WESTERN DISTRICT TACKLES 542A DISMISSAL OF ADJUSTERS AND REMOVAL OF CASES HEAD-ON

In a pair of cases decided this week by a San Antonio federal judge, the court squarely addressed and attempted to resolve lingering questions about the correct way to use the relatively new provisions in Texas Insurance Code Chapter 542A to achieve early dismissal of adjusters or agents and remove qualifying cases to federal court.   Bexar Diversified MF-1, LLC v. General Star Ind. Co., No. SA-19-CV-00773-XR, 2019 WL 6131455 (W.D. Tex. Nov. 18, 2019) and Kotzur v. Metropolitan Lloyds Ins. Co., SA-19-CV-01165-XR, 2019 WL 6168207 (W.D. Tex. Nov. 19, 2019) were both wind/hail cases in which homeowners sued their insurers and the adjusters who handled their claims.  In both cases, the insurers removed the cases to federal court, and argued the adjuster was improperly joined.

The judge denied one remand and granted the other.  The key difference between the two cases was the timing of the insurer’s 542A election.  Previous case law from across  Texas appears to reach a consensus that if the insurer elects to accept the adjuster’s liability before suit is filed (most often in response to a pre-suit demand), then there is no valid cause of action against the adjuster at the time suit is filed, and the case may be safely removed on diversity grounds.  But those very same precedents left open the question of what happens when the insurer does not make its election until after it and the adjuster are sued… as might happen when the plaintiff does not give the required pre-suit notice. These two cases fell squarely in this gap, with General Star making its election after being sued but before removing, and Metropolitan Lloyds making its election after removing on traditional improper joinder grounds.

The court acknowledged several other opinions from the Western, Southern, and Northern Districts of Texas holding a 542A election made after suit is filed is too late to allow removal, but openly disagreed with them, reasoning that a defendant’s right to remove is determined by the pleadings at the time of removal. In the court’s well-reasoned analysis, a 542A election that is post-suit but pre-removal immediately extinguishes the cause of action against the adjuster, meaning the case at the time of removal now meets the improper joinder standard, because there is no possibility of recovery against the adjuster. Thus, General Star, by making its election before removing, was able to beat the remand. The court rejected the plaintiff’s argument that the insurer must actually achieve dismissal of the adjuster, noting that imposing such a requirement could make it impossible to meet the 30-day removal deadline.

On the other hand, Metropolitan Lloyds received a different ruling because it did not make its 542A election until after it removed and the plaintiff moved to remand, including the election for the first time in its response to the motion to remand.  Applying the same logic it used in Bexar Diversified, the court concluded that because diversity and improper joinder are determined at the time of removal, and the election was not made until after the removal, it could not serve as a proper basis for removal, and the only way the removal could stand was if the insurer could win a traditional improper joinder analysis.  It could not, and the case was remanded.

Editor’s Note: These two cases, being out of the Western District of Texas, are of course, not the end of the 542A adjuster dismissal adventure because they are not binding on the other districts. However, the Western District is gradually building the most well-developed body of law on this issue, and its opinions could become the most authoritative line of cases. Whether they will be persuasive to the other districts remains to be seen.  For now, the best practice appears to be to evaluate the adjuster’s claim handling, and if appropriate, make a 542A election to accept the adjuster’s potential liability as soon as possible – ideally, in response to a pre-suit notice.  In the absence of a pre-suit notice, make the election as soon as possible after being sued, and always before attempting removal.