An Interesting Twist On A New Law

The Texas legislature passed new insurance laws effective September 1, 2017 that greatly curtail policyholder rights. One aspect of the new laws authorized insurance companies to assume legal responsibility for the conduct of certain agents. See §542A.006 Tex. Ins. Code. Under this new law, if the insurer decides to assume legal responsibility for certain agents, then these agents are dismissed from a lawsuit with prejudice. 

The new law is significant because it affects a policyholder’s ability to maintain suit in state court. The conventional wisdom is that state courts are more favorable to policyholders and federal courts are more favorable to insurers. Federal court jurisdiction, in this context, typically requires two elements: (1) controversies in excess of $75,000.00, and (2) complete diversity between the plaintiff and all defendants. Complete diversity means that none of the plaintiffs can be from the same state as any of the defendants. A policyholder often decides to join local insurance employees, representatives, adjusters, or others in a lawsuit to defeat complete diversity. By joining these insurance agents, complete diversity between the policyholder and all defendants is lacking and consequently, the case remains in state court. Essentially, the new insurance law creates a loophole and allows insurers to remove more insurance lawsuits from state court to federal court since the local agents can be dismissed from the lawsuit with the insurance companies irrevocably assumption of liability for the agent’s actions.

Recently, a federal magistrate judge issued an opinion that substantially closes this loophole. In Massey v. Allstate, No. H-18-1144, (S.D. Tex. May 16, 2018), the judge found that the “voluntary-involuntary rule” limits an insurer’s ability to remove cases from state court to federal court after it assumes liability for its agents while a lawsuit is pending in state court. The “voluntary-involuntary rule” states that “an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff.” Basically, if the case was nonremovable when filed (e.g. it had a claim against a local defendant); it can only be removed to federal court by the voluntary act of the plaintiff (e.g. the plaintiff voluntary dismisses the local defendant). The U.S. Supreme Court established the “voluntary-involuntary rule” in 1900 and it was enacted into law at 28 U.S.C. §1446. In Massey, the federal magistrate judge determined that the insurer’s right to assume legal responsibility for the conduct of its agents (and thereby have the agents dismissed from the lawsuit) is an involuntary act with respect to the plaintiff and cannot form the basis for removal for federal jurisdiction purposes.

From a policyholder’s perspective, this is a win because insurers will be able to remove fewer cases to federal court than initially thought. However, it remains to be seen whether this opinion will stand or be challenged on appeal. For now, it stands.


Three Significant Ways New Insurance Laws Affect Texas Policyholders

On May 26, 2017, Governor Greg Abbot signed House Bill 1774. The new amendments weaken consumer protection provisions in the Texas Insurance Code. The amendments go into effect on September 1, 2017. All lawsuits filed prior to September 1, 2017 will be govern under the law as it exists prior to the amendments.

Loose lips sink ships and destroy settlement agreements

One of the increasingly common provisions of a settlement agreement is a confidentiality provision. A typical confidentiality provision requires the parties to refrain from the disclosing the fact of settlement and the amount of settlement. In my opinion, you should resist including a confidentiality provision in settlement agreements. Confidentiality provisions lead only to further litigation to enforce them and could possibly cause the loss of the settlement amount.

Thierry Roge/Reuters

Thierry Roge/Reuters

The link leads to news report about a Florida lawsuit about a breach of a confidentiality agreement. In the account, a school principal (Snay) sued the school district (Gulliver) for age discrimination. The parties reach a settlement agreement at mediation that included a confidentiality provision. Snay's daughter published a Facebook message about the settlement. She posted, "Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT." The Facebook post was seen by up to 1,200 of her friends, many of whom were current or former students at Gulliver. Word of the post got back to Gulliver officials, who then refused to pay the settlement amount to Snay.

Next, there was a hearing, a trial court ruling and an appeal. Ultimately, the Florida court of appeals held that Snay violated the agreement by doing exactly what he had promised not to do. His daughter then did precisely what the confidentiality agreement was designed to prevent, advertising to the Gulliver community that Snay had been successful in his age discrimination and retaliation case against the school. Snay's breach of the confidentiality provision cost him the entire settlement amount he had sued to recover in his age discrimination suit.