Injured Third Party Has No Standing to Argue No Coverage for Insured’s Defense Costs

The United States District Court for the Western District of Pennsylvania recently found that, while an injured third party has standing to defend against declaratory judgment claims, an injured third party does not have standing to object to the insurer’s provision of a defense to its named insured, where the named insured has consented to the defense. See Alliance of Nonprofit for Ins. Risk Retention Group v. Transdev, Inc., 2019 WL 452492 (W.D. Pa. 2019).

In Alliance, the insurer filed a declaratory judgment action seeking to define its obligations to defend and/or indemnify its insured in a lawsuit arising out of the insured’s employee’s sexual misconduct against the injured third party.  The injured third party was joined in the lawsuit.

The insurer, and the named insured, agreed that the insurer should provide the named insured with a defense. However, the injured third party argued that the Court should find that the insurer should not provide the insured with a defense because any expense incurred would reduce the amount available under the policy, and therefore, limit the amount recoverable by the injured third party.

The Alliance Court did not find the injured third party’s argument persuasive.  Instead, the Court ruled that the reduction in available coverage funds did not affect “the legal rights” of the injured third party to obtain a judgment against the insured. Because the reduction in available funds only related to the amount of funds remaining for the insurer to pay on behalf of its insureds, the court found the injured third party lacked standing to request the relief sought, which the Court interpreted akin to a declaratory judgment action against the insurer.