Episode 40. Insurance Litigation in Federal Court

This week, Bob discusses a recent Ninth Circuit decision that could greatly affect insurance suits resulting from the LA wildfires. Learn why insureds might be in trouble if their cases get removed to federal court. 

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Transcript

Robert Sallander (00:02.254)
It seems inevitable there will be insurance litigation arising from the LA fires, and some of that litigation will be in federal court. Unlike California Superior Court, which is a court of general jurisdiction, federal courts have limited jurisdiction, and one of the conditions of federal jurisdiction is that the dispute has ripened into a case or controversy.

In a recent Ninth Circuit case called 50 Exchange Terrace LLC versus Mount Vernon Specialty Insurance Company, number 24-1612, published on March 3rd, 2025, a case that originated as a removal action to the Central District of California, the court threw out a case against a property insurer for water damage.

because the case was not ripe. The insured having failed to go through the dispute resolution process contained in the policy. The insured property was in Rhode Island. Some pipes froze, then burst, causing water damage. The property insurer paid the estimated value of the damage, less depreciation and deductible.

and demanded appraisal under the terms of the insurance policy. The insured sued the insurer for allegedly wrongfully withholding compensation while awaiting the outcome of the appraisal. The district court dismissed the case because the appraisal process was not completed and therefore the matter was not ripe and plaintiff lacked standing. The Ninth Circuit affirmed.

Like many property insurance policies, the policy at issue mandated appraisal in the event the parties disagreed about the amount of loss. If the parties retained appraisers and those appraisers failed to agree on the amount of loss, they submit their differences to an umpire. A decision agreed to by any two of the insured's appraiser, the insurer's appraiser, and the umpire is binding.

Robert Sallander (02:24.322)
The Ninth Circuit held that the extent of any loss cannot be determined by a court until an appraisal is completed. Any alleged injury before appraisal is too speculative to create an actionable claim. This is not a new concept, so why did the Ninth Circuit issue an opinion for publication? I quote the reason it gave. Quote,

The District Court correctly resolved this straightforward issue of ripeness and standing, consistent with a non-precedential order of this Court and decisions of other District Courts. We do not break new ground here. We have chosen to issue this decision as a presidential opinion in the hope of deterring, or at least short-circuiting, other similarly premature cases.

where the agreed insurance appraisal process has not yet been completed." It seems the Ninth Circuit is expecting a flood, no pun intended, of insurance bad faith cases from the Los Angeles fires and is warning insureds whose policies contain the appraisal requirement to complete that process before filing. Considering that the appraisal requirement

produces a binding result, it seems there would be no claim if the insurer pays the amount determined by the appraisers, even where the insurer disagrees with that amount.

I suspect this decision will motivate insurers to remove cases filed in state court to federal court under appropriate circumstances so that an insured or her counsel that files without completing the appraisal process or being excused from it may face early dismissal and possibly rule 11 sanctions. I also anticipate

Robert Sallander (04:31.681)
that where the appraisal process takes an unreasonable amount of time, or where there are due process or procedural criticisms, insureds may assert alternative bases for breach of contract and bad faith, even if the insurer pays the appraised amount. Well, that's it for this edition of Coverage Council is in. Thank you for listening. This is Bob Salander signing off.