Improperly Sued Adjuster And Dismissal

Here is a situation where a lawsuit to which Texas Insurance Code, Section 542.006 applies.  The remedy this Court applied to the case appears to be a distinction without a difference.

The case is a 2019, Southern District of Texas, Laredo Division, opinion.  The case is styled, Axel Brokers, Inc. v. United Fire & Casualty Company and David S. Walton.

This case concerns alleged liability for storm damage to a commercial building insured by United Fire.  Axel sued United Fire, the insurer, and Walton, the adjuster, for various violations of the Texas Insurance Code.

Axel sued the defendants in State Court and then the case was removed to Federal Court.  United is a foreign company and Walton is a citizen of Texas.  This situation defeats diversity and United asked the Court to apply the doctrine of improper joinder to Walton.  In that regard, United executed an “election of legal responsibility” under Section 542.006.

The Court dismissed the claims against Walton but did so in a way different from what we have seen thus far.

With vary few exceptions, a federal court may exercise removal jurisdiction over an action if the district court could have exercised original jurisdiction over it.  As in this case, a lawsuit may be removed pursuant to 28 U.S.C., Section 1332.

Under the doctrine of improper joinder, when a plaintiff is improperly joined, the Court may disregard the citizenship of the improperly joined defendant, dismiss the defendant from the case, and exercise subject matter jurisdiction over the remaining diverse defendant.

Under Section 542.006, United’s pre-lawsuit election of liability eliminated any possibility that Axel could recover against Walton.  Thus, under the express terms of the statute, United’s election is binding and irrevocable, and the claims against Walton must be dismissed because “no cause of action exists” against him.  Even if the case were to proceed to trial, the statute assumes that a jury may be asked to resolve fact issues as if Walton were a defendant but provides that any liability that would be assessed against Walton instead be included in a judgment against United.

As the Fifth Circuit has explained, the focus of the improper joinder inquiry must be on the joinder, not the merits of the plaintiff’s case.  Since Walton was improperly joined, Axel cannot recover against him.

United seeks the dismissal against Walton “with prejudice” whereas Axel seeks “dismissal without prejudice.”

The Fifth Circuit has explained that the only ground for dismissing any improperly joined, nondiverse party is lack of subject matter jurisdiction, adding that a dismissal on any other basis would require the presence of jurisdiction that does not exist.  Because a dismissal for lack of subject-matter jurisdiction is not an adjudication on the merits, the dismissal of a nondiverse party over whom the court does not have jurisdiction must be a dismissal without prejudice in every instance.  Thus, the directive in Section 542A.006(b) to dismiss an action filed against an agent “with prejudice” does not apply to a federal court without jurisdiction to reach the merits of the case.