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To begin with, a ?declaratory judgment action is the preferred manner of deciding a dispute between an insured and insurer over the construction and effect of the terms of the insurance contract.? Franklin v. Professional Risk Managment Services, Inc., 987 F. Supp.
So what is a "declaratory judgment" lawsuit? This answer is this: It's a lawsuit that a plaintiff files in which the plaintiff asks the court to "declare" through issuance of a "declaratory judgment" what the respective rights of the parties are.
Under CCP §1060, declaratory relief is available only "in cases of actual controversy relating to the legal rights and duties of the respective parties." The controversy must be real, involving justiciable questions that relate to the parties' rights and obligations.
For example, a declaratory judgment action could be brought to determine party rights and obligations under a contract or to establish the validity of a patent. Under Article III of the U.S. Constitution, a federal court may only issue a declaratory judgment when there is an actual controversy.
For example, a policyholder believes that their denied claim is unjust. As a result, they inform the insurer that they are considering a lawsuit to recover losses. The insurer seeks a declaratory judgment to clarify its rights and obligations with hopes of preventing the lawsuit.
To establish federal jurisdiction in a declaratory judgment action, two conditions must be satisfied. First, is the constitutional inquiry - the case must be a 'case or controversy' pursuant to Article III of the US Constitution. Second is the prudential inquiry ? declaratory relief must be appropriate.
The declaratory judgment is generally considered a statutory remedy and not an equitable remedy in the United States, and is thus not subject to equitable requirements, though there are analogies that can be found in the remedies granted by courts of equity.