NJ FEDERAL COURT REJECTS APPLICATION OF “DIRECT ACTION” DOCTRINE AND DENIES INSURED’S MOTION TO REMAND COVERAGE LITIGATION

In Carevel, LLC v. Aspen American Insurance Company, the plaintiff-insured filed a coverage and bad faith action against the defendant-insurer after the carrier refused to pay property damage benefits related to damage caused by Super Storm Sandy.  On November 26, 2012, the insured submitted an invoice of $23,130 for property remediation costs.  The carrier, however, denied the claim after the insured threatened to file a lawsuit if coverage was denied.  After the carrier denied coverage, the insured filed a complaint in Hudson County, New Jersey, alleging that Hurricane Sandy caused substantial damage to its property and that the carrier refused to provide benefits after the insured properly submitted claims for that damage.  The insured also alleged that the carrier’s bad faith failure to effectuate a settlement and refusal to conduct an investigation forced the insured to seek resolution through litigation.

After the carrier removed the suit to federal court in the District of New Jersey, the insured filed a motion to remand the action.  The insured argued that its suit against the carrier was a “direct action,” warranting remand back to state court.  After briefing, the court reasoned that the term “direct action” should be “limited to tort actions in which an injured party brings suit directly against a tortfeasor’s insurance company.”  More specifically, the direct action exception to the federal diversity jurisdiction statute applies only where a tort victim and defendant-insured both live in one state, but the victim litigates its action against an insurance company based in a different state.

In this case, the carrier is from Texas and New York and the insured is from New Jersey.  In a “direct action” suit, this would indicate the necessity of remand.  However, the court ruled, this is not a tort case where an injured party has filed suit against the alleged tortfeasor’s insurer.  Rather, this is coverage case filed by an insured against its own insurer that should proceed in federal court on the basis of diversity jurisdiction.