MUSINGS ON DIVERSITY SENSITIVITY
MUSINGS ON DIVERSITY SENSITIVITY
No, not the HR kind! The jurisdictional kind. As in, will the game be played in State or Federal court? Will it be a home game or an away game? How is the spread affected by where we play? Get it?
A recent case brought this subject to mind, City of Vista v. General Reinsurance, No.17-cv-2384, in the United States District Court for the Southern District of California, April 5, 2018 (Read the Court’s opinion HERE). While not a stop loss case, it arose in the excess insurance arena. It involved a $1 million claim by the City against General Re under a policy of excess coverage for workers compensation claims.
Here is the play-by-play: The City filed suit against General Re in the Superior Court of San Diego County, seeking a declaration from that court that General Re owed it $1 million. General Re then timely (there is a shot clock for removal) removed the action to the Federal Court, where it filed a counterclaim seeking, among other things, a declaration that it did not owe the City anything. In order to remove a case from State court to Federal court, the defendant must show that the Federal Court has subject matter jurisdiction of that case. There are two principal sources of federal subject matter jurisdiction (i.e., the power to hear a case), federal question jurisdiction and diversity jurisdiction.
Federal question jurisdiction exists when the case involves a substantial federal question, as where a plaintiff is seeking to recover under the provisions of some federal statute. Diversity jurisdiction exists where the parties are citizens of different States. The notion behind Congress’ grant of diversity jurisdiction to the federal courts was to lessen the impact to out-of-state defendants of perceived local prejudice against them, also known as “getting home-cooked.”
Sounds simple, but it often is not. Determining the “citizenship” of a stop loss insurer can be a dicey proposition sometimes. In the case at hand, the City argued that no diversity existed because General Re did regular business in California. As the Court held, this alone is not enough. It is enough when we are examining “personal jurisdiction” (i.e., whether a defendant can be called to answer a suit in a State other than its own), but not when subject matter jurisdiction is at stake. Two factors govern “citizenship” of a corporation: the State in which it is incorporated, and where it has its “principal place of business.” Determining the State of incorporation is a no-brainer. Principal place of business is usually determined by where the insurer has its headquarters. A corporation is deemed to be a “citizen” of both States—State of incorporation and the State where its principal place of business is. General Re was incorporated in Delaware and its headquarters are in Connecticut.
The City argued, unsuccessfully, that General Re’s principal place of business was each of the fifty States in which it conducted business, including California, so diversity was lacking, such that the federal court did not have subject matter jurisdiction of the removed case. The Court focused instead on the “nerve center” test for determining principal place of business, and concluded that, with its HQ in Connecticut, that was where General Re had its nerve center. So, there was diversity and removal of the State court case the City had filed was proper.
But diversity is not the whole ball game. The Federal Courts only have subject matter jurisdiction of diversity cases where $75,000 or more is at stake. (Federal question jurisdiction has no such requirement). The City’s case against General Re qualified, of course, because $1 million was involved.
A final note. Often it is not just the stop loss carrier that gets sued. Many times the MGU gets invited to the party, and for real fun, Plaintiffs can add the TPA too. In federal court, there must be complete diversity between the plaintiff and each of the defendants for subject matter jurisdiction to exist. The defendants don’t have to be diverse from each other, but they must be diverse from the plaintiff. So, (can you imagine?) sometimes wily plaintiffs add a defendant for the sole purpose of defeating federal jurisdiction in order to enjoy their home cookin’. SMH….🧐
Here’s the takeaway—stop loss carriers must consult with someone who understands federal jurisdiction before denying a claim of any appreciable magnitude. Why? Because where the game will be played has substantive importance to the carrier’s decision. It affects “the spread.” Assume the claim denial decision could go either way when tested on the merits by a court. If the carrier will be stuck in State court due a lack of diversity (e.g., if the City was in Delaware) this a major factor in intelligently evaluating risk. On the other hand, if the case can be defended in federal court, the odds get better for the carrier. Federal judges are much more prone to grant pre-trial dispositive motions—like motions for summary judgment—than most State court judges are. While I would argue that some federal judges still retain a local bias against out-of-staters, it is almost never as bad as that of a State court judge (there are exceptions, of course).