November 22, 2021
Subrogating a claim with diverse parties and over $75,000 in controversy – going to federal court right? “Not so fast!” as the inimitable Lee Corso would say. While federal jurisdiction may not affect your case’s merits or deter your filing of a given case – if you or your clients prefer to file in state court, you still may have an option.
The key lies in whether your client is a reciprocal exchange as opposed to a traditional insurance company. Unlike conventional insurance companies, which are either owned by shareholders for stock companies or policyholders for mutual companies, reciprocal insurance companies are owned by its subscribers or “members”. A reciprocal insurance exchange is a “web of contractual relationships” whereby several persons, corporations, partnerships, acting through a common attorney, undertake to insure each other against certain kinds of losses by means of a mutual exchange of insurance contracts. Arbuthnot v. State Auto. Ins., Ass’n., 264 F. 2d 260 (10th Cir. 1959). They insure each other, in a reciprocal arrangement, by exchanging indemnity contracts among themselves. In this type of exchange, each policyholder covers the others, pooling together resources if a subscriber faces perils. The effective and practical results of a reciprocal exchange place the members as both the insurer and the insureds. 94 A.l.R. 836; 131 A.l.R. 765; 145 A.L.R. 1121; Abuthnot v. State Auto Ins. Ass’n., 264 F. 2d 260 (10th Cir. 1959).
Reciprocal insurance exchanges got their start in 1881 when six dry-good merchants in New York agreed to indemnify each other because of their shared discontent with insurance companies.
This group’s members all had buildings of superior construction and maintained them well, but they were all charged premiums that did not correspond to the potential losses for similar commercial buildings.
At the time, insurance companies applied broad strokes in their classification of risk; modern rate-setting techniques hadn’t quite been developed yet. Able to absorb certain losses, the merchants had the incentive and ability to “self-insure” to lower their costs.
Examples of reciprocal exchanges or “reciprocal inter-insurance exchanges” include:
- AAA (American Automobile Insurance Association)
- Erie Insurance Group • PURE Insurance
- USAA (United Services Automobile Association)
It is typical for a prospective Defendant to move for Removal to federal jurisdiction when the case in controversy exceeds $75,000 and ostensibly includes diverse parties. With reciprocal exchanges, however, the diversity requirement can simply and effectively be countered – and the case Remanded back to state court – by arguing that the reciprocal exchange has customers in all or virtually all jurisdictions, and complete diversity cannot exist with the Plaintiff’s corporate structure. Dasilva at 397. See James River Ins. Co. v. AIG Propr. Cas. Co., Privilege Underwriters Reciprocal, Exchange Inc., a/s/o Joesph Insalaco, and Molly O’Neill, 2016 WL 8783213 (S.D. Fla. 2016 (granting defendants’ motions to dismiss for lack of subject matter jurisdiction for diversity jurisdiction because PURE, an indispensable party, is an unincorporated association with members in Ohio, and therefore is deemed a citizen of the State of Ohio, which is the same state of citizenship of the Plaintiff). If complete diversity of citizenship cannot be established between the parties then Removal cannot be sustained a Motion to Remand should be granted.
So cancel that hotel reservation and get some extra rest, because if your subrogation claim being Removed to federal jurisdiction involves a reciprocal exchange, you can lay your weary head on decades of comfortable case precedent and Remand this case back home where it belongs. Helpful Precedent for Remanding Reciprocal Exchange Cases Back to State Court:
- Arbuthnot v. State Auto. Ins., Ass’n., 264 F. 2d 260 (10th Cir. 1959)
- True v. Robles, 571 F. 3d 412 (5th Cir. 2009)
- Tran. v. Farmers, 104 Cal. App. 4th 1202 (2012)
- Tuck v. United Servs. Auto. Ass’n, 859 F. 2d 842 (10th Cir. 1988)
- James River Ins. Co. v. Farmers Ins. Exchange, 2012 WL 1190886 (D. Ariz. 2012)