William Lee Maher & Selective Ins. Co. of S.C. v. Federated Serv. Ins. Co.

• Decision Date: 17 November 2016
• Docket Number: No. 16-1210,16-1210
• Parties: WILLIAM LEE MAHER and SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA, Plaintiffs-Appellees, v. FEDERATED SERVICE INSURANCE COMPANY et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

WILLIAM LEE MAHER and SELECTIVE INSURANCECOMPANY OF SOUTH CAROLINA, Plaintiffs-Appellees, v. FEDERATED SERVICE INSURANCE COMPANY et al., Defendants-Appellants.

No. 16-1210

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

November 17, 2016

NOT RECOMMENDED FOR PUBLICATION

File Name: 16a0609n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN

BEFORE: MOORE, ROGERS, and SENTELLE, Circuit Judges.^*

SENTELLE, Circuit Judge. This case involves an automobile accident and a dispute over which insurer must defend and indemnify the driver against claims arising out of that accident: the vehicle owner's insurer or the driver's insurer. Under Michigan's No-Fault Act, M.C.L. § 500.3101(1), vehicle owners must provide primary residual liability coverage for their vehicles and all permissive users of their vehicles, and any provision in an insurance policy that purports to shift that responsibility to drivers and their insurers is void. In this case, the district court determined that, pursuant to Michigan law, the owner's insurer had the sole primary duty to defend and indemnify the driver up to the limits of the policy. We affirm, except as to the extent of the owner's insurer's liability, holding that the owner's insurer is obligated to provide coverage only up to the statutory minimum.

I.

In this priority dispute between two insurance companies, the relevant facts are undisputed. West Michigan Auto Auction ("West Michigan") and AON Automotive Group, Inc. d/b/a Brooklyn Ford ("Brooklyn Ford") had a business arrangement that involved West Michigan's employees driving Brooklyn Ford's vehicles. As the district court explained:

Brooklyn Ford has a contract with West Michigan . . . to auction vehicles Brooklyn Ford owns. Before an auction, West Michigan . . . sends an employee to pick up the vehicles from Brooklyn Ford and take[] them to the auction site.

Maher v. Federated Serv. Ins. Co., 143 F. Supp. 3d 663, 664-65 (E.D. Mich. 2015).

On August 1, 2013, West Michigan sent William Maher to transport one of Brooklyn Ford's vehicles to West Michigan's auction site. While driving the vehicle, Maher rear-ended Melissa Strang's vehicle on Interstate 94 in Jackson County, Michigan. It is undisputed that at the time of the accident, Maher was acting within the scope of his employment for West Michigan and had Brooklyn Ford's permission to drive the vehicle.

Because of the injuries she suffered in the accident, Strang filed suit against Maher and Brooklyn Ford, alleging that Maher had operated the vehicle in a reckless and negligent manner and that Brooklyn Ford was vicariously liable. Selective Insurance Company ("Selective"), which insured West Michigan, provided a defense to Maher.

Selective also tendered Maher's defense and indemnity with respect to the underlying case to Brooklyn Ford and Federated Service Insurance Company ("Federated"), which had issued a commercial package policy to College Chevrolet Buick Pontiac LLC that identified Brooklyn Ford as an "Additional Named Insured." The coverage provided to Brooklyn Ford under the policy is subject to certain limitations. At issue in this case is the policy's "Who Is An Insured" definition, which includes an Auto Sales Exception providing that anyone using a "covered auto" with Brooklyn Ford's permission is an insured, except for

[s]omeone using a covered "auto" while he or she is working in a business of selling, servicing or repairing "autos" unless that business is [Brooklyn Ford's] "garage operations."

Federated explains that this exclusionary provision precludes coverage for any permissive user of Brooklyn Ford's vehicles if the user is working for another commercial automotive business at the time of an accident.

Because Maher was working for West Michigan at the time of the accident, Federated claimed that Maher did not qualify as an "Insured" based on the Auto Sales Exception and refused to defend Maher in the underlying case. Selective disputed Federated's denial, however, arguing that Michigan's No-Fault Act (the "No-Fault Act"), M.C.L. § 500.3101(1), which provides that vehicle owners must provide residual liability insurance for losses arising from the use of their vehicles, required Federated to defend and indemnify Maher. See Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir. 2001); State Farm Mut. Auto. Ins. Co. v. Enterprise Leasing Co., 549 N.W.2d 345, 348 (Mich. 1996). Federated later agreed to defend Maher subject to a full reservation of rights.

In response, Maher and Selective filed suit in Michigan state court against Federated, Brooklyn Ford, and Strang. Maher and Selective sought a declaratory judgment that the Auto Sales Exception was void as contrary to the No-Fault Act and that Federated had the sole primary duty to defend and indemnify Maher up to its policy limits with respect to the underlying case. On March 4, 2015, Federated removed the action to the United States District Court for the Eastern District of Michigan on the basis of diversity jurisdiction and asserted a counterclaim requesting a declaratory judgment that it had no duty to defend or indemnify Maher based on the Auto Sales Exception.

After Federated filed its answer and counterclaim, Selective filed a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). Selective did not dispute that Maher fell within the policy's Auto Sales Exception, but instead asserted that the exception was void as a matter of law because it would exclude from coverage an entire class of permissive users—namely, "those permissive users in the business of selling autos separate from Brooklyn Ford's 'garage operations.'" Selective also argued that Federated had a duty to defend up to the limits of its policy, rather than up to the statutory minimum, because the exclusionary provision was invalid. Finally, Selective urged the district court to reject any argument that Federated's coverage obligations were "co-primary" with any other insurance policies available to Maher and hold that Federated must provide "sole primary coverage."

The district court granted Selective's motion. See Maher v. Federated Serv. Ins. Co., 143 F. Supp. 3d 663 (E.D. Mich. 2015). Explaining that the No-Fault Act "requires that a policy of auto insurance issued to the owner of a vehicle must provide primary insurance for residual liability arising from the permissive use of the vehicle," the district court held that the Auto Sales Exception was unenforceable because it would "preclude coverage to a certain class of permissive users." See id. at 666-67. The district court, relying on decisions from the Michigan Court of Appeals, then determined that Federated was "responsible for Maher's defense and indemnity up to the limits of the policy." See id. at 668-69. Finally, the district court held that Federated had the sole primary duty to defend and indemnify, regardless of the terms of the Selective policy covering Maher. Id. at 669. The district court's decision applied only to Federated's primary policy, and not to Federated's umbrella policy. See Maher v. Federated Serv. Ins. Co., No. 15-10790, 2016 WL 301955 (E.D. Mich. Jan. 25, 2016).

Federated appealed. We have jurisdiction pursuant to 28 U.S.C. § 1291.

II.

A court that lacks subject-matter jurisdiction has "no authority to sit in judgment of anything else." Vt. Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 778 (2000) (citing Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 93-102 (1998)). Therefore, we have an obligation to consider jurisdiction in every case, even if the district court never considered its own jurisdiction. Hampton v. R.J. Corman R.R. Switching Co., 683 F.3d 708, 710-11 (6th Cir. 2012); see also Pilgrim v. Universal Health Card, LLC, 660 F.3d 943, 949 (6th Cir. 2011) (noting that "parties may not establish subject matter jurisdiction in the federal courts by consenting to it" (citing Steel Co., 523 U.S. at 93)).

Maher, a citizen of Michigan, and Selective, an Indiana corporation with its principal place of business in New Jersey, filed suit in Michigan state court against three defendants: (1) Federated, a Minnesota corporation; (2) Brooklyn Ford, a Michigan corporation with its principal place of business in Michigan; and (3) Strang, a citizen of Michigan. As noted, Federated removed the case to federal court on the basis of diversity jurisdiction. But when a federal court's jurisdiction is predicated on the parties' diversity of citizenship, removal is permissible only if complete diversity exists between all named plaintiffs and all named defendants. Lincoln Prop. Co. v. Roche, 546 U.S. 81, 83-84 (2005); Coyne v. Am. Tobacco Co., 183 F.3d 488, 492 (6th Cir. 1999). In its Notice of Removal, Federated acknowledged that complete diversity was lacking but argued that the inclusion of Brooklyn Ford and Strang as defendants was "not an impediment to removal . . . pursuant to the doctrine of fraudulent joinder." See Coyne, 183 F.3d at 493 ("[T]his Court has recognized that fraudulent joinder of non-diverse defendants will not defeat removal on diversity grounds.").

Rather than "expressly dismiss the 'sham defendants' before proceeding with the case," Isaacs v. Broido, 358 F. App'x 874, 876-77 (9th Cir. 2009), the district court granted Selective's motion for judgment on the pleadings without addressing the presence of the non-diverse defendants. In fact, the district court ordered Brooklyn Ford and Strang, the non-diverse defendants, to respond to Selective's motion. Although the district court exceeded its limited jurisdiction under 28 U.S.C. §§ 1332 and 1441, we do not believe that remand is warranted under these circumstances.

Pursuant to Federal Rule of Civil Procedure 21, we have the authority to dismiss dispensable non-diverse parties. See Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832-38 (1989). In this case, Maher and Selective...