What is a Declaratory Judgment
A declaratory judgment is a court-issued judgment that defines and outlines the rights and obligations of each party in a contract. Declaratory judgments have the same effect and force as final judgments and are legally binding. These judgments are also called a declaration, or declaratory relief.
BREAKING DOWN Declaratory Judgment
Any party to a contract may petition the court to clarify its rights and obligations in the event of a legal controversy. A court-issued declaratory judgment outlines the rights and responsibilities of each involved party. This judgment does not require action or award damages. It helps to resolve disputes and prevent lawsuits.
The benefit of a declaratory judgment is that it prevents lawsuits that are likely to be unsuccessful, which saves the court's, and ultimately taxpayer's, resources and time. A policyholder that receives an unfavorable declaratory judgment is unlikely to file a lawsuit, as the suit is much more likely to be dismissed.
A Declaratory Judgment Example
In the case of insurance contracts, declaratory judgments help determine a policy's coverage. It helps to define if coverage exists for a particular peril, whether the insurer is required to defend the policyholder from a third party’s claim, and whether the insurer is responsible for a loss when other insurance contracts also cover against the same peril.
For example, a policyholder believes that his denied claim is unjust. As a result, he informs the insurer that he is considering a lawsuit to recover losses. The insurer seeks a declaratory judgment to clarify its rights and obligations with hopes of preventing the lawsuit. If a declaratory judgment indicates that the insurer is not obligated to cover the loss, the insurer will likely avoid litigation. If the judgment indicates that the insurer is responsible, then the policyholder is likely to sue the insurer to recover losses.
Declaratory judgments originated in the early 20th century when states adopted a universal set of standards after the enactment of the Uniform Declaratory Judgments Act of 1922. In 1934, Congress enacted the Declaratory Judgments Act, which granted federal courts the authority to provide declaratory judgments.