Oregon Federal Court Remands Contractor Garnishment Action to State Court

Triad Mech. v. Coatings Unlimited, Inc., 2007 WL 2713842 (D. Or. Sept. 12, 2007)

A general contractor successfully obtained a judgment against a subcontractor for breach of contract and negligence arising from a construction project.  The general contractor then sought a garnishment action against one of the subcontractor’s insurers to collect the judgment, which was filed in Oregon state court.  The general contractor was an additional insured under the subcontractor’s comprehensive general liability insurance.  The insurer removed the action to federal court and the general contractor sought remand to state court.  The district court remanded the action to state court.

Three arguments were advanced in favor of the remand:  (1) the insurer waived its right to remove because its insurance contract had a “service of suit” provision, which effectively consented to the insured’s choice of forums; (2) the insurer’s removal was untimely under the “first served defendant rule”; and (3) the federal court did not have original jurisdiction, and even if it did, the McCarran-Ferguson Action provided “reverse preemption” which would defeat the removal.

The court accepted the first argument, and held that the “service of suit” provision was sufficient to grant a remand to the general contractor.  The court’s reasoning includes an extensive discussion, citing Oregon law, that any ambiguity in insurance contracts is construed in favor of the insured and that an additional insured would have the same contractual benefits as a named insured in this case.

The court rejected the “first served defendant rule” because the garnishment claim was a fundamental change to the original action (which was limited to liability and damages) in state court and hence the 30-day rule to remove would not commence until the insurer was served with the new separate garnishment action.  The court also rejected the original jurisdiction argument, finding that the action could have been brought in federal court and that the McCarren-Ferguson Act did not reverse preempt the jurisdiction because the Oregon’s garnishment statutes are not a fundamental regulation of the insurance industry so as to activate the Act’s provisions, which preempt federal action where a state’s laws constitute regulation of the insurance industry.