Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-4_11-cv-00730/USCOURTS-azd-4_11-cv-00730-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgment (Insurance)

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UNITED STATES DISTRICT COURT 

DISTRICT OF ARIZONA 

JAMES RIVER INSURANCE COMPANY,

 Plaintiff, 

v. 

CAST & ASSOCIATES, INC., d/b/a 

FLAME CONNECTION; FARMERS 

INSURANCE COMPANY OF ARIZONA; 

FARMERS INSURANCE EXCHANGE, 

 Defendants. 

 Case No. 4:11-CV-00730-JJM 

 REPORT AND 

 RECOMMENDATION 

 

 Pending before the Court is a Motion to Dismiss pursuant to Rule 12(b)(1) 

(Doc. 7) filed by Defendants Farmers Insurance Exchange (“Farmers”) against 

Plaintiff James River Insurance Company (“James River”). James River filed a 

response to the motion (Doc. 13), and Farmers filed a reply (Doc. 14). After 

independent review of the record, the Magistrate Judge recommends that the District 

Court dismiss the Complaint. 

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I. Factual Background 

 This case arises out of an insurance coverage dispute between Farmers and 

James River. In its Motion to Dismiss (Doc. 7), filed November 29, 2011, Farmers 

argues that the Court lacks subject-matter jurisdiction to preside over this matter 

because there is no diversity between the parties. 

 James River is an Ohio corporation with its principal place of business in 

Virginia. Farmers is a California corporation with its principal place of business in 

California. Some policyholders of Farmers are residents of Ohio and Virginia. 

Flame Connection, another defendant that is not a party to the present dispute, is an 

Arizona corporation with its principal place of business in Arizona. Farmers 

Insurance Company of Arizona (not to be confused with Farmers Insurance 

Exchange), a third defendant that is not a party to the present dispute, is an Arizona 

corporation with its principal place of business in Arizona. 

II. Standard for Motion to Dismiss 

 A Rule 12(b)(1) dismissal for lack of subject-matter jurisdiction can be based 

on the face of the Complaint or extrinsic evidence demonstrating lack of jurisdiction 

on the facts of the case. White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). In 

evaluating a facial attack on jurisdiction, the court must accept the factual allegations 

set forth in the Complaint as true. See Miranda v. Reno, 238 F.3d 1156, 1157 n.1 

(9th Cir. 2001). The burden rests with the party asserting jurisdiction. Kokkonen v. 

Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). 

 Federal courts are courts of limited jurisdiction, possessing only that power 

authorized by Article III of the United States Constitution and statutes enacted by 

Congress pursuant thereto—in this case, 28 U.S.C. § 1332 (2011). See Bender v. 

Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986). Thus, federal courts have no 

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power to consider claims for which they lack subject matter jurisdiction. See Chen–

Cheng Wang ex rel. US v. FMC Corp., 975 F.2d 1412, 1415 (9th Cir. 1992). The 

court is under a continuing duty to dismiss an action whenever it appears that it lacks 

jurisdiction. Id.; see also Spencer Enters., Inc. v. US, 345 F.3d 683, 687 (9th Cir. 

2003); Attorneys Trust v. Videotape Computers Prods. Inc., 93 F.3d 593, 594–95 (9th 

Cir. 1996). 

III. Discussion 

 A. Farmers is an unincorporated association, not a corporation. 

 James River asserts that Farmers is a corporation, and is a citizen of its state 

of incorporation and its principal place of business only. 28 U.S.C. § 1332(c)(1) 

(2011). Farmers asserts that it is an unincorporated association and not a corporation, 

and as such, it is a citizen of every state of which its members, or policyholders, are 

citizens. Carden v. Arkoma Assoc., 494 U.S. 185 (1990). 

 Farmers’ website states that it is an inter-insurance exchange owned by its 

policyholders and organized under the laws of the state of California. That does not, 

however, end the inquiry as to whether it is a corporation, because inter-insurance 

exchanges may assume a corporate form of organization. Corpus Juris Secundum

§2, Nature, Status, and Incorporation of Organization. 

 James River argues that because the California Secretary of State website 

recognizes the name “Farmers Underwriters Association” in a corporate name search, 

Farmers must be a corporation. However, the entity classification of Farmers 

Underwriters Association may be different than that of Farmers, as the former owns 

the latter—they are not one and the same. See About Farmers, FARMERS INSURANCE 

GROUP, http://www.farmers.com/our_company.html (last visited Jan. 25, 2012). 

Therefore, the fact that a search of “Famers Underwriters Association” on the 

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California Secretary of State’s website yields information means nothing in terms of 

the entity formation that Farmers assumes. The fact that a search of “Farmers 

Insurance Exchange” yields no results in a corporate name search is more helpful—

and points in the direction of Farmers not being a corporation. See Ladanicolas v. 

Beury, 1994 U.S.App. LEXIS 6950, at *5 (9th Cir. 1994) (stating that “courts must 

look to state law to determine when an entity is not a corporation for diversity 

purposes). 

 Upon a thorough search of Westlaw and the internet in general, no source 

definitively characterizing Farmers as a corporation can be found. Further, in 

Farmers Ins. Exch. v. MTD Prods., Inc., WL 5877025, at *3 (N.D.Tex.2011), the 

parties did not dispute that Farmers was an unincorporated association, when it 

would have been in defendant’s best interests to dispute that classification if it had 

any grounds to do so. For these reasons, the Court finds that Farmers is an 

unincorporated association and not a corporation for jurisdictional purposes. 

 B. Farmers’ policyholders are “members” for jurisdictional purposes. 

 Since Farmers is not a corporation, it is a citizen of any state of which its 

members are citizens for purposes of diversity jurisdiction. Carden, 494 U.S. at 185. 

Farmers argues that “members” means the same thing as “policyholders” in this case. 

As such, because Farmers has policyholders in both Ohio and Virginia, where James 

River is incorporated and has its principal place of business, respectively, diversity is 

lacking and subject-matter jurisdiction is inappropriate. James River argues that 

Farmers’ policyholders are not “members” for jurisdictional purposes. 

 In MTD Products, the Texas district court, after noting that defendant MTD 

Products did not dispute that Farmers Insurance Exchange was an unincorporated 

association, tackled the question of whether Farmers’ policyholders were “members” 

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for jurisdictional purposes—and ultimately decided that they were. Farmers Ins. 

Exch. v. MTD Prods., Inc., 2011 WL 5877025, at *4-5 (N.D.Tex.2011). The court 

stressed that the analysis should be case and fact specific and directed that courts 

examine the entity’s own definition of “member.” MTD Prods., Inc., 2011 WL 

5877025, at *5 (quoting Royal Ins. Comp. v. Quinn-L Capital Corp., 3 F.3d 877, 882 

(5th Cir. 1993). In this case, Farmers’ Reciprocal Policy Conditions state that the 

membership fee is different from the premiums that the policyholders pay, and 

therefore, the policyholders are “members” for jurisdictional purposes. Further, the 

California Insurance Code states: “‘Owner,’ as used in this section, means any 

person who is named as an insured in the contract of insurance or document, or in a 

loss payable clause therein . . .” § 383.5. However, another district court held that 

Farmers did not adopt the citizenship of its policyholders, treating the policyholders 

as “customers” and not “members” for jurisdictional purposes. See Garcia v. 

Farmers Ins. Exch., 121 F.Supp.2d 667, 669 (N.D.Ill. 2000). 

 Because there is a disagreement among different district courts that have had 

the opportunity to evaluate Farmers’ jurisdictional position, it is best to see how such 

entities are treated in Arizona courts. Recently, a couple of Arizona district court 

decisions addressed the issue in relation to other well-known reciprocal insurance 

exchanges. These decisions reached the same conclusion that the Texas district court 

reached in the MTD Products decision. See Truck Ins. Exch. v. The Manitowoc Co., 

et al, 2010 WL 4961618 (D. Ariz. 2010); Cady v. American Family Ins. Co., 771 

F.Supp.2d 1129 (D. Ariz. 2011). For this reason, this Court finds that Farmers 

adopts the citizenship of each of its policyholders as “members.” Because its 

policyholders include citizens of both Ohio and Virginia, complete diversity is 

lacking and subject-matter jurisdiction is inappropriate. 

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 C. James River cannot amend their Complaint to include only diverse 

Farmers policyholders. 

 James River asks the Court to grant it leave to amend its Complaint to name 

only the diverse members of Farmers as Defendants. Farmers argues that this issue 

turns on the interpretation of A.R.S. § 20-766 (2010), which reads: “A reciprocal 

insurer shall have and use a business name which shall include the word ‘reciprocal,’ 

‘inter-insurer,’ ‘inter-insurance,’ ‘exchange,’ ‘underwriters,’ or ‘underwriting,’ and 

shall sue and be sued in its own name” (emphasis added). Farmers asserts that this 

statute should be interpreted in such a way that it precludes suit by or against 

individual policyholders, and as such, James River should be unable to amend its 

complaint to include only the diverse Farmers policyholders. The Court agrees. 

 An Idaho court, applying a statute similar to the Arizona statute quoted above, 

addressed the effect of the statutory language on diversity jurisdiction, ultimately 

finding that the statute precluded class action suits and suits by or against individuals 

affiliated with the insurance company. See Lumbermen’s Underwriting Alliance v. 

Mobile Oil Corp., 612 F.Supp. 1166 (D.Idaho 1985). The court noted that “the 

mandatory term ‘shall’ is . . . indicative of exclusivity.” Id. at 1170. In order for an 

individual policyholder to sue, he must have an individual justification for suit. Id. at 

1172. As applied to this case, A.R.S. § 20-766 precludes James River from 

dismissing Farmers and its nondiverse members in order to add only diverse 

members. Because diversity is not complete and James River is unable to amend its 

Complaint to “manufacture” diversity between the parties, subject-matter jurisdiction 

is inappropriate and the Complaint should be dismissed. 

 . . . . 

 . . . . 

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IV. Recommendation 

 Based on the foregoing, the Magistrate Judge RECOMMENDS that the 

District Court, after its independent review, GRANT Farmer’s Motion to Dismiss 

(Doc. 7) for lack of subject matter jurisdiction. 

 This Recommendation is not an order that is immediately appealable to the 

Ninth Circuit Court of Appeals. Any notice of appeal pursuant to Rule 4(a)(1), 

Federal Rules of Appellate Procedure, should not be filed until entry of the District 

Court's judgment. 

 However, the parties shall have fourteen (14) days from the date of service of 

a copy of this recommendation within which to file specific written objections with 

the District Court. See 28 U.S.C. § 636(b)(1) and Rules 72(b), 6(a) and 6(e) of the 

Federal Rules of Civil Procedure. Thereafter, the parties have fourteen (14) days 

within which to file a response to the objections. If any objections are filed, this 

action should be designated case number: CV 4:11-CV-00730-RCC. Failure to file 

timely objections to any factual or legal determination of the Magistrate Judge may 

be considered a waiver of a party's right to de novo consideration of the issues. See 

United States v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003) (en banc). 

 Dated this 5th day of March, 2012. 

 

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