Third Circuit: Insurers May Have Easier Time Keeping Coverage Litigation In Federal Court

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PHILADELPHIA, Aug. 22 – In a recent ruling, the U.S. Court of Appeals for the Third Circuit may well have made it easier for insurers to litigate coverage in federal court regardless of whether there is an existing underlying proceeding pending in state court.

In Kelly v. Maxum Specialty Insurance Group,  the Third Circuit Court of appeals reversed a ruling by U.S. District Judge Joel Slomsky, who  had opted to abstain from exercising jurisdiction over the removal of a declaratory judgment action filed by a dram shop  liability personal injury plaintiff against the tavern defendant’s insurance agent  and the agent’s liability insurer.  The Plaintiff sought a ruling that the insurer, Maxum, had an obligation to defend and indemnify the insurance agent Carman, in an underlying state suit against Carman relating to the agency’s failure to advise the tavern’s insurer of notice of the original dram shop suit, which led to a default judgment against the tavern.

Judge Slomsky remanded the insurance coverage suit, filed under the Federal Declaratory Judgment Act, on the grounds that the underlying state proceeding against the insurance agent, Carman, was a prior, parallel proceedinging.  Judge Slomsky ruled that the insurance coverage issues could be resolved in the state court action filed by the dram shop plaintiff against the agent, Carman, because Maxum could conceivably be added as a party to that suit.

Last week, however,  a three-judge panel of the Third Circuit disagreed with Judge Slomsky’s reasoning and ruled instead that that a federal action brought under the Declaratory Judgment Act is not parallel to a state case “merely because they have the potential to dispose of the same claims.”

Circuit Judge Michael Chagares wrote on behalf of the panel that “[Defining] ‘parallel state proceeding’ so broadly balloons a court’s discretion to decline a [Declaratory Judgment Act] action beyond the measured bounds we set forth in our prior decisions.”  The appeals panel further ruled that while the presence of related state court proceedings was a factor to consider, the district judge failed to consider a number of other factors, including Maxum’s argument that it was not even a party to the underlying civil errors and omissions case  against its insured, Carman.

 

 

Judge Chagares wrote:

“We hold that the mere potential or possibility that two proceedings will resolve related claims between the same parties is not sufficient to make those proceedings parallel; rather, there must be a substantial similarity in issues and parties between contemporaneously pending proceedings.”

Using that standard, the Third Circuit found that the state negligence action against Carman  and the federal declaratory judgment suit which included Maxum were  clearly not parallel, as they involved different parties and distinct claims.

The Third Circuit remanded the federal declaratory judgment  case to Judge Slomsky with the instruction that he proceed to confirm complete diversity of citizenship of the parties to the federal declaratory judgment action.

Kelly v. Maxum Specialty Ins. Grp._ 2017 U.S. App. LEXIS 15824.

Editor’s Note: The opinion issued by the Third Circuit in Kelly should be given close attention by insurers wishing to maintain declaratory judgment litigation in generally more favorable federal forums.  Those insurers often have to defend their federal coverage suits from remand motions in which state court plaintiffs make enticing arguments to federal trial judges presenting them with an opportunity to clear an active case off of their dockets through exercise of the abstention doctrine.  The rule set forth in Kelly may allow insurers to effectively respond to such remand claims, by pointing out to the federal court that an underlying personal injury proceeding which does not involve a defendant’s insurer and a federal declaratory judgment suit on coverage which does, are hardly “parallel” proceedings.  CJH

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Inclusion of Adjuster Not Sufficient To Defeat Removal Jurisdiction In Bad Faith Case

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DALLAS, Oct. 6  — Ruling that the insured failed to shoe that an  adjuster could be directly liable for the claims alleged, a federal judge in Texas denied the insured request for remand of a removed bad faith case.

In  Ministerio Internacional Lirios del Valle v. State Farm Lloyds, et al., No. 16-1212, N.D. Texas; 2016 U.S. Dist. LEXIS 137453, the plaintiff sued State Farm Lloyds in the 160th Judicial District Court of Dallas County, Texas, over a property damage claim.   The suit included claims for breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code.  The complaint included allegations that adjuster Aaron Galvan, who conducted an investigation denied the claim on grounds that the damage was uncovered, was liable.

State Farm Lloyds removed the case to the U.S. District Court for the Northern District of Texas, arguing the adjuster was not properly named as a defendant.  The plaintiffs moved for remand, and Judge Sidney A. Fitzwater denied the motion, holding:

“Defendants have met their heavy burden of demonstrating that there is no reasonable basis to predict that Ministerio might be able to recover against Galvan. . . Galvan is an adjuster, and ‘[a]n adjuster “cannot be held liable under this section [of the Texas Insurance Code] because, as an adjuster, he does not have settlement authority on behalf of the insurer…[the adjuster had] no obligation to provide a policyholder a reasonable explanation of the basis in the policy for the insurer’s denial of a claim, or offer of a compromise settlement of a claim.”

The judge also found that Galvan could not be held liable because the sections of the Texas Insurance Code relied upon by the Plaintiff applied to specifically listed ‘insurers,’ and Galvan was  “not an insurer.”

Ministerio Internacional Lirios del Valle v. State Farm Lloyds, et al., No. 16-1212, N.D. Texas; 2016 U.S. Dist. LEXIS 137453 (October 4, 2016, Fitzwater, J.)

Editor’s Note:  joinder of individual adjusters is a common tactic used by insureds to attempt to defeat federal removal jurisdiction, because it provides a “same state” defendant as the plaintiff.  While cases across the country have gone both ways, the individual liability of an adjuster is highly questionable under standard agency principles, if he or she is acting in the course and scope of his or her employment.