Insurers frequently file coverage actions in federal court, and when they do, jurisdiction is often predicated on diversity. Pursuant to 28 U.S.C. § 1332(a), a federal district court has original jurisdiction of a civil action between citizens of different states in which the amount in controversy exceeds $75,000 exclusive of interest and costs. Because all of the parties in the underlying action must be named as defendants in an insurer’s coverage action, it is possible that a particular underlying defendant’s citizenship may not be known to the carrier when the complaint is filed. In this situation, can the carrier file suit in federal court alleging an underlying defendant’s citizenship on information and belief? In a holding of first impression in that court, the U.S. Court of Appeals for the Ninth Circuit in Carolina Casualty Ins. Co. v. Team Equipment, Inc., 2014 WL 407389 (9th Cir. Feb. 4, 2014), agreed with Wilson Elser and said “yes.”
Carolina Casualty Insurance Company (Carolina) is incorporated in Iowa with its principal place of business in Florida. Carolina issued a corporate liability and directors and officers liability insurance policy to U.S. Dry Cleaning Corp. (Dry Cleaning) that was effective between January 2009 and January 2011. In February 2008, Dry Cleaning purchased dry cleaning stores from Team Equipment, Inc. and two affiliated entities (collectively, Team Equipment). For partial payment of the purchase price, Dry Cleaning issued notes to Team Equipment.
Two years later, Team Equipment filed an action in California state court against Dry Cleaning and certain of its officers, directors and affiliated entities to enforce the notes. Team Equipment settled its claims against Dry Cleaning and released all claims against the remaining defendants in June 2011 for an amount in excess of $75,000, and agreed to “limit the enforcement of any judgment or award …, including attorney’s fees, solely to the proceeds of [Dry Cleaning’s] Insurance Policy” issued by Carolina. Carolina then filed a complaint in the U.S. District Court for the Central District of California against its insureds and all other parties to the underlying action seeking a declaration that the settlement was not covered by Dry Cleaning’s insurance policy. Carolina asserted federal jurisdiction based on diversity of citizenship.
The district court dismissed the complaint with prejudice and without leave to amend 17 days after it was filed, before it was served and without prior notice to Carolina. The district court ruled in pertinent part that Carolina had not adequately alleged diversity of citizenship pertaining to all of the parties to the underlying action because Carolina alleged diversity of citizenship regarding some (but not all) of those parties on information and belief, and not on its affirmative knowledge. The district court reasoned that such allegations were insufficient to allege jurisdiction and dismissed the complaint under FRCP 12(h)(3), which provides that “[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.” Carolina moved to alter or amend the judgment pursuant to FRCP 59(e); that motion was denied and Carolina’s appeal ensued.
The Ninth Circuit’s Opinion
In a published opinion, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded for refiling of Carolina’s complaint. Adopting what it described as “the sensible principle” used in the Third and Seventh Circuits and advocated by Wilson Elser, the Ninth Circuit concluded that because the information necessary to establish diversity of citizenship of some of the defendants was not reasonably available to Carolina – and indeed was within the defendants’ control – “it was sufficient for Carolina to allege simply that the defendants were diverse to it” and “Carolina should have been permitted to plead its allegations on the basis of information and belief.”
The Ninth Circuit recognized that the pleading of diversity of citizenship on information and belief is insufficient to sustain federal jurisdiction throughout the life of a case, but reasoned that it is enough to allow the complaint to stand until it is served and responded to:
If and when the defendants respond to the complaint, the district court can revisit the jurisdictional allegations. If the defendants deny that the court has jurisdiction, the district court should evaluate the record created by the parties to determine its jurisdiction. Jurisdictional discovery may be appropriate. Even if the defendants concede jurisdiction, the district court may still conclude that some further showing of citizenship may be required to confirm its jurisdiction. But it should not be assumed at this stage that a proper basis for jurisdiction cannot be established.
Carolina is a positive development for insurers wishing to file coverage actions in federal court. There are, however, two practical considerations that should be kept in mind.
First, the plaintiff insurer should affirmatively state the basis for its information and belief in the complaint. The insurer should (1) state specifically that the basis for the allegation on information and belief is the complaint, proposed complaint or claim filed in the underlying action, (2) state further that the information pled on information and belief is not reasonably ascertainable to it, and (3) explain why this is so. With its motion to reconsider, Carolina here sought leave to file an amended complaint that contained such allegations.
These additional allegations were described as follows:
Carolina explained in its motion for reconsideration that it had made efforts to determine the citizenship of the two LLCs and four of the eight individual defendants but it was unable to do so from publicly available information. The business filings that Carolina submitted to the district court show that information necessary to determining the citizenship of the LLCs could not be determined from the public filings of those companies. Furthermore, Carolina reported that it was not able to allege the citizenship of some of the individual defendants based on their residency, as there was no information about their residency in the underlying complaints.
Second, if an insurer is unable to determine the citizenship of defendants to the coverage action, it can be anticipated that serving a complaint and summons on them might also pose a problem. The Ninth Circuit recognized this fact and noted specifically that jurisdictional discovery is an appropriate solution because the insurer will likely be able to “obtain the information it needs via discovery from the defendants it can locate.”