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Venue can make all the difference.
At the outset of any case, it is foundational to examine whether a federal or state venue is more beneficial for your client. Jurisdictional limitations generally lock a case in the venue where the action is filed, but not always. In Texas, state court can prove to be an extremely hostile venue for insurers. The chances of successful motion practice and trial outcome for an insurer, not accounting for the specific facts of the case, can be significantly lower in a state court venue. Therefore, it is important to thoroughly explore the avenues of removal to maximize your client’s potential for a favorable long-term outcome.
Combatting Misjoinder in Texas
Large-scale first-party insurance suits often contain numerous causes of action asserted against several co-defendants in state court. The makeup of the defendants usually involves a non-diverse set of defendants, i.e. out-of-state domiciled insurer(s) and state domiciled co-defendants. Initially, the mix of diverse and non-diverse defendants may seem to defeat diversity jurisdiction. However, a closer look can sometimes reveal that the defendants and causes of action asserted have been joined to defeat diversity jurisdiction. In Texas, the proper tool to combat this is a motion to sever claims for misjoinder.
Texas Rules of Civil Procedure 41 governs misjoinder of parties. Under Rule 41, a court may sever parties and actions which have been improperly joined on such terms as are just. The appropriate course of action to assert misjoinder of parties is a motion to sever claims. The goal being to have the causes of action asserted against the insurer or diverse defendants severed from the causes of action asserted against the non-diverse defendants. Once successfully severed, the causes of action asserted against the diverse defendants are ripe for removal under diversity jurisdiction.
Severance Motions in the Insurance Context
The Texas Supreme Court provided a three-prong test for severance in Guar. Fed. Sav. Bank v. Horseshoe Operating Co., 793 S.W2d 652, 658 (Tex. 1990). Severance is appropriate when (1) the controversy involves more than one cause of action, (2) the severed claim could be independently asserted in a separate lawsuit, and (3) the severed claim is not so interwoven with the remaining action that it involves the same facts and issues. Id.
In first party insurance disputes, the first prong is almost always satisfied. Plaintiffs virtually never assert a single cause of action against insurers and co-defendants in these types of disputes. The second prong provides more of a hurdle to overcome. The test of whether a claim is independent is whether a lawsuit against the state court defendant(s) could be brought separately, and the suits could result in separate, final judgements. Martinez v. Humble Sand & Gravel, Inc., 875 S.W.2d 311, 312 (Tex. 1994). This prong will obviously hinge on the cause of action asserted against the state court defendant. This prong is most clearly satisfied when (1) the cause of action asserted against the state court defendant is recognized under Texas law, which allows it to result in a final judgement, and (2) is asserted solely against the state court defendant, which would not risk inconsistent judgements as the insurer and severed party would not share in liability.
The third prong of the severance test is the most challenging. Cases of this nature ripe for severance often involve alleged violations of separate contracts by separate defendants for the same property. Texas courts have recognized that severance is valid when the claims asserted involved separate contracts with separate parties but the same property. See Union Gas Corp. v. Gisler, 129 S.W.3d 145, 154–56 (Tex. App.—Corpus Christi 2003, no pet.). An example of this in the insurance realm would be a breach of contract claim against a diverse insurer based on the insurance policy joined with a breach of contract claim against a non-diverse contractor based on a repair contract. In this case, the plaintiff’s property is subject to both contracts, however, the co-defendants do not share in contractual privity. In essence, an insurer’s potential liability for breach of the insurance policy will not affect the liability of the contractor under an alleged violation of the repair contract and vice versa. Though the contracts involve the same property and likely stem from the same set of events, the facts and issues that weigh on liability as to each cause of action do not depend on one another. Of course, the third prong is fact dependent and varies on a case-by-case basis.
Conclusion
The choice of venue is crucial in legal cases, particularly in Texas, where state courts can be challenging for insurers. It's essential to explore removal options, even when facing jurisdictional constraints. Large-scale first-party insurance disputes often involve multiple causes of action and defendants, creating complexities around diversity jurisdiction. To address this, a motion to sever claims under Texas Rules of Civil Procedure 41 can be a powerful strategy. It separates claims against diverse defendants from non-diverse ones, enabling removal under diversity jurisdiction. The Texas Supreme Court's three-prong test for severance, assessing the independence of claims, is vital. Although the third prong of the test can be a challenging hurdle to overcome, a motion to sever claims is essential to consider when seeking the best venue for clients. In essence, strategic severance can significantly improve a client's chances of a favorable long-term outcome.