Insurance Firm Flip-Flopped in Claims Cases : Legal system: USAA has history of arguing on both sides of the fence about courts’ jurisdiction regarding non-payment claims. Sanctions of $1.7 million sought.

United Services Automobile Assn., one of the nation’s largest insurance companies, has for years argued on both sides of the fence about whether suits against it for non-payment of claims should be argued in state or federal court.

In more than 170 instances throughout the United States, the Texas-based company has argued to both federal and state judges that it was being sued in the wrong court, failing to reveal that it had argued the other way in other cases, frequently simultaneously.

Now, in a case involving a federal judge in Los Angeles whose home was severely damaged in a fire, this chameleon-like behavior is being challenged as fraudulent ducking of legitimate claims.

U.S. District Court Judge Laughlin E. Waters is asking that USAA pay him and his wife sanctions of $1.7 million for engaging “in a massive, widespread and fraudulent scheme to mislead the federal courts and to manipulate federal court jurisdiction to suit its own purposes.”

Court records show that during the past two decades, USAA, attempting to avoid paying claims, has repeatedly given different descriptions of what kind of company it is. These contentions were a critical element as lawyers for the company argued that cases should be heard in federal or state court depending on what appeared to serve its best interests.

The sanctions issue, scheduled for a hearing today, stems from a suit filed in federal court here last July by Waters, a federal judge since 1976, and his wife, Voula. The Waters allege that USAA acted in bad faith, stonewalling them when they filed an insurance claim after their Hancock Park home burned last December.

Their suit states that there is federal jurisdiction because they are California residents and USAA is a Texas corporation. USAA has moved to have the suit dismissed. The company claims that it is an unincorporated association with 280,000 members in California--its policyholders--and therefore the case does not belong in federal court.

But the Waters, represented by Claremont attorney William M. Shernoff, responded by citing 172 instances where USAA has taken contradictory positions on its corporate status.

“USAA’s pattern of deliberate abuse of the federal courts is probably the most widespread, nefarious scheme perpetrated on the federal courts in the history of the federal judiciary,” Shernoff asserted in a brief. “USAA argues it is a corporation or corporate-like entity when it suits USAA to be in federal court, and argues it is an unincorporated association when it suits USAA to get out of federal court.”

The company, in court documents, acknowledged that its attorneys have made conflicting statements.

But Timothy B. Dyk, a Washington lawyer, denied that USAA had acted in bad faith, saying the company had thousands of cases in litigation and that it was difficult to keep track of what contentions were being made in each of them.

A brief filed for USAA by Century City lawyer Paul R. Fine contends that the company has done nothing wrong in the Waters case and that the court has no power to sanction USAA for anything that happened in a prior case.

However, several lawyers and law professors said they were deeply troubled by what USAA has done in these cases.

“You can’t claim you’re a fish in one court and a fowl in the other,” said attorney Edward F. Silva, who had a suit against USAA in Philadelphia. “It’s not honest to do that.”

“This company is the ‘Zelig’ of federal jurisdiction,” said New York University law professor Stephen Gillers, referring to the Woody Allen movie about a man who constantly changes his persona to suit his purposes.

Gillers, who specializes in legal ethics, reviewed the documents in the Waters case and said they show that the federal court system can be duped. “The company has manipulated its status so that no rule applies to it,” he said.

Court records show that USAA’s general counsel filed an affidavit in a Georgia federal court in 1984 supporting the company’s bid to move a case from state court to federal court on jurisdictional grounds. But he filed another affidavit in a Washington case in 1987 supporting USAA’s contention that there was no jurisdiction to sue it in federal court.

University of San Francisco law professor Jeffrey S. Brand, who specializes in federal litigation and reviewed the case documents, concurred with Giller.

He said this is the sort of situation that has prompted calls for reform of the nation’s civil justice system.

“Conduct like this should be of great concern to everyone because it makes it impossible” for the legal system to function properly, Brand said.

Brand and Gillers said they were not sure if the Waters are entitled to sanctions, but said some action was warranted based on USAA’s pattern of conduct. Both said some individuals and companies who had opposed USAA in earlier cases might be entitled to have those cases reopened.

The issue is under consideration by U.S. District Judge Wm. Fremming Nielsen of Spokane, Wash. He was brought in to hear the suit when all the federal judges in Los Angeles had to disqualify themselves because of their relationship to Waters.

Founded in 1922, USAA is the nation’s eighth-largest insurance company, with $5.6 billion in assets, an operating surplus of $2.7 billion and profits of $65 million last year, according to Best’s Insurance Guide. The company insures only current and former members of the armed services and their families.

Last June, California Insurance Commissioner John Garamendi praised USAA for having the best record of consumer service on auto claims. He also said the agency did not find a single justified complaint against the company by a homeowner.

But Waters, 77, and his wife say they have had a very disturbing experience with USAA.

Last December, the couple’s large, elaborately decorated residence on June Street suffered severe fire damage. A company chosen by the Waters made an estimate for repair work of $442,663, court documents say.

During the next several months, repair companies chosen by USAA submitted considerably lower estimates, starting at $116,587 and eventually offering $319,019. This was “certainly not sufficient” to restore the Waters’ home, attorney Shernoff alleged in the suit.

When the two sides could not agree, Waters said he and his wife decided to sue.

Shernoff said the Waters’ lives have been thrown into turmoil by USAA’s intransigence, forcing them to rent a house for many months and leading to multiple hospitalizations of Mrs. Waters “for anxiety, stress and high blood pressure.”

The issue of jurisdiction in USAA claims first arose in 1974. While defending a lawsuit in New York, USAA contended that it was not a corporation, but an “inter-insurance exchange,” all of whose policyholders are members of the exchange. A federal appeals court ruled in USAA’s favor, saying it could not be sued in a New York federal court, or a federal court in any other state where it has members. USAA is licensed to sell insurance in every state.

However, in the years since then USAA has continually flip-flopped on whether it should be in federal court, sometimes changing its mind in the same case.

For example, in 1984 it took sharply diverging positions in federal courts in Massachusetts and Georgia.

Gary Neil filed suit in federal court in Boston after USAA failed to pay a claim on his auto insurance. USAA waited several months, then challenged jurisdiction. Although U.S. District Judge A. David Mazzone agreed with USAA and dismissed the suit citing the 1974 Baer case, he chastised the company for its conduct.

“I must comment that it would behoove the defendant to act promptly and consistently in challenging diversity jurisdiction over it in federal court actions,” Judge Mazzone said in his February, 1984 decision. “In the past, the defendant has both sued and allowed itself to be sued in federal court where jurisdiction was founded on diversity of citizenship, without challenging jurisdiction as it does in this case.”

“Selective challenges to jurisdiction bespeak a self-serving abuse of the federal court processes,” Mazzone said.

Neil’s lawyer, George F. Gormley, refiled the suit in state court and seven years later collected a $32,000 judgment against two other two defendants. A jury found USAA not liable. Gormley said he believed that USAA wanted the case out of federal court because Mazzone had made preliminary rulings favorable to Neil.

Just months after Mazzone’s 1984 decision, USAA reversed direction in Georgia. Henry A. Pridgen had filed suit in Crisp County Superior Court alleging that the company had failed to pay him $47,500 in personal injury protection benefits. This time, USAA successfully got the case switched to federal court, arguing that Pridgen was a Georgian and USAA was “a citizen of Texas.”

USAA lawyers contended that the 1974 Baer decision was outmoded.

“While it (USAA) may have been a smaller operation then, which more closely resembled a voluntary association, today it is clearly a huge corporate organization,” said company attorney Hilliard P. Burt. To support this contention in November, 1984, John L. Swyers, USAA’s associate general counsel, signed an affidavit describing the company’s status, which was attached to Burt’s brief.

Attorney John C. Pridgen, who represented his cousin Henry in the case, said he believed USAA wanted to get out of the state court located in his cousin’s hometown. He said the fact that USAA was able to invoke federal jurisdiction in this case while escaping it in others showed that persons suing the company weren’t able to litigate on “a level playing field.” The case was settled on the eve of trial.

The next major decision on USAA’s status began in Tulsa, Okla., federal court in 1983. Leroy and Dorothy Tuck sued USAA, contending the company acted in bad faith when it failed to pay the couple’s claims after their son Johnny, a Marine Corps helicopter pilot, was killed by a drunk driver. The federal jury awarded the Tucks $900,000, which a judge reduced to $675,000. On appeal, citing the Baer opinion, USAA asserted that the court had no jurisdiction.

But while the Tuck appeal was pending, USAA filed suits in federal courts in Birmingham, Ala., Philadelphia and San Diego claiming it was a Texas corporation.

Changing direction again, the company filed a motion seeking to dismiss a case in Seattle federal court, buttressed by an affidavit from general counsel Swyers.

In October, 1988, the 10th Circuit Court of Appeals ruled in USAA’s favor in the Tuck case.

However, the appeals court noted that USAA had taken contradictory positions on jurisdiction. The judges said of USAA: “We expect it to make similar motions” to get out of all its pending federal cases.

Four months later, Patrick E. Carr, the Tucks’ lawyer, asked the 10th Circuit to impose sanctions on USAA because of its allegedly abusive litigation tactics. The case finally ended in November, 1990, after Carr filed a second sanctions motion asserting that despite the 10th Circuit’s 1988 decision, USAA continued to appear in federal court in 22 cases. The Tucks received a $1.4-million settlement.

Additionally, attorney Dyk submitted a report to the court for USAA describing steps the company “has taken and is taking to insure that USAA . . . will not be a party to actions in federal courts based on diversity of citizenship.”

The report said that USAA first advised all regional claims officials in May, 1988, to seek dismissal of all federal suits against it. The report said the company sent out another bulletin in December, 1988, advising its officials to “stay out of federal court.”

Nonetheless, the company acknowledged, some federal cases remained open. One of those suits was filed in 1984 in Honolulu federal court by USAA against another insurance company. USAA prevailed at trial and on appeal.

In successfully arguing the appeal in May, 1989, seven months after the 10th Circuit decision, USAA once again described itself as a Texas corporation. In December, 1989, USAA collected a $353,417 judgment from Hawaiian Insurance Group in the Honolulu case.

Bill Souza, Hawaiian Insurance Group vice president, said in an interview this week that he had just learned about the federal appeals court decision directing USAA to get out of federal court.

“I’m kind of floored by this,” he said. “I feel these people did not act in good faith.” Souza said he has asked the group’s attorney to file papers seeking to have the judgment set aside and for USAA to be sanctioned.

USAA officials in San Antonio declined to answer questions about the controversy. Company spokesman Hal Schade issued a brief statement, saying USAA was following constitutional guidelines on jurisdiction in the Waters case in Los Angeles, and that the case belongs in a state court.