Federal Courts Sketch Roadmap for Chapter 542A Removals

October 22nd, 2018 By Eric S. Peabody

As many commentators have noted, the addition of Texas Insurance Code Chapter 542A—the so-called “Hailstorm Bill”—has substantially reduced the volume of weather-related lawsuits against insurance companies since September 2017. In addition to imposing strict timelines for pre-suit notice and inspections and curbing potential penalties and attorneys’ fees awards, Chapter 542A affects the parties to, and potential venue of, a lawsuit by allowing the carrier to assume any liability an “agent” might have to the claimant (with certain exceptions) for the agent’s acts or omissions related to the claim. If the carrier assumes this liability in writing, no cause of action exists against the agent and the court is required to dismiss the action against the agent with prejudice.  Two recent federal cases, Massey v. Allstate Veh. & Prop. Ins. Co., No. H-18-1144, 2018 WL 3017431 (S.D. Tex. May 16, 2018), and Electro Grafix, Corp. v. Acadia Ins. Co., No. SA-18-CA-589-XR, 2018 WL 3865416 (W.D. Tex. Aug. 14, 2018), have examined how the procedure for obtaining this dismissal can have a significant impact on the removability of these suits to federal court.

In Massey, the carrier removed the case only after obtaining dismissal of the adjuster in state court. 2018 WL 3017431, at *1. The carrier filed its election of legal responsibility two months after filing its state-court answer, but also admitted that the adjuster had not been improperly or fraudulently joined initially.  Id. at *1-2. Despite this admission, the carrier argued that the state court’s subsequent dismissal was tantamount to a ruling of improper or fraudulent joinder—an exception to the general rule that a non-removable action becomes removable only by the voluntary act of the plaintiff rather than an involuntary act by the court. Id. at *2-3.  Finding that the dismissal was not equivalent to a dismissal for improper joinder (and noting that the removal would have been untimely if the adjuster had been improperly joined), the court granted the motion for remand. Id.at *3-4.

In contrast, in Electro Grafix, the carrier accepted its adjuster’s liability after suit was filed, but before the adjuster had been served with suit.  Id. at *1, 3.  The carrier timely removed the suit to federal court after it was served, alleging the adjuster was improperly joined because its acceptance of the adjuster’s liability under Chapter 542A eliminated all claims against the adjuster.  Id. at *3. In seeking remand, the plaintiff argued that the carrier’s letter accepting its agent’s liability was inadmissible because it was outside the four corners of the pleadings. Although a court is ordinarily limited in a removal/remand analysis to the face of the pleadings, the court noted that, in certain cases, it may pierce the pleadings and conduct a summary inquiry if a plaintiff has misstated or omitted discrete facts relevant to joinder. Id. Because Chapter 542A provides that all claims against the adjuster “shall” be dismissed following the carrier’s acceptance of liability, the court held that there was no reasonable basis of recovery against the adjuster under state law and he was improperly joined. Id. at *4.  The court denied the motion to remand.

Takeaways: Accepting agents’ legal responsibility early—before they appear or have been served—strengthens the argument that they have been improperly joined to defeat diversity.  Carriers should file removals timely and should not bank on subsequent dismissal of the agent under Chapter 542A to serve as a springboard to federal court.

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