It is very common in first-party litigation for the policyholder to sue the in-state adjuster in addition to the out-of-state insurance company and thereby destroy diversity so the case remains in state court. The carrier will generally remove the case anyway and claim that the joinder of the adjuster is improper. In a very general sense, the carrier will ultimately argue that the causes of action against the adjuster should be ignored (not taken seriously) by the federal court because the policyholder is really just trying to destroy diversity and cannot establish a viable cause of action against the adjuster. A recent decision out of the Southern District of Texas reminds us of the heavy burden a removing party has and that Texas Rule of Civil Procedure 91a does not change that analysis.
In Michael Garza v. Scottsdale Insurance Company, et al, No. 15-149, S.D. Texas; 2015 U.S. Dist. LEXIS 77525 Garza sued Scottsdale in an insurance coverage dispute arising from a hail claim. Garza also sued the in-state adjusters, thereby destroying diversity. As to the adjusters Garza claimed that they knowingly misrepresented policy coverage, undervalued the claim, intentionally excluded portions of covered damages, and failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim. In summary, Garza alleged that the adjusters violated the Texas Insurance Code’s unfair settlement prohibitions, and committed common law fraud and conspiracy to commit fraud.
Scottsdale filed a notice of removal and Garza filed a motion to remand. The court set out several very important points of law we should all remember the next time we are filing or defending a remand:
- The removing party (the insurance company) bears the burden of showing that federal jurisdiction exists and that removal is proper1;
- Any ambiguities are construed against removal because the removal statute should be strictly construed in favor or remand2. The strict construction rule arises because of “significant federalism” concerns3.
- The party seeking removal bears a heavy burden of proving that the joinder of the in-state party was improper.4
- Assuming actual fraud in pleading cannot be proved then the removing party must prove that the plaintiff is unable to establish a cause of action against the non-diverse defendant in state court.5
- The motion to remand must be granted unless “there is absolutely no possibility that that plaintiff will be able to establish a cause of action against the in-state defendant.6
- The court held that claims similar to Garza’s had been held sufficient to defeat improper joinder claims in similar cases in all of the federal districts in Texas and cited cases as examples.7
Scottsdale conceded the adjusters were subject to the requirements of the Texas Insurance Code. However, relying on JAW The Pointe, LLC v. Lexington Insurance Company 8, Scottsdale argued that there was no reasonable possibility of recovery against the adjusters because claims against the adjusters must involve extreme conduct and causation independent of the adverse policy decision. In JAW the court held that if there was no coverage then there was no bad faith. However, the Garza court held that JAW did not apply to the adjusters because they did not have liability on the policy and their alleged conduct was calculated to impair the insured’s ability to collect on the claim. The court said, “It cannot be said that these complaints as asserted against adjusters are essentially doomed before they start because they do not involve ‘extreme’ conduct or extra-contractual damages.” *2
Next Scottsdale argued that even though federal courts will apply the Texas “fair notice” pleading rules, Texas pleading rules are no longer as liberal as the once were. Scottsdale cited the court to the newly enacted Texas Rule of Civil Procedure 91a, which allows dismissal of actions where there is no basis in law or fact. Scottsdale argued that under Rule 91a Texas now follows federal pleading standards akin to FRCP 12(b)(6). Citing an opinion by the Texas 14th Court of Appeals9, the court held that TRCP 91a had not changed the “fair notice” standard for evaluating claims before trial. In other words, when a court is looking at claims under Rule 91a to determine if they are based on law or fact, the court will still use the same old Texas “fair notice” standard.
In closing, if David Byrne of Talking Heads (the name of the band is Talking Heads) was a lawyer (and that is a pretty funky thought), then I picture him in his grey suit, nerdy glasses, bow tie, and white pocket square, standing in front of the bench, bobbing his torso back and forth, chopping his hand on his forearm, making his argument about the Texas “fair notice” pleading standard and Rule 91a, and saying, “Same as it ever was. Same as it ever was. Same as is ever was10.”
1Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002).
3Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09, 61 S.Ct. 868, 85 L.Ed. 1214 (1941).
4Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 574 (5th Cir. 2004).
5Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006) (citing Travis v. Irby, 326 F.3d 644, 646-47 (5th Cir. 2003))
6Griggs v. State Farm Lloyds, 181 F.3d 694, 699 (5th Cir. 1999).
7Tenner v. Prudential Ins. Co. of Am, 872 F.Supp. 1571, 1574 (E.D.Tex. 1994); Blanchard v. State Farm Lloyds, 206 F.Supp. 840, 846-48 (S.D.Tex. 2001); Russell v. State Farm Lloyds, 2001 WL 1326501 (N.D.Tex 2001) (mem); and Bruner v. State Farm Lloyds, 1999 WL 33290662 (W.D.Tex. 1999).
8No. 13-0711, 2015 WL 1870054, *3 (Tex. Apr. 24, 2015).
9Wooley v. Schaffer, 447 S.W.3d 71, 76 (Tex. App. –[14th Dist.] 2014, pet. Filed).