Recently, a federal district court in Oregon clarified where one may sue an insurance reciprocal exchange. In the case of Staggs v. Farmers Insurance Exchange,1 the homeowners were Oregon citizens who brought suit under a homeowners’ policy issued by Farmers Insurance Exchange in a federal district court in Oregon. Farmers moves to dismiss, arguing that the court lacked subject matter jurisdiction because there was no diversity; that although its primary place of business was California, the Staggs were Oregon citizens.

The court granted Farmers’ motion, noting that in a reciprocal insurance exchange, individuals and businesses pool risk by agreeing to indemnify each other against particular kinds of losses. The policyholders are identified as “subscribers” who act through a common attorney-in-fact and are simultaneously both insurers and insureds. The court determined these insurance exchanges do not have a corporate existence. The court further determined that under California law, a reciprocal insurance exchange’s subscribers were its members and that Farmers’ citizenship had to be decided in relation to the citizenship of its members-subscribers.

Using this rationale, the court concluded that the Staggs were Oregon citizens and Farmers’ member-subscribers and therefore Farmers was an Oregon citizen, destroying diversity between the parties and resulting in the court lacking subject matter jurisdiction.

There are differing decisions among the federal courts on whether subscribers to a reciprocal insurance exchange are members or customers of the exchange.2 One significant fact is that when Congress passed the Class Action Fairness Act of 2005, it amended the diversity of citizenship rule for specific class actions.3 The amendment stated that for a subset of class actions, “an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized.”

The Senate Judiciary Committee remarked in its report on CAFA that the rule was frequently criticized because often an unincorporated association is, as a practical matter, indistinguishable from a corporation in the same business. Some insurance companies for example, are “inter-insurance exchanges” or “reciprocal insurance associations.” For that reason, federal courts have treated them as unincorporated associations for diversity jurisdiction purposes. Since such companies are nationwide companies, they are deemed to be citizens of any state in which they have insured customers.

Consequently, these companies can never be completely or even minimally diverse in any case. It makes no sense to treat an unincorporated insurance company differently from, say, an incorporated manufacturer for purposes of diversity jurisdiction. New subsection 1332(d)(10) corrects this anomaly.
1 Staggs v. Farmers Ins. Exchange, No. 3:15-cv-015020 (D. Ore. April 27, 2016).
2 Garcia v. Farmers Ins. Exch., 121 F. Supp. 2d 667, 669 (N.D. Ill. 2000); James G. Davis Const. Corp. v. Erie Ins. Exchange, 953 F. Supp. 2d 607 (D. Md. 2013); James River Ins. Co. v. Cast & Associates, Inc., No. 4:11-CV-00730 (D. Ariz. Mar. 5, 2012); Nevada Capital Ins. Co. v. Farmers Ins. Exchange, No. 2:12-cv-02166 (D. Nev. Dec. 4, 2014).
3 28 U.S.C. § 1332(d)(10).