Viewpoint: The End of the Voluntary-Involuntary Rule

Since the adoption of Chapter 542A of the Texas Insurance Code, Texas courts have been grappling with insurers’ election of responsibility of their agents—specifically how to treat such agents for diversity jurisdiction purposes. A recent decision from the US Fifth Circuit Court of Appeals, Advanced Indicator & Mfg., Inc. v. Acadia Ins. Co.,, has finally provided much needed clarity on this issue. Specifically, the case has cleared the way for insurers to elect responsibility for non-diverse adjuster defendants after a lawsuit is filed but before removal, resulting in diversity jurisdiction and effectively eliminating the so-called “Voluntary-Involuntary Rule.”

Chapter 542A of the Texas Insurance Code applies to property insurance claims arising out of forces of nature, including wind and hail claims, filed on or after Sept. 1, 2017. In adopting the bill over five years ago, the Texas Legislature intended to “mitigate the growing trend of abusive severe weather event lawsuits” that were brought by “[o]pportunistic lawyers [who] have been using extreme weather events as a pretext for exaggerating damages, suing innocent parties, and failing to give notice to insurers before filing lawsuits.”[1] One such tactic that the bill was designed to address was plaintiffs naming a non-diverse adjuster defendant in the lawsuit in the hopes of defeating diversity jurisdiction and keeping the case from being removed by the insurer to federal court. To resolve this previously pervasive issue, the legislature set out to prevent insureds from filing suit against non-diverse defendants simply to frustrate insurers’ attempts to remove cases to federal court.

Pursuant to Section 542A.006(a), an insurer may elect to accept responsibility for its agents, including adjusters and consultants. The statute

explains that if an insurer accepts responsibility for its agents “before a claimant files an action…no cause of action exists against the agent related to the claimant’s claim, and, if the claimant file an action against the agent, the court shall dismiss that action with prejudice.”[2] Further, the statute states that if an insurer accepts responsibility for its agent after a claimant files an action, “the court shall dismiss the action against the agent with prejudice.”[3]

While the intent of 542A.006 was to eradicate the tactic of policyholder attorneys naming insurance adjusters in first-party lawsuits solely for the purpose of defeating federal court jurisdiction, the application of the statute has not been without challenges. One such challenge faced by courts in Texas in applying 542A.006 has been the effect of the Voluntary-Involuntary Rule on potential removals of these weather-related cases to federal court.

The voluntary-involuntary rule was created in 1898 by the U.S. Supreme Court in Powers v. Chesapeake & Ohio Railway Co.[4] The rule provides that when a case is not removable on its face, only the voluntary dismissal or nonsuit by the plaintiff of the non-diverse defendant can make the case removable.[5] The Fifth Circuit has previously explained that this judicially-created rule is subject to judicially-created exceptions, including improper and/or fraudulent joinder of a non-diverse defendant.[6] The court in Crockett v. R.J. Reynolds Tobacco Co. held that fraudulent joinder was an exception to the voluntary-involuntary rule because the rule “is designed to prevent plaintiffs from blocking removal by joining nondiverse and/or in-state defendants who should not be parties.”[7] The Hoyt v. Lane Construction Corp. opinion extended Crockett‘s fraudulent joinder exception to include improper (although not necessarily fraudulent) joinder, holding that “[w]hen a non-diverse defendant was improperly joined, ‘the voluntary-involuntary rule is inapplicable.'”[8]

Since the adoption of Chapter 542A, Texas federal district courts have grappled with whether and when diversity of citizenship exists for removal purposes if an insurer exercises its right to elect legal responsibility for its agent(s) post-suit pursuant to 542A.006(c).

Some district courts have found that an insurer’s post-suit election under 542A.006(c) does not create diversity of citizenship sufficient to remove the suit to federal court. Many of these courts emphasize that the language of 542A.006(b) specifically provides that the pre-suit election of legal responsibility destroys any potential causes of action against the insurer’s agent, while 542A.006(c) merely directs the court to dismiss an otherwise valid cause of action.[9] Thus, in the 542A.006(c) context, while the non-diverse defendant agent would be dismissed when the defendant insurer elects to accept responsibility of its agents after suit is filed, these courts held that the non-diverse defendant agent was not improperly joined independent of the 542A.006 election at the time of joinder.[10] Further, these courts have reasoned that because the plaintiff/insured in these situations did not voluntarily dismiss the non-diverse defendant from the suit, the voluntary-involuntary rule applied to bar the defendant insurer’s removal of the suit to federal court.[11] Therefore, courts applying this approach to situations involving the post-suit 542A.006 election of responsibility of agents found that the non-diverse defendant continued to destroy complete diversity even after the insurer’s election. Thus, these courts then remanded cases back to state court.[12]

Conversely, other district courts have held that an insurer’s post-suit election under 542A.006(c), which results in the dismissal of the non-diverse defendant agent from the suit, creates complete diversity between the parties to allow the insurer to remove the action to federal court.[13] These courts reason that such an election renders the non-diverse defendant agent improperly joined.[14] Relying on Fifth Circuit precedent such as Crockett and Hoyt, the courts consider the diversity of parties at the time of removal, and have found that a defendant insurer may remove a suit to federal court after it elects responsibility for its non-diverse agents, thus creating complete diversity between the defendant insurer and plaintiff insured.[15]

In Advanced Indicator & Manufacturing. Inc. v. Acadia Insurance Co.,[16], the insured submitted a claim for roof damage following Hurricane Harvey in 2017.[17] The insurer adjusted the loss and concluded that the damage to the insured’s building was not related to the storm event.[18] The insured disagreed with the insurer’s loss determination and filed suit against both the insurance company and the in-state adjuster alleging various claims, including breach of contract, common law bad faith, and violations of the Texas Prompt Payment of Claims Act.[19]

After suit was filed, the insurer chose to elect responsibility for the named defendant adjuster pursuant to 542A.006.[20] Thereafter, the insurer removed the case to federal court. While pending in federal court, the named defendant adjuster filed a motion to dismiss the claims against him based on the insurer’s election of responsibility under 542A.006.[21] In turn, the insured filed a motion to remand, arguing that the adjuster was not improperly joined.[22]

The insured’s motion to remand focused on the tension between the language in 542A that applies to an insurer’s election of responsibility pre-suit and language that applies post-suit.[23] As noted above, the portion of the statute relating to pre-suit elections provides that “no cause of action exists against the agent related to the claimant’s claim, and, if the claimant files an action against the agent, the court shall dismiss that action with prejudice.”[24] But when an insurer elects to accept responsibility for an agent after an action is filed, the statute provides that “the court shall dismiss the action against the agent with prejudice.”[25] The insured placed particular emphasis on the fact that in the post-suit election context pursuant to 542A.006(c), the language “no cause of action exists against the agent” is omitted from the statute. Thus, the insured argued that the non-diverse adjuster defendant was not improperly joined and therefore the voluntary-involuntary rule applied, and the case must be remanded to state court.

As explained above, Texas district courts have been divided on this issue, with some courts holding that the voluntary-involuntary rule bars removal where an insurer elects liability under 542A.006 after suit has been filed, and other courts finding that the post-suit election of responsibility under 542A.006 effectively creates improper joinder of a non-diverse defendant resulting in an exception to the voluntary-involuntary rule.[26] Recognizing this split among Texas district courts, the Fifth Circuit adopted the latter approach, finding that improper joinder is determined at the time of removal, and held that the suit was properly removed as the insurer’s adjuster was improperly joined at the time of removal.[27]Relying on its precedent and several district court decisions, the Advanced Indicator court explained that the post-suit but pre-removal election of liability under 542A.006 makes the case removable as the presumably non-diverse defendant would then be considered as improperly joined. [28]

The Fifth Circuit held that the differences between the language in the statutory provisions concerning pre- and post-suit elections of responsibility are not material. [29] Rather, as long as the insurer elects to accept responsibility for the adjuster/agent before removal then removal is appropriate. [30] Circuit Judge Engelhardt recognized in his concurring opinion that the Advanced Indicator “holding all but eviscerates the voluntary-involuntary rule,” meaning that the “voluntary-involuntary rule does not exist in practice” in the context of post-suit and pre-removal election under 542A.006. [31]

Moving forward, insurers now have additional time to evaluate potential adjuster liability before deciding whether to remove the case to federal court. All that is now required is that the insurer elect liability of the agent before the matter is removed to federal court. It is no longer necessary that the election occur prior to a lawsuit being filed. Finally, it is important to note that Advanced Indicator does not affect the removal deadlines imposed by 28 U.S.C. § 1446.

[1] HB 1774, House Research Organization (May 4, 2017).

[2] Chapter 542A.006(b).

[3] Chapter 542A.006(c).

[4] 169 U.S. 92 (1898).

[5] See Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006).

[6] Id.: Martinez v. Trisura Specialty Ins. Co., No. 121CV00183MACZJH, 2022 WL 2733206, at *2 (E.D. Tex. June 23, 2022), report and recommendation adopted, No. 1:21-CV-00183, 2022 WL 2720435 (E.D. Tex. July 13, 2022); Hoyt v. Lane Constr. Corp., 927 F.3d 287, 295 (5th Cir. 2019).

[7] Crockett, 436 F.3d at 533.

[8] Hoyt, 927 F.3d at 296 (citing Crockett, 436 F.3d at 532).

[9] See e.g., Martinez, 2022 WL 2733206 at *3; Collier v. Metro. Lloyds Ins. Co. of Tex., No. 1:21-CV-00248-MJT, 2022 WL 879571, at *4–5 (E.D. Tex. Mar. 11, 2022), report and recommendation adopted, No. 1:21-CV-00248, 2022 WL 874166 (E.D. Tex. Mar. 23, 2022); Bar-B-Que Depot, Inc. v. Mesa Underwriters Specialty Ins. Co., No. 1:19-CV-625, 2020 WL 5536010, at *5 (E.D. Tex. Aug. 11, 2020), report and recommendation adopted, No. 1:19-CV-625, 2020 WL 5534654 (E.D. Tex. Sept. 14, 2020); Altom v. Allstate Vehicle & Prop. Ins. Co., No. 4:19-CV-615-RWS-KPJ, 2020 WL 810856, at *4 (E.D. Tex. Jan. 27, 2020), report and recommendation adopted, No. 4:19-CV-00615-RWS, 2020 WL 805204 (E.D. Tex. Feb. 18, 2020); Hebert v. United Prop. & Cas. Ins. Co., No. 1:19-CV-00234-MAC, 2019 WL 5617023, at *1 (E.D. Tex. Oct. 30, 2019); Yarco Trading Co., Inc. v. United Fire & Cas. Co., 397 F. Supp. 3d 939, 950 (S.D. Tex. 2019); McAdams v. Palomar Specialty Ins. Co., No. 1:18-CV-633, 2019 WL 2553616, at *7 (E.D. Tex. May 29, 2019), report and recommendation adopted, No. 1:18-CV-633, 2019 WL 2565669 (E.D. Tex. June 20, 2019); Robbins Place W. Campus, LLC v. Mid-Century Ins. Co., No. A-18-CV-875-LY, 2019 WL 2183792, at *2 (W.D. Tex. May 21, 2019), report and recommendation adopted, No. A-18-CV-00875-LY, 2019 WL 3818039 (W.D. Tex. June 7, 2019); Greatland Inv., Inc. v. Mt. Hawley Ins. Co., No. CV H-19-1212, 2019 WL 2120854, at *3–4 (S.D. Tex. May 15, 2019); River of Life Assembly of God v. Church Mut. Ins. Co., No. 1:19-CV-49-RP, 2019 WL 1767339, at *3 (W.D. Tex. Apr. 22, 2019).

[10] See e.g., Martinez, 2022 WL 2733206 at *3; Collier, 2022 WL 879571 at *4–5; Scout 5 Properties, LLC v. Acadia Ins. Co., No. 221CV00231JRGRSP, 2021 WL 5051564, at *4 (E.D. Tex. Oct. 31, 2021); Morgan v. Chubb Lloyds Ins. Co. of Tex., 541 F. Supp. 3d 754, 762–64 (N.D. Tex. 2021); Altom, 2020 WL 810856 at *4; Holmes v. Allstate Vehicle & Prop. Ins. Co., No. 1:19-CV-00420, 2020 WL 6791514, at *3 (E.D. Tex. Jan. 8, 2020); Hebert, 2019 WL 5617023 at *1; Yarco Trading Co., 397 F. Supp. 3d at 950; River of Life Assembly of God, 2019 WL 1767339 at *3; Robbins Place W. Campus, LLC, 2019 WL 2183792 at *3, report and recommendation adopted, No. A-18-CV-00875-LY, 2019 WL 3818039 (W.D. Tex. June 7, 2019); Stephens v. Safeco Ins. Co. of Indiana, No. 4:18-CV-00595, 2019 WL 109395, at *7 (E.D. Tex. Jan. 4, 2019); Massey v. Allstate Vehicle & Property Ins. Co., No. H-18-1144, 2018 WL 3017431, at *4 (S.D. Tex. June 18, 2018).

[11] See e.g., Martinez, 2022 WL 2733206 at *5; Collier, 2022 WL 879571 at *5; Scout 5 Properties, LLC, 2021 WL 5051564 at *6; Morgan, 541 F. Supp. 3d at 762–64; Altom, 2020 WL 810856 at *5; Holmes, 2020 WL 6791514 at *6; Hebert, 2019 WL 5617023 at *2; Yarco Trading Co., 397 F. Supp. 3d at 951; River of Life Assembly of God, 2019 WL 1767339 at *5; Stephens, 2019 WL 109395 at *7; Massey, 2018 WL 3017431 at *4.

[12] See e.g., Martinez, 2022 WL 2733206 at *5; Collier, 2022 WL 879571 at *5; Scout 5 Properties, LLC, 2021 WL 5051564 at *6; Morgan, 541 F. Supp. 3d at 767; Altom, 2020 WL 810856 at *5; Holmes, 2020 WL 6791514 at *6; Hebert, 2019 WL 5617023 at *2; Yarco Trading Co., 397 F. Supp. 3d at 951; River of Life Assembly of God, 2019 WL 1767339 at *5; Stephens, 2019 WL 109395 at *7; Robbins Place W. Campus, LLC, 2019 WL 2183792 at *2; Massey, 2018 WL 3017431 at *4; .

[13] See e.g., Warner v. Trumbull Ins. Co., No. SA-22-CV-00604-XR, 2022 WL 3448748, at *3-4 (W.D. Tex. Aug. 17, 2022); N&O Holdings LLC v. State Auto. Mut., No. SA-22-CV-0186-JKP, 2022 WL 1491098, at *3 (W.D. Tex. May 11, 2022); Valverde v. Maxum Cas. Ins. Co., 558 F. Supp. 3d 385, 399–400, 402 (S.D. Tex. 2021); Southbound, Inc. v. Firemen’s Ins. Co. of Washington, D.C., No. SA-21-CV-78-XR, 2021 WL 932045, at *2-3 (W.D. Tex. Mar. 10, 2021); Mazhar Footsteps, LLC v. AmGuard Ins. Co., No. SA-20-CV-00955-JKP-HJB, 2020 WL 7670245, at *3, *5 (W.D. Tex. Dec. 24, 2020); Mundkowsky v. Liberty Mut. Ins. Co., No. 1-20-CV-625-RP, 2020 WL 13199003, at *3 (W.D. Tex. Dec. 22, 2020), report and recommendation adopted sub nom. Mundowski v. Liberty Mut. Ins. Co., No. 1:20-CV-625-RP, 2021 WL 8081918 (W.D. Tex. Jan. 7, 2021); Ramirez v. Allstate Vehicle & Prop. Ins. Co., 490 F. Supp. 3d 1092, 1111 (S.D. Tex. 2020); Bexar Diversified MF-1, LLC v. Gen. Star Indem. Co., No. SA-19-CV-00773-XR, 2019 WL 6131455, at *3–4 (W.D. Tex. Nov. 18, 2019); Solares v. Allstate Vehicle & Prop. Ins. Co., No. 5:19-CV-00027, 2019 WL 3253072, at *2 (S.D. Tex. June 11, 2019); Reyna v. Allstate Tex. Lloyd’s, No. 5:18-CV-1084-OLG, 2019 WL 13080135, at *3 (W.D. Tex. Jan. 16, 2019); Yan Qing Jiang v. Travelers Home & Marine Ins. Co., No. 1:18-CV-758-RP, 2018 WL 6201954, at *2 (W.D. Tex. Nov. 28, 2018); Flores v. Allstate Vehicle & Prop. Ins. Co. Co., No. SA-18-CV-742-XR, 2018 WL 5695553, at *2, *5 (W.D. Tex. Oct. 31, 2018); Electro Grafix, Corp. v. Acadia Ins. Co., No. SA-18-CA-589-XR, 2018 WL 3865416, at *4 (W.D. Tex. Aug. 14, 2018).

[14] See e.g., Warner, 2022 WL 3448748 at *3-4; N&O Holdings LLC, 2022 WL 1491098 at *3; Valverde, 558 F. Supp. 3d at 399–400, 402; Southbound, Inc., 2021 WL 932045 at *2; Mazhar Footsteps, LLC, 2020 WL 7670245 at *3; Mundkowsky, 2020 WL 13199003 at *3; Ramirez, 490 F. Supp. 3d at 1111; Bexar Diversified MF-1, LLC, 2019 WL 6131455 at *3–4; Reyna, 2019 WL 13080135 at *3; Yan Qing Jiang, 2018 WL 6201954 at *2; Flores, 2018 WL 5695553 at *5; Electro Grafix, Corp., 2018 WL 3865416 at *4.

[15] See e.g., Warner, 2022 WL 3448748 at *3-4; N&O Holdings LLC, 2022 WL 1491098 at *3; Valverde, 558 F. Supp. 3d at 399–401; Southbound, Inc., 2021 WL 932045 at *2-3; Mazhar Footsteps, LLC, 2020 WL 7670245 at *3-5; Mundkowsky, 2020 WL 13199003 at *2-3; Ramirez, 490 F. Supp. 3d at 1104; Bexar Diversified MF-1, LLC, 2019 WL 6131455 at *3–4 (remanding for amount in controversy requirement); Solares, 2019 WL 3253072 at *2; Reyna, 2019 WL 13080135 at *3; Yan Qing Jiang, 2018 WL 6201954 at *2; Flores, 2018 WL 5695553 at *2, *5; Electro Grafix, Corp., 2018 WL 3865416, at *4.

[16] Advanced Indicator & Mfg., Inc. v. Acadia Ins. Co., 50 F.4th 469, 472 (5th Cir. 2022).

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id. Acadia moved for summary judgment on concurrent causation issues (beyond the scope of this article) and removal based on election of adjuster liability under § 542A.006.

[23] Id. at 427–73; see also Plaintiff’s Motion to Remand, Advanced Indicator & Mfg., Inc. v. Acadia Ins. Co., NO: 4:18-CV-3059 (S.D. Tex. Sept. 28, 2018).

[24] TEX. INS. CODE § 542A.006(b).

[25] Id. § 542A.006(c).

[26] Advanced Indicator & Mfg., Inc., 50 F.4th at 474.

[27] Id. at 474–75.

[28] Id. at 475.

[29] Id.

[30] Id.

[31] Id. at 478.