Coverage Litigation Should Be Stayed to Avoid Prejudice to the Insured

In either circumstance, the insured can be prejudiced by being forced to litigate on 'two fronts,' expending resources in coverage litigation that should be reserved to adequately defend against the underlying litigation. Additionally, to the extent that insurers seek to rely upon issues being litigated in an underlying action as the basis to avoid coverage, there is a clear risk that the insured will be required to litigate the same issues in two different courts before two different judges. This is inefficient and can lead to inconsistent results to the detriment of the insured. Underlying defense counsel also could be required to become involved in the coverage action, in an effort to ensure that issues at the heart of the underlying action are adequately resolved in the coverage litigation. This, of course, further depletes resources that should be focused solely upon defeating the claims in the underlying action. Indeed, allowing an insurer to attack its insured in coverage litigation on the same grounds asserted by underlying plaintiffs in underlying litigation, instead of assisting its insured in its defense against those very claims, is counterintuitive to the concept of insurance.

As a result, courts across the country repeatedly have recognized that the dangers inherent in permitting insurers to seek prejudicial discovery and to litigate against their insureds before the factual issues in the underlying lawsuit have been determined warrant a 'stay' of the coverage action. Stays have been granted even when the coverage litigation was initiated by the insured seeking the stay, and without any consideration for possible prejudice that an insurer may suffer if the coverage action is staying pending resolution of the underlying action.