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Ninth Circuit:
‘Amount in Controversy’ Needed for Jurisdiction in Insurance Dispute Is Not Set by Policy Limit
Opinion Says Federal Court May Hear Diversity of Citizenship Case, Even if Liability Is Capped Below Statutory Floor, if Insurer May Possibly Be on Hook for More
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has held that, for insurance disputes, the policy limit does not set a ceiling on the value of the underlying claim for purposes of determining whether a party has shown that the “matter in controversy” exceeds $75,000, as required for federal diversity of citizenship jurisdiction.
The opinion, filed Thursday, reverses a contrary determination by District Court Judge R. Gary Klausner of the Central District of California.
At issue is 28 U.S.C. §1332, which provides that “[t]he district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs,” and the matter is between “citizens of different States.”
After a complaint was filed in Los Angeles Superior Court relating to a January 2017 car accident, the question arose after the insurance company for the state-court defendant filed a complaint against him for declaratory relief in the District Court, seeking a ruling that the company owed no continuing duty to defend or indemnify in the underlying tort action.
That insurer, Farmers Direct Property and Casualty Insurance Company, pointed out to Klausner that the insured, defendant Dennis Perez, was uncooperative and could not be located to assist with his defense. Citing a clause in the policy requiring cooperation, the insurer argued that the defendant’s breach excused it from any future performance.
Default Judgment
On Feb. 23, 2022, Klausner found for the insurer and a default judgment was entered declaring that Farmers Direct “owes no continuing duty to defend [or] indemnify…Perez in connection with the underlying action…because Perez’s breach of the Policy’s Cooperation Clause excuses further performance by Farmers Direct…against…Perez, and all other parties that may have claims arising out of the same operative facts.”
The insurer continued to defend Perez in the state court matter, in which it had earlier intervened on the defendant’s behalf. On July 6, 2023, a jury returned a verdict for the plaintiffs, Victor and Lisa Montez, awarding them $8.9 million in damages on their negligence and loss of consortium claims.
Farmers Direct paid the $25,000 limit to the plaintiffs in partial satisfaction of the judgment.
In September 2023, the Montezes filed a motion in the federal action seeking to intervene and to vacate the judgment, arguing that it is “void” for lack of subject matter jurisdiction. They did not dispute that diversity of citizenship exists between Perez and the insurer, but said the amount in controversy was only the policy’s $25,000 face value.
Klausner sided with the Montezes, setting aside the default judgment. He wrote:
“Here, Farmers…filed a declaratory relief action seeking to relieve themselves from the duty to defend or indemnify Perez under the Policy, which limits Farmers’ recovery to $25,000….[T]he value of the underlying tort action is limited to the Policy’s maximum liability.”
Federal Circuit Judge Evan J. Wallach, sitting by designation, authored Thursday’s opinion reversing the order setting aside the judgment for lack of jurisdiction. Circuit Judges Consuelo M. Callahan and Ana de Alba joined in the opinion.
Object of Litigation
Wallach noted that, for declaratory judgment actions, the amount in controversy is measured by the value of the object of that litigation.
The Montezes argue that the 1997 Ninth Circuit decision in Budget Rent-A-Car, Inc. v. Higashiguchi established that “[w]here an insurer seeks adjudication that there is no coverage, the amount in controversy is either the policy limit or value of the underlying tort claim, whichever is lower.”
Rejecting that summary, the jurist said that “[i]n Budget Rent-A-Car, we had no occasion to consider whether the policy limit set a cap on the ‘value’ of the underlying potential tort action because the amount in controversy was satisfied even assuming the policy limit governed.”
He turned to a 2023 Fifth Circuit decision in Allstate Fire & Casualty Insurance Co. v. Love, in which the court held that “where there is a legal possibility that an insurance company may be liable for an amount in excess of its policy limit, the underlying claim determines the amount in controversy.”
Agreeing with that approach, Wallach said:
“We adopt the Fifth Circuit’s approach….Here, because there is a legal possibility that Farmers Direct may be liable for an amount in excess of its policy limit, the ‘value of the object of the litigation,’…is not limited to the Policy’s face amount.”
Allegations in Complaint
Addressing the facts surrounding the present appeal, he remarked:
“In its Complaint, Farmers Direct alleged that the Montezes, as the ‘underlying plaintiffs now contend they are entitled to hundreds of millions of dollars in damages and further contend that Farmers Direct is liable for such damages notwithstanding its Policy limits.’ The Montezes’ state court demand served as the basis for Farmers Direct’s claim that the amount-in-controversy requirement was satisfied in federal court….”
Saying that the Montezes “cannot now dispute” that the value of their underlying tort claims against Perez exceeded $75,000, he added:
“Moreover, as is apparent, their goal all along has been to recover from Farmers Direct an amount in excess of the $25,000 policy limit—apparently by setting aside the Judgment, obtaining an assignment of a bad faith claim from Perez, and then suing Farmers Direct for bad faith.”
He commented that, like the insurer in the Love case, Farmers Direct is not seeking to void the entire insurance contract but is only requesting a declaration that its policy does not extend to any damages awarded to the underlying plaintiffs in the state court action.
Wallach also said that Klausner simply concluded, without analysis or citation to authority, that the “amount in controversy does not include…defense costs for the underlying action.” Noting that the insurer submitted evidence that it has incurred several hundred thousand dollars in attorney fees to intervene in the action, he declared that “the amount-in-controversy requirement is satisfied also on this basis.”
The case is Farmers Direct Property and Casualty Insurance Company v. Montez, 23-3320.
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