September 19, 2017
Diversity jurisdiction requires complete diversity among plaintiffs and defendants. While it is difficult for a defendant to remove a case with a nondiverse defendant, removal can be accomplished through the doctrine of fraudulent joinder.
Fraudulent joinder may be established if the removing party demonstrates the plaintiff engaged in outright fraud in pleading jurisdictional facts. However, fraud is not necessary; the removing party may also show fraudulent joinder if it convinces the court there is no possibility the plaintiff would be able to establish a cause of action against the in-state defendant in state court. With a standard even more favorable to the plaintiff than the standard for ruling on a 12(b)(6) motion, fraudulent joinder comes at a heavy burden. As the court has consistently reminded, there only needs to be a slight possibility of the plaintiff achieving relief. If the court recognizes even a glimmer of hope for the plaintiff, the jurisdictional question is resolved in favor of remand.
Our district court recently recognized such glimmer as to several causes of action against an insurance agency in John W. Smith, et al v. Universal Property and Casualty Insurance Co., et al (August 22, 2017). In Smith, plaintiffs were South Carolina residents who purchased an insurance policy from defendant, The Ulmer Agency, Inc. (“Ulmer”), a South Carolina insurance agency and the only in-state defendant. The policy was issued by Universal, a non-South Carolina insurer. The day after a fire destroyed plaintiffs’ home, they filed a claim. Universal responded with several offers, but none that met the full coverage limits of the policy. Plaintiffs filed a complaint in state court, and Universal removed the action to district court pursuant to 28 U.S.C. §1332. The matter came before the court on plaintiffs’ motion to remand. In response, Universal, joined by Ulmer, opposed plaintiffs’ motion. Because there was no suggestion of outright fraud, the motion turned on whether defendants showed no possibility of plaintiffs’ success on even one of their causes of action against Ulmer. One by one, the court saw a glimmer in plaintiffs’ causes of action with very little sparkle in favor of Ulmer.
In their negligence cause of action against Ulmer, plaintiffs alleged Ulmer undertook a duty to advise them by assuring them it would secure coverage that would meet and satisfy their need for replacement cost coverage, up to the limits of the policy. Defendants asserted insurance agencies have no such duty under South Carolina law. The court found defendants’ position incorrect. While recognizing that generally an agent has no duty to advise an insured at the time of application, such a duty may be imposed if the agent undertakes to advise the insured. Upon such an undertaking, the agent must exercise good faith, reasonable skill, care and diligence. If, due to the agents fault or negligence, it fails to procure coverage, does not follow instructions, or if the policy is void or materially deficient or does not provide the coverage the agent undertook to supply, the agent is liable to the insured. The court found defendants’ argument irrelevant and based in a gross mischaracterization of the complaint.
The court found defendants’ assertion that plaintiffs had no hope of succeeding on their causes of action for negligent misrepresentation, promissory estoppel and constructive fraud equally unconvincing. Defendants argued the basis of the complaint was Universal’s failure to pay up to the policy limits, asserting plaintiffs did not allege Ulmer failed to secure the coverage plaintiffs sought. Because the complaint clearly alleged Ulmer’s failure to procure the coverage sought by plaintiffs, the court characterized defendants’ position as curious and unfounded. Thus, defendants fell short of demonstrating plaintiffs had no hope of succeeding on these three causes of action.
As to plaintiffs’ cause of action for breach of fiduciary duty against Ulmer, defendants argued there is no fiduciary duty between an insurance agency and its customers. The relationship between an insurer and an insured has been characterized as “special’ only after the parties have entered into a mutually binding contract. Here, however, the court found it necessary to examine the context of the relationship between plaintiffs and Ulmer from its inception, at the time of application. Finding no South Carolina authority for the position that a fiduciary relationship exists at the application stage, but instead citing authority establishing the sale of insurance is an arm’s length transaction that does not create a fiduciary relationship, the court interestingly still recognized a glimmer in favor of plaintiffs. Because South Carolina has not categorically held that a fiduciary relationship can never arise between an agent and insured, the court recognized an implicit possibility that such a relationship may exist if the transaction between the parties was not purely arm’s length or other factors suggest the parties’ relationship extends beyond the mere sale of insurance. Here, the court found the allegations of the complaint could support a claim that the parties relationship was something more than a mere arm’s length transaction.
In further support of their position there was no fiduciary duty, defendants asserted plaintiffs failed to allege Ulmer procured the wrong type of coverage or coverage with insufficient limits. They went on to argue plaintiffs failed to allege any action that could be conceived as a breach of fiduciary duty. The court was once again unimpressed with defendants’ construction of the complaint. Plaintiffs alleged Ulmer failed to procure a policy with sufficient limits and thus established the possibility of success on their claim.
Arguing plaintiffs failed to allege a single outrageous act on the part of Ulmer, defendants tried to convince the court plaintiffs had no hope of succeeding on their claims of outrage or intentional infliction of emotional distress (“IIED”). The court determined an insurer’s failure to pay pursuant to the terms of its policy may, under some circumstances, amount to an outrageous act to support an IIED claim.
Based upon a review of IIED cases decided by the South Carolina Court of Appeals, these cases share three factors. First, a pre-existing legal relationship between the parties, such as insurer-insured. Next, excessive self-help in asserting a legal right or avoiding a legal obligation arising out of the relationship by defendant. And, finally, clear evidence the defendant calculatedly inflicted suffering or heedlessly disregarded plaintiff’s emotional suffering to force plaintiff to comply with defendants’ wishes or to punish plaintiff for failure to comply.
With only that guidance, the court found South Carolina may allow an IIED claim by an insured to lie against an insurer, assuming sufficiently outrageous conduct. Even though the claim here is against an agent rather than an insurer, and over defendants’ arguments to the contrary, the court found plaintiffs’ complaint alleged an outrageous act on behalf of Ulmer; specifically, its failure to procure a policy with sufficient coverage. Because the state courts have not addressed whether an agent’s failure to secure requested coverage might constitute an outrageous action sufficient to establish IIED, the court could not find plaintiffs had no hope on their claim of IIED.
Declining to address plaintiffs’ claim on their SC Unfair Trade Practices Act, the court concluded defendants failed to demonstrate plaintiffs had no hope of success in state court and therefore failed to establish fraudulent joinder of Ulmer. Consequently, the case was remanded to state court.
Smith is yet another example of the difficulty of establishing fraudulent joinder. Short of actual fraud in pleading jurisdictional facts, the removing party faces the difficult task of showing plaintiff has not even a slight possibility of relief in state court.
Here, the court consistently grasped a glimmer of hope in plaintiffs’ causes of action. Exercising the liberal standard required, without specific authority to the contrary, the court refused to foreclose the possibility of plaintiffs’ recovery on their various causes of action. Insurance agents take heed – Smith offers a number of possibilities to plaintiffs. All that glimmers...
Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice.