Covid-19 has caused trillions in business losses. Whether those losses are covered by commercial property insurance is an existential issue for both policyholders and insurers. But before that legal battle, the battlefield must be chosen. Do these coverage suits belong in federal or state court?
In July 2020, a group of 42 Chicago restaurants and bars filed a lawsuit in Illinois state court against 19 commercial property insurers, seeking coverage for Covid-19 business losses, in what plaintiffs’ counsel called the “mother of all” Covid-19 coverage suits. A few days later, the same counsel filed a suit in New York state court on behalf of 94 restaurants and bars against 41 insurers. Both suits allege that the insurers wrongly denied coverage, based on a lack of “direct physical loss or damage” under the policies.
The defendant insurers removed the cases to federal court and the parties disagree, and have cross-moved, over whether the suits can stay there or must be remanded to state court. The broader issue is whether policyholders’ counsel may combine enough insureds and insurers into a jumbo coverage suit in order to destroy complete diversity and block the insurers’ path to federal court. That is, are the plaintiff policyholders the “masters of their own complaint,” or is this procedural shenanigans?
In their bid to keep the cases in federal court, the defendant insurers argue that the court should not permit policyholders’ “gamesmanship,” which should be remedied by applying the doctrines of fraudulent joinder and fraudulent misjoinder.
Fraudulentjoinderapplies when plaintiffs join a non-diverse defendant against whom only non-viable claims are asserted. Reasoning that such a defendant was fraudulently joined, courts disregard (and dismiss) that party and recognize complete diversity of the remaining action. In the suits above, each policyholder has a claim against its own insurer only, not the other insurer defendants. According to defendant insurers, viewed from the perspective of each insurer-insured pair, all the other pairs are fraudulently joined and, for jurisdictional purpose, must be disregarded and dismissed.
Fraudulent misjoinder applies when a plaintiff has a potentially valid claim against a non-diverse defendant, but that claim is not properly added to the suit under permissive joinder rules. (Joinder rules permit claims arising out of the same: transaction/occurrence; series of transactions/occurrences; or common questions of law/fact). Under this doctrine, courts can sever the misjoined party(ies) and retain the resulting diverse action(s). In the suits above, according to the defendant insurers, from the perspective of each insurer-insured pair, the other pairs are misjoined because their claims arise out of their own distinct contracts (policies), which are different transactions, occurrences, or series of transactions or occurrences. Applying joinder rules, factual differences, not similarities, predominate.
The policyholder plaintiffs see it differently. They argue that because the complaints lack complete diversity “across the v” there is no subject matter jurisdiction, and the federal courts lack the power to retain the cases, which must be remanded to state court. That is, at the threshold, federal courts are not empowered to “create” diversity using any mechanism urged by the defendant insurers.
The policyholder plaintiffs also argue that although each only has a claim against its own insurer, fraudulent joinder only applies to improper joinder of a non-diverse party against whom there is no connection to the action. That is, fraudulent joinder is not satisfied when a plaintiff can state a valid claim against a non-diverse defendant and, here, each policyholder has a valid claim against its own insurer.
Finally, the plaintiffs argue that fraudulent misjoinder is not a widely accepted doctrine because it is a disfavored attempt to expand limited federal jurisdiction by allowing federal courts to “manufacture” diversity by severing non-diverse defendants.
In sum, while the arguments focus on procedural doctrines and remedies, the forthcoming court decisions will either reject or co-sign the jumbo suit as a policyholders’ tool to block insurers’ path to federal court.
 Lettuce Entertain You Enterprises, Inc. et al. v. Employers Ins. Co. of Wassau et al., Cir. Ct. Cook Cty. Case No. 2020 L 8099.
 Steven R. Strahler, Big-Name Restaurants Sue Insurers over COVID Losses, Crain’s Chicago Business, https://www.chicagobusiness.com/law/big-name-restaurants-sue-insurers-over-covidlosses
 Abruzzo DOCG Inc. v. Acceptance Indemnity Ins. Co., Index No. 514089/2020 (Sup. Ct. Kings Cty.)