Court Prevents Insurer From Having Its Cake And Eating It Too

Insurers that breach their duty to defend argue frequently that they nonetheless have no duty to indemnify. They contend that while the breach of the duty to defend may subject insurers to liability for the costs incurred in defending the underlying actions, it does not subject insurers to liability for the amounts paid to resolve such actions. In so arguing, insurers seek to both breach their insurance policies, by breaching their duty to defend, and then rely on provisions of those breached insurance policies in disclaiming any duty to indemnify.

In an important victory for policyholders, generally, and Fried & Epstein’s client, Tate & Lyle North American Sugars, Inc., specifically, the Louisiana Court of Appeals prevented an insurer that was behaving in this manner from having its cake and eating it too. See Arceneaux v. Amstar Corp., et al., No. 2009-CA-0980 (La. Ct. App. 4th Cir. May 14, 2010). The Arceneaux Court held that an insurer could not avoid its duty to indemnify by enforcing the terms of its insurance policies that were breached when the insurer wrongfully refused to defend its policyholder.

The insurer, Continental Casualty Company had previously breached its duty to defend and had paid the substantial costs incurred by Tate & Lyle in defending against hundreds of underlying hearing loss claims. Continental argued nevertheless that its duty to indemnify was severely limited due to the application of certain policy provisions. In response, Fried & Epstein argued on behalf of Tate and Lyle that Continental could not enforce the terms of the very insurance policies that were breached when Continental wrongfully refused to defend.

In affirming the trial court’s grant of summary judgment to Tate & Lyle, the Court of Appeals found no error in the trial court’s conclusion that “Continental’s breach of the duty to defend Tate & Lyle is so grievous, mean spirited and designed to cause financial harm to [its] insured Tate & Lyle, [that] justice demands and [the court] must fashion a remedy for the redress of that breach which is commensurate with the breach of the duty to defend under [this] particular set of facts.”

Federal Court Diversity Jurisdiction: The Supreme Court Hits A “Nerve Center”

Insurance coverage cases are governed by state law. Nevertheless, those cases are often litigated in federal courts. Parties elect to proceed in federal court for various reasons. Insurance companies, fearing state court bias, often remove cases filed originally in state court to federal court. Policyholders may opt to file a case originally in federal court in the hope that the path to trial will be shorter.

In any event, proceeding in federal court requires diversity-of-citizenship. That is, each plaintiff must be a citizen of a state different from each defendant. If any plaintiff is a citizen of the same state as any defendant, then there is no diversity and the case may not proceed in federal court.

Determining the citizenship of an individual is straight forward and is guided by where one resides. Litigants and courts, however, often struggle when determining the citizenship of a corporation. The statute governing diversity jurisdiction provides that “a corporation shall be deemed a citizen of any state by which it has been incorporated and of the state where it has its principal place of business.” 28 U.S.C. § 1332(c)(1).

While determining the state of incorporation is easy, determining where a corporation maintains its “principal place of business” often proves difficult. When a corporation’s headquarters is located in the same state as its manufacturing plant and other centers of business, its principal place of business is within that state. The corporate citizenship determination is far more difficult when the corporate headquarters and other centers of business are located in different states.

In order to alleviate this confusion, the Supreme Court recently rendered an opinion adopting the “never center” approach to determining a corporation’s principal place of business. See Hertz Corp. v. Friend, __ U.S. __ (Feb. 23, 2010). Under that approach, the focus is on the place where “a corporation’s officers direct, control, and coordinate the corporation’s activities.” Slip op. at 14. In practice, this will be normally the place where the corporation maintains its headquarters. This assumes further that the corporate headquarters is the actual center of direction, control and coordination of corporate activities -- the “nerve center” if you will -- and not simply an office where the corporation holds its board meetings. Id.

Thus, for diversity purposes, a corporation is a citizen of any state in which it is incorporated and has its “nerve center.” Diversity will be present, and federal jurisdiction available, only if each plaintiff is the citizen of a state separate and distinct from each defendant.