A feature of 28 U.S.C. § 1332, the diversity-jurisdiction statute, may make you scratch your head and wonder why it’s there. In the Seventh Circuit’s March 15, 2018 decision in Hyland v. Liberty Mutual Fire Ins. Co., No. 17-2712, Judge Frank Easterbrook explained the origin of § 1332(c)(1) and the role that Wisconsin law played in its adoption. The statute is an exception tacked onto the familiar rule that a corporation is deemed to be a citizen of every state by which it has been incorporated and of the state in which it has its principal place of business. But, the text continues:
in any direct action against the insurer of a policy or contract of liability insurance, whether incorporated or unincorporated, to which action the insured is not joined as a party-defendant
the insurer is also deemed to be a citizen every state of which the insured is a citizen. § 1332(c)(1)(A).
The Hyland case arose in Illinois. The plaintiff’s son (on whose behalf she sued), was a passenger in a vehicle driven by Smith and was severely injured when Smith drove into two parked cars. Plaintiff’s state court action against Smith resulted in a default judgment for $4.6 million. The uncollectible Smith—arguably entitled to a defense of the action by Liberty Mutual, which had insured the owner of the car Smith was driving—assigned any claim that she had against Liberty Mutual to the plaintiff. Plaintiff sued Liberty Mutual in federal court for failure to defend Smith, and the district court awarded judgment for the whole $4.6 million.