There was a lot of hubbub last year about whether a policyholder can sue an adjuster for bad faith.  The question arose in the context of the Washington Supreme Court’s decision in Keodalah v. Allstate.  The Washington high court’s decision – No, at least not in one scenario.  But the court left the door open for a different scenario.  

Keodalah involved bad faith.  What about negligence?  In Phillips v. Liberty Mut. Ins. Co., 2020 U.S. Dist. LEXIS 104011 (D.S.C. June 15, 2020), the South Carolina federal court held that there is at least a “glimmer of hope” in recovering negligence damages against an insurance company’s in-house adjuster.

As a result, a South Carolina homeowner’s coverage and bad faith suit against a Massachusetts insurance company and a South Carolina adjuster was forced back to state court, due to a lack of diversity of citizenship among the parties. Phillips illustrates the trend of policyholders tacking on claims against an adjuster — typically a citizen of the same state as the policyholder — to prevent suits against out-of-state insurance companies from being removed to federal court on diversity-of-citizenship grounds. The ruling is a setback to insurance companies seeking to keep those suits in federal court after they are removed.

The Phillips plaintiff — a South Carolina homeowner who was burgled — sued her homeowners insurer and the insurer’s in-house adjuster in South Carolina state court for breach of an insurance contract, bad faith, negligence, and other related claims. The insurer was a citizen of Massachusetts; the adjuster, a fellow Palmetto State citizen. The plaintiff alleged, in her state-court complaint, that she captured on camera several individuals burglarizing her home while she was out of state. She alleged she sent the video footage of the burglary to the insurer’s in-house adjuster, but that, later, the insurer fired the adjuster and allegedly misplaced or lost the plaintiff’s file and video. The plaintiff alleged that the insurer should have paid, but failed to pay, for the burglary losses under the homeowner’s policy.

The insurer removed the plaintiff’s state-court suit to federal court, asserting that the court had diversity jurisdiction over the matter, because the homeowner was a citizen of South Carolina and the insurer was a Massachusetts citizen. The insurer argued that the court could disregard the South Carolina citizenship of the adjuster, who was “fraudulently joined” because “there is no possibility of establishing a cause of action against” the adjuster. Thus, the insurer argued, the adjuster was a “sham” defendant “named solely for the purpose of defeating diversity jurisdiction.” The plaintiff filed a motion to remand the suit back to state court. The federal court granted that motion, rejecting the insurer’s fraudulent-joinder arguments.

To defeat a fraudulent-joinder argument, the Phillips court observed, the plaintiff need only demonstrate a “glimmer of hope” in the claim against the in-state defendant. The Phillips court could not say the plaintiff had no chance of success on a negligence claim against the in-house adjuster. In so concluding the Phillips court observed that the Supreme Court of South Carolina has only “declined to recognize a duty of care from an independent adjuster to the insured,” but has not declined to recognize a duty of care from an in-house adjuster, as in Phillips. Observing that, under South Carolina law, “one may sue in negligence the master[,] or the [servant,] or both,” the Phillips court held that, “with the benefit of discovery, there is ‘at least some possibility’ that Plaintiff could establish her negligence claim against [the adjuster] at trial.” The court could not state that the plaintiff had “no chance of establishing the facts necessary to support [her] [negligence] claim [ ].” So, the court granted the plaintiff’s motion to remand the suit back to state court, based on a lack of diversity of citizenship.