Recent Decision Impacts Insurer’s Coverage Position
A recent decision by the United States District Court for the Eastern District of Virginia reminds us of how important it is to win the race to the courthouse when an insurance carrier has the grounds for a coverage denial.
The preferred forum for an insurance carrier that disputes its obligation to afford insurance coverage to an insured or to a claimant is the federal court. In Virginia, the federal courts are divided into four locations of the United States District Court for the Eastern District of Virginia and six locations of the United States District Court for the Western District of Virginia. The Virginia state courts are divided into 31 judicial circuits, each with a circuit court and a general district court.
Why Federal Court?
An insurance carrier cannot be guaranteed an efficient trial before a Virginia circuit court. The average disposition time for an insurance coverage case in federal court is nine months, primarily because the court will push the case to be decided by summary judgment. In Virginia state courts, however, it is unlikely the court will decide an insurance coverage case on summary judgment. Instead, it will allow the insured/claimant to have the case decided by a jury. While this firm has had success prevailing before juries when representing an insurance carrier, it is a difficult task. A jury will generally favor an insured and will not be favorable to the insurance carrier’s position. Furthermore, the average disposition time for an insurance coverage case before a Virginia state court is 14 to 20 months. The best strategy for an insurance carrier that intends to challenge its obligation to afford coverage for a claim is to have the case decided in federal court.
Why a Race to the Courthouse?
Virginia state courts have concurrent jurisdiction with Virginia federal courts to decide insurance coverage cases. The court where the case is first filed typically will have jurisdiction. A proactive insured/claimant who anticipates the insurance carrier’s intent to assert a coverage defense can file a declaratory judgment action in state court and impede the insurer from having the case decided in federal court. The insurer, however, may be able to “remove” a case filed in a Virginia state court to federal court, so long as the insured/claimant has not joined a proper Virginia co-defendant and the amount in controversy exceeds $75,000, exclusive of interest and costs. In summary, the insured or claimant who wins the race to the courthouse can significantly improve his, her, or its chance of prevailing over the insurer.
Recent Decision Regarding Citizenship of a Mutual Company
The most common jurisdictional basis for a federal court to decide a civil lawsuit is founded upon diversity of citizenship. To have diversity of citizenship, the party bringing the lawsuit must be a citizen of a different state than all the defendants and, again, the amount in controversy must exceed $75,000, exclusive of interest and costs.
Typically, an insured bringing a declaratory judgment action seeking an adjudication from the court that the insurer owes coverage is a Virginia citizen. So long as the insurer is a citizen of another state, the federal court will have jurisdiction to hear the case. Determining the citizenship of insurers that are corporations or limited liability companies is simple enough. Mutual insurance companies, however, have been more difficult to categorize for purposes of diversity of citizenship. Fortunately, that question has now been answered.
In 110 South Perry LLC v. Auto-Owners Insurance Company, the United States District Court for the Eastern District of Virginia, sitting in Richmond, Virginia, ruled that a Michigan mutual company was a Michigan citizen for purposes of diversity of citizenship. The insured argued that, as a mutual company, the insurer was a citizen of each state in which its members were citizens. If true, the insurer would be considered a citizen of Virginia and it could not remove the insured’s coverage case from the City of Richmond, Virginia Circuit Court to the federal court in Richmond. The federal court declared that the mutual company was a citizen of the state in which it was formed, and not of each state where its members were citizens.
Conclusion
An insured who takes the position the insured’s carrier has wrongfully denied coverage will enjoy an advantage by filing a declaratory judgment lawsuit in one of the Virginia circuit courts. At the same time, the insurer should know that it is likely to receive a better result in federal court. For mutual companies who have questioned their right to file or remove a declaratory judgment action to federal court, we now have an answer.