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Insurance Law BlogLegal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Western District of Texas provides insureds with "out" to skirt federal jurisdiction in COVID-19 business interruption coverage cases

October 20, 2020 | Brett Simon

Like many businesses during the COVID-19 pandemic, Texas dentist Louis Orsatti’s practice suffered significant lost business income as a result of the local government’s shelter-in-place order in the spring and early summer of 2020. And also like many other businesses, Orsatti made a claim on his practice’s insurance policy issued by Allstate. Allstate assigned a claims adjuster, Blesssing Sefofo Wonyaku, who allegedly summarily denied Orsatti’s claim without performing any kind of investigation whatsoever.

Orsatti filed a bad faith suit in Texas state court against Allstate after his claim was denied, joining Wonyaku as a defendant. Allstate removed the case to the United States District Court for the Western District of Texas arguing that Wonyaku, a citizen of Texas, had been fraudulently joined solely for the purpose of defeating federal diversity of citizenship jurisdiction. Finding that a claim was properly asserted against Wonyaku, the federal magistrate judge recommended the case be remanded back to state court (as of the date of this posting, the district judge has neither accepted nor rejected the recommendation).

Despite recognizing that many cases have held a claims adjuster cannot be individually liable for bad faith claims made against an insurer, the court here held that the allegations here implicated Wonyaku based on “her conduct as an individual adjuster.” Specifically, the court focused on Wonyaku’s allegedly pre-textual, results-oriented investigation, her failure to request additional information from the insured, and her “immediate” issuance of a denial letter. Consequently, the court held the complaint asserted a valid cause of action against Wonyaku and the case was accordingly remanded for lack of subject matter jurisdiction. The case is Orsatti v. Allstate Ins. Co., No. 5-20-CV-00840-FB-RBF, 2020 U.S. Dist. LEXIS 185935 (W.D. Tex. Oct. 7, 2020), and the magistrate’s report and recommendation can be found here.  

Policyholders may be tempted to stretch the Orsatti case to its limits to avoid federal jurisdiction when a non-diverse claims adjuster is involved. This may be especially true if the judicial panel on multidistrict litigation opts to create carrier-specific MDLs,[1] since struggling business may be looking for some much-needed quick money rather than being bogged down in protracted MDL proceedings. This may be particularly worrisome in jurisdictions such as Missouri, where the waters get murky when it comes to an adjuster’s personal liability in first-party claims. While Missouri generally bars such liability in third-party bad faith claims (Shobe v. Kelly, 279 S.W.3d 203 (Mo. App W.D. 2009)), first-party bad faith claims fall within the ambit of Missouri’s vexatious refusal to pay statutes (RSMo §§ 375.296 and 375.420) which generally displace other causes of action arising from an insurer’s denial of coverage. On its face, the vexatious refusal statute only permits a suit to be filed “against any insurance company,” which would seem to preclude individual liability on the adjuster’s part. However, some courts have recognized that despite the vexatious refusal statute’s exclusivity, other torts may still be viable where they are not based strictly on the insurer’s denial of coverage. In fact, United States District Court for the Eastern District of Missouri specifically held that conduct “which may have occurred during the insurer’s investigation or claims handling” can support a cause of action against an individual adjuster independent from a vexatious refusal claim. (Travelers Indem. Co. of Am. v. Holtzman Props., L.L.C., No. 4:08-CV-351 CAS, 2008 U.S. Dist. LEXIS 63966 (E.D. Mo. Aug. 21, 2008)).     

The Orsatti case provides another arrow in policyholders’ quivers to remain in state court by joining an individual adjuster as a defendant. It specifically brings deficiencies in claims handling to the forefront of the analysis, which prior Missouri precedent demonstrates may be sufficient to support an independent claim aside from a vexatious refusal claim against the carrier.  

The case also highlights the need not to be too quick to deny a COVID-related business interruption claim. While it may be tempting after reviewing dozens or hundreds of similar claims involving similar policy language to issue a form denial letter without giving it a second thought, Orsatti illustrates how this may expose the adjuster to personal liability and prevent coverage counsel from litigating in their preferred court.

[1] As of the date of this writing, requests to create five “single-insurer” MDLs were under advisement by the JMPL. The carriers in question are The Hartford, Cincinnati Insurance Co., Society Insurance Co., Travelers, and various underwriters at Lloyd’s of London. A request to create a single MDL encompassing all carriers was previously denied, which was discussed in another post found here.

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