U.S. DISTRICT COURT JOINS LINE OF CASES HOLDING THAT AN INSURER’S SECTION 542A.006 ELECTION AFTER COMMENCEMENT OF LAWSUIT DOES NOT ESTABLISH IMPROPER JOINDER

March 21, 2022

The United States District Court for the Southern District of Texas recently concluded that an insurer's Section 542.006 election to accept claims adjusters’ liability after a lawsuit has commenced against the adjuster does not by itself establish improper joinder. In Macey Property Management, LLC v Starr Surplus Lines Ins. Co., No. H-21-3943, 2022 WL 540948 (S.D. Texas, [Houston Division] Feb. 23, 2022, mem. op.), Macey sued its insurer, Starr Surplus, and two adjusters assigned to Macey’s property damage claim, in state court, asserting causes of action arising from the alleged failure to pay claims. Subsequently, Starr Surplus elected to accept whatever liability the adjusters may have had pursuant to Section 542A.006 of the Texas Insurance Code. 

Next, Macey amended its petition and added new defendants, including Underwriters, who removed the lawsuit to federal court, contending that the Starr Surplus adjusters were improperly joined and, consequently, complete diversity existed to establish federal jurisdiction. In response, Macey filed a motion to remand, which the U.S. District Court granted.    

The U.S. District Court noted the split in the decisions of Texas district courts:  

One line of cases holds that a § 542.006 election made after a lawsuit commences but before removal renders the in state adjuster improperly joined because the election, which requires that the adjuster be dismissed with prejudice, precludes any recovery against the adjuster. Another line of cases focuses on whether the parties were improperly joined at the time of joinder, and holds that an insurer's § 542A.006 election after a lawsuit has commenced does not by itself establish improper joinder.

The U.S. District Court adopted the latter approach and ultimately concluded that Underwriters did not allege facts establishing complete diversity and accordingly, remanded the case to state court.