U.S. Court of Appeals makes it harder to choose state courts for BI claims
The ruling stems from three separate suits, two from the Western District of Pennsylvania and one from the District of New Jersey.
It won’t be as easy for plaintiffs filing business interruption insurance claims to find their way to the plaintiff-friendly confines of state courts under a recent ruling from the U.S. Court of Appeals for the Third Circuit.
Federal judges must undergo a detailed analysis before declining to exercise jurisdiction in such cases brought under the Declaratory Judgment Act, the appeals court ruled recently in Umami Pittsburgh v. Motorists Commercial Mutual Insurance.
And COVID-19 business interruption claims are more likely to get dismissed in federal court than in state court, according to one database.
The Covid Coverage Litigation Tracker, a database kept by the Carey Law School of the University of Pennsylvania, says federal courts have granted 84% of motions to dismiss insurance coverage suits related to COVID-19, while state courts have granted 59% of such motions.
“I think it’s a win for whichever party wants to be in federal court,” Jay Lavroff, a lawyer at Lindabury, McCormick, Estrabrook & Cooper in Westfield, New Jersey, whose practice focuses on insurance coverage, said of the ruling. “In COVID business interruption claims and virus-exclusion claims, cases that have been removed have been largely removed by insurance companies.”
Lavroff noted that the University of Pennsylvania database shows that many more COVID business coverage cases are in federal courts than in state courts and that federal courts have resolved more motions to dismiss. He said when a business interruption insurance case is heard in federal court, “you’ve got a more fully developed body of law, more precedents, to draw on that would seem to indicate it would be more favorable for the insurance company to advocate in federal court.”
John Randy Sawyer, an attorney at Stark & Stark in Lawrenceville, New Jersey, who has filed COVID-19-related business interruption suits, agreed that the ruling “will undoubtedly result in more insurance coverage declaratory judgment cases staying in federal court. Generally speaking, state court is more plaintiff-friendly when it comes to insurance coverage actions. That is why just about every insurance carrier I have ever litigated against will seek to remove coverage declaratory actions to federal court.”
The ruling stems from three separate suits, two from the Western District of Pennsylvania and one from the District of New Jersey. In each case, the appeals court said district judges granted motions to remand to state court based on an analysis that was flawed or incomplete.
Before remanding a declaratory judgment case, judges should conduct an analysis of eight factors set out by the court in its 2014 ruling, Reifer v. Westport Insurance, which lays out the factors for exercising discretion under the DJA.
“The most significant impact of this matter on pending COVID business interruption coverage cases, and on all insurance coverage declaratory judgment cases for that matter, is that the court has now made it more difficult for a district court to abstain from hearing insurance coverage claims under the Declaratory Judgment Act,” Sawyer said.
The decision makes clear that a remand to state court will have to “check all the boxes” and “detail the factors on which the district court is relying for the remand,” Lavroff said. “General averments to the factors will not be sufficient. One thing the Third Circuit put out there is that in a case where there is diversity jurisdiction, there has to be a specific basis on which to base the remand. The district courts are there to hear cases where there is diversity jurisdiction, and for that reason, they are generally required to keep them once diversity is established unless there is a parallel state court action or unless the specific factors in the case fit in the factors of the Reifer case.”
Adam Scales, a professor at Rutgers Law School-Camden who focuses on insurance law, called the Third Circuit ruling “surprising” and said he was inclined to agree with the dissent, which called for sending the case to state courts because they presented novel state-law issues.
“When a federal court is presented a state-law issue, it has to make a guess what a state court would do. While there is no way around that reality, the federal courts consistently guess differently about the meaning of state law than state courts would,” Scales said.
The decision will “encourage insurers to resist efforts to remand suits to state courts,” Scales said. He added that the decision “provides a two-way road map” to federal judges—providing guidance for those who agree with the appeals court that such cases belong in federal court. The ruling will also provide guidance for “those courts that are more inclined to let the state courts have a crack. Decisions like this provide a road map.”
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