Merit Decision: Court Nixes Personal Jurisdiction by Imputation to Insured of Conduct of Insurance Company. Fraley v. Estate of Oeding

On February 12, 2014, the Supreme Court handed down a merit decision in Fraley v. Estate of Oeding2014-Ohio-452.  In a 5-2 decision written by Justice French, the Court held that Ohio courts cannot exercise personal jurisdiction over a nonresident based solely on the conduct of the nonresident’s insurance company. Justice Pfeifer dissented, for himself and Justice O’Neill. The case was argued October 9, 2013.

Case Background

Timothy Oeding, driving a truck owned by J&R Equipment and Storing (J&R), caused an accident with a truck owned by Fraley Trucking, and driven by one of its employees.  Both drivers were within the scope of their employment at the time of the accident, which occurred in Spencer County, Indiana.  Oeding died as the result of his injuries. J&R was insured by Auto-Owners Insurance Company (Auto-Owners), also located in Indiana.  Auto-Owners investigated the accident. During the course of this investigation, the insurance company placed an investigative hold on Fraley’s truck in Indiana for about five months.

David Fraley filed a negligence action in the Butler County Court of Common Pleas against Oeding’s Estate, J&R, and Auto-Owners (Appellants). Auto-Owners settled all claims except Fraley Trucking’s loss-of-use claim.  Appellants collectively moved the trial court to dismiss this claim pursuant to Civ. R. 12(B)(6) for lack of personal jurisdiction.

Procedural Posture

The trial court granted appellants’ motion to dismiss, finding that it could not assert personal jurisdiction over Oeding and J&R solely because their insurance company did business in Ohio. The trial court also held that Fraley was not entitled to maintain a direct action against Auto-Owners, because he had not obtained a judgment against Auto-Owners’ insureds. Fraley has not contested this part of the ruling.

The Twelfth District Court of Appeals reversed on the personal jurisdiction issue, which was the only issue before the Supreme Court. Read the oral argument preview of the case here, and the analysis of the argument here.

Key Statutes and Precedent

R.C. 2307.382(A)(4) – Ohio’s Long-Arm Statute, which provides in part that a court in Ohio may exercise personal jurisdiction over a person who acts directly or by agent to cause a tortious injury within the state if he or she regularly does business in Ohio.

R.C. 3929.06-Ohio’s direct action statute, which does not permit a direct action against a liability insurer without a final unpaid judgment in the underlying action.

Peyko v. Frederick, 25 Ohio St.3d 164 (1986).  (Insurer’s tortious litigation conduct imputed to its insured for purposes of prejudgment interest award to plaintiff.)

Griffey v. Rajan, 33 Ohio St.3d 75 (1987).  (The neglect of a defendant’s insurance company during litigation in failing to file an answer to a complaint imputed to the defendant insured.)

Kirchen v. Orth, 390 F.Supp. 313 (E.D. Wisc. 1975).  (Notions of due process and fair play would be violated if the defendant were subjected to the jurisdiction of the court under the long-arm statute based solely on the actions of its insurer in engaging in settlement negotiations.)

Rush v. Savchuk – 444 U.S. 320 (1980) (A state may not constitutionally exercise quasi in rem jurisdiction over a defendant who has no forum contacts by attaching the contractual obligation of an insurer licensed to do business in the state to defend and indemnify him in connection with the suit.)

Merit Decision

The specific question before the Court was whether the conduct of an insurance company can be imputed to its non-resident insured for purposes of establishing personal jurisdiction over the insured.

Short answer: No.

Two-Step Inquiry To Determine Personal Jurisdiction

There are two parts to the determination of whether an Ohio court has personal jurisdiction over an out-of-state defendant.

  1. Does the defendant’s conduct fall under Ohio’s long arm statute (R.C. 2307.382(A)(4)) or Civ.R. 4.3(A)?
  2. If yes, will the assertion of jurisdiction violate due process?

In this case, even though the majority answered the first question in the negative, it went on to address the second step anyway, because it has previously found that “Ohio’s long-arm statute is not coterminous with due process.”

Part I: Ohio’s Long-Arm Statute

Under Ohio’s Long-Arm statute, an Ohio court may exercise personal jurisdiction over a person who acts directly or by agentto cause a tortious injury within the state if he or she regularly does business in the state of Ohio. The civil rule mirrors the statute in regard to service of process on persons outside Ohio.  The words “person” and “agent” are key to Justice French’s analysis.

A key point on which the Supreme Court disagreed with the appeals court was the latter’s finding that Auto-Owners acted as the agent for Oeding and J&R,  placing Auto-Owners’ action within the ambit of the long arm statute, and thus, by imputation, jurisdiction extended to Oeding and J&R.  The majority found this was contrary to the plain language of the statute.

The majority found that in order to be subject to the jurisdiction of the Ohio courts, it has to be the person, (here J&R and Oeding)—not the agent (Auto Owners)–who regularly does business in Ohio before being subject to the jurisdiction of Ohio’s courts.   The term “agent,” the Court found, is not incorporated into the word “person”—an agent is distinct from the person for whom the agent acts. Honestly, I’ve read this section of the opinion a number of times, and while I understand the conclusion, I struggled with the reasoning.

Under the long arm statute, a “person” also includes a personal representative. The majority rejected Fraley’s argument that Auto-Owners qualifies as a personal representative of its insureds. The Court pretty much said, come on, that term, which isn’t defined in this statute, is someone akin to an executor or administrator, and is not akin to the contractual relationship between insurer and insured.

Additionally, the majority distinguished  Peyko and Griffey, relied on by the appeals court, in which an insurance company’s neglect was imputed to its insured, because in both those cases the Ohio courts already had personal jurisdiction over the insured defendants. The appellants had expressly noted this distinction at oral argument.

Finally, and most importantly, the majority accepted another argument strongly advanced by the appellants at argument—that Auto-Owners was not the agent of its insureds here. The appellants had argued that to find this agency relationship, the court of appeals had twisted the nature of the relationship between insurer and insured, noting that a policy holder has no control over how an insurance company investigates a claim. The Court agreed, finding that even if an agent’s doing business in Ohio could satisfy R.C. 2307.382(A)(4), Auto-Owners did not act as agent of Oeding and J&R when it instituted an investigatory hold on Fraley’s truck. The majority agreed with the reasoning in the Wisconsin case of Kirchen v. Orth , which noted that in an agency relationship the principal has the right of control over the actions of its agents.  Here, as in all liability insurance policies, the insurer has the right to defend, investigate, negotiate, and settle any claim against the insured as the insurer sees fit, and the insured has no right of control over any of this. Thus, Auto-Owners wasn’t acting as the agent for J&R and Oeding for the purposes of long arm jurisdiction in this case.

Onward, to Due Process

In addition to concluding that Ohio could not exercise personal jurisdiction over J&R and Oeding under its long-arm statute, the Court also went on to conclude that the exercise of personal jurisdiction in this case would violate established principles of due process.

Minimum Contacts, Fair Play, Substantial Justice

From International Shoe remember? “A state may exercise jurisdiction over an out-of-state defendant only if the defendant has “certain minimum contacts with [the forum] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice. ”

To meet the minimum contacts requirement, a nonresident defendant must somehow purposefully take advantage of conducting activities in the forum state, and purposefully seek the benefits of the state’s laws and protections.  Here, the only connection among any of the appellants and Ohio was Auto-Owners’ registration with the Ohio Department of Insurance and its telephone and written correspondence with Fraley and his attorney in Ohio. Fraley argued that was good enough.  The majority said it wasn’t. “Subjecting an insured to personal jurisdiction wherever its insurer chooses to conduct settlement negotiations is offensive to due process,” wrote French, quoting Kirchen.

Likewise, the majority rejected the idea that the insurer and the insureds are as one. Just because Auto-Owners had minimum contacts doesn’t mean J&R and Oeding did. In fact, the Court expressly found J&R and Oeding didn’t. It distinguished away and found unpersuasive an Alabama case relied on by the court of appeals suggesting otherwise, relying instead on the reasoning of the U.S. Supreme Court in  Rush v. Savchuk – 444 U.S. 320 (1980).

Majority Conclusion (and the Case Syllabus)

An Ohio court may not exercise personal jurisdiction over a nonresident based solely on the conduct of the nonresident’s insurance company.

Dissent

Justice Pfeifer believes Ohio’s long arm statute does confer jurisdiction  “over a  defendant whose Ohio-licensed insurer commits tortious acts against Ohio citizens and that exercising jurisdiction over the insured defendants in this case would not raise significant due-process concerns.” He also agrees with the appeals court that personal jurisdiction can be imputed from insurer to insured just as the actions of an insurer can be imputed to an insured for liability purposes.

Pfeifer notes that if a direct action were allowed in this case, Auto-Owners would undeniably be subject to long-arm jurisdiction.  The company meets the statutory definition of “person,” and its license clearly meets the “regularly does or solicits business” part of the long arm statute.

Unlike the majority, Pfeifer would find that Auto-Owners’ license to do business in Ohio is enough to establish the requisite minimum contacts as to both Auto-Owners and its insureds to meet due process.  Reviewing the factors set forth in Kentucky Oaks Mall Co. v. Mitchell’s Formal Wear, 53 Ohio St.3d 73(1990) as necessary to comport with fair play and substantial justice, he notes that case held that where appropriate, jurisdiction can be established “upon a lesser showing of minimum contacts than would otherwise be required.” He would find that to be true in this case because the burden of jurisdiction on J&R and Oeding’s Estate would be minimal.  The resolution of the loss-of-use claim would require little or no involvement or presence of the named-Indiana insureds because the loss of use claim does not involve any particulars about the auto accident or testimony of anyone involved in the accident.

Justice O’Neill signed on to this dissent.

Concluding Observations.

I correctly called this one for the Appellants, as did Student Contributor Beckie Campbell, who heard this case argued in person over fall break last year.

After argument, I wrote, “the fact that to find personal jurisdiction, the insurance company would have to be deemed the agent of the insured is going to sink this argument.” And I think that ultimately, it did.  At oral argument, Justices O’Donnell, Lanzinger, and Chief Justice O’Connor all asked about making the insurance company the agent of its insured.  All sounded skeptical when doing so. Justice Lanzinger in particular commented about the complete lack of control an insured has over the actions of its insurer. She noted that normally in an agency relationship, the principal controls the acts of an agent.

I also wrote that I thought Fraley had a good argument about precedent imputing the litigation conduct of an insurance company to its insured, but noted that in that context the court already has jurisdiction over the parties, so that precedent isn’t at all on all fours.  The majority distinguished this type of imputation from Fraley’s case.

I also predicted Justice Pfeifer would find personal jurisdiction satisfied here, and he did.  Historically, he has a more expansive view on this than his colleagues.  Justice O’Neill joined him, as he is beginning to do with some frequency.

A word about the opinion itself.  Justice French, who asked no questions during this argument, comes from a regulatory background, and it really shows in this opinion. It is highly technical, very careful, academic, and at time dense– almost the polar opposite of Justice Pfeifer’s dissent, both in style and in emphasis.  French’s concern was clearly with unfairness to J&R and Oeding’s Estate to have to defend themselves in an Ohio court, while Pfeifer’s was on the alleged wrongful conduct of the insurance company and the unfairness to Fraley of not to be able to resolve his loss of use claim here in Ohio.

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