Injury Plaintiff Indispensable Party in Insurer / Insured Dispute

A person who was injured in a car accident with an insured party and who had filed suit against the insured party was an indispensable party in a declaratory judgment action between the insured and his insurer regarding coverage of the accident.

In Tennessee Farmers Mutual Insurance Company v. DeBruce, No. E2017-02078-COA-R3-CV (Tenn. Ct. App. Aug. 9, 2018), plaintiff was injured in a car accident with defendant and filed a personal injury claim against defendant. Plaintiff’s counsel notified defendant’s insurance company of the pending lawsuit in January 2015, but defendant never notified the insurer that the lawsuit was filed. In March 2015, the insurer filed a declaratory judgment action against defendant, asserting that his failure to inform them of the claim and cooperate in an investigation amounted to a breach of his policy. Insurer sought a declaratory judgment that “it was no longer required to defend or indemnify defendant in [plaintiff’s] lawsuit against him because of his breach of the policy’s requirements.”

Defendant never responded to the declaratory judgment complaint, and a default judgment was entered in June 2015. In March 2017, plaintiff filed a motion to set aside the declaratory judgment on the basis that “she was an indispensable party to the declaratory judgment action because she had a direct interest in its outcome, as the judgment leaves [defendant] without the means to satisfy or defend himself in the [personal injury] proceedings.” Plaintiff asked that the judgment be set aside as void. The trial court denied plaintiff’s motion, finding that plaintiff was “at most, an incidental beneficiary,” and that while she “had an interest affected by the outcome of the case,” her “rights rise no higher than the rights of [defendant] which were negated by his failure to cooperate.” The Court of Appeals disagreed and vacated the declaratory judgment.

The Declaratory Judgments Act states that “when declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceedings.” (quoting Tenn. Code Ann. § 29-14-107(a)). The Court of Appeals pointed out that a very similar case was heard by the Tennessee Supreme Court in 1941, wherein injured bus riders had sued the transit company, the transit company failed to notify its insurance company of the suit, and the insurance company subsequently requested a declaratory judgment that the insurance policy had been breached and it had no duty to indemnify. The Tennessee Supreme Court therein held that “the injured parties who had filed the original personal injury claim were necessary parties and indispensable to the declaratory judgment action regarding the insurance company’s duty to indemnify.” (citing Commercial Cas. Ins. Co. v. Tri-State Transit Co. of La., 146 S.W.2d 135 (Tenn. 1941)).

Analyzing the instant case, the Court of Appeals pointed out that “Tennessee law requires automobile drivers to maintain acceptable proof of financial responsibility,” and that this requirement “clearly contemplates that most drivers will comply by purchasing liability insurance.” (internal citations omitted). While the Court rejected plaintiff’s argument that the “Declaratory Judgments Act requires the joinder of all parties who claim an interest that might be affected by the declaratory judgment regardless of the directness or proximity of their claim,” it ruled that plaintiff here was an indispensable party:

[W]e determine that the mandatory nature of liability insurance or other proof of financial responsibility renders the interest of an injured motorist sufficiently direct so as to make that motorist a necessary party to a declaratory judgment action on the issue of coverage between a defendant tortfeasor and the tortfeasor’s insurer.

(internal citation omitted).

Because plaintiff was an indispensable party, the trial court did not have subject matter jurisdiction to render a declaratory judgment and the judgment was vacated. Of note, the Court specifically stated that the consideration of whether plaintiff’s inclusion would affect the result of the case was irrelevant to whether she was an indispensable party. The Declaratory Judgments Act “requires the jointer of all parties who have or claim any interest which would be affected by the declaration[, and] this is a qualification independent from whether a party has material evidence to contribute.”

Although the Court of Appeals disagreed with the parties’ description of this case as one of first impression, this issue had apparently not been litigated in Tennessee since 1941. The finding that an injured motorist is an indispensable party to a declaratory judgment between an insurance company and insured is an important holding which plaintiff’s attorneys need to be aware of.