Smith v. Allstate Ins. Co.

• Citation: 202 F.Supp.2d 1061
• Decision Date: 14 February 2002
• Docket Number: No. CIV.01-2182 PHX RCB.,CIV.01-2182 PHX RCB.
• Parties: Cordelia SMITH, Plaintiff, v. ALLSTATE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Arizona

202 F.Supp.2d 1061

Cordelia SMITH, Plaintiff, v. ALLSTATE INSURANCE COMPANY, Defendant.

No. CIV.01-2182 PHX RCB.

United States District Court, D. Arizona.

February 14, 2002.

COPYRIGHT MATERIAL OMITTED

A. Thomas Cole, Law Offices of A. Thomas cole, Casa Grande, AZ, for plaintiff.

Floyd P. Bienstock, Jason Sanders, Steptoe & Johnson, LLP, Phoenix, AZ, for defendant.

ORDER

BROOMFIELD, Senior District Judge.

Plaintiff Cordelia Smith filed this lawsuit in Arizona Superior Court on October 9, 2001. On November 8, 2001 Defendant Allstate filed a notice of removal with this Court (doc. # 1) claiming federal diversity jurisdiction pursuant to 28 U.S.C. § 1332. Thereafter, Allstate filed a motion to dismiss for failure to state a claim (doc. # 2). Smith then filed a motion to remand the action to state court (doc. # 4). In the event the Court does not grant remand, Smith has asked the Court to certify the underlying legal question of Allstate's duty to Smith to the Arizona Supreme Court (doc. # 5). The Court heard oral argument in this matter on February 4, 2002 and now rules.¹

I. Background

Smith and her husband were insured under an automobile insurance policy issued by Allstate. Allstate's Notice of Removal (doc. # 1) Ex. 1 at ¶ III. On December 31, 1995, Smith was riding in a vehicle driven by her husband when he entered the intersection of Grand Avenue and 15th Avenue in Phoenix against a red light and collied with another vehicle. Id. Smith suffered personal injuries as a result of the accident and her husband's negligence. Id. at ¶¶ III-IV.

Allstate offered Smith $30,000 to settle her claim, which was refused. Id. at ¶ IV. The case was then taken to arbitration and Smith was awarded $144,310. Id. Allstate appealed the arbitration award. Id. Smith then brought suit against her husband in state court. Id. After a trial, the jury awarded Smith damages in the amount of $240,000. Id. Allstate paid the judgment in January, 2000. Id. Smith is now suing Allstate for breach of the covenant of good faith and fair dealing. Id. at ¶ V.

II. Remand

Allstate removed this action to federal court on the basis of diversity jurisdiction, pursuant to 28 U.S.C. § 1441. Smith now moves to remand the case based on a lack of diversity of citizenship. The statute governing remand states: "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." 28 U.S.C. § 1447(c).

Smith is a citizen of Arizona. Allstate's Notice of Removal (doc. # 1) Ex. 1 at ¶ I. Smith argues that jurisdiction does not exist because Allstate is also considered a citizen of Arizona for purposes of this lawsuit. She argues that the exception under 28 U.S.C. § 1332(c)(1) applies. That statute states: "... in any direct action against the insurer of a policy or contract of liability insurance, ... to which action the insured is not joined as a party-defendant, such insurer shall be deemed a citizen of the State of which the insured is a citizen, ...." 28 U.S.C. § 1332(c)(1). Allstate contends that a bad faith claim is not a direct action; therefore the § 1332(c)(1) exception does not apply. In the absence of the exception Allstate is a citizen of the state of its incorporation and its principal place of business, both of which are Illinois, and diversity jurisdiction is proper. Allstate's Notice of Removal (doc. # 1) at 2.

Smith's arguments against jurisdiction lack merit. The Ninth Circuit has held that "a bad faith action brought by an insured against the insurer is not a `direct action' within the meaning of 28 U.S.C. § 1332(c)(1). Rather, a direct action is one in which a plaintiff is entitled to bring suit against the tortfeasor's liability insurer without joining the insured." Searles v. Cincinnati Ins. Co., 998 F.2d 728, 730 (9th Cir.1993).

There is no collateral estoppel against Allstate as Smith claims. The Ninth Circuit has held that the case cited by Smith, Chavarria v. Allstate Ins. Co., 749 F.Supp. 220 (C.D.Cal.1990), was wrongly decided and has since discredited it. Searles, 998 F.2d at 728-29. As such, it would be inappropriate to attach any preclusive effect to the Chavarria court's determination. See Restatement (Second) of Judgments § 28(2). Additionally, Allstate has not admitted that this case is a direct action by citing General Accident Fire & Life Assurance Corp. v. Little, 103 Ariz. 435, 443 P.2d 690 (1968), in its motion to dismiss. That case did not address whether a bad faith claim is a direct action and it was not cited by Allstate for any such proposition.

Finally, Smith's contention that this case does not embody the purpose and spirit of the diversity jurisdiction statute while fulfilling its technical requirements is a legislative and not a legal argument. The jurisdiction of this Court has been properly invoked under § 1332, and as such the Court has an obligation to exercise it. First State Ins. Co. v. Callan Assoc., Inc., 113 F.3d 161, 163 (9th Cir.1997).

III. Certification to State Supreme Court

Allstate has moved to dismiss Smith's claim because Allstate insists that it had no duty of good faith toward Smith for a claim based on her husband's negligence. Smith has asked that this Court certify the question of Allstate's duty to the Arizona Supreme Court because there is no controlling precedent in Arizona.

The Court has discretion to make a decision or certify the question to the state supreme court. See White v. Celotex Corp., 907 F.2d 104, 106 (9th Cir.1990). If the Court chooses to rule it "must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance." Arizona Elec., Power Coop. v. Berkeley, 59 F.3d 988, 991 (9th Cir.1995). Therefore, the Court looks to factors such as the complexity of the issue, the availability of precedent from lower courts or other jurisdictions, and the magnitude of disagreement on the issue to determine whether certification is appropriate. See id.; Rigden v. United States, 795 F.2d 727, 735 n. 6 (9th Cir.1986).

In this case, certification is not necessary. The issue of Allstate's duty is not complex. The Court is not required to wade into any intricate or abstruse administrative or statutory scheme. The scope of an insurer's duty of good faith can be defined by reference to well-established common law principles. Furthermore, while there are no cases in Arizona and few precedents from other jurisdictions that address this issue, the decisions that do address this issue appear to be nearly uniform-indicating a lack of serious debate. See Sperry v. Sperry, 990 P.2d 381 (Utah 1999); Herrig v. Herrig, 844 P.2d 487 (Wyo.1992); Rumley v. Allstate Indem. Co., 924 S.W.2d 448 (Tex.App.1996); Wilson v. Wilson, 121 N.C.App. 662, 468 S.E.2d 495 (1996); but see Dercoli, (1988). Given these circumstances the Court will deny Smith's motion.

IV. Motion to Dismiss

Allstate moves to dismiss Smith's bad faith claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Allstate argues that Smith cannot assert a bad faith claim because insurers have no duty of good faith to third parties. Although Smith was a co-insured under the policy, Allstate contends that she stood in the position of a third-party claimant in seeking damages for her husband's negligence.

An insurance company's duty of good faith and fair dealing exists only between the insurer and its insured. An insurance company owes no duty of good faith to a third-party claimant. Leal v. Allstate Insurance Co., 199 Ariz. 250, 17 P.3d 95 (2000). The question raised by the instant action is whether an insured should be considered a third-party claimant when she is injured by a coinsured's negligence and she claims liability benefits under a jointly owned insurance policy.

As discussed previously, there are no Arizona cases addressing this issue. Four jurisdictions have dealt with this question directly, in factual circumstances nearly identical to this case. All four jurisdictions held that an insured is a third-party claimant when seeking benefits based on a co-insured's liability coverage. Sperry v. Sperry, 990 P.2d 381 (Utah 1999); Herrig v. Herrig, 844 P.2d 487 (Wyo.1992); Rumley v. Allstate Indem. Co., 924 S.W.2d 448 (Tex.App.1996); Wilson v. Wilson, 121 N.C.App. 662, 468 S.E.2d 495 (1996).

One reason for treating the co-insured as a third-party claimant is because the coverage is transaction specific. Sperry, 990 P.2d at 384; Rumley, 924 S.W.2d at 450. In the situation where, as here, a person sues because of the negligence of her spouse, she is seeking benefits based on her husband's coverage and not her own. Sperry, 990 P.2d at 384. Her position is that of an antagonist rather than a co-claimant. 924 S.W.2d at 450. As such, she relates to the insurer as a third-party, and it is reasonable that the insurer would respond likewise. Herrig, 844 P.2d at 491; Wilson, 468 S.E.2d at 498-99.

Another justification for treating a coinsured as a third-party is the conflict of interest that would otherwise be created for the insurance company. This conflict would compromise the insurer's ability to protect the interests of its insured because the insurer would owe an equal yet inconsistent duty to each party. Sperry, 990 P.2d at 384; Herrig, 844 P.2d at 491-91. It would also "make any such insurer an almost certain target for a claim of breach of one of these duties, in addition to the claim for the underlying negligence." Sperry, 990 P.2d at 384.

Finally, the contractual relationship between an insurance company and an insured does not implicate the duty to act in good faith in all situations. In a case where the claimant and the insured hold separate insurance policies with the same insurer the insurance company does not owe a duty to both. Rumley, 924 S.W.2d at 449. "In these cases, the courts almost universally hold...