Erie Insurance Exchange et al v. Potomac Electric and Power Company

Filing 16

MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 4/29/14. (sat, Chambers)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
ERIE INSURANCE EXCHANGE, et al.
:
v.

:

Civil Action No. DKC 14-0485

:
POTOMAC ELECTRIC AND POWER
COMPANY

:

MEMORANDUM OPINION
Presently

pending

and

ready

for

resolution

in

this

negligence and breach of contract case is the motion to remand
filed by Plaintiffs Erie Insurance Exchange t/i/o/u and t/u/o
Gam Nguyen and Gam Nguyen.
briefed,

and

necessary.

the

court

(ECF No. 11).

now

rules,

Local Rule 105.6.

no

The issues have been
hearing

being

deemed

For the following reasons, the

motion to remand will be granted.
I.

Background
Plaintiff

Plaintiff

Gam

Erie

Beltsville,

Nguyen

Insurance

Maryland.

had

Company
The

homeowner’s
for

policy

his

insurance

real

contained

from

property
a

in

standard

subrogation clause that entitled Erie to be subrogated to all
rights

possessed

damage or loss.

by

Nguyen

against

third-parties

who

cause

On or about February 2, 2011, a fire severely

damaged Nguyen’s property.

Plaintiffs allege that the fire was

caused by equipment or services supplied by Defendant Potomac

Electric and Power Company (“PEPCO”), including, but not limited
to,

a

dangerous,

maintained
insurance

defective,

service
policy,

line.
Erie

has

or

improperly

Pursuant
paid

to

inspected

Nguyen

$271,210.93

incurred a loss of $2,500 for his deductible.

or

homeowner’s

and

Nguyen

has

Plaintiffs bring

claims against Defendant for negligence and breach of contract,
demanding judgment against Defendants in an amount in excess of
$75,000 for each count.
Plaintiffs filed their complaint in the Circuit Court for
Prince George’s County, Maryland on January 8, 2014.
2).

Defendant

removed

to

this

court

on

February

citing diversity jurisdiction, 28 U.S.C. § 1332.

(ECF No.
19,

2014,

(ECF No. 1).

On March 14, 2014, Plaintiffs filed a motion to remand.
No. 11).
II.

Defendant opposed on April 10, 2014.

(ECF

(ECF No. 15).

Standard of Review
When the plaintiff challenges the propriety of removal, the

defendant bears the burden of proving proper removal.
v.

Crown

Title

Corp.,

216

F.Supp.2d

519,

521

See Greer

(D.Md.

2002)

(citing Mulcahey v. Columbia Organic Chems. Co., 29 F.3d 148,
151 (4th Cir. 1994)).

In considering a motion to remand, the

court must “strictly construe the removal statute and resolve
all

doubts

in

favor

of

remanding

the

case

to

state

court.”

Richardson v. Philip Morris Inc., 950 F.Supp. 700, 702 (D.Md.
1997)

(internal

quotation

marks
2

omitted).

This

standard

reflects the reluctance of federal courts “to interfere with
matters properly before a state court.”

Id. at 701.

III. Analysis
28 U.S.C. § 1441 allows defendants to remove an action
“brought in a State court of which the district courts of the
United

States

have

original

jurisdiction.”

Pursuant

to

28

U.S.C. § 1332(a)(1), district courts have original jurisdiction
“of all civil actions where the matter in controversy exceeds
the sum or value of $75,000, exclusive of interests and costs,
and is between . . . citizens of different States.”
It is undisputed that the amount-in-controversy requirement
is

satisfied

in

this

case,

but

the

parties

whether the diversity requirement is met.

disagree

as

to

“[T]he Supreme Court

has interpreted the diversity jurisdiction statute to require
complete diversity of citizenship of each plaintiff from each
Rosmer v. Pfizer Inc., 263 F.3d 110, 123 (4th Cir.

defendant.”

2001) (citing Strawbridge v. Curtiss, 7 U.S. 267 (1806)).

For

purposes of determining a party’s citizenship, a natural person
is

deemed

a

citizen

of

the

State

in

which

he

or

she

is

domiciled, Axel Johnson, Inc. v. Carroll Carolina Oil Co., Inc.,
145 F.3d 660, 663 (4th Cir. 1998), a corporation is deemed a
citizen of any state in which it is incorporated or has its
principal

place

of

business,

28

U.S.C.

§

1332(c),

and

an

unincorporated association is deemed a citizen of any state in
3

which its members are citizens, Clephas v. Fagelson, Shonberger,
Payne & Arthur, 719 F.2d 92, 93 (4th Cir. 1983).

The parties

agree that Plaintiff Nguyen is a citizen of Maryland and that
Defendant PEPCO is incorporated under the laws of Virginia and
maintains its principal place of business in Washington, D.C.
The dispute is over the citizenship of Erie.
Erie is a reciprocal insurance exchange, formed under the
laws of Pennslyvania.

It is an unincorporated association and

as such, is considered to have the citizenship of its members
for diversity purposes in federal court.
at 93.

See Clephas, 719 F.2d

Erie has provided an affidavit from one of its Record

Examiners that it has subscribers in both Maryland and Virginia.
(ECF No. 11-2).

The question is whether Erie’s subscribers are

its “members.”
This question has bedeviled numerous courts, including this
one.

A helpful starting point is to consider the nature of a

reciprocal insurance exchange.

As recently discussed by Judge

Messitte:
A
reciprocal
insurance
exchange
is
an
unincorporated association of persons or
entities, referred to as “subscribers,” who
exchange risks among themselves.
1 Jeffrey
E. Thomas, New Appleman on Insurance Law
Library Edition § 1.08[4][e].
The goal of
the exchange is for an individual or entity
to obtain insurance by entering into a pool
of subscribers who all agree to insure one
another, subject to certain conditions.
Thus, in a reciprocal insurance exchange,
4

“[e]ach subscriber is both an insurer and an
insured.”
Michael A. Haskel, The Legal
Relationship Among A Reciprocal Insurer’s
Subscribers,
Advisory
Committee
and
Attorney–in–Fact, 6 N.Y. City L.Rev. 35
(2003) (footnotes omitted) (emphasis added).
The subscribers assume liability severally,
“meaning that the liability of each member
is limited to the premiums paid by that
member.” Appleman, supra, § 1.08[4][e]. If
a subscriber defaults on his or her premium
payments, the other subscribers “cannot be
charged with a portion of the liability of
the defaulting subscriber.”
Id.
The
association is not operated for profit, but
acts
“through
a
person
or
corporation
serving
as
attorney-in-fact
for
the
organization.”
Id.
Although the powers of
the attorney-in-fact may vary from exchange
to
exchange,
the
role
is
largely
administrative. Haskel, supra, at 48–49.
James G. Davis Constr. Corp. v. Erie Ins. Exch., 953 F.Supp.2d
607, 610-11 (D.Md. 2013); see also Salvi v. Erie Ins. Exch., No.
3:12-CV-150,
reciprocal

2012

WL

insurance

1715910

(E.D.Va.

exchange

is

an

May

15,

2012)

unincorporated

(“A

business

organization of a special character in which the participants,
called

subscribers

insureds.”).

(or

underwriters)

are

both

insurers

and

In this district, Judge Messitte, Judge Quarles,

and Judge Andre Davis have held that Erie’s subscribers are its
members.

James

Messitte);

Brunson

G.

Davis,

v.

Erie

953

F.Supp.2d

Ins.,

No.

at

610-11

WDQ-12-2152,

(Judge
2013

WL

1316947, at *2-3 (D.Md. Mar. 27, 2013) (Judge Quarles); Hiob v.
Progressive Am. Ins. Co., No. AMD 08-744, 2008 WL 5076887, at *1
(D.Md.

Nov.

24,

2008)

(Judge
5

Davis).

Judge

Benson

Legg

concluded differently, however, holding that “Erie’s individual
policyholders are its customers, not its members.”
Exch.

v.

Davenport

(D.Md. 2009).

Insulation,

Inc.,

616

Erie Ins.

F.Supp.2d

578,

580

The United States Court of Appeals for the Fourth

Circuit has yet to weigh in on this issue.

Erie relies on the

James G. Davis decision and others from outside this district to
support its argument that Erie’s citizenship is determined by
its policyholders and, because it has policyholders in Maryland
and Virginia, complete diversity does not exist.

PEPCO does not

dispute that Erie has policyholders in Maryland and Virginia.
Its argument relies on Judge Legg’s decision in Davenport and
the fact that Erie has not registered with the relevant agencies
in

the

District

of

Columbia

and

Virginia,

and

thus

authorized to conduct business in those jurisdictions.
of the relevant databases lists Erie as “foreign.”

is

not

A search

PEPCO argues

that it is “contradictory, illogical, as well as confusing” for
Erie to claim it is a citizen of Virginia under James G. Davis,
“yet refusing to perfect or memorialize the citizenship Davis
purports to confer upon it by registering to conduct business
with

the

According

required
to

state

Defendant,

agencies.”
this

refusal

(ECF
to

No.

15,

register

at

5).

with

the

appropriate state agencies is “tantamount to a declaration of
non-citizenship.”

(Id.).

Erie’s status makes it impossible for

anyone to serve it with process, determine its corporate status,
6

or evaluate removal.

(Id.).

Furthermore, Erie is only licensed

to operate as an insurance company in thirty-three states plus
the District of Columbia.

Because Erie surely has at least one

policyholder in every state, to accept Erie’s argument would
make it a citizen for diversity purposes in a state in which it
is not even licensed to sell insurance.
PEPCO’s arguments will be rejected.

Davenport, and the

case it relied upon, Garcia v. Farmers Ins. Exch., 121 F.Supp.2d
667

(N.D.Ill.

2000),

do

not

identify

policyholders, are Erie’s members.

who,

if

not

its

Furthermore, they appear to

be the only two cases to have found that a reciprocal insurance
exchange’s

policyholders

purposes.

are

not

its

citizens

for

diversity

See Brunson, 2013 WL 1316947, at *3 (“It appears that

every court that has addressed the citizenship of a reciprocal
exchange

since

Garcia.”).

Davenport

has

disagreed

with

that

case

and

By contrast, Erie’s position has been accepted by

numerous judges across the country, including those in the same
district as the judges who decided Davenport and Garcia.

See,

e.g., Baer v. United Serv. Auto Ass’n, 503 F.2d 393, 396 (2d Cir.
1974) (“United [Services Automobile Association] appears to be
precisely

the

type

of

unincorporated

reciprocal

insurance

association . . . to be, for diversity purposes, a citizen of
each state in which it has members or subscribers.”); Arbuthnot
v. State Auto Ins. Ass’n, 264 F.2d 260, 261-62 (10th Cir. 1959);
7

Hartfield v. Farmers Ins. Exch., No. 11-13719, 2013 WL 136235,
at *3-4 (E.D.Mich. Jan. 10, 2013); Salvi, 2012 WL 1715910, at
*2; AMCO Ins. Co. v. Erie Ins. Exch., No. 11 C 4842, 2011 WL
5833977, at *3 (N.D.Ill. Nov. 16, 2011); Erie Ins. Exch. v.
Electrolux Home Prods., Inc., No. 3:10cv615, 2011 WL 2945814, at
*2 (W.D.N.C. July 15, 2011) (“the court finds

Davenport

and

Garcia to be against the greater weight of authority”); Cady v.
Am. Family Ins. Co., 771 F.Supp.2d 1129, 1131 (D.Ariz. 2011)
(“Because USAA is an unincorporated association with members in
all

fifty

states,

it

is

considered

a

citizen

of

all

fifty

states.”); Themis Lodging Corp. v. Erie Ins. Exch., No. 1:10 CV
0003, 2010 WL 2817251 (N.D.Ohio. July 16, 2010) (“Courts have
long recognized that reciprocal exchange insurance corporations,
like

Erie,

do

corporations
member.”).
exchange

not

but,

receive

instead,

Defendant’s

like

Erie

is

fictional
bear

concerns

the
that

essentially

citizenship
citizenship

a

reciprocal

shielded

from

as
of

do
each

insurance

ever

being

subject to diversity jurisdiction is understandable,1 but its

1

Section 4 of The Class Action Fairness Act of 2005 added
new subsection 1332(d)(10) to Title 28: “For purposes of this
subsection and section 1453, an unincorporated association shall
be deemed to be a citizen of the State where it has its
principal place of business and the State under whose laws it is
organized.” The accompanying report by the Senate Committee on
the Judiciary explained the motivations behind this new rule:
This
rule
[that
an
unincorporated
association takes the citizenship of each of
8

arguments

do

reciprocal

not

change

insurance

citizenship

as

do

the

“longstanding

exchanges
corporations

do

not

but,

recognition
receive

instead,

that

fictional
bear

the

citizenship of each member,” Salvi, 2012 WL 1715910, at *2, and
Defendant has not made a convincing argument as to why those
its members] has been frequently criticized
because often an unincorporated association
is, as a practical matter, indistinguishable
from a corporation in the same business.
Some insurance companies, for example, are
“inter-insurance exchanges” or “reciprocal
insurance associations.” For that reason,
federal
courts
have
treated
them
as
unincorporated associations for diversity
jurisdiction purposes. Since such companies
are nationwide companies, they are deemed to
be citizens of any state in which they have
insured
customers.
Consequently,
these
companies can never be completely or even
minimally diverse in any case. It makes no
sense to treat an unincorporated insurance
company
differently
from,
say,
an
incorporated manufacturer for purposes of
diversity
jurisdiction.
New
subsection
1332(d)(10) corrects this anomaly.
S.Rep. No. 109-14, at *46 (2005), reprinted in 2005 U.S.C.C.A.N.
3, 43.
Unfortunately for Defendant, this new rule only covers
class actions.
If anything, Congress’s action in CAFA
illustrates that when it wants to restrict diversity citizenship
in this manner it knows how to do so. The fact that it has not
for non-class actions suggests that the normal rule remains in
place. See United States v. Clenney, 631 F.3d 658, 667 (4th Cir.
2011) (In the context of electronic communications, fact that
Congress has provided for suppression of evidence obtained in
violation of statues governing wiretaps for oral or written
communications,
but
not
in
the
context
of
electronic
communications, is evidence that it did not intend to provide
for suppression of evidence gathered in violation of the
electronic communication statutes).
Until a modification
similar to Section 1332(d)(10) is made for non-class actions, no
diversity exists.
9

members should not be Erie’s policyholders.

Consequently, Erie

is a citizen of Virginia and complete diversity does not exist.2
IV.

Conclusion
For the foregoing reasons, the motion to remand filed by

Plaintiffs will be granted and the case will be remanded.

A

separate order will follow.

/s/
DEBORAH K. CHASANOW
United States District Judge

2

The multiple citizenships possessed by Erie and its ilk
have both benefits and costs.
It would be precluded from
removing a case solely on diversity grounds where it is a
citizen of that state. 28 U.S.C. § 1441(b)(2).
10