Diversity Jurisdiction in Federal Court for Lloyd's Syndicates


Diversity Jurisdiction in Federal Court for Lloyd's Syndicates

Historically, it was assumed that Lloyds Syndicates were citizens of the United Kingdom for purposes of diversity jurisdiction in federal court.  Ruling in 1990 that unincorporated associations have the citizenship of each of its members, the Supreme Court of the United States (Carden v. Arkoma Associates, 494 U.S. 185 (1990)) drastically changed this sleepy area of the law for Lloyd’s syndicates.  As a practical matter, this ruling meant Lloyds could not sue or be sued in federal court in most cases.  Since the ruling, various federal appellate courts and district dourts have issued opinions further muddying the waters; Lloyd’s, meanwhile, continues to evolve at a far greater pace than these courts have recognized.  It is this evolution from individual to corporate ownership which now may have re-opened the doors to federal court.

 For nearly twenty years, the Carden decision compelled many courts to conclude Lloyds syndicates were simply inappropriate parties in federal court.  The reason for this lies in a prerequisite for federal jurisdiction: only citizens of different states can bring suit under diversity jurisdiction in federal court. (Diversity jurisdiction is the most likely type of jurisdictional basis for a Lloyds syndicate.)  Since each of the Lloyd’s Names are considered by several courts to be citizens of the states in which they live, given the thousands of Names historically, it was rather simple for an adverse party to find a Name with the same citizenship and thereby defeat federal diversity jurisdiction.  Suit would then have to be filed in state court. 

Suit under diversity jurisdiction in federal court was difficult to trigger, even where Lloyd’s syndicates sought federal court litigation, such as in a declaratory action or perhaps a subrogation matter.  Indeed, because improper jurisdiction can be raised at any time, even on appeal, adverse parties – or judges themselves - can object to the inclusion of Lloyd’s in federal court.  (In Indiana Gas Company v Home Insurance, 141 F.3d 317 (7th Cir. 1998), after three years of litigation, the federal court of appeals on its own dismissed the case for lack of diversity jurisdiction which the court first raised at appellate oral argument.)  Thus, after thousands of man-hours and significant costs, the case was dismissed because at least one of the Names shared citizenship with an adverse party (even though the adverse party itself did not raise this objection).  When it came to Lloyd’s syndicates, diversity jurisdiction in federal court had proven to be rather risky.

 Now, however, with the vast influx of corporate capital in recent years, the number of individual Names in the Lloyd’s market has dropped dramatically. Less than 800 individual Names now participate at Lloyd’s, providing less than 5% of capital - with the vast remainder provided by major insurance groups, financial institutions and companies (www.lloyds.com/newscentre).  Since there are less Names, there is less likelihood for the adverse party to have the same citizenship as a Lloyds Syndicate.  Diversity jurisdiction is much more possible and it may become even more available as corporate capital continues to flow into the Lloyd’s marketplace.  
However, the evolution of Lloyd’s with greater corporate capital is no magic bullet in eliminating the risks of diversity jurisdiction.  While the significant reduction of Names means federal court diversity jurisdiction may be more available to the London market as a general principal, there are questions that must be answered and risks appreciated before a Syndicate can safely sue or be sued in Federal court.

First, one must still determine if any one of the syndicates has a Name that shares citizenship with an adverse party.  If so, diversity jurisdiction will most likely not be available.  Second, the risks and benefits of federal court, from a strategic perspective, must be evaluated.  This is a multi-faceted analysis consisting of judicial, procedural and juror-driven considerations.  Thirdly, if federal court is the right court, staying there may be an uphill battle. Some courts are now of the opinion that a Lloyd’s syndicate is only a citizen of the state in which its lead underwriter is a citizen; many federal district courts remain skeptical and bogged down by old law – e.g., old rulings that misunderstand the nature of Lloyd’s as a marketplace.  Thus, even if the initial analysis shows federal court is jurisdictionally appropriate, counsel for Lloyds will perhaps still need to prove that fact to the trial court.
Regardless, the ongoing influx of corporate ownership of Lloyds has begun to re-open the doors to federal court.  Whether the Lloyd’s market on a loss should take the opportunity to walk through those doors is best determined only after a thorough analysis of legal and strategic factors, including the citizenship of any remaining Names for syndicates involved in the loss. 

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