Court Permits Parties to Cure Defective Diversity Jurisdiction in Suit Against Underwriters at Lloyd’s

In MAve Hotel Investors LLC d/b/a The MAve Hotel, et al. v. Certain Underwriters at Lloyd’s, London, et al., 2024 WL 2830909, (S.D.N.Y. 2024), to preserve diversity jurisdiction, the United States District Court for the Southern District of New York permitted a plaintiff insured to drop non-diverse, dispensable defendant Underwriters at Lloyd’s, London (“Underwriters”) which subscribed to a commercial property insurance policy.

Background of MAve

The insured commenced suit against Underwriters in federal court seeking coverage for alleged property damage.  In doing so, the insured asserted subject matter jurisdiction based on diversity of citizenship.  Near the eve of trial, the insured wrote to the Court and explained that some of the syndicates had members who were not diverse and numerous members whose citizenship had not yet been determined.  As such, the Court instructed the parties to submit briefs addressing the Court’s ability to cure jurisdiction at that late stage.  The parties proposed dropping non-diverse syndicates who they described as dispensable parties.

Legal Analysis

For context, the majority of courts recognize that when the syndicates subscribing to a policy written in the Lloyd’s market are sued, it is the investors, or “names,” who are the real parties in interest.  See Humm v. Lombard World Trade, Inc., 916 F.Supp. 291 (S.D.N.Y 1996).  Thus, the citizenship of the syndicates is determined by the citizenship of the names.  See Certain Underwriters at Lloyd’s of London v. Illinois Nat. Ins. Co., 2012 WL 4471564 (S.D.N.Y. 2012).  This means that each must individually meet the diversity requirements.  Id.

The Second Circuit has made clear that “[e]ven if complete diversity – and thus jurisdiction – is lacking at a case’s inception, rather than dismiss the case as a nullity, the court may drop any dispensable parties that are obnoxious to its jurisdiction.”  Fed. R. Civ. P. 21 allows a court to drop a nondiverse party at any time to preserve jurisdiction, provided the nondiverse party is not indispensable under Fed. R. Civ. P. 19(b). 

Courts consider four factors in determining whether a party is indispensable: “(1) whether a judgment rendered in a person’s absence might prejudice that person or parties to the action, (2) the extent to which any prejudice could be alleviated, (3) whether a judgment in the person’s absence would be adequate, and (4) whether the plaintiff would have an adequate remedy if the court dismissed the suit.”

Of note, like nearly all Lloyd’s policies, the subject policy contained a “Service of Suit Clause,” which stated that “in any suit instituted against any one of [the syndicates comprising Underwriters] upon this contract, Underwriters will abide by the final decision of such Court or of any Appellate Court in the event of an appeal.”

Addressing each of the four factors, the Court found that the non-diverse syndicates were not indispensable parties and could be dropped to preserve jurisdiction.  First, the parties agreed that there would be little or no prejudice to any party if the action continued without the non-diverse syndicates.  Pursuant to the policy’s “Service of Suit Clause,” each syndicate was required to abide by a final decision by the Court against any of the syndicates.  Accordingly, the remaining defendants and the non-diverse syndicates would not be prejudiced if the non-diverse syndicates were dropped from the action.  Consequently, relative to the second factor, there was little to no prejudice to mitigate.

As to the third factor, the Court noted that it was clearly more efficient to allow the parties to finish litigating in federal court rather than to “send the parties to state court for a do-over.”  The case had been active for over two and a half years, during which the parties completed discovery, the Court decided summary judgment, and the parties filed motions in limine in preparation for an impending trial.

Regarding the fourth factor, although the insured would have an adequate remedy if the Court dismissed the suit because it could proceed against all the defendants in state court, “that consideration is far outweighed by the…harm to judicial economy resulting from dismissal.”

Accordingly, the Court found that the non-diverse syndicates were not indispensable parties and could be dismissed from the action.

Takeaway

Often, federal courts lack subject matter jurisdiction due to failures to sufficiently plead the diversity requirements for Underwriters at Lloyd’s (i.e., citizenship and amount in controversy for each individual name).  Such deficiencies could result in dismissal or a remand to state court (if the action was initially filed there).  It should also be noted that if the case is appealed, the Second Circuit can decide to revisit jurisdiction sua sponte and may reach a different result.  Therefore, these issues should be addressed early in the litigation to prevent an unnecessary expenditure of time and resources.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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