United States Court of Appeals, Third Circuit

942 F.
2d 862
EMPLOYERS INSURANCE OF WAUSAU, a Mutual

Company
v.
CROWN CORK & SEAL COMPANY, INC.; Aetna Casualty
& Surety
Company; Continental Insurance Company; Insurance
Company
of North America; Lumbermens Mutual Casualty Company;
Firemen's Fund Insurance Company; Allianz Underwriters,
Inc.
Lumbermens Mutual Casualty Company, Appellant.
No. 91-1060.
United States Court of Appeals,

Third Circuit.
Argued June 6, 1991.
Decided Aug. 30, 1991.
Mark M. Wilcox (argued) and Theresa W. Hajost, Drinker Biddle &

Reath, Philadelphia, Pa., for appellant Lumbermens Mut. Cas. Co.
Gregory J. Castano (argued), Kenneth D. McPherson, Jr., Robert J.
Donaher, Waters, McPherson, McNeill, Secaucus, N.J., and Michael J.
Stack, Stack & Gallagher, Philadelphia, Pa., for appellee Crown Cork &
Seal Co., Inc.
Before SLOVITER, Chief Judge, and GREENBERG and
HIGGINBOTHAM, Circuit Judges.
OPINION OF THE COURT
SLOVITER, Chief Judge.
Appellant Lumbermens Mutual Casualty Co., which, along with several other
insurance companies and Crown Cork & Seal Co., their insured, was named as
a defendant in the district court, appeals from the order dismissing the
plaintiff's complaint for lack of subject matter jurisdiction. The district court
determined that the parties were improperly aligned, and that once they were
properly aligned, with all the insurers on one side and their insured Crown on
the other, there would no longer be complete diversity between the plaintiffs
and the defendant.
I.
Background Facts and Procedural History
2
Crown Cork & Seal Co. has been named as a defendant or potentially
responsible party in claims arising out of alleged environmental hazards at
more than twenty waste disposal sites throughout the country. In February
1988, Crown filed a complaint in New Jersey Superior Court, Law Division,
seeking a declaration of the obligations of its insurers to defend and indemnify
it in the underlying environmental litigation. It named as defendants seven
insurance companies who had issued comprehensive general liability or excess
umbrella policies to Crown over the past three decades. Named as defendants
were Lumbermens, Employers Insurance of Wausau (Wausau), Aetna Casualty
& Surety Company, Insurance Company of North America (INA), Continental
Insurance Company, Firemen's Fund Insurance Company, and Allianz
Underwriters, Inc.
Ten months after the New Jersey state court action was filed (though before
Crown had effected service on the defendants in that action), Wausau initiated
this suit in the United States District Court for the Eastern District of
Pennsylvania against Crown and the other six insurers who are Wausau's codefendants in Crown's state court action. Wausau sought a declaration pursuant
to the Federal Declaratory Judgment Act, 28 U.S.C. 2201, of the scope and
nature of its obligations and those of the other six insurers under their various
policies providing coverage to Crown. Wausau alleged that the district court
had subject matter jurisdiction under 28 U.S.C. 1332 by virtue of the diversity
of citizenship between Wausau and all the defendants.
Crown moved to realign the parties and dismiss for lack of jurisdiction. It
asserted that all the insurers should be aligned with Wausau as plaintiffs,
because they all had the common interest of seeking to avoid liability to
Crown. Such a realignment would destroy diversity because Crown and one of
the insurers, INA, are both citizens of Pennsylvania. In the alternative, Crown
sought a stay of the federal proceeding pending the outcome of the state action.
Without deciding the jurisdictional issue, the district court granted Crown's
motion for a stay, relying in the alternative on the Declaratory Judgment Act or
the abstention principles enunciated in Colorado River Water Conservation
Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).
5
On appeal, we vacated the district court's order because the court's grant of a
stay presupposed that it had subject matter jurisdiction. We remanded the case
for further consideration of Crown's challenge to the parties' diversity and
motion for realignment of the parties. Employers Ins. of Wausau v. Crown
Cork & Seal Co., 905 F.2d 42 (3d Cir.1990) (Crown I ). Specifically, we
instructed the district court to determine the primary issue or controversy in the
action and whether the parties need to be realigned in light of that principal
purpose of the litigation.
On remand, the district court found that "[t]he primary issue ... is whether any
insurer is obligated according to the terms of its own policy to defend or
indemnify Crown against the pending environmental clean-up claims."
Employers Ins. of Wausau v. Crown Cork & Seal Co., 753 F.Supp. 160, 164
(E.D.Pa.1990) (Crown II ). Because the primary dispute was between the
insurers and their insured, the district court held that the parties had to be
realigned, with all of the other insurers joining Wausau as plaintiffs, leaving
Crown as the only defendant. The realignment destroyed diversity, and the
court dismissed the action. Id. at 164-65.
Only one insurer, Lumbermens, challenges the district court's order in this
court; the others have not joined the appeal. We exercise plenary scope of
review because the issue is one of law.
II.
Discussion
A.
8
The leading case on the realignment of parties according to their real interests
in a controversy is City of Indianapolis v. Chase Nat'l Bank, 314 U.S. 63, 62
S.Ct. 15, 86 L.Ed. 47 (1941). In that decision, the Court iterated the
fundamental principle that "[d]iversity jurisdiction cannot be conferred upon
the federal courts by the parties' own determination of who are plaintiffs and
who defendants." Id. at 69, 62 S.Ct. at 17. "It is our duty ... to 'look beyond the
pleadings and arrange the parties according to their sides in the dispute'....
Whether the necessary 'collision of interests ... exists ... must be ascertained
from the 'principal purpose of the suit' ... and the 'primary and controlling
matter in dispute'...." Id.
9
In that case, the Court identified as the "primary and controlling matter in
dispute" whether the city was bound by a lease between Indianapolis Gas
Company and Citizen Gas Company after the latter conveyed its property and
the lease to the city. Id. at 70-72, 62 S.Ct. at 17-18. Finding that the two gas
companies had always been united in their position that the city was obligated
by the lease, the Court concluded that the companies had to be realigned on the
same side of the controversy. That realignment destroyed diversity. Id. at 7475, 62 S.Ct. at 19-20; see also Smith v. Sperling, 354 U.S. 91, 96-97, 77 S.Ct.
1112, 1115, 1 L.Ed.2d 1205 (1957) (applying analysis of City of Indianapolis
but holding realignment not necessary in that case); 3A Moore's Federal
Practice p 19.03 (1991).
10
From the City of Indianapolis decision courts have evolved two similar but
distinct inquiries to determine whether parties must be realigned. As noted in
our opinion in Crown I, this court, as well as the Court of Appeals for the Ninth
Circuit, has adhered to the "principal purpose" or "primary issue" test, under
which a court must first identify the primary issue in controversy and then
determine whether there is a real dispute by opposing parties over that issue.
Our opinion in Crown I was consistent with the analysis employed by this court
since our decision in Ackerman v. Hook, 183 F.2d 11, 14-15 (3d Cir.1950). See
also Continental Airlines, Inc. v. Goodyear Tire & Rubber Co., 819 F.2d 1519,
1523 n. 2 (9th Cir.1987) (adopting principal purpose test); Zurn Industries, Inc.
v. Acton Constr. Co., 847 F.2d 234, 237 (5th Cir.1988) ("The determination of
the 'primary and controlling matter in dispute' ... is to be determined by
plaintiff's principal purpose for filing its suit.... If the parties are not realigned
on that claim, and there is no showing that the claim was a sham simply
asserted for federal jurisdiction, subject matter jurisdiction exists.").
11
The other approach, employed by the Seventh Circuit as well as some district
courts in this circuit prior to our first opinion in this action, focuses on the
language in City of Indianapolis that a "substantial controversy" must exist
between citizens of different states. See 314 U.S. at 69, 62 S.Ct. at 17. Under
this inquiry, a court determines merely whether there is any substantial conflict
between opposing parties, regardless of whether it is on a primary or nonprimary issue and regardless of whether the parties have common positions on
equally important issues. See Fidelity & Deposit Co. v. Sheboygan Falls, 713
F.2d 1261, 1267-68 (7th Cir.1983); see also Universal Underwriters Ins. Co. v.
Wagner, 367 F.2d 866, 870-71 (8th Cir.1966) (mentioning the "principal
purpose" inquiry but apparently requiring only a "substantial controversy" on
any issue between parties).

12
Lumbermens relies primarily on American Motorists Ins. Co. v. Trane Co., 657
F.2d 146 (7th Cir.1981), a case with facts similar to this. There, Trane incurred
some liability and was insured by four insurers. One of them, American
Motorists, brought a declaratory judgment action naming Trane and the three
other insurers as defendants and seeking a declaration of the four insurers'
obligations. The Court of Appeals reversed the district court's realignment and
dismissal of the insurers, stating that even though the insurers have a common
interest in avoiding liability, the insurers can stay on opposing sides of the
litigation because they have a "substantial conflict ... on the duty to defend"
since any would benefit from a holding that another had a duty to defend. Id. at
150.
13
Lumbermens' reliance on Trane is unavailing. Our precedent acknowledges the

Seventh Circuit's use of the "substantial conflict" test to determine whether
parties must be realigned, but we opted to follow what we considered to be
dispositive Supreme Court analysis. Crown I, 905 F.2d at 46 (declining to
follow Sheboygan Falls, decided two years after Trane ). Inasmuch as we have
already held that the "principal purpose" test is the analysis to be employed in
this circuit, neither Trane nor the district court decisions in this circuit that
predated our first opinion in this case, see U.S. Fidelity & Guar. Co. v. Korman
Corp., 693 F.Supp. 253 (E.D.Pa.1988); Liberty Mutual Ins. v. Insurance Corp.
of Ireland, 693 F.Supp. 340 (W.D.Pa.1988), can be considered persuasive
authority.
B.
14
Lumbermens' argument on appeal is essentially one for an exception to the

"principal purpose" or "primary issue" test that this court adopted in Crown I,
905 F.2d at 46. Lumbermens argues that the principal purpose test is not
appropriate for all cases--especially not multiple-issue litigation with several
parties--because there may be several equally important issues rather than one
dominant one. Lumbermens suggests that some cases, including this one, are a
complex mix of interdependent, equally important issues, so that no one point
of dispute can be identified as "primary" or "principal." Lumbermens urges that
in such cases, courts should simply ascertain whether there is an actual
"substantial controversy" on one of the primary issues. With that approach,
courts would not have to insist, as the district court did in this case, that "[t]here
can be only one 'dominating controversy,' ... only one 'primary issue that
divides the parties,' ... no matter how entwined with subsidiary matters it may
be." Crown II, 753 F.Supp. at 164.
15
We need not decide whether there may be some multi-party, multi-issue

litigation that will fit so poorly into the paradigm of a dispute centered on a
single, dominating issue, as covered by the language of City of Indianapolis,
that another test would be more appropriate. This is not such a case.
16
It is, of course, true that because each insurer issued a separate policy to Crown,
the interpretation of several insurance contracts is at issue. Furthermore, some
insurers are concerned not only with the interpretation of the policies they
issued, but policies issued by other insurers as well, because coverage under
some policies is primary, excess or both. In the determination of insurer
liability under those policies, the insurers disagree on several issues of contract
interpretation, particularly: (1) whether coverage is "triggered" at the time of
actual injury or at the time the harm is discovered; (2) whether a covered
"occurrence" took place under any of the policies during the policy period; (3)
interpretation of "other insurance" clauses, which define the coverage available
under each policy based on the availability of other insurance, and other factors
that determine the "apportionment of responsibility" among the insurers for
indemnifying Crown. Nonetheless, this case can be fairly analyzed under the
"principal purpose" test.
17
The district court described the principal issue in this case as simply whether
the insurers have obligations to defend and indemnify Crown. Crown II, 753
F.Supp. at 164. Despite the different theories advanced by the insurers, they are
joined in their common goal of avoiding obligations to Crown. Although one
insurer may seek to escape on a trigger-of-coverage ruling, another may seek to
show that a third insurer provided primary coverage, and so on, they are united
in their position that Crown, the insured, should not be able to recover on its
insurance policies for its obligation with respect to the environmental cleanups.
Their common adversity to Crown is evident. There is no insurer who is not
antagonistic to Crown. Crown patently would have been able to maintain this
action against all the insurers without being subject to realignment had there
been complete diversity.
18
It is clear that Wausau initiated this action for the purpose of determining its
duty to defend and indemnify Crown. The district court looked to the language
of Wausau's complaint for its description of the action. The pleadings are
always a key source to which courts look when identifying the primary issue
for jurisdictional purposes. See Sperling, 354 U.S. at 96-97, 77 S.Ct. at 1115-16
("[T]he proper course is ... to determine the issue of antagonism on the face of
the pleadings and by the nature of the controversy.... This is a practical ...
determination and is resolved by the pleadings and the nature of the dispute.");
Continental Airlines, 819 F.2d at 1523 n. 2; Zurn Industries, 847 F.2d at 237.
19
Wausau's complaint states that "the plaintiff [Wausau] ... seeks this Court's
determination concerning the scope and nature of its obligations and those of
the [six] defendants [who are insurance companies] ... as issuers of certain ...
insurance policies providing coverage to the defendant Crown Cork." App. 7-8.
The answers of the insurers, including appellant Lumbermens, generally center
on their attempts to escape liability to their insured, Crown, not their disputes
between each other. Lumbermens' answer asserts that "Lumbermens does not
have any obligation under its policy to defend or indemnify Crown." App. 33.
Although some insurers also assert a counterclaim and/or cross-claims for
contribution from other insurers, generally the courts do not look to crossclaims and counterclaims to determine the primary issue of a dispute. See Zurn
Industries, 847 F.2d at 237.
20
Significantly, although Lumbermens points out why the insurers would

disagree among themselves on important theories of liability, it has never
explained persuasively why only Wausau should be aligned on one side of this
litigation while all other insurers, along with their insured, are aligned in
opposition. Lumbermens has never claimed that the disagreements among the
insurers are ones in which Wausau disagrees with all other insurers. Moreover,
the disagreements among the insurers who are presently grouped together as
defendants are not so great that their common alignment as defendants in this
litigation is inappropriate. Indeed, the failure of six of the seven involved
insurers to appeal cannot be overlooked because that failure is a strong
indication that their interests in the litigation do not diverge from those of
Lumbermens.
21
In commenting on the rule of complete diversity, the Supreme Court stated in

City of Indianapolis, "[t]hese requirements, however technical seeming, must
be viewed in the perspective of the constitutional limitations upon the judicial
power of the federal courts, and of the Judiciary Acts in defining the authority
of the federal courts when they sit, in effect, as state courts." 314 U.S. at 76, 62
S.Ct. at 20. The Supreme Court has long interpreted statutes conferring
diversity jurisdiction with "jealous restriction" and "strict construction," so as
not to infringe on "state sensitivities" regarding the judicial power reserved to
the states on matters of state law, and to "reliev[e] the federal courts of the
overwhelming burden of 'business that intrinsically belongs to the state courts,'
in order to keep them free for their distinctive federal business." Id.
22
We believe that our application of the "principal issue" analysis, rather than one
that looks only for a "substantial controversy," most closely follows the
mandate of the federal courts in diversity litigation to " 'scrupulously confine
their own jurisdiction to the precise limits which the statute has defined.' " Id. at
77, 62 S.Ct. at 20.

III.
23
For the reasons set forth above, we will affirm the judgment of the district court
dismissing this case for lack of subject matter jurisdiction.

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942 F.

EMPLOYERS INSURANCE OF WAUSAU, a Mutual

United States Court of Appeals,

Mark M. Wilcox (argued) and Theresa W. Hajost, Drinker Biddle &

any issue between parties).

Lumbermens' reliance on Trane is unavailing. Our precedent acknowledges the

Lumbermens' argument on appeal is essentially one for an exception to the

We need not decide whether there may be some multi-party, multi-issue

Significantly, although Lumbermens points out why the insurers would

In commenting on the rule of complete diversity, the Supreme Court stated in

77, 62 S.Ct. at 20.

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