More guidance on staying in federal court: Southern District affirms importance of timing in 542A removals

Although there has been a flurry of litigation about removals under Section 542A of the Texas Insurance Code (see Eric Peabody’s stellar blog post here), until recently none of the current crop of federal cases addressed whether a pre-suit election by an insurance carrier of the liability of an adjuster precludes remand to state court. According to the Southern District the answer is a resounding yes.

A bit of background: When out-of-state insurers have been sued for first-party claims, it’s a good bet that the plaintiff will also sue an in-state employee or adjuster to defeat diversity jurisdiction and keep the lawsuit in state court. The Texas Legislature’s overhaul of property-damage claims in Chapter 542A was supposed to curb this practice; under Section 542A.006, the Insurance Code now allows insurers to elect responsibility for their adjusters or other third parties in order to prevent removal:

• Except as provided by Subsection (h), in an action to which this chapter applies, an insurer that is a party to the action may elect to accept whatever liability an agent might have to the claimant for the agent’s acts or omissions related to the claim by providing written notice to the claimant.
• If an insurer makes an election under Subsection (a) before a claimant files an action to which this chapter applies, no cause of action exists against the agent related to the claimant’s claim, and, if the claimant files an action against the agent, the court shall dismiss that action with prejudice.
• If a claimant files an action to which this chapter applies against an agent and the insurer thereafter makes an election under Subsection (a) with respect to the agent, the court shall dismiss the action against the agent with prejudice.

Per the terms of the statute, the insurance company can make this election both before and after a lawsuit is filed.

It seems that the Legislature intended to keep lawsuits against foreign insurance companies out of state courts so long as they agree to accept liability for diversity-defeating defendants. But as Chief U.S. District Judge Lee Rosenthal recently pointed out, federal courts are actually split on whether this actually requires a remand where the insurer elects to accept liability after a lawsuit has been filed. Vyas v. Atain Specialty Ins. Co., No. H-19-960, 2019 WL 2119733 (S.D. Tex. May 15, 2019). Courts in the Eastern, Southern, and Western Districts have all concluded that insurers who wait until after a lawsuit is filed in state court to make their election to accept liability for adjusters or other agents cannot rely on 542A alone as a reason for removing the action to federal court. Id. (citing Stephens v. Safeco Ins. Co. of Ind., No. 18-CV-595, 2019 WL 109395, at *7 (E.D. Tex. Jan. 4, 2019); Massey v. Allstate Vehicle & Prop. Ins. Co., No. H-18-1144, 2018 WL 3017431, at *3 (S.D. Tex. June 18, 2018); Yan Qing Jiang v. Travelers Home & Marine Ins. Co., No. 18-CV-758, 2018 WL 6201954, at *2 (W.D. Tex. Nov. 28, 2018).  This is because of the general rule that an action that was not removable on filing can only become removable on the voluntary act of the plaintiff.

 Another court in the Western District concluded that because an election of liability effectively precludes recovery, removal is proper even after a post-suit election of liability because there is no reasonable basis to predict that the plaintiff could recover against the agent. Flores v. Allstate Vehicle & Prop. Ins. Co., No. 18-CV-742, 2018 WL 5695553, at *5 (W.D. Tex. Oct. 31, 2018).

However, by electing to accept liability before a lawsuit is filed (presumably on receipt of the required pre-suit demand letter), an insurer effectively precludes any possibility of recovery at the time plaintiff files suit. The court noted in an apparent issue of first impression that an election of liability before the lawsuit was filed categorically precluded remand: an election letter issued before suit was filed meant that the plaintiff had no possibility of recovery at the time of filing, so the court dismissed the plaintiff’s claims against the adjuster with prejudice and concluded removal was proper.

In sum, if insurers know they want to litigate in federal court, the sooner a letter electing liability is sent, the better.