Compulsory joinder of compensating insurers: Federal Rule of Civil Procedure 19 and the role of...

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Author: Entman, June F.

When an insurer has the right to bring and control a claim against a third party who has caused some payment by the insurer to the insured,the insurer is said to be subrogated to the insured's claim. Compensating insurers may be entitled, however, only to reimbursement from proceeds the insured recovers from third parties. When the insurer has only a claim against its insured for reimbursement, and not a claim directly against the third party, the insurer is not considered to be subrogated.[16]

The rights of a compensating insurer depend upon the applicable law of insurance subrogation, the type of insurance involved, and the terms of the particular insurance contract.[17] In some circumstances, the exclusive right to control any claim against a third party remains in the insured.[18] Although the compensating insurer is entitled to reimbursement from the insured's recovery, the insurer does not have an enforceable claim against the third party.[19] In other circumstances, the insurer entitled to reimbursement is further entitled to assert and control the claim against the third party.[20] Finally, the insured and insurer sometimes each have separate claims against the third party.[21] In the latter situation, however, the law of subrogation usually further provides that either joinder of both insured and insurer is required[22] or the filing of suit by one precludes enforcement of the claim by the other.[23]

Either state or federal law may govern the insurance relationship and, therefore, determine the insurer's right to reimbursement or subrogation and the consequences to the insured of accepting compensation from its insurer. In some cases, the source of the applicable insurance law may differ from the source of law that governs the underlying claim against the third party. For example, the subrogation rights of one who pays workers' compensation benefits to a longshoreman are governed by the federal Longshore and Harbor Workers' Compensation Act,[24] although the tort claim against the third party may arise under either federal or state law.[25] Similarly, the law of one state may determine the injured party's right to recover against the tortfeasor, while the law of another state may determine whether an insurer is subrogated to the injured party's claim.[26]

The function of Federal Rule of Civil Procedure 17(a),[27] the real party in interest rule, is to require that the plaintiff be the person who, under the substantive law, has the fight to bring and control the action.[28] When an injured party has been compensated by his insurer, therefore, Rule 17(a) means that the court should require the naming of the party plaintiff to conform to the answer found in the law of subrogation to the question of who has the fight to sue.[29]

If Rule 17(a) were properly understood and applied, it alone (or better yet, Rule 12(b)(6)[30] alone) would be sufficient in many cases to resolve the question of whether an insurer must be joined as a plaintiff when its compensated insured brings an action against a third party.[31] If, for example, the applicable subrogation law denies the insured's right to assert the claim that once was his, the insured should not be permitted to proceed as the party plaintiff. The insurer that has acquired through subrogation the right to assert the claim, and who is in actual control of the lawsuit that has been brought, is the only proper plaintiff.[32] There is no joinder issue, only a real party in interest, or Rule 12(b)(6), issue.

Unfortunately, Rule 17(a) rarely has been construed in the subrogation context to resolve party plaintiff issues in so straightforward a fashion. Rule 17(a) has been misapplied in a number of ways that have resulted in decisions either to require or not to require joinder of insurers without careful reference to the underlying substantive law. The frequent result is that federal courts fail to enforce the substantive law of subrogation, often the law of a state, that ought to control whether the insured or the insurer is named as the plaintiff.[33] In addition, by concluding erroneously that both the insured and the insurer are entitled to assert a claim against the third party, the federal courts create an unnecessary issue of compulsory joinder.[34]

The problem is only compounded when federal courts apply Rule 19 in response to a defendant's motion to require naming of a compensating insurer as a party plaintiff.[35] Rule 19 requires joinder on the basis of the nonparty's relationship to the claims asserted in the lawsuit.[36] If the court fails to determine correctly the nonparty insurer's rights with regard to the insured's claim, its application of Rule 19's criteria may yield a result that is inconsistent with the substantive law.[37]

The practice of ignoring substantive law in designating the proper plaintiff to a claim did not originate, however, with the Federal Rules of Civil Procedure. Even prior to the enactment of the federal rules, federal courts encountered considerable difficulty in determining the proper party plaintiff in a suit to enforce a claim that had been compensated by insurance. The decision has been a difficult one to make because it implicates a number of important substantive and procedural policies.[38]

Prior to the 1949 United States Supreme Court decision in United States v. Aetna Casualty & Surety Co.,[39] federal and state courts followed one of two different doctrines for identifying the proper party plaintiff in a case involving insurance subrogation. One approach, which originated in the law courts prior to merger and adoption of the real party in interest rule, was "use practice," under which the suit would be brought in the name of the insured alone "for the use" of the insurer to the extent of its subrogation interest.[40] The other approach was to apply the compulsory joinder doctrines of "necessary" and "indispensable" parties, which had originated in courts of equity.[41]

A. Use Practice and the Rule That Only the Insured May Sue

Common-law courts initially were hostile to assignments and considered chooses in action to be unassignable.[42] Nor were they receptive to subrogation, which was a creation of equity[43] sometimes described as an equitable assignment.[44] In the nineteenth century, however, the law courts began to recognize the right of an assignee or subrogee to reimbursement, at least when the assignee or subrogee had acquired the entire claim.[45] Law courts accepted the substance of subrogation to the extent of refusing to permit a defendant to defeat an insured's claim on the grounds that the insured, having been compensated by insurance, had suffered no loss.[46]

The law courts were never fully comfortable, however, with the idea that a subrogee, having only an equitable interest, could directly enforce its claim against a third party.[47] Many courts also expressed the view that the insured's cause of action was "indivisible"[48] and that permitting a subrogee to prosecute its claim would result in multiple lawsuits when there was more than one subrogee or when subrogation was partial.[49] An assignee or subrogee, therefore, was allowed to sue only in the name of the assignor or subrogor.[50]

Use practice was a typical common-law fiction.[51] When the claim was fully subrogated, the subrogee controlled the suit and was liable for costs.[52] Many decisions described the insured-subrogor as a trustee,[53] an analogy that perhaps helped to explain how the equitable right of subrogation could be enforced in a law court.[54] But it was an odd trusteeship indeed when, in a case of full subrogation, the insured-trustee was only a nominal plaintiff and the insurer-beneficiary had actual control of the action.[55]

Eventually, common-law courts adopted use practice to allow actions to be brought in the name of the insured in cases of partial, as well as complete, subrogation.[56] Use practice, or at least a simple rule that suits must be in the name of the insured alone, continued to be followed in many code states with merged systems of law and equity,[57] and in a number of federal courts following adoption of the Federal Rules of Civil Procedure.[58]

While use practice or suit in the name of the insured alone may have appeared to be a workable solution to the problem of the proper plaintiff when there had been partial subrogation, it really did no more than mask the underlying problem, which was how to recognize the rights of both insured and insurer without creating a risk of multiple litigation. If the rule were to have achieved its goal, it would have required that the insurer be bound by the judgment in any action brought in the name of the insured to recover the subrogated claim. But in a case of partial subrogation, if the rule really meant that only the insured, like a trustee, was entitled to control an action against the third party, then the rule effectively reduced the insurer's subrogation right to a claim for reimbursement.[59]

Some courts, therefore, while generally following the rule that the insured alone is the only proper plaintiff, carved out exceptions to protect the interests of the partially subrogated insurer. For example, some courts permitted the insurer to prosecute an action in the name of the insured when the insured declined to bring the claim.[60] Carving out exceptions, however, did not adequately deal with the problems caused by the rule that the insured was the only proper named plaintiff in a subrogation action. Such a rule is simply not a satisfactory way of dealing with the complexity that subrogation introduces into litigation.[61] It merely simplifies the question of whom to name as the plaintiff by rendering the name meaningless, and defers resolution of problems to other stages in the litigation.

The United States Supreme Court appeared to announce the demise of use practice when it stated in 1949 that the practice was "obviously unnecessary" under modern rules of civil procedure.[62] Use practice, nevertheless, has not disappeared. It has found a new incarnation in the device of ratification under the 1966 amendment to Rule 17(a).[63] As of 1992, moreover, twelve states explicitly permitted suit in the name of the insured alone even with total subrogation.[64]

The other pre-merger approach to resolving questions of proper parties and insurance subrogation was to apply doctrines of compulsory joinder that originated in equity and were ultimately incorporated into the Federal Rules of Civil Procedure.[65] Courts of equity, of course, had no difficulty in accepting a subrogee as a party plaintiff on the basis of its equitable and beneficial right to recovery.[66] With both subrogor and subrogee permitted to enforce a claim, however, the issue then arose whether both must appear as plaintiffs when one chose to bring suit.

Joinder of parties in law courts had been quite limited: plaintiffs were compelled to join when their rights were "joint," and no other joinder was permitted.[67] In equity, on the other hand, joinder of all interested parties was encouraged to prevent a multiplicity of suits.[68] In the seventeenth and eighteenth centuries, equity's permissive attitude toward joinder was combined with the idea that equity should do complete justice by requiring the joinder of all persons, known as "necessary parties," having an interest in the subject matter of the litigation, thus leading to a rule of compulsory joinder.[69] Authorities generally agree that compulsory joinder of "necessary" parties was motivated by three purposes: 1) to protect absentees whose out-of-court situations might be adversely affected by the litigation; 2) to protect the defendant from subsequent litigation reaching inconsistent results; 3) to protect both the parties and society from unnecessary multiplicity of litigation.[70]

At first, courts excused joinder of necessary parties when joinder was impossible, impractical or unduly complicated.[71] Later, however, the doctrine of indispensability emerged. According to this doctrine, there are "indispensable" parties whose relationship to the controversy is so substantial that not only should they be joined, but in their absence the court cannot proceed and the action must be dismissed altogether.[72]

In the second half of the nineteenth century, equity's flexible principles of compulsory joinder calcified into what came to be known as a "jurisprudence of labels."[73] In the much-quoted and highly influential case of Shields v. Barrow,[74] the Supreme Court described equity's compulsory joinder doctrines in terms of classifications of parties in which "necessary" parties are those "having an interest" in the controversy, but whose "interests are separable from those of the parties before the court," while "indispensable" parties are those whose interests are not separable.[75] Rules of procedure provided similar disembodied abstractions for identifying necessary and indispensable parties. The Field Code[76] provided that "toil the parties to the action, those who are united in interest must be joined as plaintiffs or defendants."[77] Federal Equity Rule 37 spoke in terms of "persons having a united interest."[78] Federal Rule of Civil Procedure 19, as adopted in 1938,[79] retained the labels "necessary" and "indispensable"[80] and mandated joinder of persons having "a joint interest."[81]

Compulsory joinder decisions under these rules, including the Shields decision itself, have been widely criticized for employing abstractions and labels rather than applying the underlying purposes of compulsory joinder to the facts of the case at hand.[82] As Professor Reed described the problem, "Judges, with human preference for the simplicity and apparent certainty of pat concepts and rules of thumb, tend to lapse into the terminology of joint fights, inseparable rights, and the like, instead of striving (through factual analysis) for a balance of equity and convenience."[83] Similarly, the Shields formulation has been accused of resulting in "classification of cases by a kind of sloganeering process in which important factual detail was overlooked."[84]

One such slogan widely, though not unanimously, adopted by both state and federal courts[85] was that partially compensated insureds and their compensating insurers were necessary parties when either brought suit.[86] Many courts, on the other hand, held that the insurer was not a necessary party and continued the older practice of suit in the name of the insured alone, at least when subrogation was only partial.[87] Still other courts simply were confused by the whole business.[88] In this sloganeering process, however, the courts overlooked the substantive law of insurance subrogation and the underlying purposes of compulsory joinder. And there was no more guilty party than the United States Supreme Court, which in 1949 put its stamp of approval on one of the slogans in a case that vividly illustrates how the jurisprudence of labels diverts attention from the underlying substantive law.

In the four cases consolidated for appeal in United States v. Aetna Casualty & Surety Co.,[89] an insured allegedly had been injured by the negligence of a federal government employee.[90] The injured parties' insurers had brought suit against the United States pursuant to the Federal Tort Claims Act[91] to recover the amounts they had paid in compensating the injured parties.[92] The issue before the Court was whether an insurer's subrogation claim against the United States was prohibited by the Anti-Assignment Statute, which barred "transfers and assignments" of claims against the United States.[93]

Without discussing whether the compensating insurers were, in fact, subrogated under the substantive law of insurance that applied to each claim,[94] the Court framed the issue before it as whether an insurance company may "bring suit in its own name against the United States upon a claim to which it has become subrogated by payment to an insured who would have been able to bring such an action[.]"[95] The Court concluded that the Anti-Assignment Statute did not bar assignments by operation of law, such as subrogation.[96] Consequently, the right of a subrogee to bring suit against the government under the Tort Claims Act was the same as the subrogee's right to bring suit against a private person.[97]

In concluding its decision, the Aetna Court briefly discussed the proper parties to a suit seeking to recover damages that have been compensated by insurance. Having already assumed that the compensating insurers were subrogees, the Court announced that, under Rule 17(a), a subrogee that has paid an entire loss must sue in its own name alone, while in a case of partial compensation, "both the insured and insurer (and other insurers, if any, who have also paid portions of the loss) have substantive rights against the tortfeasor which qualify them as real parties in interest."[98] Like the Court's facile assumption that a compensating insurer is necessarily subrogated and entitled to enforce a claim, the Court erroneously assumed that the insured's remaining pecuniary interest rendered it a "real party in interest" also entitled to sue.[99]

The Court next discussed the joinder issue.[100] Addressing whether the insurer might sue alone,[101] or whether the suit must be in the name of the insured for the use of the insurer, or whether all parties in interest must join in the action, the Court first rejected the notion of "use" practice as "obviously unnecessary" under Federal Rule 17(a).[102] The Court added that "[n]o reason appears why such a practice should now be required in cases of partial subrogation, since both insured and insurer 'own' portions of the substantive right and should appear in the litigation in their own names."[103]

The Court then turned to compulsory joinder under Rule 19. In a classic example of labelling, the Court stated that:

Although either party may sue, the United States, upon timely motion, may compel their joinder. . . . 3 Moore, Federal Practice (2d ed.) p. 1348. Both are "necessary" parties. Rule 19 (b), Federal Rules of Civil Procedure. The pleadings should be made to reveal and assert the actual interest of the plaintiff, and to indicate the interests of any others in the claim.[104]

The Aetna Court gave no further explanation of why the insured and the insurer were necessary parties. The Court did not even cite Rule 19(a), which defined "necessary" parties as those with joint interests. Perhaps the Court considered the insured and the insurer to be "necessary" simply because of their "joint" interests, but this reasoning was not in the opinion. Rather, the Court cited subdivision (b), which provided for compulsory joinder of persons who are not "indispensable," but "who ought to be parties if complete relief is to be accorded between those already parties."[105] The Court did not explain why the presence of either the insured or the insurer would be needed to provide complete relief between those already parties. In fact, it would seem that the opposite is true--that a court could resolve the dispute between either insured or insurer and the alleged tortfeasor without the presence of the other party interested in the claim.[106]

The Aetna Court also noted that although it considered both the insured and the insurer to be "necessary" parties, they "clearly" would not be "indispensable" under Rule 19.[107] Thus, the Court suggested that if the party who is not joined is beyond the jurisdiction of the court, the suit may nevertheless proceed without him under Rule 19(b) and the defendant may have to defend two or more actions on the same tort.[108] Again, the Court did not explain its conclusion. The Court stated simply that neither absent party would meet the Shields v. Barrow[109] test that indispensable parties are those with "'an interest of such a nature that a final decree cannot be made without either affecting that interest, or leaving the controversy in such a condition that its final termination may be wholly inconsistent with equity and good conscience.'"[110]

The Aetna decision created an unfortunate, although highly influential, precedent for compelling joinder of a compensating insurer under Rule 19 without regard to either the substantive law or any policies of compulsory joinder. Moreover, the Court's broad statement that the defendant may compel joinder of either insurer or insured was dicta with regard to joinder of the insurer. In each of the cases before the Court, the insurer had brought suit. The Court's failure to analyze the application of Rule 19 or its underlying policies make it difficult to assess the proper precedential value of its dicta. Had the Court at least explained why the insureds were necessary, but not indispensable, it might be possible to determine whether the same reasoning should apply to the insurer, or whether there is any distinction between insured and insurer in this situation that would call for a different result.

The Court's failure to justify its joinder pronouncements in the Aetna opinion is probably attributable to its heavy reliance on Moore's Federal Practice, which had recently been published in second edition.[111] In the 1948 version of the second edition, Professor Moore described principles for joinder of compensating insurers in his discussion of Rule 17(a).[112] He echoed Clark's preference[113] for the analogy to partial assignment--that in a case of partial subrogation, either subrogor or subrogee may sue, but that upon defendant's objection, joinder of the other should be compelled.[114] The Moore treatise and the Aetna decision both imply that the role of the substantive law ends with the conclusion that the insurer is entitled to reimbursement. Whether the insured or the insurer each may assert and control a claim against the third party, and whether joinder of the other is required or may be dispensed with, are all treated as matters of federal procedure.[115] And even as to matters of federal procedure, both Moore and Aetna reinforce a jurisprudence of labels, oblivious to underlying policies of compulsory joinder.[116] This approach, in turn, was reflected for many years in lower court decisions, even after the 1966 amendment to Rule 19 should have settled that the scope of federal compulsory joinder is much narrower and depends upon careful analysis of the substantive rights of the parties.[117]

One legacy of the Aetna opinion, explored in some detail elsewhere,[118] was a large number of lower court decisions finding that insurers and insureds were both real parties in interest in spite of substantive law to the contrary. The importance of this legacy for present purposes is that an incorrect determination that both insured and insurer are entitled to state a claim for relief against the third party creates an unnecessary joinder issue and, in some cases, an erroneous decision to require joinder.

An illustrative case is Gas Service Co. v. Hunt,[119] decided by the Tenth Circuit one year after the Aetna decision. In Hunt, the circuit court assigned error to the trial court's denial of a defendant's motion to require joinder of subrogated insurers as plaintiffs in an action brought by the insured. The Tenth Circuit reversed and required joinder.[120] The Hunt court first stated that under Kansas law both the insured and the partially compensating insurer were real parties in interest with the substantive right to sue the wrongdoer for their respective shares of the claim.[121] Acknowledging that Kansas permitted the insured to sue alone for the entire claim, the Tenth Circuit concluded that this rule was "procedural rather than substantive," and therefore not applicable in a federal court.[122]

The Hunt court's conclusion that the Kansas rule was merely procedural is not borne out by an examination of the Kansas authorities. The Kansas rule had been announced in City of New York Insurance Co. v. Tice,[123] a case cited but badly misunderstood by the Tenth Circuit in Hunt. In Tice, the Kansas Supreme Court stated that in a case of partial compensation,

[The] action should be brought by the property owner, who will hold as trustee for the insurer in respect to such part of the amount recovered as the insurer has been compelled to pay under the policy. If, in such a situation, the property owner refuses to bring action, justice requires that the insurer be permitted to bring action.[124]

On its face, the Kansas rule limited the right of the insurer to bring an action to enforce its interest. When the insured sued for the entire claim, the insurer was limited to the role of beneficiary; it was entitled to bring an action to enforce its claim against the wrongdoer only if the insured did not.

Moreover, the Tice court's rationale for this rule was that "[t]he wrongdoer should not be compelled to defend two actions for the same wrong."[125] The rule concerned more than "the person in whose name the action may be prosecuted," as the Tenth Circuit characterized it.[126] The rule was a substantive limitation on the insurer's right to sue, designed for the protection of the accused tortfeasor.[127] Nonetheless, the Hunt court decided that the Kansas rule was procedural and that the insurer was a real party in interest.

In contrast to the Hunt case, a number of lower federal court decisions have followed state law in deciding that compensating insurers were not real parties in interest with regard to claims asserted by insureds. For example, denying the defendant's motion to join a workers' compensation insurer as a party plaintiff in Pyle v. Kansas Gas & Electric Co.,[128] the court first stated that the insurer's right to recover from the defendant was controlled by Kansas law.[129] Then, after examining the Kansas workers' compensation statute, the court concluded that because the employee had brought suit, the insurer was only entitled to a lien on the employee's recovery and therefore was not subrogated.[130] Several other post-Aetna decisions involving workers' compensation carriers have carefully examined the underlying substantive law and have concluded correctly that the insurers were not real parties in interest when the applicable statutes gave the insurers only a right to reimbursement and not a fight to sue the third party.[131]

It is really not surprising to find more accurate assessments of insurers' substantive rights in the workers' compensation cases. Federal courts in those cases often have the benefit of statutes that explicitly address the insurer's right to bring an action against the third party. When a statute creates the right of the insurer to compensation, it is not difficult for the court to ascertain that fight and also to appreciate that the state rule is substantive. In cases such as Hunt, on the other hand, the federal court is faced with deciphering state court decisions to determine the right of a compensating insurer to state a claim against a third party. In many instances, it may be considerably more difficult than it was in Hunt to determine the correct answer.[132] Outside of the workers' compensation area, therefore, one more frequently finds federal courts simply concluding that a state rule is procedural, or ignoring state law altogether, and applying the Aetna assumption that insurers are subrogated.[133]

Aetna's other legacy is the use of labels to determine compulsory joinder, in particular the label that partially compensating insurers are necessary parties. For example, in Gas Service Co. v. Hunt,[134] after mischaracterizing Kansas law as procedural and deciding that the insurer was a subrogee and a real party in interest,[135] the court quickly resolved the joinder issue. Relying solely upon the Aetna dicta, and without citing Rule 19, the court stated that when either the insured or the subrogated insurer brings suit, the other should be joined upon timely motion of the alleged wrongdoer.[136] Thus, the Hunt court required joinder of an insurer that did not even have a claim for relief against the third party.

In Wright v. Schebler Co.,[137] on the other hand, the district court had also decided incorrectly that the insurer was subrogated,[138] but it nonetheless declined to order the insurer's joinder. Unlike the Hunt court, the court in Wright distinguished Aetna and relied upon the text of Rule 19.[139] Reading the criterion of subparts (a) and (b) of Rule 19 to be cumulative, the Wright court first found that the insurer had a "joint interest" with the plaintiff, as specified in subpart (a).[140] In light of the insurer's limited interest under the Illinois workers' compensation act, that conclusion was debatable. The court found, however, that the criterion of subpart (b) was not met.[141] Subpart (b) provided that joinder was necessary "if complete relief is to be accorded between those already parties."[142] The court found that complete relief could be granted between those already parties, the insured and the tortfeasor, without joinder of the insurer.[143]

Apparently attempting to cover all bases, the Wright court further stated that an "underlying objective" of Rule 19 is to "avoid multiple suits, and generally promote the economy and efficiency of judicial action."[144] In the situation before it, the court explained, there was no possibility of multiple suits because "there can be but one recovery under Illinois law."[145] Although the court cited no authority for this statement about Illinois law, it was undoubtedly correct. Under the express language of the act, the insurer had no right to sue once the insured had sued.[146]

In Wright, the court escaped an erroneous decision requiring joinder as a plaintiff of an insurer that was not subrogated. The court, moreover, eschewed the jurisprudence of labels and attempted to apply the text of Rule 19. Its statement, however, of a broad purpose in Rule 19 to avoid multiple litigation typifies an unfortunate judicial tendency that has continued even after the 1966 revision of Rule 19. Had the Aetna court provided more accurate guidance in the application of Rule 19, perhaps this trend would not have begun and future courts would have had a clearer idea of federal compulsory joinder doctrine.

In 1966, Rule 19 was completely rewritten and the labels discarded. The Advisory Committee's aim was to replace "abstract classifications" with "pragmatic considerations" as the correct basis of decision with regard to compulsory joinder.[147] The new rule entirely eliminated the terms "necessary" and "joint" and "united" interests; "indispensable" was retained, but not as a classification. "Indispensable" was instead used as a conclusion to describe the consequence of analysis.[148] The rule spelled out the factors to be considered both in requiring joinder and in deciding whether to proceed in the absence of a party who should be joined. The rule adopted in 1966 provided:[149]

JOINDER OF PERSONS NEEDED FOR JUST ADJUDICATION.

(a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in his [the person's] absence complete relief cannot be accorded among those already parties, or (2) he [the person] claims an interest relating to the subject of the action and is so situated that the disposition of the action in his [the person's] absence may (i) as a practical matter impair or impede his [the person's] ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his [the] claimed interest. If he [the person] has not been so joined, the court shall order that he [the person] be made a party. If he [the person] should join as a plaintiff but refuses to do so, he [the person] may be made a defendant, or, in a proper case, an involuntary plaintiff. If the joined party objects to venue and his joinder [of that party] would render the venue of the action improper, he [that party] shall be dismissed from the action.

(b) Determination by Court Whenever Joinder Not Feasible. If a person as described in subdivision (a)(1)-(2) hereof cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person's absence might be prejudicial to him [the person] or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.

In Provident Tradesmens Bank & Trust Co. v. Patterson,[150] the United States Supreme Court addressed the significance of the 1966 amendment. The court of appeals reversed plaintiffs' verdicts in a declaratory judgment action brought to determine whether the driver of a vehicle involved in a fatal accident had been using the car with the permission of the owner, Dutcher, who was not a defendant in the suit.[151] The defendants were Dutcher's liability insurer and the estate of the driver, against which one of the plaintiffs had an unsatisfied consent judgment. The court of appeals reversed on the grounds that Dutcher was an indispensable party.[152] Reversing, the Supreme Court criticized the court of appeals for its failure to base its decision on the new rule's "stated pragmatic considerations."[153] The Court admonished that the inflexible approach adopted by the court of appeals "exemplifies the kind of reasoning that the Rule was designed to avoid."[154] Focusing primarily upon the "equity and good conscience" test of Rule 19(b), the Court concluded that the trial court's judgment should have been permitted to stand in spite of Dutcher's absence.[155]

The 1966 amendment of Rule 19 has not significantly improved the quality of federal decisions with regard to joinder of compensating insurers. As the Supreme Court discovered in the Provident Tradesmens case, improving the text of Rule 19 does not automatically improve judicial understanding of compulsory joinder doctrine. The Aetna legacies have continued to influence analysis, or a lack thereof, in federal decisions concerning compensating insurers. The first Aetna legacy-assuming without sufficient attention to the substantive law that both insured and insurer are real parties in interest entitled to sue--has not been avoided by Rule 19's clearer articulation of compulsory joinder doctrine. As the decisions discussed below illustrate, federal courts have continued to give insufficient attention to the substantive rights of insured and insurer under the applicable law of subrogation.

The second Aetna legacy--failing to understand and to apply compulsory joinder doctrine properly--has also continued unabated, although it has taken various forms. First, some federal courts, despite the admonitions of Provident Tradesmens,[156] have ignored the criteria of Rule 19 altogether and have relied upon Aetna dicta[157] and other outdated precedent. Second, many courts, applying either the "complete relief" language of Rule 19(a)(1) or the "multiple or otherwise inconsistent obligations" language of Rule 19(a)(2)(ii), have read Rule 19 incorrectly as a broad prohibition against multiple lawsuits from one transaction.[158]

Illustrative of unquestioning reliance on pre-1966 precedent in requiring joinder of a compensating insurer is the Tenth Circuit opinion in Public Service Co. v. Black & Veatch.[159] In Public Service Co., the court declined to overrule its 1950 holding in Gas Service Co. v. Hunt[160] that a compensating insurer should be joined as a party plaintiff upon motion of a defendant tortfeasor.[161] In calling for the overruling of Hunt, both the plaintiff[162] and the district court[163] focused their concern on jury prejudice, a concern that failed to move the Tenth Circuit.[164] The district court reasoned also that Hunt should not be followed when "the insured brings the action for the entire loss and a rule prohibits another suit by anyone having an interest in the Plaintiff's cause of action."[165] Unfortunately, the lower court failed to explain fully the significance of the Oklahoma rule: because the insurer had no fight to enforce its claim, there was no reason for requiting its joinder.[166]

The Tenth Circuit in Public Service Co. merely reaffirmed the rule in Aetna and Hunt that "where the owner has been reimbursed for only a part of his loss, both the insured and the insurer own portions of the substantive right against the wrongdoer and should appear in litigation in their own names."[167] The court again failed to recognize the need to refer first to the substantive law to determine the rights of insured and insurer before proceeding to the joinder issue. Furthermore, it appears that neither the plaintiff nor either of the courts in Public Service Co. took note of the 1966 amendment of Rule 19. Had they done so, they might have seen the necessity for re-evaluating both Hunt and Aetna, and the new rule may have helped to focus the inquiry on the rights of the parties.[168] Instead, the Tenth Circuit merely reiterated that Hunt was consistent with Aetna and other authorities,[169] most of which predated the 1966 amendment.[170]

One year later, another circuit court of appeals took up the issue, this time taking note of the 1966 amendment. The result, however, fell far short of the careful analysis that the Supreme Court called for in Provident Tradesmens.[171] In Virginia Electric & Power Co. v. Westinghouse Electric Corp.,[172] the Fourth Circuit granted an interlocutory appeal from the denial of a motion to dismiss on the grounds that the plaintiff's insurer was a real party in interest and an indispensable party.[173] The insurer in Virginia Electric, unlike the plaintiff insured, shared the citizenship of the defendant, and thus its joinder would have defeated federal diversity jurisdiction.[174] In Virginia Electric, Circuit Judge Craven first determined that under Rule 17(a) and applicable Virginia law, both the insured and the partially subrogated insurer were real parties in interest.[175] In this case, however, the conclusion that the insured was a real party in interest entitled to sue was in conflict with a cooperation agreement between the insured and the insurer in which the insured agreed "that the conduct of the continuing action to recover . . . for such claims shall be under the exclusive direction and control of the Insurer," and a subrogation instrument providing that the insured "subrogates the Insurer to all of its remaining rights of recovery."[176] Pursuant to this agreement, the insured apparently had conveyed to the insurer all rights to enforce the claim against the defendant.[177] The insured, therefore, had no claim to enforce against the defendant.

Because the insured in Virginia Electric was not, therefore, a proper plaintiff, the suit simply should have been dismissed for lack of diversity jurisdiction, or on proper motion, via summary judgment. Believing that both insured and insurer were proper plaintiffs, however, Judge Craven then turned to Rule 19. His entire analysis under subdivision (a) consisted of only a citation to Aetna and the conclusion that "[i]t is clear that a partial subrogee is a person to be joined if feasible under Fed. R.Civ.P. 19(a)."[178] Thus, once again, the pre-amendment dicta of Aetna, and not the specific criteria of Rule 19(a), prevailed.[179]

It may be that Judge Craven devoted so little attention to applying Rule 19(a) because he had determined that in any case this was a suit that, under Rule 19(b), should be permitted to proceed in spite of the insurer's absence as a party.[180] In other words, Judge Craven may have reasoned in a somewhat backwards fashion: The insurer cannot be joined because its presence would defeat jurisdiction. The ultimate question, therefore, is whether the suit may proceed without the insurer. Applying the criteria specified in Rule 19(b), the suit may so proceed. Thus, it matters little whether joinder of the insurer would be required if it were feasible.

Deciding that the insurer was not indispensable under Rule 19(b) led to the same result in Virginia Electric as the court would have reached had it determined that joinder of the insurer was not required by Rule 19(a). The insured was permitted to sue alone for the entire loss. It is unfortunate, however, for a court, especially a court of appeals, to treat the subdivision (a) analysis as merely academic. This methodology creates a body of precedent that, when applied in a case in which joinder is feasible, supports much broader joinder than may be warranted by a careful application of subdivision (a). In Virginia Electric, the court's simple reliance on Aetna and its apparently backwards application of Rule 19 created an influential precedent that leads to misapplication of Rule 19.[181]

Several federal courts have adopted the approach, in cases in which joinder of the absentee is not feasible, of analyzing whether to proceed or dismiss under subdivision (b) without analyzing whether joinder would be required under subdivision (a).[182] Other federal courts have criticized this approach.[183] Under some circumstances it may be justifiable for a trial court, presented with a motion to dismiss because joinder of an absentee is not feasible, to engage in only the subdivision (b) inquiry. If the court decides to proceed without the absentee as a result of a subdivision (b) analysis, there is no harm done by the court's making the assumption that the absentee is "a person as described in subdivision (a).'"[184] If the court is clear that it is operating only upon an assumption, and not a finding, with regard to subdivision (a), the approach will have saved the court unnecessary effort and will not create careless precedent. When the trial court's conclusion, however, is that under subdivision (b) it should not proceed without the absentee, the subdivision (a) application is unavoidable because a suit should be dismissed only if the absentee is "a person as described in subdivision (a)."[185]

The reasons given by Judge Craven for concluding that the insurer was not indispensable under subdivision (b) highlight the inadequacy of his conclusion that the insurer was a person whose joinder was required under subdivision (a). Judge Craven explained that the insurer was not indispensable because a judgment in the insurer's absence would be "fully adequate to protect both INA [the insurer] and the parties and the public interest in the termination of disputes."[186] Specifically, because of INA's control of the litigation, it would have been bound by any judgment in favor of the defendants.[187] An examination, however, of the subdivision (a) criteria for determining if a person must be joined if feasible reveals that the very reasons Judge Craven cited for finding the insurer not indispensable under subdivision (b) indicate that INA's joinder would not be required under subdivision (a). If INA controlled the litigation and would be bound by a judgment, the factors listed in subdivision (a) did not require joinder. Complete relief could be afforded; INA's interests were protected; and there was no risk of multiple or inconsistent obligations. INA was not, therefore, a "person to be joined if feasible" within the meaning of Rule 19(a).

Had Judge Craven more carefully considered subdivision (a) of Rule 19, rather than relying exclusively upon the Aetna dicta,[188] he may well have reached the same result without ever having had to consider the problem of indispensability under subdivision (b). Of course, had Judge Craven first reached the conclusion, as he should have, that under the circumstances of this case the insured had no claim and only the insurer was entitled to sue, he would have reached an entirely different result, dismissing the case for lack of diversity of citizenship between the insurer and the defendant.[189] As it was, however, Virginia Electric authorized a fiction in the naming of the plaintiff that not only permitted the exercise of federal jurisdiction where none in fact existed,[190] but that also permitted the insurer to escape the responsibilities it should have borne as the party in control of the litigation.[191] Virginia Electric, therefore, in effect, allowed a type of "use plaintiff."[192]

Other courts have concluded that compensating insurers whose joinder is feasible must be joined under Rule 19(a), but, in contrast to the reliance on outdated precedent found in Public Service Co. and Virginia Electric, have done so by applying the post-1966 language of the rule. These courts have generally found that Rule 19 is designed to prevent multiple litigation and that such a danger exists if an insured is permitted to sue alone to recover a claim that is partially subrogated.

In Potomac Electric Power Co. v. Babcock & Wilcox Co.[193] defendants moved to dismiss the suit on the grounds that the plaintiff's insurers were real parties in interest under Rule 17(a) and indispensable parties under Rule 19(b).[194] The court first determined that the insurers were real parties in interest.[195] One of the insurers, Royal Indemnity Company, had paid part of the insured's loss under a loan receipt agreement.[196] The agreement provided that Royal would have "exclusive direction and control" of any suit to recover for the loss. In addition, officers of Royal were appointed as agents and attorneys in fact "with irrevocable power" to collect any claim resulting from the loss.[197] The court found that the arrangement was not a bona fide loan and did not avoid the conclusion that the insurer was subrogated and was, therefore, a real party in interest in the suit.[198]

In light of the insurer's exclusive control of the claim, the court might have concluded that Royal alone was the real party in interest, thus obviating any issue of Rule 19 in the case. The suit could have been dismissed on the ground that the plaintiff insured had no claim to enforce and that substitution of the insurer, Royal, would defeat subject matter jurisdiction because of loss of diverse citizenship. Moreover, the court noted in passing that a Maryland rule of procedure required that the insurers be named as parties plaintiff.[199] Had the court examined the Maryland rule and found it to reflect a substantive state policy, the court might have found it controlling.[200] Under either rationale, there was sufficient basis in the substantive law for the court's ultimate decision to dismiss the case for lack of diversity, without applying Rule 19. Not appreciating these potential solutions to its case, however, the Potomac Electric court turned to compulsory joinder under Federal Rule 19.

The court first noted the plaintiff's heavy reliance on the Aetna dicta that neither the insured nor the insurer would be indispensable.[201] The court rejected that authority both because the statement was dicta and because "that case was decided in 1949, long before Rule 19 was amended and put in its present form emphasizing that pragmatic considerations should be controlling."[202] The court then applied amended Rule 19 by finding initially that the insurer was a party whose joinder was required if feasible under subdivision (a)(1). Reasoning that the insurer might be entitled to bring a subsequent action against the defendant if the insurer were dissatisfied with the outcome of the suit brought by its insured, the court found that complete relief would not be "accorded the other parties" in the insurer's absence.[203] The court quoted the Advisory Committee Note to Rule 19, which stated that "the interests that are being furthered [by subdivision (a)(1)] are not only those of the parties, but also that of the public in avoiding repeated lawsuits on the same essential subject matter."[204] Next applying subdivision (b), the court decided that the insurers were indispensable, and, therefore, it dismissed the suit.[205]

The Potomac Electric court's interpretation of Rule 19(a)(1) is one that has been rejected by most authorities, including a number of well-reasoned federal court opinions. In finding that Rule 19(a)(1) identified the insurer as a person to be joined if feasible, the court ignored the plain and specific language of Rule 19(a)(1), which is that absence of the non-party will prevent "complete relief among those already parties." The Potomac Electric court's concern about a subsequent lawsuit prosecuted by the no