Policyholders and their insurers can often take on several roles over the course of their relationship. This is especially true once litigation begins. In Evanston Ins. Co. v. House. Auth. Of Somerset, the Sixth Circuit Court of Appeals discussed how to determine whether policyholders and their insurers are truly adverse for the purposes of federal diversity jurisdiction.
Evanston stemmed from the tragic death of a young pregnant mother. Both the woman and her child were killed when a tree collapsed while she was unloading a vehicle in an area maintained by the Housing Authority of Somerset (“HAS”) in Kentucky. Evanston Ins. Co. v. Hous. Auth. of Somerset, 6th Cir. No. 16-5018, 2016 U.S. App. LEXIS 14465, at *3 (Aug. 3, 2016). Both the parents of the mother and the father of the child she was carrying (the “State Court Plaintiffs”) sought damages in the form of loss of parental consortium. Id. The jury awarded the State Court Plaintiffs nearly four million dollars in damages. Id.
HAS maintained coverage through a risk management pool (the Kentucky Housing Authorities Self-Insurance Fund ("KHASIF")), which provided coverage up to $150,000.00. KHASIF also maintained excess coverage with Evanston Insurance Company (“Evanston”), covering its members in amounts up to one million for each occurrence and two million total for both a) liability stemming from bodily injury and b) liability from neglect, negligence, or breach of duty. Id. at 4. When the State Court Plaintiffs attempted to bring Evanston into the case following trial, HAS opposed on the grounds that doing so would be contrary to “Evanston’s potential interest” in a federal forum. Id. Evanston then initiated declaratory judgment proceedings in federal court to determine the policy limits, naming itself as Plaintiff and all other parties, including HAS and KHASIF (its insureds), as Defendants. Id. at 5. Subject matter jurisdiction was premised on the diversity of Evanston, an Illinois company, from the remaining parties, all domiciled in Kentucky. Id. The parties reached a settlement soon after in which it was agreed that Evanston would pay the “policy limits,” whatever they may be. Id. at 5-6. The State Court Plaintiffs then dismissed their claims, leaving only the federal declaratory judgment action. Id. at 5.
The District Court for the Eastern District of Kentucky found in Evanston’s favor regarding the policy limits, finding only one occurrence and, therefore, only one million dollars in damages under the settlement agreement. The State Court Plaintiffs appealed to the Sixth Circuit. Id. at 6. The Sixth Circuit, instead of focusing on the “occurrence” issue, premised its decision on the State Court Plaintiffs’ alternate assignment of error: that the District Court lacked diversity jurisdiction over the case because HAS and KHASIF were improperly aligned as defendants. Id. at 6-7.
The Sixth Circuit first noted that a plaintiff is not entitled to deference when determining proper alignment amongst the parties. Id. at 7-8. Instead, courts must look “beyond the pleadings and arrange the parties according to their real interests in the suit.” Id. at 8. Additionally, courts should focus their analysis on the “primary dispute in the controversy.” Id. The Court called HAS and KHASIF’s positions as adverse parties to their insurer into question with these principles in mind. Id. at 10-12. The Court noted that HAS opposed the State Court Plaintiff’s attempts to bring Evanston into that action, failed to file an appeal from the District Court’s decision in Evanston’s favor (or even to join in the individual defendant’s appeal), and had a likely interest in maintaining a low award so as to stem possible rate increases in their insurance. Id. Additionally, the Court pointed to an affidavit submitted by KHASIF’s president in which he stated he believed the policy limited recovery in a way favorable to Evanston. Id. at 11. The Court remanded to the District Court to consider the procedural alignment of the parties. Id. at 13.
On remand, the District Court found none of these details persuasive. Evanston Ins. Co. v. Hous. Auth. of Somerset, E.D.Ky. Civil Action No. 6: 14-027-DCR, 2016 U.S. Dist. LEXIS 155273, at *10 (Nov. 9, 2016). Instead, looking to the parties’ respective positions at the time the federal action was filed, the Court found the policyholders (HAS and KHASIF) and the insurer (Evanston) to be adverse, upholding Evanston’s chosen party alignment. Id. Importantly, at the time the federal action was filed, the settlement agreement had yet to be entered into by the parties. Id. at 5. The District Court seemed significantly less willing than the Court of Appeals to interpret the inaction of HAS and KHASIF in the federal case as cooperation, and found their opposition to the joinder of Evanston in the state action to be similarly non-persuasive. Id. at 6-9. Instead, the Court focused on how HAS and KHASIF answered the Complaint in the federal declaratory judgment action, specifically noting their denial that the policy limited recovery to a singular occurrence up to one million. Id. at 5.
The decision is important for a few reasons. First, had the District Court realigned the parties to reflect the post-settlement posture of the policyholders and the insurer, the message to future policyholders in similar situations would be to engage in the unenviable task of actively working against their insurer, and in certain instances, their own interests. Second, had the Court realigned the parties based on the policyholders’ attempts to protect the interests of their insurer in the state court action, it may have punished them for actions that were contractually required under their insurance agreement. At the very least, the Court would have been creating disincentives for cooperation between policyholders and their insurers. Declining to realign the parties avoided these possible pitfalls and encouraged cooperation between policyholders and insurers.