The Court's Decision

The court granted Farmers' motion.

In its decision, the court explained that, in a reciprocal insurance exchange, individuals and businesses pool risk by agreeing to indemnify each other against particular kinds of losses. These policyholders, known as “subscribers,” act through a common attorney-in-fact and are simultaneously both insurers and insureds. Unlike mutual insurance companies, the court observed, insurance exchanges do “not have a corporate existence.”

The court then ruled that, under California law, a reciprocal insurance exchange's subscribers were its members and not merely its customers and that Farmers' citizenship had to be determined in relation to the citizenship of its member-subscribers.

The court held that, because the Staggs were Oregon citizens and Farmers' member-subscribers, Farmers was an Oregon citizen and it lacked subject matter jurisdiction because there was not complete diversity between the parties.

The court was not persuaded by the Staggs' argument that it should rely on Farmers' principal place of business being California, finding that although the principal place of business test determined a corporation's citizenship, it was not relevant when considering the citizenship of an unincorporated association such as Farmers.

It also rejected the Staggs' contention that Farmers should be considered a California citizen based on search results on the Oregon Insurance Division's online insurance company search engine, which listed Farmers' “State of Incorporation” as California and its “Incorporation Date” as January 1, 1928. The court explained that Farmers was “not a corporation” and the Staggs' reliance on this search engine – as opposed to the California Secretary of State or Farmers' own website – did not change Farmers' legal form.

The case is Staggs v. Farmers Ins. Exchange, No. 3:15-cv-01502-MC (D. Ore. April 27, 2016).

FC&S Legal Comment

Federal courts have split as to whether subscribers to a reciprocal insurance exchange are members or merely customers of the exchange. Compare Nevada Capital Ins. Co. v. Farmers Ins. Exchange, No. 2:12-cv-02166-APG-CWH (D. Nev. Dec. 4, 2014); James G. Davis Const. Corp. v. Erie Ins. Exchange, 953 F. Supp. 2d 607 (D. Md. 2013); James River Ins. Co. v. Cast & Associates, Inc., No. 4:11-CV-00730-JJM (D. Ariz. Mar. 5, 2012) with Garcia v. Farmers Ins. Exch., 121 F. Supp. 2d 667, 669 (N.D. I11. 2000).

It is worth noting that five years after Garcia, Congress passed the Class Action Fairness Act of 2005 (“CAFA”), which amended the diversity of citizenship rule for specific class actions. See 28 U.S.C. § 1332(d)(10) (for a subset of class actions, “an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized”). The Senate Judiciary Committee remarked in its report on CAFA:

This rule “has been frequently criticized because often an unincorporated association is, as a practical matter, indistinguishable from a corporation in the same business.” Some insurance companies, for example, are “inter-insurance exchanges” or “reciprocal insurance associations.” For that reason, federal courts have treated them as unincorporated associations for diversity jurisdiction purposes. Since such companies are nationwide companies, they are deemed to be citizens of any state in which they have insured customers. Consequently, these companies can never be completely or even minimally diverse in any case. It makes no sense to treat an unincorporated insurance company differently from, say, an incorporated manufacturer for purposes of diversity jurisdiction. New subsection 1332(d)(10) corrects this anomaly.

S.Rep. No. 109-14, at 46 (Feb. 28, 2005), reprinted in 2005 U.S.C.C.A.N. 3, 43 (footnotes omitted). This change only abrogated the rule for particular class actions and did not alter general diversity jurisdiction.

It also is worth noting that the Staggs cited a number of cases in which Farmers sought to remove similar cases from state to federal court on the basis of diversity of citizenship. See, e.g. Fountain v. Farmers Ins. Exchange, No. 4:13-cv-120-D(2) (E.D. N.C. Dec. 3, 2014); Wheeler v. Farmers Ins. Exchange, No. 13-cv-0951 (W.D. La. Jan. 22, 2014); Brackney v. Farmers Ins. Exchange, No. 4-11-cv-00527-FJG (W.D. Mo. Aug. 22, 2011); Thompson v. Victoria Fire & Ca. Co., 32 F. Supp. 2d 847 (D. S.C. 1999); Incopero v. Farmers Ins. Exchange, 113 F.R.D. 28 (D. Nev. 1986).

The court in the Staggs case said that, to the extent the Staggs had correctly identified that Farmers “strategically and self-servingly argue[d] opposing theories of diversity jurisdiction,” those “tactics” were “troubling.” The court cautioned Farmers in its approach to analogous litigation in the future, adding that “this particular area of law is unsettled in many jurisdictions, which explains the conflicting arguments Farmers has made in other lawsuits.”