Certain Underwriters at Lloyd's, London v. Kentucky School Boards Association et al

Filing 19

MEMORANDUM OPINION & ORDER: 1. The Defendants' Motion to Dismiss 9 is GRANTED; 2. Lloyds' Petition for Declaratory Judgment is DISMISSED without prejudice; and 3. Because the Court abstains from resolving the coverage issues, and in light of the parties' concessions at the hearing, Lloyds' claim for breach of contract is DENIED as moot. Signed by Judge Gregory F. VanTatenhove on 3/9/2016.(CBD)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
FRANKFORT
CERTAIN UNDERWRITERS at
LLOYD’s, LONDON,

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Civil No. 15-28-GFVT
Plaintiff,
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V.
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MEMORANDUM OPINION
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&
KENTUCKY SCHOOL BOARDS ASSOC., )
ORDER
KENTUCKY SCHOOL BOARDS
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INSURANCE TRUST, and
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BOARD OF TRUSTEES of the
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KENTUCKY SCHOOL BOARDS
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INSURANCE TRUST,
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Defendants.
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*** *** *** ***
This matter is before the Court on Defendants’ motion to dismiss. [R. 9.] The action
itself is ancillary to two related cases currently pending in state court. The underlying lawsuits
concern claims of unjust enrichment, negligence, and negligent misrepresentation on the part of
Defendants related to their recommendation that members of the Kentucky School Boards
Association participate in certain self-insured property, casualty, and worker’s compensation
funds instead of obtaining insurance coverage on the commercial market, and by their receipt of
certain payments to that effect. Plaintiff, Certain Underwriters at Lloyds, London (“Lloyds”),
has been providing a defense to Defendants in the state-court lawsuits subject to a reservation of
rights. After eight months of litigation, Lloyds brought a declaratory judgment action in this
Court seeking a declaratory judgment that it owes no coverage to any of the Defendants in any of
the related state-court litigation and also seeking recovery on a single breach-of-contract claim.
[R. 1.] Defendants move to dismiss Lloyds’ Complaint, arguing that the Court should abstain

from exercising its discretion under the Declaratory Judgment Act, and also arguing that Count
VII of the Complaint is deficient under Federal Rule of Civil Procedure 12(b)(6). [R. 9.] The
Court, having considered the briefing of the parties and the record herein, will GRANT the
motion, for the reasons explained below.
I
Plaintiff, Certain Underwriters at Lloyds, London (“Lloyds”), filed this action under the
Federal Declaratory Judgment Act, 28 U.S.C. §2201(a) (FDJA”), for a determination of whether
it is required to defend and indemnify the Kentucky School Boards Association (“KSBA”),
Kentucky School Boards Insurance Trust (“KSBIT”), and the KSBIT Board of Trustees
(“KSBIT Board”) with respect to two pending actions in Franklin Circuit Court. The first is
Kentucky League of Cities Insurance Services Association, et al. v. Kentucky Department of
Insurance, et al., Case No. 13-CI-1282, and the second is Joseph N. Pope, Jr. v. Kentucky
League of Cities, Inc., et al., Case No. 14-CI-1080. [R. 1 at 2.]
Defendant KSBIT was created by KSBA and certain trustees to provide insurance
coverage through three separate self-insurance funds for workers’ compensation, property and
liability, and unemployment, referred to collectively as the “KSBIT Funds.” [R. 1, ¶¶ 7-8.]
Kentucky law provides for the creation of self-insurance groups who pool their risks for certain
claims. Ky. Rev. Stat. §§ 304.48-30, 304.50-010. Each such group is operated by a board of
trustees who, among other duties, must ensure that there is adequate funding and that claims are
paid promptly. Ky. Rev. Stat. §§ 304-48-140, 304.50-085. According to Lloyds,1 the KSBIT
Funds allegedly operated at a deficit for several years. [R. 1, ¶ 27.] In 2009, KSBIT entered into

The facts related herein are alleged in Lloyds’ Petition and are not disputed by Defendants. There is some indication
that they are based on facts alleged in the related state court lawsuits. [See R. 1 at 7-9.]
1

2

an agreement with the Kentucky League of Cities (KLC) and the Kentucky League of Cities
Insurance Services Association (KLCIS), in which KCL and KLCIS were to manage KSBIT’s
affairs, and KSBIT was required to abide by KLC’s formal recommendations in its capacity as
administrator of KSBIT. [Id., ¶¶ 28-32.]
The claims in the state court lawsuits all arise out of financial deficits in the KSBIT selfinsured funds. In these lawsuits, it is alleged that the KSBIT Board, KLC, and KLCIS
improperly approved and made interest payments on certain Surplus Notes which were part of a
money transfer from KLCIS to KSBIT. [R. 1, ¶¶ 32-34.] As the deficits increased, KSBIT
stopped writing coverage for the KSBIT Funds in 2013. [Id.,¶¶ 34-35.] Consequently, the
Kentucky Department of Insurance (KDOI) instituted proceedings to place the KSBIT Funds
into rehabilitation. [Id., ¶ 37.] On November 5, 2013, KSBIT and others filed a Complaint in
Franklin Circuit Court against the KDOI, and the KDOI then filed two actions for declaratory
judgment in Franklin Circuit Court to obtain approval of its proposed rehabilitation plans. [Id.,
¶¶ 39-40.] These actions were consolidated into Case No. 13-CI-1282, and in May 2014, the
Franklin Circuit Court approved plans to assess former participants in the KSBIT Funds in order
to cure the deficits. [Id., ¶¶ 40-41.] The issues of whether the Surplus Notes must be repaid or
whether interest payments made on the Notes must be refunded remain pending. [Id., ¶ 42.] In
August 2014, Joseph N. Pope, Jr., Deputy Rehabilitator of the KSBIT Funds, filed a separate
action (the “Rehabilitator Complaint”) in Franklin Circuit Court against KSBA, KSBIT and the
KSBIT Board.2 That action continues.

Up to this point, Lloyd’s is providing a defense to KSBA and KSBIT (including the KSBIT Board) in the
Rehabilitator Complaint with a reservation of rights. [R. 9-1 at 2; R. 11 at 3.]
2

3

In March 2012, Lloyds apparently issued an insurance policy to KSBA and KSBIT. [R.
1, ¶¶ 1-2, 15-16; R. 1-1.] In the case before this Court, Lloyds alleges it has no duty, or only a
limited duty, to defend and indemnify KSBA, KSBIT, and the KSBIT Board under various
policy exclusions. [R. 1.] Lloyds additionally alleges that KSBA, KSBIT, and the KSBIT Board
breached the terms of the insurance policy and are liable for damages. [R. 1, Count VII.]
Defendants urge this Court to abstain from exercising jurisdiction under the FDJA and further
argue that Lloyds’ Count VII fails to state a claim upon which relief may be granted. [R. 9-1.]
Subsequent to significant briefing on the motion to dismiss, the Court was advised that
Lloyds is now a defendant in the Franklin Circuit Court action. [R. 12 at 3.] In June 2015, the
state court allowed the Deputy Rehabilitator to amend his complaint in order to pursue a new
count against Lloyds seeking a declaration that Lloyds’ insurance policy provides coverage to
Defendants. [Id.] This Court held a hearing to determine the status of the state court suits,
during which counsel for Lloyds confirmed that the declaratory judgment action in Franklin
Circuit Court is still pending, that the Rehabilitator has filed a motion for summary judgment
requesting a ruling on specific exclusions in Lloyds’ policy, that the motion is fully briefed and
set for a hearing in April 2016, and that the state court in the Rehabilitator’s action is considering
the same coverage issues as the ones before this Court.
II
A
As a threshold matter, the Court must determine if it has subject matter jurisdiction over
Lloyds’ case. See Caudill v. N. Am. Media Corp., 200 F.3d 914, 916 (6th Cir. 2000) (explaining
that the “first and fundamental question presented by every case brought to the federal courts is

4

whether it has jurisdiction to hear a case”) (citations omitted) (internal quotation marks omitted).
The parties do not dispute that this Court has diversity jurisdiction under 28 U.S.C. § 1332(a) as
Lloyds is a citizen of the United Kingdom, Defendants are Kentucky citizens, and the amount in
controversy exceeds $75,000. As the record contains no evidence indicating otherwise, the
Court confirms its subject matter jurisdiction in this matter.
B
The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its
jurisdiction … any court of the United States … may declare the rights and other legal relations
of any interested party seeking such declaration, whether or not further relief is or could be
sought.” 28 U.S.C. § 2201. The exercise of jurisdiction under the Act is not mandatory,
especially when a related case is simultaneously pending in the state court. Brillhart v. Excess
Ins. Co., 316 U.S. 491, 494 (1942); see also Bituminous Cas. Corp. v. J & L Lumber Co., Inc.,
373 F.3d 807, 812 (6th Cir. 2004). Instead, the Act “confers discretion on the court rather than
an absolute right upon the litigant.” Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995). In
other words, although the district court has jurisdiction under the Declaratory Judgment Act, it is
“under no compulsion to exercise that discretion.” Brillhart, 316 U.S. at 494. Indeed,
considerable discretion is afforded to the district courts as to whether to exercise jurisdiction “in
the first instance, because facts bearing on the usefulness of the declaratory judgment remedy,
and fitness of the case for resolution, are peculiarly within their grasp.” Id. at 289.
Therefore, this Court must determine whether this case is appropriate for such relief. In
doing so, the Court should determine primarily whether “the judgment will serve a useful
purpose in clarifying and settling the legal relationships in issue,” and whether “it will terminate

5

and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.”
Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F. 2d 323, 326 (6th Cir. 1984) (citations
omitted). In making this determination, the Sixth Circuit has identified the following five factors
to guide the district courts’ exercise of discretion:
(1)

Whether the declaratory action would settle the controversy;

(2)

whether the declaratory action would serve a useful purpose in clarifying the
legal relations in issue;

(3)

whether the declaratory remedy is being used merely for the purpose of
“procedural fencing” or “to provide an arena for res judicata”;

(4)

whether the use of a declaratory action would increase the friction between
our federal and state courts and improperly encroach upon state jurisdiction;
and

(5)

whether there is an alternative remedy which is better or more effective.

Scottsdale v. Flowers, 513 F.3d 546, 554 (6th Cir. 2008); see also Western World Ins. Co. v.
Hoey, 773 F.3d 755, 759 (6th Cir. 2014). These factors are useful benchmarks and must be
considered, but the ultimate decision about whether to accept jurisdiction is left to the “unique
and substantial” discretion of the Court. Id. at 563 (quoting Wilton, 515 U.S. at 286). The Sixth
Circuit has not assigned weights to the factors, and the factors are not always equal. Western
World Ins. Co., 773 F.3d at 759. In considering them, courts should review all the relevant facts
“within the considerations of efficiency, fairness, and federalism.” Id.
1
With respect to the first factor, whether the declaratory action would settle the
controversy, the Flowers court noted a split in precedent regarding how to analyze this factor “in
the context of an insurance company’s suit to determine its policy liability.” Flowers, 513 F.3d

6

at 555. According to the court, “[o]ne set of cases has concluded that a declaratory relief action
can settle the insurance coverage controversy not being addressed in state court, even though it
will not help resolve the underlying state court action.” Id. (citing cases). “A different set of
cases, however, has found that, while such declaratory actions might clarify the legal relationship
between the insurer and the insured, they do not settle the ultimate controversy between the
parties which is ongoing in state court.” Id. (citing cases). The Sixth Circuit has suggested that
this split “might reflect both ‘competing policy considerations of consolidating litigation into one
court versus permitting a party to determine its legal obligations as quickly as possible,’ as well
as differences in the factual circumstances presented by different cases.” Western World, 773
F.3d at 760 (quoting Flowers, 513 F.3d at 555-56).
Here, the factual circumstances support abstention regardless of the split in authority.
While it is true that the Sixth Circuit has upheld district courts that retained jurisdiction if the
action would settle the discrete controversy between the parties before it, the plaintiff in those
cases was not a party to the state court action, and therefore the same coverage issue would not
be addressed in the state court. See, e.g., Flowers, 513 F.3d at 556; Northland Ins. Co. v. Stewart
Title Guar. Co., 327 F.3d 448, 454 (6th Cir. 2003). “Where the federal court plaintiff is not a
party in state court and the issue of insurance coverage is not before that [state] court, the federal
action could sufficiently settle the controversy between the parties.” QBE v. Green, 2014 WL
7359043, at *2 (E.D.Ky, Dec. 23, 2014) (citing Flowers, 513 F.3d at 556). Here, however,
Lloyds is a party in the state court action brought by the Rehabilitator, and Lloyds concedes that
the same coverage issues are being litigated in that suit. On the other hand, “where the state
court plaintiff is not a party in federal court, a declaratory judgment would not settle the

7

controversy because the federal court’s judgment would not be binding as to the state court
plaintiff.” Id. Here, the Rehabilitator is not a party in the federal case. Accordingly, a
declaratory judgment by this Court will not settle the underlying controversy under either the
first or second line of precedent because Lloyds is also a party in the state court action, the
Rehabilitator is not before this Court, and the scope of insurance coverage is also at issue in state
court. See Flowers, 513 F.3d at 556.
Moreover, regardless of whether Lloyds is a party in the state court proceeding, if
resolution of the declaratory judgement claim would require the federal court “to engage in factfinding that may affect the underlying action,” the court should abstain. Auto Club Property v.
Denton, 2015 WL 4484173, *4 (W.D. Ky., July 22, 2015). Thus, perhaps even more importantly,
this Court’s decision cannot settle the ultimate controversy because determining the applicability
of the exclusions at issue would require the Court to make factual determinations regarding the
allegations that serve as the basis for the asserted liability in the state court suit. In particular,
because of the ongoing declaratory judgment action in state court, a judgment by this Court
would do little, if anything, to resolve the claims pending before the state court. The underlying
tort actions have been proceeding in Franklin Circuit Court for several years. The parties have
engaged in extensive discovery and briefing in that court. The Rehabilitator has brought a
declaratory judgment action against Lloyds in the state court, and the state court is currently
considering the same issues presented to this Court. Thus, instead of resolving the controversy,
the potential for inconsistent coverage obligations would further complicate it. See Bituminous
Cas. Corp., 373 F.3d at 813-14 (abstaining from jurisdiction when “[t]he federal court could
either reach the same conclusion as the state court, in which case the declaration would have

8

been unnecessary and the federal litigation a waste of judicial resources, or the federal court
could disagree with the state court, resulting in inconsistent judgments.”); Therefore, the first
factor weights in favor of abstention in this case. See Auto-Owners v. Egnew, 2016 WL 310365
*6 (E.D.Ky., Jan. 25, 2016); Bituminous Cas. Corp. v. Kinzer Drilling Co., 2014 WL 5685541,
*3 (E.D. Ky. Nov. 4, 2014) (finding that because of “policy considerations for encouraging
consolidated litigation in one court over piecemeal litigation of separate claims in separate
courts,” retaining jurisdiction would not serve a useful purpose when the litigation would not
settle the broader controversy between the parties).
2
The second factor, whether the declaratory judgment action would serve a useful purpose
in clarifying the legal relations in issue, “is closely related to the first factor and is often
considered in connection with it. Indeed, it is almost always the case that if a declaratory
judgment will settle the controversy, then it will clarify the legal relations in issue.” Flowers,
513 F.3d at 557 (citations omitted). The concern here is whether the federal declaratory
judgment will resolve, “once and finally, the question of the insurance indemnity obligation of
the insurer.” Id. at 557. Here, because of the Rehabilitator action, and because the Rehabilitator
has not been made a party to the instant action in federal court, it is questionable whether any
judgment in this Court would be binding as to him, and thus a decision by this Court may not
resolve the controversy among the parties involved in this case. See Bituminous Cas. Corp., 373
F.3d at 814; see also Travelers Indem. Co. v. Bowling Green Prof'l Associates, PLC, 495 F.3d
266, 272 (6th Cir. 2007) (finding that first two factors weighed against federal jurisdiction when
there were parties who could be affected by the federal court’s judgment but were not joined as

9

parties in the federal district court’s action); Green, 2014 WL 7359043, at *2 (“where the state
court plaintiff is not a party in federal court, a declaratory judgment would not settle the
controversy because the federal court’s judgment would not be binding as to the state court
plaintiff”). Retaining jurisdiction would risk inconsistent rulings concerning Lloyds’ coverage
obligations, and therefore would not bring lasting clarity to the legal relationships at issue.3
To the extent that Lloyds argues the instant suit could provide needed clarification in
order to prevent being “forced into a waiting period of legal uncertainty respecting the
obligations it has incurred in its policy,” Western World, 773 F.3d at 760-61, because the
coverage dispute in the state court is already fully briefed and a hearing is scheduled for April
2016, a judgment by this Court would not clarify Lloyds’ obligations in a more timely fashion.
To resolve the instant dispute in this Court would take significantly longer because discovery has
not begun and the federal record is “virtually devoid of facts about the underlying tort actions”
sufficient to support the Court’s determination. Brotherhood Mut. Ins. Co. v. United Apostolic
Lighthouse, Inc., 200 F. Supp. 2d 6689, 693 (E.D. Ky. 2002). Indeed, both factors one and two
in this case are compounded by the lack of a factual record, without which this Court cannot
adequately determine the extent of Lloyds’ obligations anyway. See Travelers, 495 F.3d 266 at
273. The question of Lloyds’ obligations will be resolved much sooner by the state court. Thus,
the Court cannot see that a federal declaratory judgment action would be more “useful” in
clarifying the legal relations at issue than would the state declaratory action. As explained
above, given the complexity and factual overlap of the issues in the related state court suits, the
declaratory judgment action will not resolve the ultimate dispute, and rather than clarifying

Moreover, the five factors must be balanced against each other, and “clearly factor one – resolving the ultimate
dispute – should weigh more heavily than factor two – just resolving some legal relation at issue.” Grange Mut. Cas.
Co. v. Safeco Ins. Co. of Am., 565 F. Supp. 2d 779, 788 (E.D.Ky. 2008).
3

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anything, may only delay and complicate matters further. Therefore, this second factor also
weighs in favor of abstention.
3
The third factor asks “whether the use of the declaratory judgment action is motivated by
‘procedural fencing’ or likely to create a race for res judicata.” Flowers, 513 F.3d at 558. It “is
meant to preclude jurisdiction for ‘declaratory plaintiffs who file their suits mere days or weeks
before the coercive suits filed by a ‘natural plaintiff’ and who seem to have done so for the
purpose of acquiring a favorable forum.” Id. (quoting AmSouth Bank v. Dale, 386 F.3d 763, 788
(6th Cir. 2004)). A primary consideration is “whether the declaratory plaintiff has filed in an
attempt to get her choice of forum by filing first.” Id. When the declaratory judgment “plaintiff
has filed his claim after the state court litigation has begun, we have generally given the plaintiff
‘the benefit of the doubt that no improper motive fueled the filing of [the] action.’” Id. (quoting
Bituminous, 373 F.3d at 814). Here, Lloyds filed the instant suit at least eight months after the
state court litigation had begun, and there is no evidence in the record of an improper motive in
doing so. Therefore, the third factor weighs against abstention. See Flowers, 513 F.3d at 559,
563 (indicating that absence of improper motive by declaratory judgment plaintiff points toward
exercising jurisdiction); Bituminous, 373 F.3d at 814.
4
The fourth factor requires the Court to consider whether the declaratory action would
increase the friction between federal and state courts. The “mere existence” of an ongoing
related proceeding in state court “is not determinative of improper federal encroachment upon
state court jurisdiction.” Allstate Ins. Co. v. Green, 825 F.2d 1061, 1067 (6th Cir. 1987).

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However, the Supreme Court has cautioned that “where another suit involving the same parties
and presenting opportunity for ventilation of the same state law issues is pending in state court, a
district court might be indulging in gratuitous interference, if it permitted the federal declaratory
action to proceed.’” Flowers, 513 F.3d at 559 (quoting Wilton, 515 U.S. at 283). To avoid that
situation, three sub-factors should be considered:
(1) whether the underlying factual issues are important to an informed resolution
of the case;
(2) whether the state trial court is in a better position to evaluate those factual issues
than is the federal court; and
(3) whether there is a close nexus between the underlying factual and legal issues
and state law and/or public policy, or whether federal common or statutory law
dictates a resolution of the declaratory judgment action.
Id. at 560. This fourth factor primarily considers whether the state court is likely to be in a better
position to evaluate the factual issues than the federal court. See Western World, 773 F.3d at
761. (“The fourth factor and its subfactors reflect concerns about principles of federalism.”).
a
The first sub-factor “focuses on whether the state court’s resolution of the factual issues
in the case is necessary for the district court’s resolution of the declaratory judgment action.”
Flowers, 513 F.3d at 560. Sometimes declaration of insurance coverage can be resolved as a
matter of law, and factual findings by a state court are unnecessary to that determination. Id.
(citing Northland Ins. Co., 327 F.3d at 454). In such cases, federal jurisdiction may be suitable.
See id. However, if the issues raised in the federal case require making factual findings that
might conflict with similar findings in state court, “exercise of jurisdiction would be
inappropriate.” Id.

12

Defendants argue that a declaratory judgment by this Court depends on the application of
facts to the insurance policy, and thus the facts established in the state court proceedings will
affect any determination about Lloyds’ obligations. [R. 9-1 at 6-7.] Although Lloyds contends
the coverage issues may be determined as a matter of law, counsel for Lloyds conceded at the
hearing that the same coverage issues are presently before the state court, and therefore a
possibility of conflicting judgments exists. Because the primary concern with this sub-factor is
that of comity, a federal court in this situation should avoid conflicting factual determinations
with the state court. Flowers, 513 F.3d at 560. Thus, if a federal declaratory judgment action
involves the same underlying factual issues that are pending in a related state court action, the
federal court should generally abstain so as to avoid subjecting the parties to competing rulings.
See Travelers, 495 F.3d at 272; Bituminous, 373 F.3d at 816.
Here, as explained above, not only would determining the scope of coverage depend to
some extent on the applicability of the policy exclusions to the facts of the underlying tort suit,
but also the same coverage issues are before the state court in the Rehabilitator’s suit. Moreover,
while the state court proceedings have involved extensive discovery and have developed a record
spanning nearly two years, resolution in this Court will be further complicated by the
comparative lack of a factual record. See Allstate Ins. Co. v. Mercier, 913 F.2d 273, 278 (6th
Cir. 1990) (“without any factual record, there is a real possibility that the district court’s
declaration of no coverage would conflict with a state court’s determination of the coverage
question after being informed of the facts”). Accordingly, the strong likelihood of conflicting
rulings and inconsistent judgments with the state court weighs in favor of abstention. See
Denton, 2015 WL 4484173, at *5 (noting that when the federal court must engage in fact-finding

13

concerning similar issues as those before the state court, the federal court’s exercise of
jurisdiction will “encroach on the state court’s jurisdiction”).
b
The second sub-factor also weighs in favor of abstention. This sub-factor “focuses on
which court, federal or state, is in a better position to resolve the issues in the declaratory action.”
Flowers, 513 F.3d at 560. State courts are generally better suited to resolve novel questions of
state law. Id. Here, Defendants offer no showing that Kentucky law is unsettled in this area, or
that any novel questions of insurance law are involved.
Novelty, however, is not the only concern. The Sixth Circuit has found that “issues of
insurance contract interpretation are questions of state law with which Kentucky state courts are
more familiar and, therefore, better able to resolve.” Travelers, 495 F.3d at 273 (quoting
Bituminous, 373 F.3d at 815). The instant case involves only questions of state law such as
insurance contracts, which, in the interests of comity and federalism, are better interpreted by the
Kentucky state courts. Bituminous, 373 F.3d at 815. Thus, even if no novel issues of state law
are involved, the federal court is not necessarily in a “better position” to resolve these issues than
the state court because even if the Court could hear the case there is no reason that the Court
must hear the case. See Flowers, 513 F.3d at 560. When both forums would apply Kentucky
state law, “because Kentucky law is controlling,” the “Kentucky courts are in the better position
to apply and interpret its law on [insurance contract] issues.” Travelers at 272.
This need not always be the result when insurance contracts are in dispute. “[W]hen an
insurance company is not a party to the state court action, and neither the scope of the insurance
coverage nor the obligation to defend [is] before the state court . . . a decision by the district

14

court on these issues would not offend principles of comity.” Flowers, 513 F.3d at 560 (citing
Northland, 327 F.3d at 454). Here, however, Lloyds is a party to the state action, and the factual
record on the same issues concerning scope of coverage is better developed there. Thus, the
Franklin Circuit Court “is in [at least] a marginally better position to decide the issues in this
case because all issues are before the state court and involve questions of state law.” Denton,
2015 WL 4484173, at *6 (citation omitted); see also Travelers, 495 F.3d at 273.
c
The third sub-factor “focuses on whether the issue in the federal action implicates
important state policies and is, thus, more appropriately considered in state court.” Flowers, 513
F.3d at 561. With respect to this final sub-factor, the Sixth Circuit has held that
[i]ssues of insurance contract interpretation are questions of state law with which
the Kentucky state courts are more familiar and, therefore, better able to resolve.
The states regulate insurance companies for the protection of their residents, and
state courts are best situated to identify and enforce the public policies that form
the foundation for such regulation.
Flowers, 513 F.3d at 561 (internal citations and quotation marks omitted). The Sixth Circuit also
has recognized that concerns about comity and federalism concerning state policy “frequently
appl[y] in cases of insurance contract interpretation and we have held on a number of occasions
that a district court should stay or dismiss complaints filed by insurance companies seeking a
declaratory judgment as to their underlying state court lawsuits.” Travelers, 495 F.3d at 273
(collecting cases); see also U.S. Fire Ins. Co. v. Albex Aluminum, Inc., 161 F. App’x 562, 565-66
(6th Cir. 2006) (unpublished table decision) (noting that the possibility of “friction” with the
state courts is increased where a case turns on questions of state law that “arise in a field [that] is

15

largely reserved to the states and thus implicates public policy considerations that form the
foundation of state regulation of insurance.”).
Because the instant case centers on the interpretation of an insurance contract, Lloyds
concedes that this sub-factor either weighs in favor of abstention or is at least neutral [R. 11 at
13], and the Court agrees. Even though this Court is capable of weighing such public policy
considerations, “the Sixth Circuit’s precedent unequivocally states that a Kentucky state court is
better situated to handle this task.” Egnew, 2016 WL 310365, at *8. Moreover, because this
case was brought pursuant to the Court’s diversity jurisdiction, and neither federal common law
nor federal statutory law apply to the substantive issues presented, Kentucky courts are in the
better position to evaluate and enforce the state law and public policy involved. Bituminous, 373
F.3d at 816; see also Travelers, 495 F.3d at 273 (“This is not a case where federal law will come
into play, and, therefore, a state court forum is preferable.”). Therefore, the third sub-factor also
weighs in favor of abstention.
In sum, all three sub-factors oppose jurisdiction. Given the extensive litigation taking
place in the state courts, and the extensive overlap of factual determinations, this is clearly a
situation in which the state court suit presents the opportunity for “ventilation” of the same state
law issues, and therefore the Court should abstain from jurisdiction. See Wilton, 515 U.S. at 283;
Travelers, 495 F.3d at 273 (concluding that a “close nexus between the underlying factual issues
and state law and public policy favor a decision by the state court instead of the federal court”).
5
Finally, the Court considers the fifth factor – whether there is an alternative remedy that
is better or more effective than a federal court ruling. See Flowers, 513 F.3d at 554. Lloyds

16

clearly has alternative remedies. One such alternative is to seek a declaratory judgment in state
court, which would allow Lloyds to seek the same relief either alone or with other relief. See
Ky. Rev. Stat. § 418.040. Proceeding in state court would have the advantage that “Kentucky
courts might also [be] able to combine the two actions so that all issues could be resolved by the
same judge,” which is generally considered a preferable option. Flowers, 513 F.3d at 562.
Especially in the instant case, because there is already a declaratory judgment action pending, the
state court remedy is likely the superior one.
Although Lloyds contends that the posture of this case presents a situation in which
diversity jurisdiction would be particularly appropriate, in light of the fact that it is a foreign
defendant who may be required to replenish funds for school boards around the state [R. 11 at
14-15], Lloyds does not present any evidence of bias in the state court. “We question the need
for . . . declaratory judgments in federal courts when the only question is one of state law and
when there is no suggestion that the state court is not in a position to define its own law in a fair
and impartial manner.” Bituminous, 373 F.3d at 816-17 (quoting Am. Home Assur. Co. v. Evans,
791 F.2d 61, 63 (6th Cir. 1986) (internal quotation marks omitted)). Moreover, “declaratory
judgment actions seeking an advance opinion on indemnity issues ‘should normally be filed, if at
all, in the court that has jurisdiction over the litigation which gives rise to the indemnity
problem.’” Grange, 565 F.Supp.2d at 791 (quoting Bituminous, 373 F.3d at 812). When related
actions are filed in two separate courts, “confusing problems of scheduling, orderly presentation
of fact issues and res judicata are created.” Id. at 791 (quoting the same).
Alternatively, Lloyds could presumably file an indemnity action after the underlying state
action has been resolved. See Flowers, 513 F.3d at 562. An indemnity action is generally

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considered an inferior alternative to the federal declaratory judgment action when the plaintiff
would have to join the underlying state action and wait until its conclusion to obtain resolution of
its obligations. Flowers, 513 F.3d at 562. Here, however, Lloyds is already a party in the
Rehabilitator suit pending in Franklin Circuit and there would be no further delay in clarifying its
status. Even if some delay did occur, the state forum is still not necessarily an inferior forum to
the federal court, particularly when the state court is in the midst of resolving related issues, as is
the case here. See id. Indeed, if this Court were to retain jurisdiction, the delay would likely be
much longer. Therefore, on balance, the fifth factor also weighs in favor of abstention. See
Travelers, 495 F.3d at 273 (upholding district court’s determination that fifth factor weighed
against federal discretionary jurisdiction when insurers could utilize Kentucky’s declaration of
rights procedure in state court or could file an indemnity action); see also Bituminous, 373 F.3d
at 816 (finding a superior alternative remedy exists when a party could bring a declaratory
judgment action in the “same court that will decide the underlying tort action” and when “the
issues presented involve questions of state law only”).
III
Federal courts are courts of limited jurisdiction, and they are “particularly reluctant to
entertain federal declaratory judgment actions premised on diversity jurisdiction in the face of a
previously filed state-court action.” Adrian Energy Associates v. Mich. Public Service Comm.,
481 F.3d 414, 421 (6th Cir. 2007). In the case at hand, only the third factor weighs in favor of
retaining jurisdiction while the other four factors point toward abstention. This assessment is
supported by the overarching principles concerning declaratory judgment actions such as the
declaratory judgment’s potential usefulness, and whether it will “terminate” the uncertainty and

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controversy giving rise to the dispute. Grand Trunk, 746 F.2d at 326. As explained above,
because Lloyds is also a party to the state court action, while the Rehabilitator is not a party to
the instant suit, and because of the significant overlap of issues and factual determinations with
the state court proceedings, this Court’s exercise of jurisdiction will not serve any useful
purpose, nor will it provide certainty to the parties concerning their legal obligations. If
anything, retaining jurisdiction will only serve to delay ultimate resolution and cause the parties
to litigate on two fronts, which, given the lack of factual record in the federal case and the
advanced posture of the related state court suits, would not promote considerations of efficiency
or of federalism. See Western World, 773 F.3d at 759. Accordingly, and in reliance on the
Court’s “unique and substantial” discretion, Flowers, 513 F.3d at 563, it is hereby ORDERED
as follows:
1.

The Defendants’ Motion to Dismiss [R. 9] is GRANTED;

2.

Lloyds’ Petition for Declaratory Judgment is DISMISSED without prejudice;

3.

Because the Court abstains from resolving the coverage issues, and in light of the

and

parties’ concessions at the hearing, Lloyds’ claim for breach of contract is DENIED as moot.
This the 9th day of March, 2016.

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