A Tangled Tale of Choice of Laws Cases
I often receive phone calls from adjusters asking for coverage advice with respect to matters pending in Massachusetts that, in fact, have little to do with Massachusetts insurance coverage principles. While it’s hardly intuitive, the location of the accident giving rise to an insurance coverage dispute often makes little difference with respect to which state’s law should apply. This is because of the crucial role that state “choice of laws” rules play in such cases. Thus, the fact that an Ohio manufacturer has been sued for copyright infringement in Massachusetts rarely means that Massachusetts law will apply to the issue of whether liability insurance is available for the Massachusetts litigation.
The problem with “choice of laws” is how different the rules are from state to state. The traditional rule was lex loci contractus, that is to say, the law of the place of contracting. Generally, this resulted in the selection of the law where the insured was headquartered and the policy issued, although some courts have since refined the doctrine to use out of state laws where the loss involves an insured facility in a state other than that where the insured is headquartered. See, e.g. Diamond International Corp. v. Allstate Ins. Co., 712 F.2d 1498, 1502 (1st Cir. 1983)(applying New Hampshire law to loss arising out of insured facility in New Hampshire even though the policy was issued in New York). Other courts evolved a variation of this approach in the context of environmental claims during the past two decades and held that the “law of the site” should control, even if it was not an insured facility.
Note that a few jurisdictions apply a literal view of the place of contracting that may result in the choice of law being determined by the location of the final act necessary to finalize the insurance contract, such as an agent’s receipt of the agreement or a countersignature to the policy, that has nothing at all to do with where the insured is located or the risks insured under the policy. For instance, a federal district court ruled last year that California law should apply to Chinese drywall claims even though the claims were filed in Florida against Florida insureds. In American Home Assurance Co v. Peninsula II Developers, Inc., No. 09-23691 (S.D. Fla. October 19, 2010), Judge Seitz declared that even though common sense seemed to dictate the application of Florida law, the Florida Supreme Court’s strict adherence to lex loci contractus required that California law apply because the last act necessary to complete the formation of the policies at issue in this case were not formed until the insuring binder was received by the insured’s agent in California.
Choice of law issues can also be influenced by state statutes. In California for instance, the Court of Appeal has ruled in two recent cases that Civil Code Section 1646, which states that “a contract is to be interpreted according to the law and usage of a place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made,” required the application of California law to the issue of whether insurers had a duty to defend the policyholder against pollution claims in California even though the policies in question were issued elsewhere. In Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App.4th 1436 (2007) and American Motorists Ins. Co. v. Thomson, B226068 (Cal. App. August 29, 2011), the Court of Appeal ruled that the place of performance was California, as being the jurisdiction where the insurers were being asked to perform their contractual duty to defend.
For the most part, however, courts apply the analysis set forth in the American Law Institute’s Restatement (Second) of Conflict of Laws and apply the law of the state with the most significant relationship or contacts with the contract. As the Indiana Supreme Court explained in National Union Fire Ins. Co. of Pittsburgh, PA v. Standard Fusee Corp., 940 N.E.2d 810 (Ind. 2010), these contacts include (1) the place of contracting; (2) the place of the negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties. In Standard Fusee, the Indiana court ruled that “Maryland is the state with the most intimate contacts to the facts in light of the fact that the insured was located in Maryland and all discussions with respect to the purchase of these policies occurred at its headquarters in Maryland.”
While the foregoing disputes all involved CGL policies, choice of law issues are by no means limited to commercial lines policies. In a recent Pennsylvania case, for instance, the U.S. Court of Appeals for the Third Circuit addressed the perplexing question of which state’s “choice of law” rules should apply to resolve such questions in a case where both the insured and the coverage litigation had migrated from New Jersey to Pennsylvania.
At issue in Amica Mut. Ins. Co. v. Fogel, No. 10-3611 (3rd Cir. September 8, 2011) was whether the insured could stack its claim for PIP benefits under Pennsylvania law, which allows stacking where more than one vehicle is insured under an auto policy, whereas New Jersey would not allow such stacking, in a case where an automobile policy was issued to residents of New Jersey who relocated to Pennsylvania during the term of the policy.
The Fogel case was originally filed in state court in New Jersey but was removed to the federal district court in New Jersey on the basis of diversity jurisdiction and thereafter transferred to the Eastern District of Pennsylvania, as permitted by 28 U.S.C. § 1404(a). The U.S. District Court in Philadelphia applied Pennsylvania own choice of law rules in holding that New Jersey law should apply. On further review, however, the U.S. Court of Appeals for the Third Circuit applied New Jersey choice of law rules to hold that Pennsylvania law should apply. Confused yet?
On September 8, 2011, the U.S. Court of Appeals for the Third Circuit declared that the Pennsylvania district court should have applied New Jersey choice of law rules not those of Pennsylvania since the lawsuit had originally been filed in state court in New Jersey and had only reached the federal court in Philadelphia after being removed to the federal court in New Jersey on the basis of diversity jurisdiction and then being transferred pursuant to 28 U.S.C. 1404(a).
Applying New Jersey choice of law principles, the court held that the principal location of the insured risk in this case was clearly Pennsylvania. Quoting an opinion of the New Jersey Appellate Division, the Third Circuit commented that consistent with Section 193 of the Restatement (Second) of Conflict of Laws, automobile insurers should understand that given the mobility of the insured risk, the circumstances of a particular loss may result in the applicability of the law of a state other than that in which the policy was issued.
In this case, the court found that once Amica was on notice that its insureds had relocated to Pennsylvania, it no longer had a justified expectation that New Jersey would remain the principal location of the insured risk and that Pennsylvania law should control even though the insured had not yet completed the paperwork or obtained a Pennsylvania driver’s license that Amica had required before it would have agreed to issue a Pennsylvania policy to the Fogels.
Nevertheless, the Third Circuit affirmed the district court’s partial summary judgment to Amica with respect to the issue of its claimed bad faith under 42 Pa. C.S.A. § 8371 noting that if reasonable judges such as the district court could have agreed with Amica, there was no principled basis for asserting that its effort to limit coverage consistent with New Jersey law could form the basis for bad faith.
If there is a takeaway from this brief survey of recent case law, it is that the choice of laws is a crazy quilt of different theories, often result-oriented, that may result in the application of the law of states whose relationship to an insured and policy are hardly intuitive. Maybe calling outside counsel for advice isn’t such a bad idea after all!
