One of the exceptions to federal jurisdiction under the Class Action Fairness Act (“CAFA”) is known as the “local controversy exception.”  It requires a federal district court to decline to exercise jurisdiction where more than two-thirds of the proposed class members are citizens of the state where suit was filed, the principal injuries occurred in that state, and at least one defendant is a citizen of that state, and is a defendant from whom members of the class are seeking “significant relief,” and whose alleged conduct “forms a significant basis” for the proposed class’s claims.  In addition, the exception applies only if no other similar class action was filed against any of the defendants in the past three years. 

This exception is rarely a point of contention in insurance class actions.  If the insurer is sued in its home state in a statewide class action, CAFA jurisdiction generally does not exist.  The “local controversy” exception tends to come into play when multiple insurers are sued in one case, or where other in-state defendants (such as insurance agents or insurance adjusters) are added to a suit against an out-of-state insurer.  A new Fourth Circuit case presents one more potential area where the “local controversy” exception is likely to be litigated – where the plaintiff sues a defendant class of individuals, as well as a corporate defendant.

In Quicken Loans Inc. v. Alig, No. 12-342, 2013 U.S. App. LEXIS 25224 (4th Cir. Dec. 19, 2013), the plaintiffs alleged that Quicken Loans originated unlawful loans in West Virginia.  Suit was brought in a West Virginia state court, on behalf of a putative statewide class of West Virginia citizens, against Quicken Loans (an out-of-state defendant), as well as a defendant class of real estate appraisers who are citizens of West Virginia and performed appraisals for the loans at issue.  The district court granted the plaintiffs’ motion to remand based on the “local controversy” exception.  The Fourth Circuit granted interlocutory review, and vacated the remand order.

The only dispute was over whether there was at least one in-state defendant from which “significant relief” was sought, and whose alleged conduct formed a “significant basis” for the putative class claims.  The key issue the Fourth Circuit focused on was whether the putative class of defendant appraisers could be aggregated to determine whether the “local controversy” exception applied.  The Fourth Circuit held that no such aggregation was proper because the members of the uncertified defendant class were not parties:

[I]t was proper for the district court to aggregate the named defendant appraisers for purposes of the local controversy exception. But, the district court went further than that: it also combined the absent members of the putative class. Therein lies the problem. An unnamed member of a proposed but uncertified class is not a party to the litigation. Smith v. Bayer Corp., 131 S. Ct. 2368, 2379 (2011). Consequently, because the class of unnamed defendant appraisers is not a party to this lawsuit, it was improper for the district court to consider them in deciding whether Plaintiffs had satisfied the “at least 1 defendant” requisite of the local controversy exception.

As such, we are left with the question as to whether the named defendant appraisers—Appraisals Unlimited, Inc., Dewey V. Guida, and Richard Hyett—meet the “at least 1 defendant” portion of the local controversy exception. But, we are unable to make that determination on the record before us. Accordingly, we remand this action to the district court to make that decision.

Id. at *13.

So what does this mean for insurance class actions, where plaintiffs’ counsel attempts to invoke the “local controversy” exception by suing insurance agents, adjusters or auto appraisers as well as the company?  I see this decision as generally a good development for those types of cases, in addition to other arguments of fraudulent joinder that the insurer often has when there is no proper cause of action against the insurance agents or adjusters.