Last week, the United States District Court for the Eastern District of Texas, Sherman Division, held that the insured’s claims of violations of Chapter 541 of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and negligence claims were barred by the statute of limitations.  And, the court concluded that the discovery rule did not toll the statute of limitations because the insured should have discovered the alleged deceptive practices and negligence when it initially received the insurance policy, not three years later when it was sued and requested a defense and indemnity under the policy. Consequently, claims against the Texas based agent and agencies were barred by limitations and the court found they were improperly joined in finding that the court maintained diversity jurisdiction.

In Adaptive Modifications, LLC v. Atlantic Casualty Ins. Co. et. al, No. 4:18-CV-00864, 2019 WL 1904680 (E.D. Texas [Sherman Division]., April 29, 2019, mem. op.), James Boren, the sole member of Adaptive Modifications, procured a commercial general liability policy for Adaptive Modifications from Dan Mitchell, an insurance agent for Trimark Insurance Group (“Trimark”). In the process, Boren explained to Mitchell that Adaptive Modifications performs all types of work, including minor plumbing, attaching faucets and toilets, etc. and told Mitchell that the policy must cover this type of work.  Mitchell assured Boren that he would procure a policy that would cover this work and any associated damages.

Mitchell, as agent for the insured Adaptive Modifications, applied to Delta General Agency Corporation (“Delta”). And Delta, acting as a Texas-based managing general agent for a surplus lines insurer Atlantic Casualty Insurance Company (“Atlantic”), issued the policy in March of 2015.  However, the policy covered only carpentry work.

Later in 2015, Adaptive Modifications installed a faucet in a home which subsequently leaked and caused damage to the homeowners’ property. In March of 2017, the homeowners sued Adaptive Modifications and, in March of 2018, served Adaptive Modifications with notice of the suit.  In turn, Adaptive Modification requested a defense and indemnity from Atlantic.  Atlantic, however, denied Adaptive Modifications’ claim.

Consequently, in November of 2018, Adaptive Modifications brought suit in Texas state court against Mitchell, Trimark, Delta, and Atlantic alleging claims for violations of Chapter 541 of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and negligence.

Mr. Mitchell, Trimark, and Delta (citizens of Texas) were not diverse from Adaptive Modifications (also a citizen of Texas), but they and Atlantic (a citizen of North Carolina) removed the case to the U.S. District Court for the Eastern District of Texas contending that the Texas Defendants were improperly joined in the suit as the statute of limitations barred the claims against them. In response, Adaptive Modifications filed a motion to remand the cause to Texas state court.

In deciding the issue of improper joinder, the U.S. District Court found that Adaptive Modifications’ claims were barred by the two-year statute of limitations and the Discovery Rule did not apply because Adaptive Modifications should have learned of Mr. Mitchell’s alleged misrepresentations and the lack of coverage after receiving the policy in 2015.  As such, the court held that the Texas Defendants were improperly joined and denied Adaptive Modifications motion to remand and dismissed the Texas Defendants without prejudice.

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