine Insurance Co. v. Sumit-Warren Industries Co., 143 F.R.D. 129, 133-35 (N.D. Ohio 1992).

I conclude that Beckett Ridge Communities and Harris Boulevard Communities have a substantial legal interest in the case. I am persuaded that this case can be distinguished by the holdings in United States v. Tennessee and Blount-Hill v. Board of Education on the basis that the economic interests at issue were unrelated to the alleged statutory and constitutional violations in the case. Here, the economic interest is clearly related to the transaction which is the subject of the declaratory judgment action. Beckett Ridge Communities and Harris Boulevard Communities have also demonstrated that their ability to protect that interest may be impaired and that the existing parties do not adequately represent their interests. Plaintiffs are the only source of recovery for movants in the event that their action against Slate Rock is successful. Plaintiffs maintain that this is because of movants' own actions, but that [*13] does not alter the fact that no other source of compensation is available to them. Furthermore, because movants cannot recover from Slate Rock if they succeed on their state court action, Slate Rock does not have a great incentive for vigorously defending this action.

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