Sixth Circuit Interprets ‘Direct Action’ Provision of 28 U.S.C. 1332 in the Context of Michigan’s No-Fault Insurance Law

In Ljuljdjuraj v. State Farm Mutual Automobile Ins. Co., 2014 U.S. App. LEXIS 24108 (6th Cir. Dec. 19, 2014), the U.S. Court of Appeals for the Sixth Circuit held that the ‘direct action’ provision of 28 U.S.C. § 1332(c)(1) does not destroy diversity jurisdiction in an action brought against an insurer pursuant to Michigan’s No-Fault Insurance Law where a “contract of liability insurance” was not implicated.

Elvira Ljuljdjuraj (EL) was driving a car owned by her friend, Bardhyl Mullalli, when she lost control of the vehicle, crashed it, and suffered severe brain and spinal injuries. EL then filed a diversity suit in Michigan federal court seeking recovery under Mullalli’s no-fault insurance policy, which had been issued by State Farm. With regards to diversity jurisdiction, EL’s complaint alleged that the amount in controversy exceeded $75,000.00, that she was a citizen of Michigan, and that State Farm was a citizen of Illinois.

The district court dismissed the case for lack of subject matter jurisdiction, holding that 28 U.S.C. § 1332(c)(1) destroyed diversity between the parties; it noted,

“[i]n suits against insurers under Michigan’s no-fault scheme, the direct action provision in 28 U.S.C. § 1332(c)(1) is applicable, and where imputing the insured’s citizenship to the insurer destroys diversity, the federal court is without jurisdiction to hear the case.”

In pertinent part 28 U.S.C. § 1332(c)(1) provides: “in any direction action against the insurer of a policy or contract of liability insurance … to which action the insured is not joined as a party- defendant, such insurer shall be deemed a citizen of the State of which the insured is a citizen … .”

The Sixth Circuit reversed and remanded, stating, “The language of the statute on its face does not apply where a suit is brought under an insurance policy provision that does not provide for liability insurance, but rather where a suit is brought under a policy provision that covers the plaintiff on a basis other than liability by the insured to the plaintiff … .  The insurance provision [here] provides benefits on the basis of plaintiff’s having been a passenger in the primary insured’s automobile, and not on the basis of the primary-insured’s liability to the plaintiff.”  Therefore, the “direct action” provision did not apply, diversity was restored, and EL’s case should have been allowed to proceed in Federal court.