How should federal district courts determine the amount in controversy in declaratory judgment actions brought by insurance companies? Should they rely on the face value of the policy at issue, or the amount of the claim against the insurer? A recent decision by a federal district court in Alabama analyzed the issue.

The Case

In 2016, a security guard at the Calhoun Hunting Club and Lounge in Letohatchee, Alabama, allegedly fired five to six shots into a car occupied by Nakia Rivers and Tiffany Miller. Ms. Rivers was killed in the incident and her estate brought claims against, among others, the club and its owner, Terry Baity.

Pursuant to a commercial liability insurance policy, Scottsdale Insurance Company paid $300,000, the full aggregate limit of the policy, in settlement of the estate's claims against the club.

After the insurance company settled with Ms. Rivers' estate, Ms. Miller sued the club and Mr. Baity, seeking an unspecified amount of compensation for severe mental anguish, emotional distress, and damages to her vehicle. She also included a claim for punitive damages in an unspecified amount. She did not name Scottsdale as a defendant.

Scottsdale Company then filed a lawsuit in a federal district court in Alabama, seeking a declaration that it had paid the full $300,000 sum of the general aggregate limit of its policy with the club and, therefore, that it had no further duty to defend or indemnify the club or Mr. Baity in connection with Ms. Miller's suit.

Mr. Baity and Ms. Miller moved to dismiss Scottsdale's action for lack of subject matter jurisdiction, claiming that Scottsdale's case was not properly in federal court because Ms. Miller was not claiming over $75,000 in her action.

For its part, Scottsdale argued that the face value of its policy – $300,000 – should be considered in determining the amount in controversy.

The District Court's Decision

The district court granted the motion to dismiss.

In its decision, the district court explained that the face value of an insurance policy controlled for purposes of determining the amount in controversy only where the validity of the policy was disputed or the value of the underlying claims exceeded the policy limits.

This principle, the district court continued, made sense because, in both of those situations, the face value of the entire policy was “actually in controversy.” The district court reasoned that, in the case of a dispute about the validity of the entire policy, the face value was in controversy because a judicial determination as to the entire policy's validity would settle whether the insured had a right to coverage in the full amount stated in the insurance contract. It added that, in the case of underlying claims that exceeded the policy limits, the face value was in controversy because, if the claimant was successful, the insured would look to the insurer for indemnification in the full amount stated in the insurance contract.

However, the district court continued, where the applicability of an insurance policy to a particular occurrence was at issue, the jurisdictional amount in controversy was measured “by the value of the underlying claim – not the face amount of the policy.”

That was because, the district court reasoned, the full amount of the policy was “not being sought by the injured party,” so the full amount was “not actually in controversy.”

The district court observed that, in this case, the face value of $300,000 was not actually in controversy given that Scottsdale already had discharged its insurance obligations to the club with respect to the 2016 shooting when it tendered the full amount of the $300,000 aggregate policy limit in satisfaction of Ms. Rivers' estate's claims, and the validity of the insurance contract was not in dispute.

All that remained in controversy, the district court said, was Ms. Miller's claims. It concluded that the value of those claims – not the face value of the Scottsdale policy – was the measuring stick for the amount in controversy.

The case is Scottsdale Ins. Co. v. Calhoun Hunting Club and Lounge, No., 2:18cv475-MHT (M.D. Ala. Dec. 26, 2018). Attorneys involved include: For Scottsdale Insurance Company, Plaintiff: Arthur Grady Williams, IV, LEAD ATTORNEY, Phelps-Dunbar LLP, Mobile, AL; Jennifer R. Kretschmann, LEAD ATTORNEY, Phelp Dunbar LLP, New Orleans, LA; William Eugene Shreve, Jr., LEAD ATTORNEY, Phelps Dunbar LLP, Mobile, AL. Calhoun Hunting Club and Lounge, Defendant, Pro se, Letohatchee, AL. For Terry Baity, Defendant: James Robert Cooper, Jr., LEAD ATTORNEY, Attorney at Law, Montgomery, AL; Jerry Laurance Thornton, LEAD ATTORNEY, Law Offices of Jerry L. Thornton, Hayneville, AL.