The Seventh Circuit recently held that a declaratory judgment action involving liability insurance coverage for an underlying class action, in which the insured’s rights under the policy had been assigned to a certified class, was removable to federal court under the Class Action Fairness Act (CAFA).  This is a significant decision for insurers faced with other similar suits.

In Addison Automatics, Inc. v. Hartford Casualty Insurance Company, No. 13-2729, 2013 U.S. App. LEXIS 20109 (7th Cir. Oct. 2, 2013), the plaintiff brought a putative class action against Domino Plastics Company, which Domino’s liability insurers declined to defend.  Domino then entered into a settlement, under which a class was certified, a “nominal judgment” for $18 million was entered against Domino, Domino’s claims against its insurers were assigned to the class, and the plaintiff agreed that the judgment would not be collected from Domino itself.  Id. at *2-3.  The settlement was approved by the state court.  The plaintiff then filed a new lawsuit in state court against Hartford Casualty Insurance Company (“Hartford”), which (after an initial voluntary dismissal and re-filing of the suit) purported to be only an individual action and not a class action.  The suit sought to hold Hartford liable for the judgment against Domino, pursuant to the assignment of rights.  Id. at *3-4.  When Hartford removed the case to federal court, the district court remanded the case on the grounds that it was brought as an individual suit and not a class action.  The Seventh Circuit then granted appellate review under CAFA, and reversed and remanded.

The Seventh Circuit held that the case was removable because it was “in substance a class action” despite the plaintiff’s “artificial attempt to disguise the true nature of the suit.”  Id. at *5.  The court first reasoned that the terms of the settlement specifically assigned Domino’s rights “to the Class (as represented by Plaintiff and its attorneys),” and thus “only [plaintiff] has standing to pursue [the requested] relief on behalf of the class certified by the state court.”  Id. at *6.  The Seventh Circuit then focused on the plaintiff’s fiduciary duty to the class members:

If we were to treat Addison as anything other than a class representative here, the interests of the class would be in danger.  If a class representative could seek such relief on its own, relieved of its fiduciary duties, it could be induced to sell out the interests of other class members in a lucrative settlement.

Id. at *8.  Citing the Supreme Court’s recent decision in Standard Fire Ins. Co. v. Knowles (blog post), the court further explained that “[t]o hold otherwise would, for CAFA jurisdictional purposes, . . . exalt form over substance, and run directly counter to CAFA’s primary objective of expanding federal jurisdiction over national class actions.”  Id. at *10.

This decision is particularly helpful to insurers because it holds that this type of declaratory judgment action, which is fairly common in the context of liability insurance, belongs in federal court under CAFA notwithstanding gamesmanship by plaintiffs attempting to keep it in state court.