May 26 (Westlaw Journals) - An equitable contribution action for over $75,000 between a Michigan insurer and a California insurer qualified for diversity jurisdiction, a California federal court ruled before it transferred the case to the venue with closer ties.    

Judge Susan Illston of the Northern District of California found that the “direct action” exception to diversity jurisdiction did not apply in a declaratory judgment action when one insurer seeks contribution from another insurer.

The judge determined that the federal courts had jurisdiction over the dispute between Sutter Insurance Co., a California citizen, and Williambsurg National Insurance Co, a Michigan citizen, and she denied Sutter’s motion to remand to the state courts.

The “direct action” exception, which sometimes applies in insurance coverage cases, is found in 28 U.S.C. § 1332(c)(1).  Under the exception, the insurer takes on the citizenship of its policyholder in cases where an injured party brings a direct action against the insurer rather the policyholder, the statute says.

In this case, Sutter directly sued Williamsburg in California state court seeking equitable contribution for money it paid out to settle a lawsuit involving a tractor trailer that allegedly hit another vehicle.  Sutter insured Carlos Garibay, a California citizen who owned and drove the tractor, but Williamsburg insured Lawson Rock & Oil, Inc., a California citizen that owned the trailer.

With the underlying case settled, the only issue between the insurance companies is whether Sutter and Williamsburg’s policies apply on a co-primary basis or whether Williamsburg’s policy only provides excess coverage.  Sutter never named Williamsburg’s insured, Lawson Rock & Oil, as a party to the lawsuit.

Williamsburg filed a motion to transfer the state court case to the Northern District of California based on diversity jurisdiction, asserting that it was a Michigan citizen, Sutter is a California citizen, and the suit is for over $75,000.

In response, Sutter filed the motion to remand and argued that, without joining Lawson Rock & Oil, Williamsburg takes on California citizenship under the “direct action” exception to diversity jurisdiction.

Judge Illston, however, disagreed.  She noted that the exception applies when an injured party sues an insurer directly for injuries its policyholder caused, but that in this case, Sutter is not the injured party.  Moreover, she said that, “the liability sought —

equitable contribution to Sutter — could not be imposed on Sutter’s insured, the tractor trailer driver.”

In the same ruling, Judge Illston granted Williamsburg’s motion to transfer the case to the Eastern District of California.  She agreed with Williamsburg that the Eastern District is the proper venue for this case because the accident occurred within its jurisdiction, both insureds live there, and the underlying action was decided in that court.  Therefore, she granted the motion to transfer.

Sutter Insurance Company v. Williamsburg National Insurance Co., No. C 11-01150 SI, 2011 WL 1833127 (N.D. Cal. May 13, 2011).

(Reporting by Melissa Sachs, Westlaw Journal Insurance Coverage)