SC District Court Grants Motion to Realign, Preserves Jurisdiction Covil Corp. v. Zurich Am. Ins. Co., No. 18-3291-BHH, 2019 WL 2482382, June 14, 2019

The federal district court for the District of South Carolina granted the motion of defendant Sentry Insurance, a Mutual Company, to realign certain defendants in the case as plaintiffs in order to create diversity jurisdiction in the federal court.

The overall matter is an insurance coverage dispute among Covil Corp., a now-defunct company that once manufactured asbestos-containing thermal insulation, and its insurers, regarding underlying personal injury claims. In 2018, Covil was subjected to a $38 million judgment in one of the underlying suits, and it filed the present lawsuit in South Carolina state court seeking damages for breach of contract and bad faith against its insurers for failing to settle the underlying suit within policy limits. Viewing South Carolina state court as a more sympathetic forum, Covil included a number of other claims and named some of the plaintiffs in the underlying lawsuits—all South Carolina citizens—as defendants in the state court coverage action in an effort to defeat diversity jurisdiction should the insurers attempt to remove the action to federal court.

The insurers did remove the action to federal court, and Sentry moved to realign the non-insurer defendants as plaintiffs in order to create diversity jurisdiction. In deciding the motion, the court applied the “principal purpose” test, wherein the court first determines the primary issue in controversy, aligns the parties according to their positions with respect to the primary issue, and then determines diversity.

The court agreed with Sentry that the primary issue in the action was the scope of insurance coverage available to Covil in the underlying lawsuits. The court further agreed that the plaintiffs in those underlying suits, who Covil had named as defendants in the coverage action, should be realigned as plaintiffs because both they and Covil wanted the broadest possible coverage to be available in the underlying suits. The remaining defendants, all insurers, were those who wanted the narrowest possible coverage to be available in the underlying suits. The fact that Covil was seeking a declaratory judgment against the underlying plaintiffs limiting their claims to available insurance coverage did not matter because, the court noted, Covil had been defunct since 1991, and Covil’s only remaining assets were its insurance policies. Thus, the underlying plaintiffs’ damages were already de facto limited to available insurance coverage.

With the parties realigned, complete diversity existed, and the court found it had diversity jurisdiction over the action.

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