Fifth Circuit Holds Removal is Not Barred by an Insurer’s Post-Suit Election of Liability for the Insurer’s Agent
On Oct. 3, 2022, the Fifth Circuit resolved a split among Texas federal district courts and held that an insurer’s post-suit election of liability for a non-diverse agent/adjuster defendant under the Texas Insurance Code does not foreclose the possibility of removal to federal court based on diversity jurisdiction.
While it was already settled law that a pre-suit election of liability for a non-diverse adjuster/agent defendant renders a case removable, the holding settled a divide among federal district courts in Texas as to whether a post-suit election of liability renders the case removable.
In prior district court cases, some courts focused their analysis on whether the agent/adjuster was improperly joined at the time of joinder, holding that that if the insurer makes the election of liability after the plaintiff initiates suit (whether before or after removal), then the election itself does not conclusively establish improper joinder, opening the case to remand to state court without additional support.
Other district courts focused their analysis on the effect of the Code which requires dismissal with prejudice of the agent/adjuster (thereby precluding recovery against the agent/adjuster), which in turn made the agent/adjuster improperly joined and rendered the case removable upon the election. For a time, it appeared a majority approach was emerging with courts finding that the election alone was insufficient to allow removal.
However, the Fifth Circuit recently held that “[w]hen a state court order creates diversity jurisdiction, and that order cannot be reversed on appeal, [Fifth Circuit] precedent treats the voluntary-involuntary rule as inapplicable . . .” Some courts believed this precedent, therefore, supported an exception to the voluntary-involuntary rule, given the Code requires a dismissal with prejudice.
The Fifth Circuit Ruling
In the present matter, the Fifth Circuit explained that the focus in determining “whether a plaintiff has improperly joined a non-diverse defendant” requires an examination of the “plaintiff’s possibility of recovery against that defendant at the time of removal,” applying the analysis set by Flagg. The Fifth Circuit further explained that precedent set by Crockett “recognizes an exception to the voluntary-involuntary rule where a claim against a nondiverse or in-state defendant is dismissed on account of fraudulent joinder.”
Reading the Flagg and Crockett opinions together, the Fifth Circuit reasoned that because the Code election leaves a plaintiff with no possibility of recovery against an adjuster, this makes the adjuster an improperly joined defendant at the time of removal under Flagg, thus qualifying as an exception to the voluntary-involuntary rule under Crockett.
In a concurrence, Judge Engelhardt asserted that the opinion effectively overruled the long-established voluntary-involuntary rule, which provides that only a voluntary act of the plaintiff can render the case removable. While the concurrence commented that “[o]ur precedents in this field have flummoxed parties and district courts alike” and seemed to suggest that Flagg and Crockett opinions may have wrongly decided, the concurrence also acknowledged that the precedents are binding and expressed “hope that our decision today offers some clarity.”
Changes to Prior Trade-Offs
Prior to the Fifth Circuit’s decision, insurers frequently had to decide whether to accept liability for an adjuster or other agent during the 60-day, pre-suit notice period to ensure a chance at attempting removal to federal court. Because the information available to litigants can change during discovery, this left many insurers facing a difficult trade-off between the opportunity of seeking a federal forum versus the risk of later discovering actionable conduct by an adjuster after already accepting liability for that adjuster.
The Court’s opinion ameliorates this issue and makes it easier for insurers sued in Texas to remove to federal court by clarifying that post-suit election of liability under the Code qualifies as an exception to the voluntary-involuntary rule.
Please contact Mark Broom, Julien Petit or any member of the Phelps Insurance Team if you have questions on this case or need advice or guidance.
