Certain insurers must now give pause to the common practice of filing in or removing to federal court on the basis of diversity. The U.S. District Court for the District of Oregon recently mirrored the majority of federal jurisdictions in ruling that reciprocal insurance exchanges are unincorporated associations, which are deemed to be a citizen of every state in which it has members, or policyholders, regardless of whether those policyholders are involved in the litigation.
In Staggs v. Farmers Insurance Exchange, the insured homeowners, citizens of Oregon, filed a claim under their homeowners’ policy to recover losses sustained in a house fire. The insurer, a reciprocal insurance exchange organized under California law, disputed its coverage obligations and the insureds filed a declaratory judgment action in federal court asserting diversity jurisdiction.
In granting the insurer’s motion to dismiss for lack of subject matter jurisdiction, the court rejected the insureds’ argument that the insurer should be treated as a corporation for purposes of citizenship based on the fact that it was organized under the law of another state and had its principal place of business in another state. While the court noted that federal courts are split on the issue of whether insurance exchange policyholders will be considered “members” or simply “customers” for purposes of citizenship, the law of the state in which the insurer was organized defined policyholders as “members.”
Therefore, the court sided with the majority of jurisdictions that have held that an insurance exchange is a citizen of every state in which it has policyholders. Because the plaintiff policyholders were citizens of Oregon, the insurance exchange was also a citizen of Oregon, thus destroying diversity.
This case presupposes the feasibility of assessing the citizenship of every policyholder prior to filing or removal. Nonetheless, as admonished in dicta by this and other federal courts addressing the issue, insurers and counsel must safeguard against adopting inconsistent positions nationwide, between filing in or removing to federal court and opposing diversity on a contrary basis.
Staggs v. Farmers Ins. Exch., Civ. No. 3:15-cv-01502-MC (D. Or. April 27, 2016).