Tough Pleading Standards In Insurance Cases

As has been said many times and will be said many more times, the insurance companies prefer to have their cases in Federal Court.  The rules of procedure, in the opinion or most lawyers, are more favorable to insurance companies.

The pleading standards are illustrated yet again in a Western District, El Paso Division opinion styled, Shiana Corporation v. Depositors Insurance Company and David Morgan.

Shiana suffered a loss from a wind and hail storm.  The insurance company, Depositors, hired adjuster Morgan to adjust the loss.  Morgan came back with an estimate of $49,268.48.  Shiana hired a public adjuster who adjusted the loss at $519,459.86.   A lawsuit resulted and was filed in State Court where it was promptly removed to Federal Court by Depositors who alleges that Morgan was improperly joined in an effort to defeat diversity jurisdiction.

28 U.S.C., Section 1441(a) allows a defendant to remove a cause from state court to federal court.  A federal court has jurisdiction based on diversity of citizenship between the parties and the amount in controversy being greater than $75,000, according to 28 U.S.C., Section 1332(a).

For legal purposes, Shiana is a Texas resident and Depositors is a resident of Iowa.  Morgan is a resident of Texas.  Morgan defeats diversity jurisdiction but Depositors alleges that Morgan was improperly joined in an effort to defeat diversity jurisdiction and supports this allegation by pointing out that Shiana has not properly alleged any specific actionable conduct against Morgan that stands alone.

Depositors bears the burden of proving that joinder of Morgan was improper and can do so by establishing either (1) actual fraud in the pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause of action against the non-diverse party (Morgan) in state court.  Actual fraud is not being alleged.

Under the second test for improper joinder, courts must determine whether the defendant has demonstrated that there is no possibility of recovery by plaintiff against an instate defendant, which stated differently means that there is no reasonable basis for the district court to predict the plaintiff might be able to recover against an in-state defendant.  One method of resolving whether there is a possibility of recovery against the in-state defendant is to conduct a Rule 12(b)(6) – type analysis in which the Court looks at the allegations of the complaint to determine whether the complaint states a claim under state law against the in-state defendant.   The Fifth Circuit recently clarified that federal courts should use the federal court pleadings standard when conducting the Rule 12(b)(6)-type analysis of an improper joinder claiming a motion to remand to determine whether the plaintiff has stated a claim against the non-diverse defendant.

Depositors argues that Shiana’s complaint does not allege specific actionable conduct against Morgan, but merely lumps his actions together with Depositors actions.  A reading of the case recitation of the DTPA causes of action show that Shiana did not properly plead against Morgan.

As to the Insurance Code violations, while Texas law permits adjusters to be held individually liable for violations of the Texas Insurance Code, the adjuster must have committed some act that is prohibited by the section to be found liable, not just be connected to an insurance company’s denial of coverage.

Here, Shiana fails to offer specific facts in support of its claims against Morgan and fails to make the required factual fit between the allegations and the pleaded theory of recovery.  Instead, Shiana makes conclusory allegations against Morgan that merely track the statutory language of Chapter 541 of the Texas Insurance Code and makes no reference to any material facts to which the law should apply.

Shiana’s motion to remand was denied and Morgan was dismissed from the case.