South Carolina Federal Judge Finds that Interpretation of CGL Policies is an Issue for the State Courts
Interestingly, in an August 29, 2011 decision in South Carolina District Court, Charleston Division (Auto Owners v. Retreat at Edisto), Judge Norton granted a motion to dismiss a declaratory judgment action primarily because the interpretation of what constitutes an "occurrence" in a CGL policy is best addressed by South Carolina Courts. In addition, the fact that the underlying construction case was pending in state court seemed to factor into the decision. South Carolina attorney, Morgan Templeton, who argued in opposition to the motion to dismiss at the hearing, explained that Judge Norton was reluctant to weigh in on the definition of occurrence in a CGL policy given the numerous decisions of the South Carolina Supreme Court on the issue.
Declaratory judgment actions are often filed in federal court requesting a determination of the rights and responsibilities of the parties with regard to insurance coverage. However, Judge Norton pointed out that the power granted to district courts by the Federal Declaratory Judgment Act is considered nonobligatory and discretionary. In particular, when a related action in pending in state court, the federal court may abstain from exercising jurisdiction over state-law claims.
Looking to factors outlined by the Fourth Circuit when related state court litigation is pending, Judge Norton held that the issues raised in the declaratory judgment can be "more efficiently resolved in the state court where the action is pending." Specifically, Judge Norton noted that "the State of South Carolina has an overwhelming interest in having its courts decide issues related to insurance coverage because those issues are governed purely by South Carolina law." Judge Norton went on to say that he "cannot imagine an issue creating more federal and state court 'entanglement' than the determination of what constitutes an 'occurrence' in a CGL policy under South Carolina law."
A motion to reconsider the decision was denied. Given the propensity of parties looking to resolve coverage issues to file a declaratory judgment action in federal court, it will be interesting to see if other South Carolina District Court judges will follow Judge Norton's lead and will dismiss these actions so that they can be resolved in state court.