MEMORANDUM AND ORDER RE: MOTION TO REMAND

WILLIAM B. SHUBB, District Judge.

Defendant Midas1 leased property from plaintiffs. (Compl. ¶ 9 (Docket No. 1-1).) The lease agreement allegedly required Midas to obtain liability and property damage insurance coverage and designate plaintiffs as loss payees and/or as additional insureds on the policy. (Id. ¶ 10.) Accordingly, Midas took out a policy through defendant Liberty Mutual. (Id. ¶ 11.)

Plaintiffs allege that during an inspection of the premises they discovered substantial damage. (Id. ¶ 13.) They filed this action in Sacramento Superior Court, alleging breach of contract, breach of the covenant to keep and surrender leased premises in good condition, real property damage, and breach of the covenant of good faith and fair dealing against Midas and TBC. They also asserted claims of breach of contract and breach of the implied covenant of good faith and fair dealing against Liberty Mutual and Marsh USA, which they refer to collectively as "the insurer." (Id. ¶ 4.)

Defendants removed the action to district court on the basis of diversity jurisdiction, asserting complete diversity exists because plaintiffs are citizens of California; Liberty Mutual was incorporated in Wisconsin and has its principal place of Business in Massachusetts; Marsh was incorporated in Delaware and has its principal place of business in New York; and TBC and its subsidiary Midas were incorporated in Delaware and have their principal places of business in Florida. (Notice of Removal at 1-2 (Docket No. 1).) Plaintiffs later dismissed Midas and TBC with prejudice.

Plaintiffs now move to remand the action to state court, arguing that diversity is destroyed under 28 U.S.C. § 1332(c)(1). Only defendant Liberty Mutual opposed the motion, but the court was later advised that plaintiffs reached a settlement with that defendant. Because Marsh, USA remains in the action, the court will proceed to consider the merits of plaintiffs' motion.

The district court exercises jurisdiction over an action where complete diversity exists and the amount in controversy exceeds the sum or value of $75,000. 28 U.S.C. § 1332(a). A special rule applies, however, to so-called "direct actions" against insurers. Section 1332(c)(1) provides that

Id. § 1332(c)(1) (emphasis added). Plaintiffs argue that this is a "direct action," and that Liberty Mutual and Marsh USA should thus assume plaintiffs' California citizenship, destroying diversity.2

Plaintiffs' motion rests on a misapplication of § 1332(c)(1). A "direct action" is "of such a nature that the liability sought to be imposed could be imposed against the insured." Searles v. Cincinnati Ins. Co., 998 F.2d 728, 729 (9th Cir. 1993). In a direct action, the insurer is essentially a surrogate for the defendant tortfeasor whom it insures, who has not been joined. See id. "Section 1332(c)(1) was intended to eliminate diversity jurisdiction for suits on certain tort claims in which both parties are local residents, but which, under a State `direct action' statute, may be brought directly against a foreign insurance carrier without joining the local tort-feasor as a defendant." Id. (citing Northbrook Nat'l Ins. Co. v. Brewer, 493 U.S. 6, 10 (1989)) (internal quotation marks omitted). Based on this reading of Congress's intent, the Ninth Circuit held that a `first party' insurance action, or a suit by an insured against an insurer, is not a `direct action.' Searles, 998 F.2d at 729.

Plaintiffs brought breach of contract and breach of the implied covenant of good faith and fair dealing claims against Liberty Mutual and Marsh USA for duties the insurer owed directly to them, including the duty to investigate "their" claim. (Compl. ¶ 33.) Plaintiffs allege that they are the "insured" under the meaning of § 1332(c)(1) as the "intended beneficiaries under the terms of the insurance contract." (Compl. ¶ 11.) Based on plaintiffs' own characterization of the Complaint, (see Pl.'s Mem. at 2 (stating plaintiffs are bringing the lawsuit against Liberty Mutual as insureds under the policy)), this is therefore a "first party" insurance action—a suit by an insured against an insurer. This is not a direct action under § 1332(c)(1) where, rather than suing a tortfeasor defendant, a plaintiff brings the claims it would have brought against the tortfeasor instead against defendant's insurer. Section 1332(c)(1) cannot apply. See Searles, 998 F.2d at 729.

IT IS THEREFORE ORDERED that plaintiffs' motion to remand be, and the same hereby is, DENIED.