If an insurance company denies coverage for state court class action litigation and wants the right to litigate the coverage issues in federal court rather than state court, the insurance company should consider filing a declaratory judgment action in federal court before approval of a class settlement or risk losing the right to litigate the issues in federal court. Travelers Property Casualty v. Good, 2012 WL 3059297 (7th Cir. July 27, 2012), holds that a federal court lacks subject matter jurisdiction over a declaratory judgment action filed by an insurance company after approval of a class settlement—if the settlement includes an assignment that limits the insured’s and each class member’s claims to less than $75,000—unless their claims cannot “be adjudicated on an individual basis without affecting the interests of the other claimants”—because jurisdictional rules do not permit aggregation of their coverage claims. Travelers also holds, however, that if the insurance company does not file a declaratory judgment action before approval of a settlement of this kind, the company may nevertheless litigate the coverage issues in federal court if the class members’ coverage claims, when aggregated, exceed $5 million—by promptly removing the state court case to federal court once post-judgment supplementary proceedings are filed by the class against the insurance company, rather than by filing a separate federal declaratory judgment action.

In Travelers, two Travelers insurance companies filed an action in federal court in Chicago, seeking a declaratory judgment that they had no duty to defend an insured, Rogan Shoes, in a class action pending in Illinois state court. In the class action, customers of Rogan Shoes sought over $387 million based on allegations that Rogan Shoes had violated the federal Fair and Accurate Credit Transactions Act (“FACTA”)—which authorizes damages of up to $1,000 per unlawful receipt—by printing customers’ charge card expiration dates on 387,291 receipts in 2008 and 2009. Rogan Shoes tendered its defense to Travelers, but Travelers denied coverage. In 2010, the court approved a $16 million class settlement. The settlement, however, provided that Rogan Shoes agreed to pay the customer class only $50,000—and assign its rights under its insurance policies (other than its $50,000 reimbursement claim) to the class—and that the class agreed to satisfy the remainder of the $16 million settlement only from proceeds of the insurance policies.

In 2011, the class began supplementary proceedings by filing a citation to discover assets against Travelers in Illinois state court. A citation to discover assets allows a judgment creditor to learn whether the person to whom the citation is addressed (whether a defendant or a third party) has assets that may be used to satisfy the judgment in whole or in part. Travelers responded by filing the declaratory judgment action in federal district court. The district court dismissed the case, choosing to exercise its discretion under the Wilton/Brillhart abstention rule (which permits dismissal of a declaratory judgment action if parallel proceedings are pending in state court). Travelers appealed. During oral argument, the Seventh Circuit Court of Appeals ordered supplemental briefing regarding whether the assignment to the class prevented the case from satisfying the amount in controversy requirement for diversity jurisdiction, because no class member individually had a claim for more than $75,000. After further briefing, the Seventh Circuit held that the case failed to satisfy the amount in controversy requirement and that the absence of subject matter jurisdiction required dismissal.

To reach this decision, the Seventh Circuit sorted through several jurisdictional rules relating to whether claims may be aggregated to satisfy the amount in controversy requirement. The general rule is that multiple litigants cannot aggregate claims to reach the jurisdictional minimum, but this rule does not apply to a declaratory judgment action based on a “unitary controversy” that “reflects the sum of many smaller controversies.” The anti-aggregation rule accordingly does not apply to a declaratory judgment action by or against an insured for coverage of a group of smaller underlying claims against it. The assignment by Rogan Shoes to the class, however, precludes this exception to the anti-aggregation rule from applying to Travelers’ declaratory judgment action because the assignment converted the “unitary controversy” between Rogan Shoes and Travelers into a controversy between Travelers and each of the class members.

The anti-aggregation rule also distinguishes between co-parties’ “separate and distinct demands”—which cannot be aggregated—and co-parties’ claims that have a ‘“common and undivided interest’ in a ‘single title or right’”—which can be aggregated. Under the Eagle Star rule, co-parties’ claims are “common and undivided”—rather than “separate and distinct”—and thus can be aggregated—if each claim is both “(1) part of a ‘common fund’ and (2) could not be adjudicated on an individual basis without affecting the interests of the other claimants.”

Based on the terms of the settlement agreement between Rogan Shoes and the class, the Seventh Circuit held that Travelers’ declaratory judgment action fails to satisfy at least the latter requirement of the Eagle Star rule. The settlement agreement provided that each class member would receive a pro rata (per receipt) share of the recovery from the insurance policies, but not more than $1,000. After deducting a third of the $16 million settlement sum for attorneys’ fees, roughly $10.667 million would remain to be distributed. The amount that any class member could recover thus only could be less than $1,000 if more than 10,667 viable claims are submitted. Travelers, as the party asserting the existence of federal jurisdiction, had the burden of proving by a preponderance of the evidence that jurisdictional requirements had been satisfied—in other words that more than 10,667 viable claims would be submitted. Travelers, however, failed to provide evidence (apparently other than the settlement agreement) on this point.

Before concluding that the district court accordingly lacked jurisdiction and that the absence of jurisdiction required dismissal of the case, the Seventh Circuit determined that Rogan Shoes’ assignment of its policy rights did not improperly deprive Travelers of its right to a federal forum. Travelers had at least two opportunities to litigate the coverage issues in federal court. First, Travelers could have filed its declaratory judgment action when it denied coverage and before approval of the class settlement that assigned the policy rights. Second, after approval of the class settlement and the assignment, Travelers could have removed the state court citation proceeding to federal court. A state court supplementary proceeding, such as a garnishment or a citation to discover assets, may be removed if it involves both a new party (i.e., a party that was not a party in the case that resulted in the judgment underlying the supplementary proceeding) and a disputed issue that was not decided as part of the underlying judgment (such as whether a policy provides coverage). The general anti-aggregation rule would not have precluded removal of the state court citation proceeding instituted by the class because the Class Action Fairness Act permits aggregation in class actions and provides for jurisdiction if the aggregated amount in controversy exceeds $5 million.

Travelers Property Casualty v. Good, 2012 WL 3059297 (7th Cir. July 27, 2012), thus highlights that if an insurance company denies coverage for state court class action litigation and wants the right to litigate the coverage issues in federal court rather than state court, the insurance company should promptly consider filing a declaratory judgment action in federal court before approval of a class settlement or risk losing the right to litigate the issues in federal court.