Related Practices
Timing is Key for Texas Insurers Accepting Agents' Liability
Texas Law360April 15, 2019
By Brett A. Wallingford and Hanna Kim
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In 2017, Chapter 542A of the Texas Insurance Code introduced new laws pertaining to lawsuits arising from weather-related claims. Notable is Section 542A.006, which allows an insurer to elect to assume an agent’s liability.[1] Specifically, if an insurer notifies the insured of the election, “the court shall dismiss the action against the agent with prejudice.”[2]
Prior to this amendment, policyholders would routinely file a lawsuit against both the insurer and the local (nondiverse) agent in state court even if there was no actual evidence of wrongdoing on the agent’s part. This was done solely to prevent the insurance company from removing the case to federal court.
While Section 542A.006 created a mechanism to prevent policyholder attorneys from unfairly targeting insurance adjusters with lawsuits simply to destroy diversity, it has also created an unexpected jurisdictional issue. The crux of the issue is whether the timing of notifying the policyholder of the election affects an insurer’s ability to remove the action to federal court.
Section 542A.006(b) is clear that when an insurer assumes an agent’s liability before an action is filed, the insured has “no cause of action [that] exists against the agent.”[3] Similarly, Section 542A.006(c) provides that if an insurer makes an election after a claimant files an action, the court shall dismiss the action against the agent with prejudice.[4] The clear intent of the statute was to read these provisions in conjunction with one another and allow an election to occur either before or after suit was filed.
Nevertheless, an issue has arisen in the federal courts that does not appear to have been contemplated by the drafters of Section 542A.006.
The issue involves something called the “voluntary-involuntary dismissal rule.” This is a judicially created rule that established that “a case nonremovable on the initial pleadings [may] become removeable only pursuant to a voluntary act of plaintiff.”[5] Essentially this rule prohibits an insurer from removing an action to federal court once a nondiverse agent is dismissed from the action in state court unless voluntarily removed by the plaintiff themselves.
Improper joinder is an exception to the voluntary-involuntary rule, such that a plaintiff cannot purposefully join a nondiverse party to prevent an action from being removed to federal court.[6] This means that federal courts will allow removal and maintain jurisdiction over the case if it finds that a nondiverse party — such as a local agent — should have never been a party to the suit from the start.
Although the language of Section 542A.006 plainly states that an insurer’s assumption of the liability of its agent would effectively dismiss an insured’s claims against the agent, insurers should be aware of the possible jurisdictional complexities that arise due to existing precedent under the federal removal statute.
Since Chapter 542A was enacted in 2017, several courts within the Fifth Circuit have already addressed this issue — with some remanding the action back to state court. In Stephens v. Safeco Insurance Company of Indiana, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas remanded the action back to the state court because the insurer elected to assume its adjuster’s liability after the insured had filed suit.[7] Judge Mazzant reasoned that an election made after the suit commences does not challenge the joinder of the nondiverse agent, and thus has no impact on whether the insured asserted viable claims against the agent.[8]
According to Judge Mazzant, when the assumption of liability is made during the pendency of the action, the insurer then bears the burden to prove that the nondiverse agent is improperly joined.[9] This interpretation of Section 542A.006 focuses on the timing of the insurer’s election as “critical to a court's improper joinder inquiry. That is, whether an insurer's election to accept full liability of an adjuster is tantamount to a finding of improper joinder turns on if it was made prior to or after the state court action was commenced.”[10]
Judge Mazzant’s reasoning was most recently adopted by the U.S. District Court for the Western District of Texas in River of Life Assembly of God v. Church Mutual Insurance Company, in which the court granted the insured’s motion to remand.[11] In River of Life, the court found that because the insurer assumed liability of its adjuster two months after the insured filed the petition in state court, then a “reasonable basis existed that River of Life might be able to recover against [the adjuster] at the time of his joinder, he was properly joined even though [the insurer] has now elected responsibility.”[12] Thus, the improper joinder analysis would only be proper “for a reason that predated [the adjuster’s] joinder.”[13]
Similarly, in Massey v. Allstate Vehicle & Property Insurance Company, the U.S. District Court for the Southern District of Texas remanded the action back to state court because the election to assume the nondiverse agent’s liability was made after the insured filed suit.[14] In Massey, the insurer attempted to dismiss the nondiverse agent under Section 542A.006 and subsequently removed the case to federal court, where the court ultimately found that the case could not be removed pursuant to the voluntary-involuntary rule.[15] Stephens, River of Life and Massey illustrate that insurers must make the election to assume liability prior to litigation in order to guarantee the lawsuit can be removed to federal court.
However, it is unclear whether all federal courts will consider the timing of the election as the “critical” piece to the jurisdictional inquiry. In Electro Grafix Corp. v. Acadia Insurance Company, the Western District of Texas denied the insured’s motion to remand in part because the insurer notified the insured before the suit was filed, but the court also cited to Section 542A.006(c) in reasoning that the insurer met its burden to the show that the agent was improperly joined.[16]
The court did not focus on the timing of the election, but merely held that “when an insurer elects to accept liability for an agent and notifies the claimant, the court ‘shall dismiss’ the claimant’s action against the agent.”[17] Thus, it is unclear whether the court denied the insured’s motion to remand simply because the insured was notified of the election before the insured filed suit.
Further, in Jiang v. The Travelers Home and Marine Insurance Company, the Western District of Texas did not consider the voluntary-involuntary rule.[18] The court ultimately denied the insured’s motion for remand and dismissed the insured’s claim against the agent even though the insurer elected to accept responsibility for the agent’s liability after the insured filed suit.[19] The court cited Section 542A.006(c) in holding that it must dismiss all of the insured’s claims against the agent.[20]
Likewise, in Flores v. Allstate Vehicle and Property Insurance Company, the Western District of Texas held that the agent was improperly joined because the state court’s dismissal of the agent was final and unappealable under Section 542A.006.[21] Even though the insurer accepted the liability after the insured filed suit, the court reasoned that the Texas Legislature’s enactment of Section 542A.006 “essentially rendered plaintiffs unable (not merely unlikely) to succeed on their claims against [the agent.]”[22]
Judge Mazzant’s holding that “timing of an insurer’s election is critical to a court’s improper joinder inquiry” is an interpretation of Section 542A.006 that may indicate how other courts will interpret Section 542A.006 moving forward — as clearly demonstrated by the Western District’s decision in River of Life.
However, for some courts, Section 542A.006 itself is enough for an insurer to successfully prove an agent was improperly joined — meaning that electing to assuming the liability during the pendency of the litigation does not impact the insurer’s ability to maintain its action in federal court. Based on the contrasting holdings by the courts that have considered this issue thus far, it is unclear whether the timing of an insurer’s election will dictate its fate in all federal courts.
For insurers seeking to preclude lawsuits against their agents and ensure matters are removable to federal court, the required process is simple — adopt the agent’s responsibility in response to the required presuit notice letter. The law is clear that an adoption prior to the filing of suit precludes suit against the agent. As a result, such matters would always be properly removable to federal court.
In this situation, timing is everything.
Brett A. Wallingford is a partner and Hanna Kim is an associate at Zelle LLP.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, Inc., or any of its or their respective affiliates. This article is for general informational purposes and is not intended to be and should not be taken as legal advice.
[1] Tex. Ins. Code § 542A.006(a)
[2] Tex. Ins. Code § 542A.006(b)
[3] Id.
[4] Tex. Ins. Code § 542A.006(c)
[5] Stephens v. Safeco Ins. Co. of Indiana, No. 4:18-cv-00595, 2019 WL 109395, at *3 (E.D. Tex. Jan. 4, 2019) (citations omitted).
[6] Id.
[7] Id. at 4.
[8] Id.
[9] Id. at 5.
[10] Id. at 6.
[11] River of Life Assembly of God v. Church Mutual Ins. Co., No. 1:19-cv-49, 2019 WL 1468933 (W.D. Tex. Apr. 3, 2019).
[12] Id. at 4.
[13] Id. at 3.
[14] Massey v. Allstate Vehicle & Property Ins. Co., No. H-18-1144, 2018 WL 3017431, at *4 (S.D. Tex. June 18, 2018).
[15] Id.
[16] Electro Grafix Corp. v. Acadia Ins. Co., No. SA-18-CA-589-XR, 2018 WL 3865416, at *3–*4 (W.D. Tex. Aug. 14, 2018).
[17] Id.
[18] Jiang v. The Travelers Home and Marine Ins. Co., No. 1:18-cv-758, 2018 WL 6201954 (W.D. Tex. Nov. 28, 2018)
[19] Id.
[20] Id.
[21] Flores v. Allstate Vehicle & Property Ins. Co., No. SA-18-CV-742-XR, 2018 WL 5695553 (W.D. Tex. Oct. 31, 2018)
[22] Id. at 5.
