Plaintiff’s counsel often employ a range of strategic tactics to defeat diversity jurisdiction because they view federal court as an unfavorable forum. One such tactic is to challenge the amount in controversy—a key requirement for diversity jurisdiction. However, the Ninth Circuit’s recent decision in Farmers Direct Property & Casualty Ins. Co. v. Perez, — F.4th —, 2025 WL 716337 (9th Cir. March 6, 2025), makes it difficult to challenge the amount in controversy in declaratory judgment actions filed in federal court involving an insurer’s duty to defend and/or indemnify. In Perez, the Ninth Circuit held that in determining the amount in controversy, district courts may consider (i) the insurer’s potential excess liability and (ii) defense fees and costs that the insurer might incur in the underlying action. 

Perez arose out of a January 2017 auto accident between Montez and Perez, who was insured by Farmers Direct. Montez, made a policy limit demand, conditioned on an affidavit from Perez that he did not have any other insurance. Farmers Direct offered to pay its $25,000 policy limit but explained that it was unable to reach Perez to obtain an affidavit. 

Montez did not accept the policy limit and filed a personal injury lawsuit against Perez in state court. Farmers Direct provided a defense, but Perez would not communicate with defense counsel and was uncooperative in his own defense. Eventually, judgment was entered against Perez for more than $11 million.

Before the state court judgment was entered, Farmers Direct filed a declaratory judgment action against Perez in federal court, seeking a declaration that it had no duty to defend and indemnify Perez because he had breached the policy’s cooperation clause. When Perez did not respond to the complaint, the district court entered a default judgment against him and found that Farmers Direct had no continuing duty to defend and no duty to indemnify Perez.

Montez intervened in the federal action to set aside the default judgment, arguing that given the face amount of the policy, the amount in controversy requirement was not satisfied. The district court agreed, found it did not have subject matter jurisdiction, and vacated the judgment. 

Farmers Direct appealed, and the Ninth Circuit reversed. The court concluded that the amount in controversy was not limited to the policy’s $25,000 limit. Rather, in determining the amount in controversy, the district court was required to take into account (i) Montez’s contention that Farmers Direct should be liable for the excess amount of the underlying personal injury judgment and (ii) Farmers Direct’s ongoing defense costs in the underlying tort action. Because there was a legal possibility that Farmers Direct could be liable for these amounts, each of which exceeded $75,000, the panel held that the district court erred in vacating the default judgment and remanded the matter for further proceedings.