Schwartz v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 15 April 1999
• Docket Number: No. 98-2448,98-2448
• Citation: 174 F.3d 875
• Parties: Eugene SCHWARTZ and Pamela Schwartz, Plaintiffs-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Robert E. Comte, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 875

174 F.3d 875

Eugene SCHWARTZ and Pamela Schwartz, Plaintiffs-Appellants, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and Robert E.

Comte, Defendants-Appellees.

No. 98-2448.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 10, 1999.

Decided April 15, 1999.

James E. Brammer (argued), Allen & Associates, Valparaiso, IN, for Plaintiffs-Appellants.

Richard M. Davis (argued), Hoeppner, Wagner & Evans, Valparaiso, IN, for Defendants-Appellees.

Before COFFEY, FLAUM, and EASTERBROOK, Circuit Judges.

FLAUM, Circuit Judge.

This is an appeal from summary judgment in favor of State Farm Mutual Automobile Insurance Company ("State Farm") in a suit brought by one of its policy holders claiming that the under-insured vehicle provision of the State Farm automobile insurance policy provided only illusory coverage, and that the insurance company's denial of the insured's claim following a car accident was in bad faith. The policy holder appealed, arguing that the district court lacked jurisdiction and erred in holding that the policy provision at issue was not illusory. We now affirm the district court's decision.

Background

On July 6, 1994, Pamela Schwartz and her daughter were involved in a two-car accident in which both Schwartzes sustained personal injuries and claimed damages. It was later determined that the driver of the other car, Everitt C. McMillin, was at fault. McMillin carried an insurance policy from United Southern Assurance Company ("Southern Assurance") providing liability coverage in the amount of $25,000 per person and $50,000 per occurrence--the minimum required by Indiana law. Southern Assurance offered the full amount of McMillin's policy to the Schwartzes which they accepted with the consent of their own insurer, State Farm.

At the time of the accident, the Schwartzes had an automobile insurance policy with State Farm which, along with other coverages, provided for under-insured vehicle protection in the amount of $25,000 per person and $50,000 per occurrence. ¹ Because the Schwartzes claimed damages in excess of the $50,000 they received from Southern Assurance, they filed a claim with State Farm based on the under-insured vehicle provision. The insurer rejected the claim on the grounds that McMillin's vehicle was not under-insured and that because the Schwartzes' recovery under its policy was offset by any amount it received from a liable party, and because McMillin had paid them $50,000 (the limit of the Schwartzes' coverage) the insurer owed the them nothing.

The Schwartzes sued State Farm and one of its agents, Robert E. Comte, in Indiana state court arguing that the insurer failed to settle their claim in good faith and that the under-insured provision in the policy it sold them was illusory. State Farm, an Illinois corporation, removed the action to federal court invoking diversity jurisdiction. See 28 U.S.C. § 1441. The Schwartzes, Indiana residents, then moved to remand the case to state court for lack of complete diversity because defendant Comte was also a resident of Indiana.

The district court held that because the Schwartzes did not have a cognizable cause of action against Comte, his residency could not be used to destroy federal jurisdiction. On the merits, the court granted State Farm's motion for summary judgment holding that because the underinsured provision of the Schwartzes' policy did cover certain risks, it was not illusory. Additionally, because the plaintiffs had not provided any evidence of deception beyond their claim that the provision was illusory, State Farm was not liable for bad faith regarding the policy.

The Schwartzes appealed, challenging the district court's jurisdiction and maintaining that the under-insured provision was illusory.

Discussion

We review issues involving removal of an action from state to federal court de novo. See Chase v. Shop N Save Warehouse Foods, Inc., 110 F.3d 424, 427 (7th Cir.1997). We also review de novo the award of summary judgment, construing the evidence in the light most favorable to the non-moving party. See Drake v. Minnesota Mining & Mfg. Co., 134 F.3d 878, 883 (7th Cir.1998). We are, however, "not required to draw every conceivable inference from the record [in favor of the non-movant]--only those inferences that are reasonable." Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991). Summary judgment is appropriate "if there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Salima v. Scherwood South, Inc., 38 F.3d 929, 932 (7th Cir.1994). Under these standards, we examine each of the Schwartzes' claims.

Jurisdiction-Fraudulent Joinder

The Schwartzes initially challenge the district court's determination that federal jurisdiction was appropriate because Comte had been fraudulently joined as a defendant. The court explained that although a plaintiff is normally free to choose its own forum, it may not join an in-state defendant solely for the purpose of defeating federal diversity jurisdiction. Gottlieb v. Westin Hotel, 990 F.2d 323, 327 (7th Cir.1993). Such joinder is considered fraudulent, and is therefore disregarded, if the out-of-state defendant can show there exists no "reasonable possibility that a state court would rule against the [in-state] defendant." Poulos v. Naas Foods, Inc., 959 F.2d 69, 73 (7th Cir.1992). We must therefore determine whether, based on Indiana state law, there is a reasonable possibility that the Schwartzes could recover against Comte.

The plaintiffs allege that Comte denied their insurance claim in bad faith. Although such a denial is recognized as a tort under Indiana law, see Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind.1993), as the district court noted, it has been applied only to insurance companies, not to their individual employees. See id. at 518. The Schwartzes nonetheless argue that under Indiana's version of respondeat superior, when a tort is committed by an employee, plaintiffs have the option of suing either the employer, the individual tort-feasor or both. United Farm Bureau Mutual Ins. Co. v. Blossom Chevrolet, 668 N.E.2d 1289, 1291 (Ind.Ct.App.1996). Therefore, because Comte was the agent who actually denied the Schwartzes' claim, they should be allowed to recover from him as well as his employer if indeed there has been a bad faith denial of their claim.

We are not convinced. The Schwartzes have not cited a single case from any jurisdiction, let alone Indiana, which has recognized individual liability for bad faith denial of an insurance claim. Nor is it reasonable to expect that an Indiana court would break new ground in this case. First, the plaintiffs have alleged no facts indicating that Comte himself acted in bad faith beyond complying with the terms of State Farm's allegedly illusory policy. Any liability on Comte's part would therefore be derivative of his employer's. Such a result would turn traditional respondeat superior doctrine on its head. Second, it is unlikely that an Indiana court would recognize any tort duty that Comte owed to the Schwartzes. Embedded in the plaintiffs' respondeat superior argument, and the case they rely on, is the notion that the individual employee owed an independent duty to the plaintiffs. ² But the plaintiffs can identify no such duty here. As the Indiana Supreme Court made clear when it first recognized the tort of bad faith denial of insurance claims, the duty arises from the "unique character of the insurance contract" itself. Erie Ins. v. Hickman, 622 N.E.2d 515, 518 (Ind.1993). A special relationship exists "between an insurer and an insured because they are in privity of contract." Id. Yet here, both parties admit that, as an individual, Comte is not in privity with the Schwartzes based on their insurance policy. Thus the employee did not owe a special duty to the plaintiffs on which the bad faith tort could be based. See Troxell v. American States Ins. Co., 596 N.E.2d 921, 925 n. 1 (Ind.App.1992) (dismissing claims adjuster from suit against insurer based on lack of any special relationship); Ligon Furniture Co. v. O.M. Hughes Insurance, 551 So.2d 283, 285 (Ala.1989) (under Alabama law, defendants not parties to insurance contract could not be held liable for tort of bad faith breach); First National Bank of Louisville v. Lustig, 809 F.Supp. 444, 447 (same, applying Kentucky law); Natividad v. Alexsis, 875 S.W.2d 695, 698 (Tex.1994) (same, applying Texas law); see also John C. McCarthy, Punitive Damages in Bad Faith Cases, 14 (2nd ed. 1978) ("Because he is considered a stranger to the insurance contract, the employee of a defendant insurance company who is not a party to the insurance contract cannot be liable for breach of the duty of good faith and fair dealing.") Therefore, we do not believe that under Indiana law, the Schwartzes could recover against Comte individually.

This is not to say that there is no possibility that a state court would someday hold that individuals can be liable for the tort at issue. We only hold that it is not a reasonable possibility based on current Indiana law and the facts before us. See Poulos v. Naas Foods, 959 F.2d 69, 73 (7th Cir.1992). Therefore the joinder was fraudulent, ³ and because it did not destroy federal jurisdiction, the district court's refusal to remand this case was correct. Id.

Illusory Insurance Policy

On the merits, the plaintiffs argue that while they are not entitled to payment under the terms of the under-insured provision of their policy, they are nonetheless entitled to damages because the provision is illusory. An insurance provision is considered illusory if "a premium was paid for coverage which would not pay benefits under any reasonably expected set of circumstances." Fidelity & Guaranty Ins. Underwriters, Inc. v. Everett I. Brown Co., 25 F.3d 484, 490 (7th Cir.1994). If a provision covers some risk reasonably anticipated by the...