Smith v. American General Life and Acc. Ins.

• Decision Date: 24 July 2003
• Docket Number: No. 02-2114.,02-2114.
• Parties: Carolyn SMITH, Plaintiff-Appellant, v. AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

337 F.3d 888

Carolyn SMITH, Plaintiff-Appellant, v. AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY, INC., Defendant-Appellee.

No. 02-2114.

United States Court of Appeals, Seventh Circuit.

Argued January 13, 2003.

Decided July 24, 2003.

Rehearing Denied August 18, 2003.

COPYRIGHT MATERIAL OMITTED

Gary D. McGaune (argued), Aurora, IL for plaintiff-appellant.

David J. Novotny (argued), Chittenden, Murday & Novotny, Chicago, IL, for defendant-appellee.

Before POSNER, KANNE, and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

Carolyn Smith purchased life insurance policies for her three children from an agent selling insurance door-to-door for American General Life and Accident Insurance Company. When one of her children died of complications from sickle cell anemia, American General refused to issue the full $15,000 benefit that Smith anticipated receiving on her policy. Instead Smith received $7,500 (a portion of this amount was paid directly to the funeral home to which Smith assigned her claim) and was told that her original policy had lapsed and was substituted by a policy that carried higher premiums and half the benefit. After retaining a lawyer to help her sort out the problem, Smith was eventually paid an additional $7,500 plus interest, thereby collecting the full $15,000 benefit under her original policy. She then sued American General in state court alleging common law and statutory fraud in addition to vexatious delay under the Illinois Insurance Code, hoping to recover $36.54 in excess premium payments, $2,500 that she paid her lawyer to recover the second half of her benefits, attorneys fees for her statutory fraud and vexatious delay claims, and over $1,000,000 in punitive damages.

American General removed the case to federal court, and on cross-motions for summary judgment the district court granted partial summary judgment to American General. Eager to appeal that decision to this court, Smith passed up the opportunity to try her surviving fraud claims and stipulated that she could not establish damages at trial on what remained of her claims, despite the district court's suggestion to the contrary. The case was then dismissed on the court's motion, and Smith brought this timely appeal.

At oral argument we expressed concern that Smith's claim might not meet the amount in controversy requirement that is necessary to support federal jurisdiction under 28 U.S.C. § 1332(a) and asked the parties to file supplemental briefs on this question. After reviewing these filings we have concluded that the district court lacked jurisdiction over Smith's claim. We therefore vacate the district court's judgment and remand the case with instructions to remand the case to state court. See, e.g., Ross v. Inter-Ocean Ins. Co., 693 F.2d 659, 663 (7th Cir.1982), abrogated on other grounds by Hart v. Schering-Plough Corp., 253 F.3d 272, 274 (7th Cir.2001).

I

In March 1991, Smith purchased life insurance for her three children, including her son Isaac J. Smith, from a door-to-door agent selling policies for American General. Isaac's policy required Smith to pay monthly premiums of $9.85; it promised a $15,000 death benefit, payable to Carolyn Smith, in the event of his death. Every month Smith faithfully paid the premium on the policy to an American General agent who came to her home, collected the payment, and marked a receipt book that the company gave her to keep track of her monthly payments. In September 1992, Smith cancelled the policy for another of her sons, D'Right, but she continued to pay monthly premiums to insure her daughter Tynisa and Isaac. The premiums for these two policies together totaled $18.79 per month. At some time in 1996, American General's agents stopped marking Smith's receipt book with each monthly payment and instead issued a computerized receipt from a hand-held device that its agents carried. Smith detected a problem with the first computerized receipt, which indicated that her total premium was $23.18 rather than $18.79, and did not include a policy number. She expressed concern to American General's agent, who explained that her original policy on Isaac had lapsed for non-payment and that the new, higher premium was for a second policy that Smith supposedly purchased in August 1994. Smith asked to see a copy of her application for the new policy, which a different agent showed her on a subsequent visit to her home. According to Smith, that policy contained her forged signature, but she was not able to get a copy of the policy from American General. Despite concerns over the accuracy of her monthly premium charges and which policy was in effect, Smith dutifully paid the revised monthly premiums on Isaac's policy until her son's death in September 1997.

When Isaac died Smith tendered a claim to American General for the $15,000 death benefit that she believed she was owed under her policy. This is when Smith first learned that the new policy carried only a $7,500 benefit, despite the increase in monthly premiums. Smith retained a lawyer to help her recover the difference, and this lawyer sent a letter to American General on her behalf. In response to Smith's lawyer's letter, American General explained that Smith's policy on Isaac had lapsed and that the current benefit was paid out under her new policy. At that time American General asked for any information that would support a different conclusion, but it received no response from Smith or her lawyer. Nearly one year later, a second lawyer retained by Smith (the record is silent on why she changed lawyers) responded to American General's letter by sending copies of handwritten and computerized receipts as proof that Smith's original policy never lapsed, and seeking full payment of the $15,000 benefit. In this new round of correspondence Smith's lawyer urged American General to settle his client's claim or face a lawsuit over its conduct. That letter and supporting documentation were then referred to the proper department within American General for investigation, and handwriting exemplars were requested to establish that Isaac himself had not applied for the second policy. (A second application was produced by American General containing what appears to be Isaac Smith's forged signature. That application contains a spelling mistake in Isaac's name, as well as a mistake in his social security number.) Smith's lawyer supplied American General with a copy of a car loan application that Isaac filed shortly before his death, and within four days of its receipt of this handwriting sample, American General paid Smith $7,500 plus interest "to reflect the amount [of insurance] originally applied for."

Smith's claim against American General is not for the balance of her insurance policy — that much she has already received. Instead she seeks to recover for the delay in payment under her original insurance policy, the excess premiums that were never refunded, and the costs she incurred in securing complete payment. Beyond these costs Smith seeks punitive damages for what to her seems like an inexcusable delay in payment under the policy, as well as a major scam on American General's part to defraud unsophisticated customers out of their benefits. Since Smith's complaint seeks relief solely on the basis of Illinois law, federal jurisdiction exists, if at all, if the requirements of 28 U.S.C. § 1332 are met.

II

This court has an independent obligation to satisfy itself that federal subject matter jurisdiction exists before proceeding to the merits in any case, even where, as here, neither the parties nor the district court has questioned the existence of such jurisdiction. St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 287 n. 10, 58 S.Ct. 586, 82 L.Ed. 845 (1938); Ross, 693 F.2d at 660. To invoke the federal courts' diversity jurisdiction, the parties must establish both complete diversity and that the "matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs." 28 U.S.C. § 1332(a). Complete diversity is not a problem because Smith is a citizen of Illinois and American General is a Tennessee corporation with its principal place of business in Tennessee.

The amount in controversy presents a much more difficult question. Based on language in the Supreme Court's decision in St. Paul Mercury, the federal courts have adopted what is known as the "legal certainty" test to assess whether the amount in controversy in cases originating in federal court satisfies § 1332's requirements. See Gardynski-Leschuck v. Ford Motor Co., 142 F.3d 955, 957 (7th Cir.1998); 14B Charles A. Wright, Arthur R. Miller & Edward H. Cooper, FEDERAL PRACTICE & PROCEDURE § 3702, at 17 (3d ed.1998). Under the legal certainty test, courts will find federal jurisdiction on the basis of the plaintiff's complaint unless it appears "to a legal certainty that the claim is really for less than the jurisdictional amount." St. Paul Mercury, 303 U.S. at 289, 58 S.Ct. 586. But a different rule governs cases filed in state court and subsequently removed to federal court by a defendant. In removed cases, the amount alleged in the plaintiff's complaint, if sufficient to meet the jurisdictional requirements of § 1332, is presumed correct on the assumption that a plaintiff would not fabricate the amount in controversy to meet the federal diversity jurisdiction requirements and then file her suit in state court relying on the defendant to remove the case to federal court. Id. at 290-91, 58 S.Ct. 586. In keeping with this presumption, our court has adopted a rule that the removing party must establish any disputed aspect of diversity jurisdiction by offering "evidence which proves to a reasonable probability that jurisdiction exists." Chase v. Shop 'N Save Warehouse Foods, Inc., 110 F.3d 424, 427 (7th Cir.1997) (citation and internal quotation marks omitted).

In this case, at first blush, it looks as if the amount could...