When your out-of-state insurer-client is sued in state court, you may be tempted remove to federal court under 28 U.S.C. § 1332. Yet even if your insurer-client is incorporated and headquartered out-of-state, determining whether you may remove the suit to federal court may be trickier than it seems. In this article, we will examine the diversity analysis for two insurer-specific association structures—the reciprocal insurance exchange and the mutual insurance company—the functional similarities of both, and the differences in assessing their citizenship for 28 U.S.C. § 1332 diversity of citizenship purposes.
A Comparison of the Reciprocal Insurance Exchange and the Mutual Insurance Company
A reciprocal insurance exchange is an organization where insureds “exchange contracts and pay premiums … for the purpose of insuring themselves and each other.” Reciprocal Exchange, Black’s Law Dictionary (11th ed. 2019). In this context, the Courts have defined subscribers to the exchange as being both the insured and the insurer. Peace Church Risk Retention Group v. Johnson Controls Fire Protection LP, 49 F.4th 866, 871 (3d Cir. 2022). In most settings, the “subscriber” in a reciprocal insurance exchange is the policyholder. Although the insurance exchange can sue and can be sued, it has no corporate existence or formal corporate structure. Rather than formal corporate officers, the subscribers are served by an attorney-in-fact who serve as the subscribers’ agent in fulfilling indemnity and reporting obligations. See, e.g., 40 Pa. C.S. § 964.
The mutual insurance company has the similarity that members serve as “insurers as well as the insured[.]” Com., Ins. Dept. v. Safeguard Mut. Ins. Co., 387 A.2d 647, 649 n.1 (Pa. 1978). Unlike stock insurance companies, mutual insurance companies do not issue stock. Rather, each policyholder, by virtue of holding the policy, owns part of the mutual insurance company. See generally 44 C.J.S. Insurance § 181. Despite this superficial resemblance to the reciprocal insurance exchange, the mutual insurance company is not an unincorporated association but an incorporated entity. Consequently, despite not formally issuing stock, the Courts frequently apply laws applying to stock corporations for purposes of assessing a mutual insurance company’s corporate governance. See, e.g., Wiltsie v. Standard Acc. Ins. Co., 135 N.W.2d 592, 593 (Mich. 1965) (using Michigan corporate law in assessing shareholder rights of policyholders of mutual insurance company).
Diversity Jurisdiction of the Reciprocal Insurance Exchange and the Mutual Insurance Company
For diversity jurisdiction purposes, unincorporated associations usually follow the rule that the citizenship of the association is the citizenship of every member of the association. United Steelworkers of America v. R. H. Bouligny, Inc., 382 U.S. 145 (1965). As may be obvious, reciprocal insurance exchanges, as unincorporated associations, typically follow this rule. For those practicing in Pennsylvania, New Jersey, or Delaware, the Third Circuit has expressly ruled in Peace Church Risk Retention Group v. Johnson Controls Fire Protection LP, 49 F.4th 866 (3d Cir. 2022) that a reciprocal insurance exchange is the citizen of all of its subscribers. Peace Church, 49 F.4th at 871. Large reciprocal insurance exchanges may consequently be the citizens of many states and territories. Indeed, if any subscriber sues the insurance exchange, the insurance exchange will usually not be diverse from the subscriber.
There may be small exceptions to the normal lack-of-diversity situation, however, if the plaintiff is not a subscriber or the subscriber moves to another state following the loss. For example, imagine that ABC Reciprocal Insurance Exchange issues policies in both Pennsylvania and New York, but not in New Jersey. At the time of a loss, a subscriber is domiciled in Pennsylvania but, by the time the subscriber files the complaint, the subscriber moves to New Jersey. Because citizenship is determined at the time the complaint is filed, see, e.g., Mollan v. Torrance, 9 Wheat. 537, 539 (1824), diversity citizenship and removal opportunities may exist for ABC Reciprocal Insurance Exchange in this scenario. Nevertheless, even in this instance, we warn that any reciprocal insurance exchange seeking to remove the suit to federal court on diversity grounds is likely going to need to produce substantial information with consequent factfinding concerning the citizenship of its subscribers. See, e.g., Peace Church, 49 F.4th at 873 (remanding case back to district court so district court may engage in “factfinding” regarding citizenship of reciprocal exchange).
Although the Third Circuit has not expressly ruled on the citizenship of mutual insurance companies, apparently all courts hold mutual insurance companies to be corporations for purposes of citizenship analyses. Many courts do not analyze the differences between mutual insurance companies and stock corporations and conclusively apply the citizenship rules of corporations to mutual insurance companies. See, e.g., Postell v. Ryder Truck Rental, Inc., 512 Fed.Appx. 977, 980 (11th Cir. 2013). Those who analyze the issue overwhelmingly conclude that a mutual insurance company’s citizenship is, like a corporation’s citizenship, assessed by the place of incorporation and principal place of business. In one persuasive analysis, Judge Forrester of the United States District Court for the Northern District of Georgia cited precedent in both the Second and Seventh Circuit, holding that “it matters not for purposes of diversity jurisdiction whether the corporation is formally shareless or has members rather than shareholders.” Barnett v. Norfolk & Dedham Mut. Fire Ins. Co., 773 F.Supp. 1529, 1531 (N.D. Ga. 1991). Consequently, Judge Forrester held that citizenship rules for corporations likewise applied to mutual insurance companies.
Courts have likewise examined how states typically apply corporate laws and principles to mutual insurance companies. For example, Judge Forrester in Barnett placed particular emphasis on how a particular state treats mutual insurance companies. For example, in Massachusetts, “the general principles of law relative to the powers, duties and liabilities of corporations shall apply to all incorporated domestic companies, including mutual insurance companies having members rather than stockholders.” Id. (quoting Mass. Gen. Laws Ann. Ch. 175 § 30). Likewise, more recently, in assessing the citizenship of a Michigan-based mutual insurance company, Judge Payne of the Eastern District of Virginia found persuasive that the Michigan Supreme Court treated mutual insurance companies as corporations in certain contexts. 110 South Perry, LLC v. Auto-Owners Insurance Company, 2023 WL 6368970 (E.D. Va. Sept. 28, 2023) (citing Wiltsie, supra).
Consequently, although the Supreme Court of the United States has not squarely addressed the issue, the corporate citizenship of a mutual insurance company is likely to follow the corporation citizenship rules. That is, the mutual insurance company’s citizenship is determined by its place of incorporation and the principal place of business.
Remember the Statutory Interpleader!
We would be remiss to fail to note that although 28 U.S.C. § 1332 requires “complete diversity” of the parties—that is, no plaintiff must share a citizenship with any defendant—the federal statutory interpleader statute, 28 U.S.C. § 1335, requires only “minimal” diversity. So, for the requisite “minimal diversity” jurisdiction to exist under 28 U.S.C. § 1335, two of the claimants to the interpleaded fund must not be co-citizens, even if the other claimants are co-citizens. State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 530 (1967). The citizenship of a disinterested stakeholder is also irrelevant for diversity purposes. Treinies v. Sunshine Mining Co., 308 U.S. 66, 71 (1939). Consequently, the issues for reciprocal insurance exchanges found in a 28 U.S.C. § 1332 analysis may not necessarily be present under 28 U.S.C. § 1335.
Conclusion
Despite their functional commonalities, reciprocal insurance exchanges and mutual insurance companies have different citizenship analyses for assessing citizenship. While the above serves only as a brief overview of the citizenship analysis for a lawyer’s insurer-client, it is clear that a lawyer must understand an insurer’s corporate structure and cannot jump to conclusions on diversity of citizenship when assessing removal.
For additional questions, please contact Conrad James Benedetto, Esq. or Christopher Regan, Esq.
This article was prepared by McCormick & Priore, P.C. to provide information on recent legal developments of interest to our readers. This publication is in no way intended to provide legal advice or to create an attorney-client relationship. All Rights Reserved. This article may not be reprinted without the express written permission of McCormick & Priore, P.C.