Did Congress Mean What It Didn't Say About Reverse Direct Action Lawsuits?

Abstract

This article previews the issues and arguments in Northbrook National Insurance Co. v. Brewer, on the Supreme Court’s 1989-90 appellate docket. The diversity jurisdiction statute clearly prohibits an insured person from suing an insurance company in federal court on diversity grounds. The Court now is basically being asked whether what is good for the goose is also goodfor the gander. That is, can an out-of-state insurance company invoke the diversity jurisdiction of a federal court to sue a local, in-state employee?

One would have thought that by now Congress and the Supreme Court would have ironed out every conceivable wrinkle and loophole concerning the diversity jurisdiction of federal courts. Indeed, just last fall, Congress in its Judicial Improvements Act of 1988 tidied up some relatively obscure but persistently problematic technical rules governing federal diversity jurisdiction. Nonetheless, the Supreme Court never fails to surprise long-time followers with yet another instance of unimagined jurisdictional arcana, and the opening of this year's term will not disappoint jurisdiction aficionados.

In a sense, Northbrook v. Brewer deals with a jurisdictional issue that somehow got away, or at least was lurking, in Texas. The concededly technical question is whether an out of-state insurance company may invoke the diversity jurisdiction of the federal courts to sue an employee who recovered an award in a state worker's compensation proceeding. The general diversity statute governing jurisdiction in federal court permits lawsuits between citizens of different states (including corporate citizens), but Congress has carved out an exception for insurance companies. The scope and application of this exception provides the basis for this "test case" before the Court.

The Fifth Circuit believes insurance companies and claimants ought to settle up in state court, while the Sixth Circuit believes that out-of-state insurance companies ought to be able to litigate in federal court under diversity jurisdiction, just like everybody else. Although hardly a major doctrinal schism, the Supreme Court is now being called upon to resolve this split of opinion between the Fifth and Sixth Circuits. The Court will have to decide whether the 1964 amendment to the diversity statute was intended merely to stem the flow of direct action lawsuits in federal court, or whether it was designed to keep all insurance litigation, by whomever brought, out of federal forums and in state courts.

The Supreme Court might also decide the issue with reference to the underlying purpose of diversity jurisdiction ― to protect out-of-state litigants from possible in-state local bias. If the Court chooses this analytical framework, Northbrook will have the compelling argument that the insurance exception defeats the very purposes of diversity jurisdiction in cases where out-of-state insurance companies sue local defendants. On the other hand, it would raise the specter of a logical inconsistency to permit insurance companies to sue injured parties in federal court while forbidding injured parties from suing insurance companies there.