Fifth Circuit Widens Availability Of Federal Jurisdiction In Property Insurance Disputes

• Published date: 02 November 2022
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: Wilson Elser Moskowitz Edelman & Dicker LLP
• Author: Ms Jennifer Martin and Timothy P. Delabar

Since the Texas Legislature promulgated Texas Insurance Code Chapter 542A in 2017, federal district courts in Texas have been deeply divided on what this means for removal jurisdiction in the state. The two competing views are best set forth by Judge Micaela Alvarez of the Southern District of Texas¹ and Judge Mark Pittman of the Northern District of Texas.² Because the district courts were so deeply divided, whether a case could be removed to federal court depended on which judge was assigned the case after the notice of removal was filed.³

As the district courts became even more divided and entrenched in their respective positions, the Fifth Circuit issued its opinion in Advanced Indicator & Manufacturing, Inc. v. Acadia Insurance Company, Cause No. 21-20092, __ F.4th __ (5th Cir. 2022). The authors of this article, who were the defense attorneys in this case, convinced the Fifth Circuit to accept the minority view that an insurance company may remove a case to federal court even if the insurance company's election of liability occurred after the suit was filed in state court. This decision presents a big win for defendants seeking a federal forum.

Chapter 542A and Removal Jurisdiction
Section 542A.006 of the Texas Insurance Code sets forth a framework by which an insurance company can elect to accept whatever liability its agent may have for the agent's acts or omissions related to the claim.⁴ If the insurance company makes the election before the lawsuit is filed, "no cause of action exists against the agent."⁵ If the insurance company makes its election after the lawsuit is filed, the court must dismiss the agent with prejudice.⁶ All courts agreed that if the election were made prior to the suit being filed in state court, then the case would be removable to federal court. Where they disagreed, however, was what to do when the insurance company elected to accept the agent's liability after the suit was filed.

Because the agent was a proper party when the lawsuit was filed, some federal district courts held that the removal was barred by the voluntary-involuntary rule, which says that if a case is not initially removable to federal court then it only can become removable by the voluntary act of the plaintiff.⁷ This became known as the majority view. In contrast, the district courts that adopted the minority view held that because the election is irrevocable and there is no possibility that the plaintiff could recover against the agent, the...