When a liability insurer wishes to avoid all coverage obligations with respect to a claim against its insured, it will sometimes file a declaratory relief action requesting a ruling that it has no duty to defend or indemnify the insured. If the insurer files for such declaratory relief while the underlying litigation is still pending, California insureds will frequently move to stay the coverage action, pursuant to Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993). The purpose of such a Montrose stay is to avoid the risk of prejudice to the insured in the underlying action, if it is simultaneously forced to litigate an insurance coverage dispute.
In these situations, the insured faces a dilemma: should it immediately move to stay the coverage litigation, or wait until it has filed an answer and cross-complaint? A recent California Court of Appeal decision, Great American Insurance Company v. Superior Court, 178 Cal. App. 4th 221 (2009), suggests that the better practice may be to answer and cross-complain before moving to stay.
Erica Villanueva of Farella Braun & Martel LLP wrote a good article on this topic which I commend for your reading.