## Facts

- A & S Manufacturing Company faced EPA-related claims for environmental contamination and sought liability coverage under policies issued by United States Fidelity & Guaranty Company (USF&G), Federal Insurance Company, and Hartford Accident and Indemnity Company.
- A & S brought the insurers into the EPA-related litigation to obtain indemnification and coverage.
- USF&G filed a separate federal declaratory judgment action in the District of Maryland against A & S, Federal, and Hartford, invoking diversity jurisdiction.
- A & S filed a parallel action in New Jersey state court raising similar insurance-coverage issues.
- In the Maryland action, A & S moved to realign the parties on the ground that all three insurers shared the same interest against A & S on the central coverage dispute.

## Issues

1. What standard governs party realignment for diversity jurisdiction in a multi-party insurance coverage declaratory judgment action.
2. Whether, applying the proper standard, the insurers should be realigned together against the insured, thereby eliminating complete diversity and requiring dismissal for lack of subject-matter jurisdiction.

## Decision

- The Fourth Circuit affirmed the district court’s dismissal for lack of subject-matter jurisdiction.
- The court held that the “principal purpose” / “primary and controlling matter in dispute” test governs realignment.
- Applying that test, USF&G, Federal, and Hartford were properly aligned on the same side because their primary interest was limiting or avoiding coverage obligations to A & S.
- After realignment, complete diversity was absent because A & S and Federal were both New Jersey citizens, so the federal court lacked diversity jurisdiction.

## Legal Principles

- Federal courts must independently examine subject-matter jurisdiction and may not accept party labels that obscure the parties’ actual interests.
- For diversity realignment, the court identifies the action’s principal purpose and the primary and controlling matter in dispute, then aligns parties according to their positions on that core dispute.
- The existence of secondary or contingent disputes among parties does not prevent realignment when those parties share the same position on the primary dispute.
- Complete diversity is required under 28 U.S.C. § 1332; if any properly aligned plaintiff shares citizenship with any properly aligned defendant, the action must be dismissed for lack of diversity jurisdiction.

## Conclusion

The Fourth Circuit held that the central controversy was whether the insurers owed coverage to the insured for environmental liabilities, so the insurers had to be aligned together against the insured; that alignment destroyed complete diversity and required dismissal for lack of subject-matter jurisdiction.


United States Fidelity & Guaranty Co. v. A & S Mfg. Co., 48 F.3d 131 (4th Cir. 1995)