Opinion ID: 525699
Heading Depth: 2
Heading Rank: 3

Heading: the insurance company as a party

Text: 20 In general, a real party in interest is a party that has a real and substantial stake in the litigation and who exercises substantial control over the litigation. Navarro 100 S.Ct. at 1784 (emphasis added). The definition of a real party in interest, however, breaks down in the area of insurance law because of the courts' historic treatment of insurance companies in tort litigation. Although liability insurance companies often have a real and substantial stake in their insured's litigation, they are usually not treated as parties to an action involving their insured. This is true even though the company has a contractual obligation to pay for the litigation and/or to pay any judgment rendered against the ultimate tortfeasor. 21 Thus, for example, Fed.R.Evid. 411, prohibits the use of any evidence that a party was or was not insured against liability for any purpose relating to that party's negligence. In addition, in the typical scenario, insurance companies defend the insured in cognito so as to preserve its anonymity and remain undetected by the jury. Cf. Webster, 727 S.W.2d at 251. Because of the indirect and invisible roles often played by insurance companies in tort litigation, courts generally do not recognize these companies as real parties to an action unless they have become subrogated to the rights of their insured after payment of the loss, they are defending actions brought directly against them, or when, for some reason, they must assume primary and visible control of the litigation. Compton v. D'Amore, 101 A.D.2d 800, 800-01, 475 N.Y.S.2d 463, 466 (1984); See also Lumbermen's, 348 U.S. at 51, 75 S.Ct. at 154 (insurance company real party in interest when plaintiff brings direct action); O.M. Greene Livestock Company v. Azalea Meats, Inc., 516 F.2d 509, 510 (5th Cir.1975) (insurance company real party in interest when plaintiff voluntarily dismissed insured). This paradoxical treatment of insurance companies stems from the companies' contingent and often indirect potential for liability in tort litigation as well as from the recognition that jurors will be much more inclined to award high damages to an injured party if they are aware that an insurance company will ultimately bear the burden of the award. 22 In this case, we are not concerned with those situations in which an insurance company becomes a real party by procuring the right to enforce an action, as a plaintiff, through subrogation. Nor are we concerned with those situations in which the insurance company must defend itself against a direct action as that term is used in 28 U.S.C. Sec. 1332(c) or as that term would apply to actions brought solely against an insurance company over such issues as payment or coverage. 1 Rather, we are concerned with those situations in which the insurance company becomes the real party in interest as a defendant because it inherits the sole duty to defend or it exercises visible and substantial control over the litigation. To aid us in our real party inquiry in this case, we must consider the essential nature and effect of the proceedings in question. Adden v. Middlebrooks, 88 F.2d 1147, 1150 (7th Cir.1982); New York v. General Motors Corp., 547 F.Supp. 703, 704 (S.D.N.Y.1982). 23 In looking at the essential nature and effect of the proceedings of this case, we are convinced that while Tennessee Farmers has a financial stake in the litigation, it is not a real party in interest for purposes of determining diversity. In this case, Tennessee Farmers' liability is contingent and indirect. Tennessee Farmers is, in effect, twice removed from direct liability in this action. First, the plaintiff must be awarded damages greater than the amount for which the defendant's own insurance company has responsibility. Second, before liability may be imposed on Tennessee Farmers, the issues of coverage must be litigated. The district court ordered this litigation to be conducted separately from the tort litigation, although it is to remain part of the original proceeding. See also Gatlin v. Tennessee Farmers Mutual Insurance Company, 741 S.W.2d 324, 325 (Tenn.1987). Thus, under general principles determining the party status of liability insurance companies, Tennessee Farmers does not have the direct stake in the litigation that might otherwise make it a real party in interest regardless of its degree of participation. As a result, because of the peculiarity of liability insurance law, the question of whether Tennessee Farmers is a real party turns on whether it exercised substantial control of this action. 24 The present action is not one in which Tennessee Farmers incurred, through default, the primary obligation to defend the lawsuit because it became the only defendant in the lawsuit. Compare O.M. Greene Livestock, 516 F.2d at 510 (insurance company primary defender when plaintiff voluntarily dismissed insured); Webster, 727 S.W.2d at 251-52 (insurance company primary party when tortfeasor is unknown); Wilkinson v. Vigilant Insurance Company, 236 Ga. 456, 224 S.E.2d 167 (1976) (under Georgia uninsured motorist statute, which is comparable to the one in Tennessee, insurance company is real party in interest when tortfeasor is discharged in bankruptcy so that no liability could attach to him). Furthermore, Tennessee does not allow direct actions against the uninsured motorist company. Instead it confers on the insurance company only the option, not the absolute obligation, to take substantial control of the defense in these types of lawsuits. The uninsured motorist statute provides that nothing in this subsection shall prevent such owner or operator from employing counsel of his own choice. Thus, although Tennessee Farmers has the right to defend the action, this right is secondary to Bayless' right to defend. In this case, Bayless employed counsel and, as a result, Tennessee Farmers did not substantially control the litigation. Indeed, the trial transcript in this case reveals that Tennessee Farmers took a back seat to the defendant's counsel throughout the liability proceedings. Bayless' counsel conducted opening argument, presented the witnesses, and conducted all direct and cross examination of the witnesses on the issue of liability. Tennessee Farmers participation in the tort proceeding was minimal. 25 In sum, the essential nature of the present proceeding is an action in tort between diverse citizens for the recovery of injuries sustained in an automobile accident. The essential effect of the lawsuit is to adjudicate the liability of Bayless. If Bayless successfully defends himself, Tennessee Farmers will escape any financial obligations to Broyles. 26 Finally, we note that the Tennessee uninsured motorist statute attempts to protect the anonymity of the insurance company as in any other insurance liability case. Webster, 727 S.W.2d at 251. It makes little sense to allow the company to proceed in cognito and yet consider its phantom presence in determining diversity. Although an uninsured motorist carrier is given the option to defend in its own name, rarely will such an event occur if there is a jury trial. Unless this rarity occurs and is coupled with substantial participation during trial, an insurance company's citizenship should not be considered for diversity purposes. Considering the residency of a largely invisible uninsured motorist carrier would not serve the claimed purpose of diversity which is to prevent local prejudice. The controversy, for all intent and purpose, would appear to the jury as a dispute between two residents of different states and indeed, that would be the core of the proceeding.