Insurance companies often prefer to litigate insurance coverage issues in federal courts. There are a number of reasons for this. First, well-founded or not, there is a general perception that the federal bench is more accustomed to addressing the complex legal issues that can sometimes arise in insurance coverage disputes. Second, while insurance coverage litigation is often adjudicated on dispositive motions, where there is a factual dispute to be resolved, the federal courts offer a more diverse jury pool, an important factor where the state court jury pool is perceived as unfriendly to insurers. Finally, litigation in federal court insulates an insurer from any perceived local bias in favor of a local insured.

Insurance coverage litigation usually ends up in federal court in two ways. First, assuming there is a basis for diversity jurisdiction under 28 U.S.C. Section 1332, an insurer seeking adjudication of a coverage dispute can file an action in federal court asking the court to make a declaration of its rights and obligations under the insurance policy. Alternatively, where an insurer has been sued by its insured in state court, and again, where there is a basis for diversity jurisdiction under 28 U.S.C. Section 1332, an insurer can remove the action to federal court under 28 U.S.C. Section 1441. However, the fact that the litigation starts in federal court or is removed to federal court doesn't necessarily mean it will stay there. Due to the nature of the federal declaratory remedy and principles of comity, an insurer's invocation of federal jurisdiction is often challenged.

The Federal Declaratory Judgment Act, 28 U.S.C. Section 2201 et. seq., authorizes any court of the United States to declare the rights and other legal relations of any interested party seeking such declaration. This confers discretionary, rather than compulsory, jurisdiction on the federal courts, as in Brillhart v. Excess Insurance, 316 U.S. 491, 494, 62 S. Ct. 1173, 1175 (1942); Wilton v. Seven Falls, 515 U.S. 277, 279, 115 S. Ct. 2137, 2139 (1995). Over the years, the U.S. Court of Appeals for the Third Circuit has identified a series of factors for district courts to consider in determining whether to exercise that discretion. (See Reifer v. Westport Insurance, 751 F.3d 129 (3d Cir. 2014).) The court has also addressed the question both where there are parallel state proceedings pending, State Auto Insurance v. Summy, 234 F.3d 131, 131 (3d Cir. 2000), and where no parallel state proceedings exist. In the latter circumstance, a rebuttable presumption arises in favor of jurisdiction.