Despite Limited Jurisdiction, Texas Federal Court Keeps the Class in Class Action

The forum selection battle between insurance carriers and policyholders over whether litigation should be conducted in state or federal courts remains as contentious as ever. Litigants on both sides know forum shopping affects the rules of civil procedure, the choice of law analysis, remedies, and the potential judge and jury pool. Insurance carriers often believe that federal courts can provide a more equal playing field to address coverage disputes when compared to the home court advantage policyholders are perceived to have in local state courts. Because federal courts are of specific and limited jurisdiction, an insurance carrier removing a case to federal court can face significant hurdles in maintaining that cause of action.

This issue recently was addressed in the context of a class action in Magnum Minerals, L.L.C. v. Homeland Ins. Co., No. 2:13-CV-103 (N.D. Tex., Sept. 5, 2013), where plaintiffs sought class certification in state court of all Texas residents who had been insured by a surplus lines insurance carrier (Homeland) from January 2005 to the present. The plaintiffs alleged that Homeland had violated Chapters 101 and 981 of the Texas Insurance Code, which allows a policyholder to procure insurance from surplus lines carriers through authorized agents, but only if the policyholder has failed to obtain non-surplus lines insurance after a diligent search.  Plaintiffs alleged defendant insurance agents placed their surplus lines coverage with Homeland without first searching for non-surplus lines coverage. Accordingly, plaintiffs sought injunctive relief that, in part, prohibited Homeland from enforcing any contractual rights or exclusions to insurance coverage against them and the putative class.

In response, Homeland removed the plaintiffs’ suit to federal court pursuant to the Class Action Fairness Act (CAFA). CAFA grants federal jurisdiction for diversity class actions involving more than 100 class members if at least one member of the class is diverse from at least one defendant, and if more than $5 million in damages is in controversy exclusive of interests and costs. While conceding diversity, plaintiffs argued there was no federal jurisdiction under CAFA as the amount in controversy did not exceed $5 million.  In the alternative, plaintiffs argued the “local controversy exception” and “small class exception” to CAFA defeated federal jurisdiction.

As the removing party, Homeland had the burden to show that CAFA’s prima facie elements were met to maintain federal jurisdiction. The court held that, because the validity of the putative class members’ insurance contracts was at issue, the proper measure to determine the amount in controversy would be based on the policy limits for each distinct class member. Homeland presented evidence showing that there were 117 insureds on 73 Homeland policies, with each policy containing a per-insured limit of liability of at least $1 million. Accordingly, the court held the amount in controversy easily exceeded the $5 million threshold.

In contrast, the plaintiffs could not show by a preponderance of the evidence that the local controversy and small class exceptions to CAFA should apply. Although the local controversy exception has four requirements, the only requirement in dispute was whether the plaintiffs sought “significant relief” from at least one of the Texas defendants, which were insurance agents and individuals involved in placing coverage with Homeland. Looking to the pleadings, the court determined that plaintiffs did not seek injunctive relief against of those defendants.  Moreover, the plaintiffs’ remaining allegations against the Texas defendants fell within exceptions to relief sought under the Texas Insurance Code. Accordingly, the court held that the plaintiffs were only seeking significant relief against Homeland, which was a New York corporation. The court also disagreed with the plaintiffs’ argument that the small class exception applied.  Although the plaintiffs asserted only the 73 customers that purchased policies should be considered class members, the court concluded that each of the 117 named insureds were distinct class members.

Because plaintiffs failed to show that either exception to CAFA applied, Homeland was allowed to proceed with its action in a federal court.


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