For purposes of federal diversity jurisdiction, an independent adjuster was not a “sham” defendant where the insureds alleged that the adjuster negligently supervised and controlled emergency repairs, causing additional damage to the insureds’ property. ( Huber v. Tower Group, Inc. (2012) — F.Supp.2d –, WL 1641601)
Facts
Christopher Huber and Marian Huber purchased a homeowners policy from Tower Select Insurance Company (“Tower Select”). After their property was damaged by severe weather, the Hubers reported the loss to Tower Select.
Tower Select retained Sams & Associates, Inc. (“Sams”), an independent adjusting firm, to inspect and assess the damage to the property. In turn, Sams retained a contractor to make emergency repairs to the Hubers’ property and, according to the Hubers, Sams supervised and exercised control over the contractor’s work. The Hubers alleged that the emergency repairs were improper, which allowed rats to infest the property and toxic mold to develop.
The Hubers (both of whom were California citizens) filed a lawsuit in California state court against Tower Select (a New York corporation) and Sams (a California corporation). Tower Select and Sams asserted that, as an independent adjuster, Sams could not be liable to the Hubers for negligence. Tower Select and Sams also asserted that, because the Hubers could not state a claim against an independent adjuster, Sams was a “sham” that had been named in the suit solely to defeat federal diversity jurisdiction. As such, Tower Select and Sams removed the state court case to federal court, and then filed a motion to dismiss Sams (a motion which, if successful, would have allowed for diversity jurisdiction).
Holding
The federal district court ruled that Tower Select did not establish, as a matter of law, that the Hubers could not state a claim against Sams. Although an insurer’s independent adjuster ordinarily cannot be liable to an insured for negligence that leads to a denial of coverage or reduced payment of benefits, the insureds in this case alleged that that the independent adjuster had, through negligence, actually caused additional direct physical damage to the insureds’ property (e.g., the infestation of rats and the development of mold). Thus, the court reasoned that the unusual nature of the independent adjuster’s alleged negligence, if proved, might support a recovery.
Because the Hubers potentially had stated a claim against Sams, the court rejected Tower Select’s argument that Sams was a sham defendant who had been named as a party primarily for the purpose of defeating diversity jurisdiction. Because the court rejected the argument that Sams was a sham defendant, the court determined there was no diversity jurisdiction (since the Hubers and Sams all were citizens of California), and that the case should be remanded from federal court back to state court.
Comment
This case illustrates one of the problems that can arise when an insurer appears to take control of efforts to make repairs (even emergency repairs). However, note that this case does not stand for the proposition that an independent adjuster necessarily is liable to an insured for negligence. Instead, the court ruled that the insurer had not clearly established at the pleading stage that the insureds had failed to state a claim against the independent adjuster.
When a case is filed in state court, a defendant may remove the case to federal court provided that the federal district court otherwise has original jurisdiction over the case. (28 U.S.C. § 1441(a).) In insurance litigation, the most frequent basis for federal jurisdiction is “diversity,” meaning that all parties are citizens of different states and the amount in controversy exceeds $75,000. (28 U.S.C. § 1332.)
At least in the Ninth Circuit, courts strictly construe the removal statute againstremoval jurisdiction, and the party seeking removal bears the burden of establishing federal jurisdiction. Any questions regarding the propriety of removal are resolved in favor of the party moving to have the case remanded back to state court.