Greg E. Searles v. Cincinnati Insurance Company

Greg Searles, a resident of Arizona, brought an action in the Central District of California against Cincinnati Insurance Company (“Cincinnati”), which has its principal place of business in Cincinnati, Ohio. Searles alleged that Cincinnati breached its insurance contract when it failed and refused in bad faith to indemnify Searles for damages and costs of defense resulting from an action brought against Searles for libel, slander, unfair competition and malicious prosecution. Before Cincinnati filed its answer, the district court sua sponte dismissed the action without prejudice for lack of diversity jurisdiction under 28 U.S.C. § 1332(c)(1). Because a bad faith insurance action is not a “direct action” under § 1332(c)(1), we reverse and remand for further proceedings.

DISCUSSION

Section 1332(e)(1), 28 U.S.C., provides:

[A] corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business, except that in any direct 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, as well as of any State by which the insurer has been incorporated and of the State where it has its principal place of business.

(Emphasis added).

In Beckham v. Safeco Ins. Co., 691 F.2d 898, 902 (9th Cir. 1982), we held that a bad faith action against a plaintiffs own in *729 surer is not a “direct action” within the meaning of § 1332(c)(1). We concluded that § 1332(c)(1) applies to

those cases in which a party suffering injuries or damage for which another is legally responsible is entitled to bring suit against the other’s liability insurer without joining the insured or first obtaining a judgment against him....

Thus, “unless the cause of action urged against the insurance company is of such a nature that the liability sought to be imposed could be imposed against the insured, the action is not a direct action.” Id. at 901-02 (citations and quotation omitted). Many other courts have reached the same conclusion that a “first party” insurance action, or a suit by an insured against an insurer, is not a “direct action.” See Myers v. State Farm, Ins. Co., 842 F.2d 705, 707 (3rd Cir. 1988); Bowers v. Continental Ins. Co., 753 F.2d 1574, 1576 (11th Cir.), cert. denied, 473 U.S. 906, 105 S.Ct. 3531, 87 L.Ed.2d 655 (1985); Velez v. Crown Life Ins. Co., 599 F.2d 471, 473 (1st Cir. 1979); Vargas v. California State Automobile Ass’n Inter-Insurance Bureau, 788 F.Supp. 462, 463-64 (D.Nev. 1992); Field v. Liberty Mut. Ins. Co., 769 F.Supp. 1135, 1138 (D.Haw. 1991); Basel v. Allstate Ins. Co., 757 F.Supp. 39,, 40-41 (N.D.Cal. 1991); Kim ball Small Properties v. American Nat’l Fire Ins. Co., 755 F.Supp. 1465, 1467-68 (N.D.Cal. 1991); Blake v. National Casualty Co., 607 F.Supp. 189, 191 (C.D.Cal. 1984).

In dismissing this action, the district court followed Chavarria v. Allstate Ins. Co., 749 F.Supp. 220 (C.D.Cal. 1990). In Chavarria, the court held that Beckham was no longer good law after the Supreme Court’s decision in Northbrook Nat’l Ins. Co. v. Brewer, 493 U.S. 6, 110 S.Ct. 297, 107 L.Ed.2d 223 (1989). Id. at 222-23. In Northbrook,, an Illinois workers’ compensation insurer brought an action against a Texas employee to challenge an award of compensation benefits by the Texas Industrial Accident Board. Applying the plain language of § 1332(c)(1) restricting the provision to a direct action against an insurer, the Court held that the action by an insurer against an insured did not fall within § 1332(c)(1). Northbrook, 493 U.S. at 12-13, 110 S.Ct. at 301.

Northbrook explicitly did not address the meaning of a “direct action.” Id. at 9 n. 1, 110 S.Ct. at 299 n. 1. Moreover, the narrow holding in Northbrook is not contrary to our interpretation of “direct action” in Beckham. The Chavarria decision does not follow binding Ninth Circuit precedent and has been criticized on this basis. See Vargas, 788 F.Supp. at 463; Field, 769 F.Supp. at 1138 n. 2; Basel, 757 F.Supp. at 41; Kimball Small Properties, 755 F.Supp. at 1466.

Further, the legislative history of § 1332(c)(1) supports the result in Beckham. As explained in Northbrook, the provision was enacted in response to an increase in the caseload of federal district courts in Louisiana resulting from that state’s adoption of a “direct action” statute. Northbrook, 493 U.S. at 9-10, 110 S.Ct. at 299. The statute allowed an injured party to sue a tortfeasor’s insurer directly without joining the tortfeasor as a defendant, which created diversity jurisdiction in a large number of eases. Id.

Believing that such suits did “not come within the spirit or the intent of the basic purpose of the diversity jurisdiction of the Federal judicial system,” Congress enacted the proviso “to eliminate under fhe diversity jurisdiction of the U.S. district courts, . suits on certain tort claims in which both parties are local residents,- but which, under a State ‘direct action’ statute, may be brought directly against a foreign insurance carrier without joining the local tort-feasor as a defendant.”

Id., citing S.Rep. No. 1308, 88th Cong., 2d Sess. 1, 7 (1964); U.S.Code Cong. & Admin.News 1964, p. 2778-79, 2784. See also Beckham, 691 F.2d at 901 (same).

The district court held in Chavarria, and Cincinnati argues here, that applying § 1332(c)(1) to bad' faith actions is consistent with its purpose to prevent insurance litigation from increasing, court congestion, and that an insurance company doing business in the state in which the suit is brought is not subject to local prejudice. Chavarria, 749 F.Supp. at 223. However, the Supreme Court rejected this broad approach to precluding federal jurisdiction in all cases in which an insurance company is a party, noting that Congress had not specifically expressed any concern about diversity actions filed by insurance carriers. Northbrook, 493 U.S. at 9-10, 12, 110 S.Ct. at 299, 301 (“[W]e refuse to attribute to Congress an intent broader than that specifically expressed in *730 the direct action proviso.”)- Similarly, Congress did not specifically express any concern about diversity jurisdiction over bad faith actions brought by an insured against his or her own insurer.

Cincinnati also argues that the “plain language” of the statute, which precludes diversity jurisdiction in “direct actions” rather than in suits pursuant to “direct action statutes,” requires this court to apply § 1332(c)(1) to a bad faith action. While Cincinnati is correct that the plain language of a statute must be followed, Northbrook, 493 U.S. at 9-10, 110 S.Ct. at 299, the meaning of “direct action” is not clear from the statutory language. The legislative history thus must be consulted, and as explained by the Supreme Court, § 1332(c)(1) was intended to' eliminate diversity jurisdiction for. “suits on certain tort claims in which both parties are local residents, but which, under .a State 'direct action’ statute, may be brought directly against a foreign insurance carrier without joining the local tort-feasor as a defendant.” Northbrook, 493 U.S. at 10, 110 S.Ct. at 299.

CONCLUSION

In Beckham, we held that a bad faith action brought by an insured against the insurer is not a “direct. action” within the meaning of 28 U.S.C. § 1332(c)(1). Rather, a direct action is one in which a plaintiff is entitled to bring suit against the tortfeasor’s. liability insurer without joining the insured. The Supreme Court’s decision in Northbrook did not address the meaning of a “direct action,” and thus does not dictate a contrary result. Section § 1332(c)(1) does not preclude diversity jurisdiction in this case.

REVERSED and REMANDED.