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The Federal Statute Every Aggressive Insurance Litigator Should Know

There is a critical federal statute that all insurance litigators should be aware of when their case is “removed” from a State trial court to a federal court. Insurance companies often remove State court cases to the federal system to take advantage of what they apparently believe is a strategic advantage. Although this perceived advantage may or may not exist, all aggressive insurance attorneys should know how to fight back.

First, you should know that there is a presumption against federal court jurisdiction. By statute, a federal district court must send any case that lacks subject-matter jurisdiction back to State court. 28 U.S.C. §1447(c). And although a plaintiff usually has only thirty days to object to a defendant’s “removal” of a State case to federal court, an objection based on the federal Court’s lack of subject matter jurisdiction can be raised at any time before final judgment, even in the middle of a trial. 28 U.S.C. §1447(c). Federal courts routinely make thorough examinations of subject matter jurisdiction early in a case in order to avoid wasting resources on a case that ultimately needs to be sent back to State court.

Insurance companies “remove” many insurance cases from the State system to the federal system by alleging that federal “diversity jurisdiction” supports the removal. “Diversity jurisdiction” generally means that the opposing parties are from different States (and that a minimum amount in dispute has been met). A federal district court lacks diversity subject matter jurisdiction when only partial, but not complete, diversity exists. See, e.g., Fekyibelu v. Tolen, 2012 WL 6679452 (D.Md., Dec. 20, 2012).

Insurance companies, like most other corporations, are a citizen of any State in which it has been incorporated and of the State where it has its principal place of business. 28 U.S.C. § 1332(c)(1). If the person suing the insurance company is a citizen of either of these two States, diversity does not exist, and a “removed” case must be sent back to State court. While this general rule applies to most corporations, there is one additional basis for defeating federal jurisdiction in “direct actions” against insurance companies. This exception makes it more difficult for insurance companies to prove federal diversity jurisdiction, and thus makes it easier to keep “direct actions” in State court, assuming State court is deemed to be the preferable tribunal for the trial of your case.

The exception is as follows: in any “direct action” against an insurance company, the insurance company is deemed a citizen of every State of which their insured (i.e., the person or corporation who is insured under the insurance policy) is a citizen. 28 U.S.C. § 1332(c)(1).

“Direct actions” are lawsuits in which an injured party “directly” sues the insurance company that is insuring the person who allegedly caused the damage. Cunningham v. Twin City Fire Ins. Co, 669 F. Supp. 2d 624, 628 (D. Md. 2009) (quoting Corn v. Precision Contracting, Inc., 226 F.Supp.2d 780, 782 (W.D.N.C.2002))(a “direct action” is a tort lawsuit in which a plaintiff with a claim against an insured person sues the insurer directly). Some statutes authorize injured persons to file “direct actions” against the insurance companies to avoid the waste of time and money that would result if an injured person was required to first sue the party causing the harm, and obtain a judgment, only to learn that the party who caused the harm cannot pay the judgment, so a second separate lawsuit against the harm-causer’s insurance company is then necessary. Direct action statutes are intended to permit plaintiffs to file one lawsuit, rather than two, in order to obtain more efficient compensation for their losses.

When a “direct action” is removed from State court to federal court, it is not sufficient to analyze whether the plaintiff (the party who has been harmed) and the defendant (the insurance company) are “diverse” (i.e., citizens of different States). Even if the plaintiff and the insurer in a direct action are diverse, under the exception set forth in § 1332(c)(1), diversity still does not exist if the plaintiff and the person who cased the alleged harm, and who is insured under the insurance policy at issue, are citizens of the same State.

As one might imagine, business disputes, commercial torts and other loss-causing incidents often involve citizens of the same State. Section 1332(c)(1) thus ensures that a large group of insurance cases, which would otherwise be removable to federal court, cannot be removed – and all aggressive insurance litigators should keep the § 1332(c)(1) arrow in their quiver.

Please feel free to contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or bsinclair@mdattorney.com, for more information.

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