Remand From Federal Court After Passage of the “Hail Bill:” Section 542A.006 and the Election of Legal Responsibility

The infamous “Hail Bill” will be celebrating its second birthday this September 1, 2019. Whether there will be any celebrations is another question. The “Hail Bill” – the Chapter 542A amendment to the Texas Insurance Code—covers first-party claims arising from “forces of nature.”¹ Within that chapter, one notably section is 542A.006, which allows an insurer to elect to assume its agent’s civil liability for the agent’s conduct related to the handling of a claim. This section has been seeing a lot of litigation of late.

On February 18, 2019, I authored a piece entitled, It’s a Brand-New Ballgame, which discusses the first four decisions out of the Texas federal courts regarding remand after insurers had taken Texas Insurance Code Section 542A.006 elections of responsibility for their agents. At that time, the score was tied–two wins for insureds who were remanded to state court, and two wins for insurers in which remands were denied allowing insurers to stay in federal court. Since February there have been more than a dozen decisions—the number increases weekly. Although, the Texas federal district courts remain in conflict, at the moment, remands appear to be in the majority. It does not take a crystal ball to perceive that the Fifth Circuit may weigh in at some point.

The statute allows an insurer to make an election to accept liability after a policyholder files a damage claim and before a policyholder files a suit (pre-suit) on that claim or after a policyholder files a lawsuit in state court (post-suit). If an election is taken pre-suit, insurers have a straight path to federal court when suit is filed, because, as a result of the election, there is diversity of the parties (plaintiffs from a different state than defendants) which makes federal court jurisdiction proper and a remand unavailable.

The cases that are in conflict presently concern post-suit elections. Two theories have evolved thus far which have resulted in the split of authorities in Texas federal district courts regarding the granting or denying of remands. One approach holds that as an insurer’s election under Section 542A.006 and the accompanying dismissal of the Texas defendant agent, results in improper joinder. This boot-strapping argument reasons that because the Texas defendant was improperly joined (as a result of the election), the plaintiff would not be able to recover against him/her in state court, so the suit should remain in federal court. Remand is denied.

The second approach focuses on the propriety of the “joinder” when the suit was filed in state court. These courts have remanded cases and concluded that when an insurer makes an election post-suit, joinder is not improper at that point even if the plaintiff can no longer recover against the Texas defendant. In following this second approach, one court explained its reasoning:

The Court cannot accept this argument [the first approach described above] as reasonable under the law or logic. Whether a non-diverse defendant is improperly joined is a binary question; the defendant is either a proper party when joined to suit or the defendant is an improper party when joined to the suit…. It does not follow that a non-diverse defendant [a Texas defendant in Texas state court] that is initially properly joined may become initially improperly joined. Again, the focus must be on the joinder.²

In another recent order, River of Life Assembly of God v. Church Mutual Insurance Company,³ Judge Pitman ruled that the improperly joined argument based solely on a Section 542A.006 election “misunderstands the doctrine of improper joinder, which is fundamentally about joinder.” Judge Pitman wrote that it would not deny remand based on the Defendant’s Section 542A.006 election alone, noting that the election was made was over two months after the Texas defendant was joined initially. The trial court reasoned that the Defendant’s “election of responsibility therefore did not render Harris’ [the Texas Defendant] joinder improper because it did not preclude recovery against Harris until months after his joinder. If Harris is improperly joined, it must be for a reason that predated his joinder.”.

One of the most interesting parts of this River of Life order is in a footnote following the last statement above in which Judge Pitman writes:

Had the Court taken this approach in Jiang, it would not have denied remand solely based on the insurer’s election, which was made after the plaintiff joined the adjuster in her original petition. The Court now rejects the approach taken in Jiang in favor of the approach taken in this decision.⁴

This admission by a federal judge is telling.
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¹ Tex. Ins. Code §542A.001(2) includes earthquakes, earth tremors, a wildfire, a tornado, lightning, a hurricane, hail, wind, snowstorms or rainstorms.
² See Stephens v. Safeco Ins. Co., of Indiana, No. 18-595, 2019 WL 109395 (E.D. Tex. Jan. 4, 2019).
³ River of Life Assembly of God v. Church Mutual Ins. Co., 2019 WL 1767339, at *3 (W.D. Tex. April 22, 2019).
⁴ Id. at fn 2 (citation omitted, emphasis added). See Jiang v. The Travelers Home and Marine Ins. Co., No. 18-758, 2018 WL 6201954 (W.D. Tex. Nov. 11, 2018).