Conversion of State-Law Declaratory Judgment Actions Concerning First-Party Coverage Disputes into Federal Declaratory Judgment Actions Is Not Required Upon Removal

Addressing the thorny issue of whether a state-law declaratory judgment action had to be converted into a federal cause of action under 28 U.S.C. § 2201-2202 to defeat remand to state court, a federal court in Florida recently held the lawsuit was properly removed to federal court and that it did not have to be converted into a federal cause of action. Even if it did, the court determined that the insured’s claim clearly satisfied federal standards.

In Realbook, LLC v. RSUI Indemnity Company, No. 2:24-CV-407-JES-KCD, 2024 WL 4002988 (M.D. Fla. Aug. 30, 2024), the carrier afforded coverage for the loss to the insured’s property caused by Hurricane Ian. The insured disputed the carrier’s calculation of the loss. The insured filed a Notice of Intent to Initiate Litigation, contending it was owed an additional $500,000.00. The insured filed a single-count petition for declaratory relief in state court pursuant to section 86.011, Florida Statutes. Summarily, the insured sought a declaration that its calculation of the loss was correct and that the carrier’s was wrong. In its pleading, the insured alleged that it suffered damages in excess of the carrier’s calculation of the loss and that it is owed at least $500,000.00 more than the amount calculated by the carrier. After propounding jurisdictional discovery, the carrier timely removed the action based on the parties’ complete diversity of citizenship and the insured’s allegation that the carrier underpaid the insured’s insurance claim by $500,000.00.

The insured moved to remand the case back to state court. In support of the remand, the insured argued that its state-law cause of action must be converted into a federal cause of action under 28 U.S.C. § 2201-2202. Specifically, the insured contended that its state-law declaratory judgment action, when viewed as a federal declaratory judgment action, was insufficient and resulted in a lack of federal jurisdiction.

Under federal law, where a plaintiff seeks prospective relief, such as a declaratory judgment, it must allege facts from which it appears there is a substantial likelihood that it will suffer injury in the future. But where a plaintiff seeks a declaration concerning insurance for a specific past event without allegations of a reasonable expectation of future harm, there is no standing for prospective relief. The insured characterized the carrier’s coverage determination as a past event and argued that it had not alleged any expectation of future harm. Thus, the insured concluded that the court was required to remand the action back to state court because the insured lacked standing under Article III and the federal Declaratory Judgment Act.

The court rejected the insured’s argument, explaining that “there is no requirement that its state-law declaratory judgment action be re-characterized as a federal declaratory judgment action upon removal to federal court.” The court pointed out that the rule that state-law claims must be recharacterized as federal claims when brought in federal court was limited to certain Employee Retirement Income Security Act (ERISA) claims and certain Labor Management Relations Act (LMRA) claims based on the pre-emption doctrine. The court noted that the Federal Declaratory Judgment Act does not contain the jurisdictional language or express legislative intent necessary to conclude that the federal act completely pre-empts the claims brought under its Florida counterpart.

After resolving this issue, the court went on to find that even if the insured’s declaratory judgment claim was subject to federal standards, the claim clearly satisfied those standards.

The Declaratory Judgment Act alone does not provide a basis for jurisdiction. Similar to suits for any other type of remedy, a claim for declaratory relief must satisfy Article III’s case-or-controversy requirement. The question comes down to “whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Id. at *3 (quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007)).

This requires a federal claimant to establish standing by demonstrating that it has (1) suffered an injury in fact (or has a personal stake in the case), (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. The court found the insured clearly had standing as a policyholder who was suing its insurer for underpayment of an insurance claim. The court further noted that it is undisputed that a federal district court has original jurisdiction over cases in which the amount in controversy exceeds the sum of $75,000, exclusive of interest and costs and there is complete diversity of citizenship. Both conditions were met here. Specifically, the court explained that the amount in controversy was $500,000, which represented the difference between the loss amount calculated by the insured and the amount calculated by the carrier.

There are two key points to take away from this case. First, a plaintiff bringing a state-law action for declaratory relief does not lose its standing once the action is removed to federal court. Only certain kinds of state actions (ERISA and LMRA) must be recharacterized as federal actions post-removal. Nevertheless, this case demonstrates that even if a state-law action for declaratory relief were converted into its federal counterpart, the action would satisfy Article III’s case-or-controversy requirement. This brings us to the second point. The amount in controversy of a declaratory judgment action is the value of the object of the litigation measured from the plaintiff’s perspective. If the insured seeks a declaratory judgment regarding liability under its policy, the value of the declaratory relief, and the amount in controversy, is the amount of potential liability under the insured’s policy.