Reciprocal Insurance Companies

Federal courts are courts of limited jurisdiction, possessing only that power authorized by Article III of the United States Constitution and statutes enacted by Congress. Under 28 U.S.C. § 1332, federal district courts “have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000 … and is between … citizens of different States.” Whereas the Constitution contemplates minimal diversity, § 1332 requires complete diversity—no plaintiff may be a citizen of the same state as any defendant.¹ For purposes of diversity jurisdiction, a corporation is a citizen of both the state where it is incorporated and the state where its “nerve center” (typically its headquarters) is located.²

But how do you determine the citizenship of partnerships or other unincorporated associations? In the seminal decision of Carden v. Arkoma Associates, Justice O’Connor found, “[T]he citizenship of partnerships and other unincorporated associations is determined by the citizenship of [their] partners or members. The state of organization and the principal place of business of an unincorporated association are legally irrelevant.”³ Accordingly, whenever a partnership, a limited partnership, a joint venture, a joint stock company, a labor union, a religious or charitable organization, a governing board of an unincorporated institution, or a similar association brings suit or is sued in a federal court, the actual citizenship of each of the unincorporated association’s members must be considered in determining whether diversity jurisdiction exists.

One such unincorporated association is a reciprocal insurance exchange. A reciprocal insurance exchange, “in its pure form … is a web of contractual relationships between subscribers who agree to insure one another, consummated through a common agent with power of attorney.”⁴ The exchange is the insurer and the subscribers are the insureds.⁵ The subscribers execute powers of attorney appointing the attorney-in-fact to act on their behalf. The attorney-in-fact executes the exchange’s insurance power.⁶ Multiple circuits have found reciprocal insurance exchanges are unincorporated associations and therefore share the citizenship of each of their members.⁷

So which insurance companies have been found to be reciprocal insurance companies? The Fifth Circuit found USAA to be a reciprocal insurance exchange.⁸ USAA has subscribers in all fifty states, defeating diversity. Courts have also found Farmers Group to be a reciprocal. Farmers has three exchanges: Farmers Insurance Exchange;⁹ Truck Insurance Exchange,¹⁰ and Fire Insurance Exchange. If your matter involves either USAA or Farmers, you may be able to defeat diversity jurisdiction by asserting they are residents of all fifty states. However, the law is not well-settled. Yet, multiple district courts have consistently found that for diversity purposes, an insurance exchange shares citizenship with each of its members. It is an issue worth raising.
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¹ See Lincoln Property Co. v. Roche, 546 U.S. 81, 82, 126 S.Ct. 606, 163 L.Ed.2d 415 (2005); see also Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806).
² 28 U.S.C. § 1332(a)(1), (c)(1); Hertz Corp. v. Friend, 559 U.S. 77 (2010).
³ Carden v. Arkoma Associates, 494 U.S. 185 (1990).
⁴ True v. Robles, 571 F.3d 412, 414 (5th Cir.2009).
⁵ Tran. v. Farmers, 104 Cal.App.4th 1202 (2012).
⁶ Id.
⁷ See e.g., Tuck v. United Servs. Auto. Ass’n, 859 F.2d 842, 844 (10th Cir.1988); Baer v. United Servs. Auto. Ass’n, 503 F.2d 393 (2nd Cir.1974).
⁸ True v. Robles, 571 F.3d 412, 414 (5th Cir.2009).
⁹ James River Ins. Co. v. Farmers Ins. Exchange, No. 11-730, 2012 WL 1190886 (D. Ariz. 2012).
¹⁰ Truck Ins. Exchange v. Manitowoc Co., No. 10-8191, 2010 WL 4961618 (D. Ariz. 2010); see also R & B Auto Center, Inc. v. Farmers Group, Inc., 140 Cal.App.4th 327, 362, 44 Cal.Rptr.3d 426, 455 (2006) (“Truck Insurance [Exchange] is a reciprocal or interinsurance exchange…. An interinsurance exchange is an unincorporated business organization made up of subscribers and managed by an attorney-in-fact.”).