Logo On ROR Letter Gets Coverage Action Booted From Federal Court

I have never addressed a case in Coverage Opinions involving fraudulent joinder.  Yet alone in the annual Top 10 article.  It is hard to imagine anything that could be more deadly dull.  Plus, while the issue certainly arises in coverage litigation, it is not a coverage issue per se.  You know where this is going.  The fraudulent joinder drought is over.  A big welcome to CO and the annual Top 10 to the Western District of New York’s decision in Glidedowan, LLC v. Hiscox, Inc.

I follow reservation of rights cases very closely – and discuss, in my “50 Item ROR Checklist” webinar, the issue of making clear in the letter on whose behalf the reservation of rights is being issued.  Some insurers have a lot of writing companies.  The one that issued the policy relevant to the claim at hand is the one on whose behalf rights are being reserved.  That wasn’t made clear in Glidedowan and it cost the insurer.  As Glidedowan demonstrates, the situation is likely more concerning for insurers using TPAs/claims administrators to issue coverage determination letters.  

So, despite it being a fraudulent joinder case, Glidedowan had a strong enough hook to coverage, not to mention and interesting issue, to make it into the annual insurance coverage Top 10.

At issue in Glidedowan was whether a declaratory judgment action could remain in federal court on the basis of diversity of citizenship -- as the supposedly non-diverse party was fraudulently joined in an effort to defeat diversity.  It is a fraudulent joinder case, period.  It is not a case with several issues, and one just happened to be fraudulent joinder.  I’m glad about this.  The first fraudulent joinder case should be one where the issue does not need to share the spotlight.

In general, the case is eye-glazing and with a complex procedural history – which demonstrates why it has taken 23 years for a fraudulent joinder case to make the Top 10.  Here’s the part that matters.

Glidedowan LLC was sued for wrongful death in connection with its home health care business.  Lloyd’s issued the company a professional liability policy and Hiscox was the administrator.  Hiscox sent a reservation of rights letter stating: “Hiscox will agree to provide [Plaintiff] a defense under the policy, subject to the below reservation of rights.” 

A dispute arose over choice of counsel.  Glidedowan rejected Hiscox’s chosen counsel and retained its own.

Coverage litigation ensued.  Glidedowan filed suit in New York state court against a Lloyd’s syndicate, Hiscox and certain insurance parties associated with its business automobile policy.  Putting aside various details, the case was removed to federal court.  At issue was whether it could remain there.  Specifically, for purposes of the relevant time period, Hiscox was a citizen of New York.  And since the plaintiff was also a New York citizen, it was argued that there was no diversity of citizenship.  Hence, there was no federal court jurisdiction.

But there would be diversity of citizenship if Hiscox had been fraudulently joined.  Specifically, if, from the pleadings, there is no possibility that the claims against the non-diverse defendant could be asserted in state court, then the court will disregard the presence of such non-diverse defendant.

In making the determination, the court turned to the issues in the coverage case.  One of them was the possible violation of New York Insurance Law § 3420(d)(2) – namely, Hiscox did not disclaim coverage within the time prescribed by the statute and, therefore, was liable for defense costs and may not disclaim indemnity coverage.

Hiscox argued that a § 3420 claim cannot be asserted against it because the statute regulates insurers.  Hiscox was the policy administrator and a Lloyd’s syndicate issued the policy.  But the court disagreed that Hiscox could not be liable for a violation of § 3420.  The court was influenced by the Hiscox logo on the reservation of rights letter:

“New York courts, however, have rejected the argument that Section 3420 applies only to the specific entity that issued the policy. See, e.g., B&R Consol., LLC v. Zurich Am. Ins. Co., 993 N.Y.S.2d 121, 123-124 (2d Dep't 2014). In B&R Consolidated, LLC v Zurich American Ins. Co., the Second Department rejected the defendants’ contention that ‘Zurich is not a proper party to this action under Insurance Law § 3420(b) because it did not issue the subject policy.’ Id. at 124. Although Section 3420(b), like Section 3420(d), refers to ‘an insurer,’ the Appellate Division held that the evidence of ‘Zurich's direct participation in the administration of [plaintiff’s] claim is sufficient to establish, prima facie, that an agency relationship existed between Zurich and American Guarantee such that Zurich may be held liable to [plaintiff].’ Id. The Appellate Division noted that Zurich's logo was present on the relevant documents and that Zurich's claims counsel was assigned to handle the underlying action. Id.

“Here, as with Zurich, Hiscox’s logo was present on the policy documents and the Reservation of Rights letter, which was sent by Hiscox’s claim counsel.  Accordingly, resolving all factual and legal ambiguities in favor of Plaintiff, Hiscox’s assertion that it is not a proper party because it did not issue the policy fails to establish that there is ‘no possibility’ that Plaintiff could assert a Section 3420 claim against Hiscox in state court.”

Other arguments concerning Hiscox’s role were rejected.  So there was no fraudulent joinder since it was not a situation of no possibility that the claims against the non-diverse defendant could be asserted in state court.  In other words, Hiscox was properly before the court, so diversity was defeated and the case was remanded to state court.