Injuried Party Need Not Be Included in Declaratory Judgment Action Between Defendant and Defendant’s Insurer

An injured person who had sued an insured but did not yet have a judgment against the insured was not an indispensable party in a declaratory action between the insurance company and the insured regarding coverage of the accident.

In Tennessee Farmers Mutual Insurance Company v. DeBruce, No. E2017-02078-SC-R11-CV (Tenn. Ct. App. Oct. 16, 209), Christina Wright (“claimant”) had been injured when her vehicle was rear-ended by a car driven by Brandon DeBruce (“insured”). The claimant sued the insured, but the insured failed to inform his insurance company of the suit, which was a requirement of his policy. According to the insurance company, the insured also failed to cooperate in the investigation of potential claims.

Based on his failure to cooperate, the insurance company filed a declaratory judgment action seeking a declaration that it “did not have to provide a defense to DeBruce in the personal injury suit or indemnify him for any damages awarded to Wright.” The claimant was not a party to this suit. The insured failed to respond to the complaint, and the trial court granted a default judgment declaring that the insurance company was not obligation to defend or indemnify the insured in connection with the accident.

Almost two years after the default judgment was entered, the claimant filed a motion to set aside the judgment, asserting that she was “an indispensable party to the declaratory judgment action because she had a direct interest in the outcome of the case.” The trial court denied her motion, but the Court of Appeals reversed, ruling that the claimant “had a sufficiently direct interest in the coverage determination to make her a necessary party to the declaratory judgment action.”

In this opinion, the Tennessee Supreme Court held that the trial court, rather than the Court of Appeals, was correct. The Supreme Court held that “the insurance company and its insured—not the claimant—were necessary parties to the declaratory judgment action.”

In Tennessee, actions for declaratory judgments require that “all necessary parties must be joined.” (internal citation omitted). “Whether a party must be joined in a declaratory judgment action depends on the type of case and the issues involved.” (internal citation and quotation omitted). The Court noted that whether the claimant was an indispensable party here “hinge[d] on whether she had any interest which would be affected by the declaration.” (internal citation omitted).

In the context of an insurance contract, the Court stated that the presumption is that the contract is “for the benefit of the parties to the contract and not for the benefit of third parties.” (internal citations omitted). Those who are not parties to the insurance contract, however, “can become an intended beneficiary of an insurance policy when the claimant obtains a judgment against the insured.” (internal citations omitted). Accordingly, the Court stated that had claimant been “armed with a judgment, [she] would have had a real interest in the contract of insurance—one that the declaratory judgment would affect.” At the time of the declaratory judgment action, however, the claimant had no such judgment against the insured.

The Court reasoned:

[A] claimant whose interest has not been reduced to a judgment against an insured has a remote interest that has not accrued into a real interest in the insurance policy. Having only a remote interest, the claimant cannot bring a direct action against the insurance company to recover damages under the policy because of the insured’s negligence. …Wright’s claim had not been reduced to a judgment and thus she had no interest that would be affected by the declaratory judgment action. Wright’s joinder would not have prevented the default judgment from being entered against DeBruce. Wright’s absence from the litigation did not impede the full termination of the controversy between Tennessee Farmers and DeBruce.

Based on this reasoning, the Supreme Court held that claimant was not a necessary party to the declaratory judgment action, and that the trial court did not abuse its discretion in denying claimant’s motion to set aside the default judgment.