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.