INSURANCE LAW Consistent Patterns Help Inform the Choice of Law in Analysis Bad Faith Claims

By John G. O’Neill

Choice of law questions It is almost inevitable in modern practice, especially for are a recurring and attorneys who specialize in representing insurance com- often outcome- panies, that they will encounter a dispute over which law determinative issue governs a bad faith claim. In many cases, resolution of the choice of law issue can determine of the competing jurisdictions. For exam- in bad faith litigation. whether a plaintiff may maintain a bad ple, conflicts have been found when the faith claim against a client. This article is laws of the relevant states disagree over With so much riding on intended to provide a practical guide to the following: analyzing conflict of laws issues in the con- • Whether a third-party claimant is per- the determination, it is text of bad faith litigation against liability mitted to maintain a direct claim for bad insurers. (Unfortunately, bad faith claims faith against an insurer. See Denham v. important for counsel to arising out of property insurance, as well Farmers Ins. Co., 262 Cal. Rptr. 146, 147 as underinsured, uninsured, and simi- (Cal. App. 1989). understand the relevant lar automotive coverages, are outside the • The level of misconduct that must be scope of this discussion, and are excluded.) shown to recover. See Mirville v. All- principles and the As will be seen below, the outcome of a state Indem. Co., 71 F. Supp. 2d 1106 (D. choice of law analysis can depend upon the Kan. 1999). various ways in which conflict of laws principles followed by the • The types of recoverable damages.See forum jurisdiction as well as the specifics Ryder Truck Rental, Inc. v. UTF Carri- courts apply them. of the claim advanced against the insurer. ers, Inc., 790 F. Supp. 637, 639–41 (W.D. Va.1992). Analytical Framework If a court finds that a conflict does exist, Although courts draw from a range of dif- it will then typically move to the second ferent principles to resolve conflict of laws step, which involves characterizing a bad issues in bad faith claims, they generally faith claim as either an action in tort or share a similar analytical framework. Usu- in contract for the purposes of applying ally, the first step is to determine whether the forum state’s corresponding conflict there is an actual conflict between the laws of laws principles. While this would seem to be a straightforward task, courts have ■ John G. O’Neill is a partner with the Boston law firm Sugarman, Rogers, sometimes struggled with characteriza- Barshak & Cohen, P.C., where he focuses his practice on insurance, busi- tion because claims for bad faith do not fit ness disputes, and professional liability defense. Mr. O’Neill regularly advises neatly into one category: tort or contract. and represents insurers in coverage and bad faith matters throughout the As one court noted, “[t]he doctrinal roots . He is a member of the DRI Insurance Law Committee. of the obligation [of good faith] are notori- ously elusive: one scholar has argued that

46 ■ For The Defense ■ May 2017 © 2017 DRI. All rights reserved. actions for bad faith sound in ‘conequitort,’ tort actions generally apply the rule of lex contemplated in her insurance contract” suggesting the interaction among con- loci delicti. Under this rule, an action in upon entry of judgment). The court con- cepts of contract, equity, and tort.” Ryder tort is governed by the law of the place in cluded that the insured’s bad faith claims Truck, 790 F. Supp. at 641. See also Ferrell which the wrongful conduct occurred. See were governed by Florida law. v. Grange Ins., 354 F. Supp.2d 675, 677 (S.D. Restatement (First) of Conflict of Laws §378 Although it would be tempting to think W. Va. 2005) (noting divergence of opinion (1934); American Guarantee & Liab. Ins. that the “last event necessary” rule rou- whether bad faith claims sounded in tort or Co. v. Liberty Mut. Fire Ins. Co., 2014 WL tinely results in the application of the law contract and evaluating choice of law issue 11514675, at *3 (D.N.M. March 24, 2014), of the jurisdiction in which the underly- under both analyses). Luckily, the issue has vac. in part on other grounds, 2015 WL ing action is litigated, this is not always the already been addressed in many jurisdic- 11117309 (D.N.M. Feb. 17, 2015). Accord- tions, making it less likely that it will be a ingly, if the forum state characterizes a bad significant area of dispute. faith action as a tort, it will generally follow Once a bad faith action has been charac- the lex loci delicti rule to resolve choice of Although it would be terized, the court will move to the third and law issues and will seek to determine where final step in the analysis, which involves the bad faith occurred. tempting to think that the applying the corresponding conflict of laws Although the rule is fairly straightfor- principles as adopted by the forum state. A ward, applying it to a bad faith claim can “last event necessary” majority of jurisdictions follow the princi- be challenging. See Pen Coal Corp. v. Wil- ples in the Restatement (Second) of Conflict liam H. McGee and Co., Inc., 903 F. Supp. rule routinely results in the of Laws (1971), though several jurisdic- 980, 983 (S.D. W.Va. 1995) (discussing the tions continue to adhere to the Restatement difficulty of identifying the place where the application of the law of (First) of Conflict of Laws (1934). A handful wrong occurs in a bad faith claim). Depend- of jurisdictions apply other methodologies, ing on the nature of the claim, the wrongful the jurisdiction in which the such as the “choice-­influencing consid- conduct could be said to have occurred in erations” developed by Professor Robert several locations: at the office of the insur- underlying action is litigated, LeFlar, or the “governmental interests” er’s adjuster, where settlement negotiations approach developed by Professor Brain- occur, where the underlying tort action is this is not always the case. erd Currie. Courts are far from uniform in litigated, or where the insured feels the eco- their application of these various choice of nomic effect of the alleged misconduct.See law principles to bad faith claims. Never- id. Many courts that adhere to the First Re- case. One federal court reached a very dif- theless, some general observations can be statement approach have attempted to ad- ferent conclusion following the “last event made that are helpful in analyzing choice of dress this problem by deeming the wrongful necessary” rule in determining which law law issues in these types of matters. conduct to have occurred in the jurisdic- governed bad faith claims arising out of tion where the last event necessary to cre- a personal injury suit brought in Indi- The First Restatement: ate liability occurs. See Restatement (First) ana against a Michigan insured. See Bris- “Vested Rights” of Conflict of Laws §377 (1934); Morgan v. tol West Ins. Co. v. Whitt, 406 F. Supp. 2d The traditional approach to resolving con- Government Employees Ins. Co., 2012 WL 771 (W.D. Mich. 2005) (applying Indi- flict of laws issues, sometimes referred to 4377790, at *4 (M.D. Fla. Aug. 22, 2012). ana choice of law principles). The insurer as the “vested rights” approach, is stated In Morgan, a Georgia insured brought had disclaimed coverage or any obliga- in the Restatement (First) of Conflict of suit against her insurer for negligently and tion to defend the tort suit, which was then Laws. The First Restatement has been crit- in bad faith failing to settle an underlying resolved by the insured through a settle- icized for being too mechanical in applica- personal injury lawsuit in Florida, resulting ment and consent judgment exceeding the tion and for sometimes selecting the laws of in a substantial excess verdict against her. policy limit. See id. at 778–79. Citing the a jurisdiction that has little connection to See 2012 WL 4377790, at *1. The insured insurer’s lack of involvement in the Indi- the dispute. See William M. Richman and argued that the insurer’s bad faith had been ana suit and any settlement discussions David Riley, The First Restatement of Con- committed in Georgia for purposes of the that occurred in connection with it, the flict of Laws on The Twenty-­Fifth Anniver- lex loci delicti rule because that was where court declined to hold that Indiana law gov- sary of Its Successor: Contemporary Practice she resided and suffered injury, which was erned the claim. See id. at 788–89. Instead, in Traditional Courts, 56 Md. L. Rev. 1196, the last event necessary to make the insurer the court found that the last act necessary 1199 (1997). At present, only a small group liable. Id. at *3. The court rejected this to make the insurer liable had occurred of jurisdictions continue to adhere to the argument, holding that the insured had at an earlier point in Michigan, where the First Restatement approach. suffered injury in Florida when the court insurer had sent letters wrongfully deny- in the underlying litigation entered judg- ing coverage for the tort suit. See id. at 788. Torts: Lex Loci Delecti ment against her in excess of her policy Accordingly, the court concluded that the Courts following the First Restatement limit. See id. at *5–6 (ruling that insured bad faith claim was governed by Michi- approach to resolve choice of law issues for incurred “damages beyond the damages gan law.

For The Defense ■ May 2017 ■ 47 INSURANCE LAW

In Calderon v. Melhiser, 458 F. Supp.2d ment offer or the wrongful refusal to pro- sengers, who were all from New York, had 950 (S.D. Ind. 2006), a Kentucky claimant vide coverage, may be governed by the law settled the personal injury claims with who was involved in an automobile acci- of a different jurisdiction, such as the juris- a consent judgment in excess of the pol- dent with an Indiana insured brought suit diction where settlement offers or coverage icy limits and an agreement not to exe- in Indiana, alleging negligence against the decisions were (or should have been) made. cute against the driver. The driver’s insurer insured and bad faith against his insurer sought dismissal of the negligence claims, for failing to effectuate a settlement after Contracts: Lex Loci Contractus arguing that any action against it was gov- liability became clear in violation of a Ken- Courts following the First Restatement erned by New York law, which required a tucky statute. The insurer moved to dis- approach to resolve choice of law issues for showing of bad faith. See id. at 1107. Find- contract actions generally apply the rule of ing that it was undisputed that the insur- lex loci contractus. Under this rule, a dis- ance contract was entered in New York, pute over the parties’ rights under a con- the court ruled that the passengers’ claims Application of the lex tract is generally governed by the law of were governed by New York law and dis- the state in which the contract was formed. missed the negligence claim. See id. at 1108. loci contractus rule can See Restatement (First) of Conflict of Laws §346 (1934); Ryder Truck Rental, Inc. v. UTF Place of Contract Performance Rule lead to selection of the law Carriers, Inc., 790 F. Supp. 637, 638 (W.D. As can be seen from the Ryder Truck and Va. 1992). A forum that characterizes a bad Mirville decisions, application of the lex of a jurisdiction that has faith action as sounding in contract will loci contractus rule can lead to selection apply the lex loci contractus rule and will of the law of a jurisdiction that has only a only a tenuous connection seek to determine where the insurance con- tenuous connection to the events that give tract was entered. rise to the bad faith claim. For this reason, to the events that give rise In Ryder Truck, an insured that had and in view of the fact that the primary settled an underlying personal injury lit- issues in bad faith claims are typically per- to the bad faith claim. igation in Virginia brought claims in a formance related as opposed to substan- Virginia federal court, seeking punitive tive, many states have moved away from damages against its insurer for bad faith in strict application of the lex loci contractus miss, arguing that the bad faith claim was refusing to provide coverage for the under- rule and have instead applied an exception, governed by Indiana law, under which lying action. See 790 F. Supp. at 638. The the “place of performance” rule. Under this an insurer owes no duty to act in good insurer argued that the bad faith claims rule, when the dispute focuses on the man- faith to a third-party claimant. See id. at were governed by the , where ner or method of a party’s performance, 952. Following the “last event necessary” the underlying litigation occurred, which the claim is subject to the law of the place approach, the court held that the bad faith did not permit recovery of punitive dam- where that performance was to occur. See claim, which was premised upon the fail- ages. See id. at 640–41. The insured main- Restatement (First) of Conflict of Laws §358 ure to make a good faith effort to settle, tained that its claim was governed by the (1934); Moses v. Halstead, 581 F.3d 1248, occurred in Kentucky, where the claim- law of or New York, where the 1251 (10th Cir. 2009). ant and the insurer’s representatives were insurance contract was arguably entered, Determining the “place of performance” located and where the settlement negotia- which authorized recovery of punitive for an insurer’s contractual obligations is tions occurred. See id. at 952–53. Therefore, damages in bad faith actions. See id. After again not always as simple as it might seem. the claim was governed by Kentucky law, determining that Virginia characterizes As with the lex loci delicti rule, the place of and the claimant could proceed under the bad faith actions as contractual in nature, performance could be said to be where the Kentucky statute. See id. at 953. the court applied the lex loci contractus insurer’s settlement or coverage decisions rule and held that the bad faith claims are made, where settlement negotiations Observations were governed by either New York or Con- occur, or where the underlying tort action The lex loci delicti rule offers a straight- necticut law and that the insured could is litigated. With some exceptions, deci- forward, though not always predictable, proceed against the insurer for punitive sions applying the “place of performance” method for resolving conflict of laws issues damages. See id. at 641–42. rule have generally found that an insur- in bad faith actions. The law selected will A federal court in also applied er’s obligations are to be performed where depend upon the specific misconduct of the the lex loci contractus rule to determine the underlying claim against the insured insurer as well as the harm suffered by the which law governed negligence and bad is brought and defended. See Government plaintiff. Claims involving an excess ver- faith claims brought by automobile pas- Employees Ins. Co. v. Grounds, 332 So.2d 13, dict are likely to be subject to the law of the sengers against an insurer for failing to 15 (Fla. 1976). As a result, these decisions jurisdiction where the tort claim was liti- settle their personal injury action against have generally held that the bad faith claim gated. Claims that are actionable upon the the driver after an accident in Kansas.See against the insurer is governed by the law happening of some other event, such as the Mirville v. Allstate Indem. Co., 71 F. Supp.2d of the jurisdiction in which the underlying breach of a statutory duty to extend a settle- 1103 (D. Kan. 1999). The driver and the pas- tort action is litigated.

48 ■ For The Defense ■ May 2017 In MI Windows & Doors, LLC. v. Lib- and defended by the insurer, and where set- in the bad faith claim. The “place of per- erty Mut. Fire Ins. Co., 88 F. Supp.3d 1326 tlement negotiations occurred). formance” rule tends to select a state with (M.D. Fla. 2015), a federal court consid- a closer connection to the events giving rise ered whether a bad faith claim against an Merging the Lex Loci Contractus and to the bad faith claim. Similar to the lex loci insurer for refusing to indemnify a Flor- the “Place of Performance” Rules delictis rule, predicting which law will be ida insured in connection with a judg- While most jurisdictions following the selected requires a careful examination of ment entered by an court was First Restatement approach apply either the nature of the insurer’s misconduct and governed by Florida or Alabama law. The the lex loci contractus rule or the “place of the claimed harm to the plaintiff. When insured argued that application of the lex performance” rule, it should be noted that the claim involves an excess verdict, there loci contractus rule resulted in Florida at least one decision has taken a slightly law governing its claims. The court noted, different approach and applied both rules. however, that the weight of Florida prece- See Moses v. Halstead, 581 F.3d 1248 (10th dent held that a claim for bad faith “goes Cir. 2009). In that case, a Kansas passenger While most jurisdictions to… performance of the contract (or lack brought suit against an insurer for failing thereof)” and that it was therefore subject to settle her claims against another Kan- following the First to the “place of performance” rule. Id. at sas resident for injuries that she suffered in 1328. The place of performance, the court a single-car accident that occurred in Mis- Restatement approach observed, was typically found to be “where souri. After the insurer rejected her pol- the [underlying] cause of action against icy limits demand, the claimant filed suit apply either the lex loci [the insured] was maintained and defended and recovered an excess verdict against the by the [insurer].” Id. at 1331. Accordingly, driver in Missouri, and then brought suit contractus rule or the “place the court concluded that the insured’s bad against the insurer in Kansas for failing to faith claim was governed by the law of the settle her claims. The insurer argued that of performance” rule, it state of Alabama, where the underlying Missouri did not recognize a direct cause of action had been litigated. Id. See also Gov- action in favor of a claimant, and the claim- should be noted that at least ernment Employees Ins. Co. v. Grounds, 332 ant argued that her claims were governed So.2d 13, 15 (Fla. 1976) (applying “place of by Kansas law. one decision has taken a performance” rule to bad faith claim and The Tenth Circuit parsed the choice of law determining that the place of performance question into two components: (1) which slightly different approach was where underlying action was main- state’s law governed the existence of a duty tained and defended by insurer). of good faith, and (2) which state’s law and applied both rules. A similar result was reached in Shin determined whether the insurer complied Crest Pte, Ltd. v. AIU Ins. Co., 2008 WL with any duty owed. See id. at 1252–53. As 728388 (M.D. Fla. March 17, 2008), in which to the first issue, the existence of a duty, is a good chance that the “place of perform- the court found that Florida law governed the court determined that it was substan- ance” will be the jurisdiction in which the a bad faith claim by a Taiwanese insured tive, and applying the lex loci contractus underlying tort action was litigated. How- against its insurer arising out the insur- rule, found that it was governed by the law ever, if the conduct at issue occurs before er’s settlement of claims brought against of Kansas, where the insurance contract the filing of litigation or is sufficiently -dis an additional insured in Florida. Although was entered. See id. at 1254. As to the sec- tinct from the underlying tort action, a acknowledging that the insured’s separate ond issue, compliance with any such duty, court may find that the place of perform- claim for coverage was governed by the the court found that it was performance ance was in another jurisdiction. law of Taiwan, where the insurance con- related and governed by the law of the place tract had been executed, the court held that of performance, which was also Kansas, The Second Restatement: the bad faith claim was a matter concern- where the claimant had made a settlement Contacts and Policy Factors ing the insurer’s performance under the demand and the insurer had rejected it. See A majority of jurisdictions follow the prin- policy. See id. at *2. As such, the bad faith id. The court concluded that the claimant’s ciples set forth in the Restatement (Second) claim was governed by the law of the place bad faith claims were governed by Kansas of Conflict of Laws (1971), which provides of performance, which was Florida, where law and that the claimant could therefore a more nuanced approach to resolving the underlying action had been maintained proceed against the insurer. See id. choice of law issues. Under the Second and defended. See id. Accord Teachers Ins. Restatement, courts seek to determine Co. v. Berry, 901 F. Supp. 322, 323 (N.D. Fla. Observations which jurisdiction has the “most signifi- 1995) (holding that claim against insurer In the final analysis, the lex loci contractus cant relationship” with the claim and the for bad faith in failing to properly handle rule normally selects the law of the juris- parties by evaluating various contacts with time-limit demand was governed by Flor- diction where the insurance contract was the competing jurisdictions in the context ida law because that was where the under- entered, which may or may not have a sig- of several policy-based factors, which are lying suit was brought against the insured nificant connection to the matters at issue intended to guide the choice of law deci-

For The Defense ■ May 2017 ■ 49 INSURANCE LAW sion. See Dowis v. Mud Slingers, Inc., 621 flict of Laws §6 (1971). The result is a com- edging that the claim arose out of the S.E.2d 413, 415 (Ga. 2005). The factors plex, multi-­step, balancing test that is less alleged misconduct of defense counsel in include (1) the needs of the interstate sys- predictable and applied with considerably Maine, where the malpractice claim was tem, (2) the relevant policies of the forum, less uniformity than the analysis under litigated, the court emphasized its view (3) the relevant policies of other interested the First Restatement. Shirley W. Wie- that the primary issue was “the manner in states and the relative interests of those gand, Fifty Conflict of Laws “Restatements”: which a New York insurance company pro- states in the determination of the partic- Merging Judicial Discretion And Legislative ceeded with settlement of a claim made by ular issue, (4) the protection of justified Endorsement, 50 La. L. Rev. 1, 4 (2004). As residents.” Id. at 510. The expectations, (5) the basic policies under- will be seen below, this is particularly the court ruled that because Massachusetts has case with bad faith claims. an interest in protecting its citizens from unfair claims-­settlement practices, and Torts: Section 145 Contacts Analysis because Maine did not have a connection to A majority of jurisdictions Courts characterizing a bad faith claim the parties or a more significant interest in as tortious in nature look to Restatement having its law applied, Massachusetts law follow the principles set (Second) of Conflict of Laws §145 (1971). would govern the claim. See id. Section 145 governs torts generally, and In West American Ins. Co. v. RLI Ins. Co., forth in the Restatement it lists the following contacts to be taken 698 F.3d 1069 (8th Cir. 2012), the court was into consideration when resolving choice required to decide whether claims by an (Second) of Conflict of Laws of law issues: excess insurer against a primary insurer 1. The place where the injury occurred; for failure to settle were governed by the (1971), which provides a 2. The place where the conduct causing law of Kansas, where the insured pur- the injury occurred; chased coverage, or the law of Missouri, more nuanced approach 3. The domicile, residence, nationality, where an underlying personal injury claim place of incorporation, and place of was arbitrated, resulting in an excess ver- to resolving choice of law business of the parties; and dict. Noting that the excess insurer stood 4. The place where the relationship, if in the shoes of its insured for purposes issues. Under the Second any, between the parties is centered. of its claim, the court evaluated various Restatement (Second) of Conflict of Laws contacts under Section 145 as though the Restatement, courts seek to §145 (1971). claim had been brought by the insured. The relative importance to be assigned See id. at 1073. The court found that the in- determine which jurisdiction to each of these contacts depends upon the sured was located in Kansas and suffered nature of the claim asserted. See id. at cmt. injury there and that these contacts favored has the “most significant f. Although these contacts might in theory the application of Kansas law. See id. The point to a number of different jurisdictions, court rejected the primary insurer’s argu- relationship” with the claim as a practical matter, the analysis typically ment that the conduct causing the injury boils down to the question of whether a occurred in Missouri, where the arbitra- and the parties by evaluating bad faith action is governed by the law of tion was held, because the bad faith claim the state in which the underlying action focused upon the insurer’s failure to set- various contacts with the against the insured was litigated or by the tle before the commencement of suit, and law of the state in which the insured or there was no evidence that any of the pre- competing jurisdictions claimant is located. suit negotiations occurred in Missouri. See In Adams v. Rubin, 964 F. Supp. 507 (D. id. The court also observed that Kansas’s in the context of several Me. 1997), the court faced the question of interest in protecting its residents from whether a bad faith claim brought by Mas- misconduct by insurers outweighed any policy-based factors, which sachusetts claimants against a New York contrary interest that Missouri might have insurer for failing to settle an underlying in ensuring that litigants make good faith are intended to guide the legal malpractice action in Maine was gov- attempts to settle, particularly when the erned by the , which alleged misconduct occurred before any choice of law decision. permits third-party claims against insur- suit was filed in that state. See id. at 1073– ers, or of Maine, which does not. In con- 74. Accordingly, the court concluded that ducting a Section 145 contacts analysis, the Kansas law governed the excess insurer’s lying the particular field of law, (6) the cer- court gave great weight to the fact that the claim. See id. tainty, predictability, and uniformity of claimants were Massachusetts residents As shown in the cases discussed above, the result, and (7) the ease of the deter- and that they felt the effect of the alleged when a court places greater weight on the mination and application of the law to be misconduct by the insurer in Massachu- location of the insured/claimant and the applied. See Restatement (Second) of Con- setts. See id. at 509. Although acknowl- place where the injury occurred (which

50 ■ For The Defense ■ May 2017 are typically the same state), the Section 2016 WL 6124637 (S.D. Ill. Oct. 17, 2016), contacts analysis, the court found that the 145 analysis is likely to result in the selec- in which the court considered whether a place of injury was Louisiana, where the tion of the law of the state in which the in- claim against an insurer for refusing in insured was located, and that the conduct sured/claimant is located. However, as will bad faith to settle, resulting in an excess causing the injury did not occur in Texas. be seen below, when a court does not place verdict, should be governed by the law of See id. at *4. The court further found that weight on these contacts, or the facts make the state in which the insured was located, none of the parties was located in Texas these contacts less important, the Section , or by the law of the state where the and that the parties’ relationship was cen- 145 analysis is more likely to favor applica- underlying personal injury action was lit- tered in Louisiana, “where the insurance tion of the law of the place where the under- igated, Illinois. In applying Section 145, policy was presumably negotiated, issued lying lawsuit occurred. the court ruled that the first contact, the and delivered.” Id. Lastly, the court noted Such was the case in American Guar- place where the injury occurred, did not that the insured seemed to expect that Lou- antee and Liability Ins. Co. v. U.S. Fidelity favor application of Iowa law because the isiana law would apply, since it had couched & Guar. Co., 668 F.3d 991 (8th Cir. 2012), insured had not paid the excess verdict for its bad faith claims, in part, upon the viola- which involved a suit by an excess insurer which it sought recovery. See id. at *5. It tion of a Louisiana statute. See id. The court against a primary insurer for bad faith fail- further found that the disparate locations concluded that Louisiana law governed the ure to settle an underlying personal injury of the parties, with the insured in Iowa and bad faith claims against the insurers. See action that resulted in an excess verdict. the insurer in New Jersey, did not weigh in id. at*5. The court conducted a Section 145 contacts favor of either jurisdiction over Illinois. See A similar ruling was made on a slightly analysis to determine whether the bad faith id. The court determined that the remain- different issue in T-­Mobile USA, Inc. v. claim was governed by the law of Washing- ing contacts, the place where the conduct Selective Ins. Co. of America, 2016 WL ton, where the insured had been headquar- causing the injury occurred and the place 1464468, at *1 (W.D. Wash. April 14, 2016), tered, or in Missouri, where the tort action where the parties’ relationship was cen- which considered whether a claim for bad had been litigated. See id. at 996. The in- tered, both favored Illinois because Illi- faith refusal to afford coverage to a com- sured corporation had been dissolved sev- nois was the location where the case was pany claiming additional insured status eral years before the entry of the adverse litigated, and where any opportunity for was governed by the law of Washington, verdict, and this factored heavily into the settlement occurred, and also the loca- where the additional insured was located, court’s analysis. See id. at 997–98. In evalu- tion of the “relevant” relationship between or New Jersey, where the named insured ating the first contact, the court concluded the parties regarding the litigation. See id. was located. Acknowledging that there was that the dissolution of the insured weighed Considering the Section 6 factors, the court a divergence in judicial opinions on the against the selection of Washington as the ruled that Illinois had a greater interest in subject, the court first determined that the place where the injury occurred. See id. at having its law applied than Iowa or other place of injury contact weighed “slightly” 997–99. The court noted that the second jurisdictions and that application of Illi- in favor of Washington, the location of the contact, the place where the conduct caus- nois law was predictable and met the par- additional insured. See id. at *10. It went ing the injury occurred, pointed toward ties’ expectations. See id. on to find that the place where the wrong- Missouri because nearly all of the settle- Another consideration that can influ- ful conduct occurred favored New Jersey, ment discussions occurred there. See id. at ence the outcome of a Section 145 anal- where the insurer made and communi- 999. The third contact, the place of the par- ysis is the nature of the bad faith claim. cated its decision to deny a defense. See id. ties, did not favor Washington or Missouri The cases discussed above all involved an at *11. According to the court, the location because neither of the insurers were located insurer’s alleged failure to settle a claim of the parties was neutral: the additional in those states, and as noted, the insured against an insured. When the alleged bad insured was located in Washington, and had been dissolved. See id. at 1000. The faith arises out of other conduct, such as an the insurer was located in New Jersey. See court found that the final contact favored allegedly wrongful refusal to provide cov- id. Noting that the policy had been issued Missouri because the relationship between erage, a contacts analysis under Section and delivered to the named insured in New the two insurers was centered in that state, 145 may be less focused upon the location Jersey and the insurer’s rejection of the due to the underlying litigation. See id. at in which the underlying claim was litigated additional insured’s tender occurred there, 1001. It also found that the Section 6 pol- and more likely to point toward the juris- the court determined that the parties’ rela- icy factors, previously listed above, favored diction in which the insured is located. tionship was centered in New Jersey. See id. application of Missouri law because Wash- This was the case in Aspen Specialty Because it found the most significant con- ington would have little interest in the Ins. Co. v. Technical Indus., Inc., 2015 WL tacts between the additional insured and application of its law to a dispute between 339031 (W.D. La. 2015). There, the court the insurer were in New Jersey, the court litigants who were not residents of the state. considered whether an insured’s claims for ruled that the bad faith claim was governed See id. at 1002. Therefore, the court ruled bad faith against its insurers for wrongfully by New Jersey law. See id. at 12. that the bad faith claim was governed by denying coverage were governed by the law Of course, there are no absolutes in Missouri law. of Texas, where the underlying action was choice of law, and at least one court has A similar result was reached in West litigated, or Louisiana, where the insured reached the opposite conclusion, finding Side Salvage, Inc. v. RSUI Indemnity Co., was located. In conducting a Section 145 that an insured’s claim for bad faith refusal

For The Defense ■ May 2017 ■ 51 INSURANCE LAW to pay the full hourly rate of independent 145 contacts will often point toward either merger, or Washington, where the newly counsel was governed by the law of the state the location of the insured/claimant or merged entity was located. Noting that the in which the underlying action was liti- the location of the underlying litigation. If policy was issued to the insured in Vir- gated. See IMS Health Inc. v. Zurich Amer- greater weight is given to the place of injury ginia and incorporated Virginia amenda- ican Ins. Co., 2015 WL 9653012 (Pa. Com. and the location of the insured/claimant, tory endorsements, the court found that Pl. Dec. 15, 2015). In that case, the insurer the analysis is likely to select the law of the the place of contracting was Virginia. See argued that the claim was governed by the jurisdiction in which the insured/claim- id. at *4. Turning to the place of perform- law of Connecticut, where the insured was ant is located. If greater weight is instead ance, the court rejected the parties’ argu- headquartered, while the insured argued given to the place where the wrongful con- ments in favor of Washington and Virginia duct occurred and the place where the par- and instead found that this contact favored ties’ relationship was centered, the analysis Delaware, where the underlying suit was is more likely to select the law of the juris- litigated and where a defense to the insured For claims involving an diction in which the underlying action was was due. See id. at *5. The court found that litigated. For other types of claims, such as the third contact, the location of the sub- excess verdict, the Section bad faith in refusing to provide coverage, ject matter of the contract, weighed in the analysis is more likely to select the law favor of Virginia because the policy insured 145 contacts will often of the jurisdiction in which the insured is the conduct of the directors, and the con- located. Although the choice of law analy- duct that formed the basis for the underly- point toward either the sis is supposed to include evaluation of the ing lawsuit occurred in that state. See id. at Section 6 policy factors, any discussion of *6. After finding that the final contact, the location of the insured/ these factors is usually limited to confirm- location of the parties, also favored Vir- ing that the law selected by the Section 145 ginia, the court concluded that Virginia law claimant or the location of contacts is appropriate. governed the bad faith claim. See id. Although the AT&T court relied solely the underlying litigation. Contracts: Section 188 (and Sometimes upon Section 188 to determine the law Section 193) Contacts Analysis governing a bad faith claim, other courts Jurisdictions that characterize a bad faith have sometimes incorporated Section 193 that it was governed by the law of Penn- action as contractual in nature will apply into the choice of law analysis. Section 193 sylvania, where the claim was pending. Restatement (Second) of Conflict of Laws addresses the law governing insurance con- In its conflicts analysis, the court found §188 (1971). Section 188 includes the fol- tracts and provides: that Pennsylvania was the place of injury lowing contacts to be considered: The validity of a contract of fire, surety because that was where the insurer was 1. The place of contracting; or casualty insurance and the rights cre- supposed to defend the insured from the 2. The place of negotiation of the ated thereby are determined by the local underlying claim, but had not done so. See contract; law of the state which the parties under- id. at *6. For largely the same reasons, the 3. The place of performance; stood was to be the principal location of court also found that the place of the inju- 4. The location of the subject matter of the insured risk during the term of the rious behavior was Pennsylvania. See id. the contract; and policy, unless with respect to the partic- Although the court found that the location 5. The domicile, residence, nationality, ular issue, some other state has a more of the parties favored Connecticut, because place of incorporation, and place of significant relationship under the prin- this was where the insured was headquar- business of the parties. ciples stated in §6 to the transaction and tered, it found that the parties’ relationship Restatement (Second) of Conflict of Laws the parties, in which event the local law was centered in Pennsylvania, due to the §188(2) (1971). These contacts are to be of the other state will be applied. pending litigation. See id. The court also evaluated according to their relative Restatement (Second) of Conflict of Laws noted Pennsylvania’s interest in protect- importance with respect to the particu- §193 (1971). ing insureds doing business in the state, lar issue. Id. In Bristol West Ins. Co. v. Whitt, the court without specifically discussing any coun- Application of a Section 188 contacts conducted a mixed Section 188 and Section tervailing interests of Connecticut. See id. analysis is demonstrated in AT&T Wire- 193 analysis to determine whether a claim The court concluded that Pennsylvania law less Svcs., Inc. v. Federal Ins. Co., 2007 WL for bad faith denial of coverage and failure governed the bad faith claim. 1849056 (Del. Sup. June 25, 2007), which to settle brought by a insured was governed considered which law governed a claim by the , where the insured Observations for bad faith refusal to defend an insured resided, or Indiana, where an underlying Section 145 permits a flexible, fact-driven in connection with a shareholder action tort action arising out of an automobile analysis of choice of law issues for bad arising out of a merger. The parties dis- accident was litigated. See 406 F. Supp.2d faith claims that often turns upon the spe- puted whether the bad faith claim was 771, 785–86 (W.D. Mich. 2005) (apply- cific circumstances of a case. For claims governed by the law of Virginia, where ing Indiana choice of law principles). The involving an excess verdict, the Section the insured had been located before the court found that the place of contracting

52 ■ For The Defense ■ May 2017 for the insurance policy was Michigan, next evaluated the location of the subject and (3) determine how those policies are where the “application [was] made, the matter under Section 188, which it framed affected by each state’s contacts with the premium [was] paid, and the policy [was] as referring to the subject matter of the bad litigation and the parties. See Woessner v. delivered.” Id. at 786–87. Although not- faith claim, not the subject matter of the Air Liquide Inc., 242 F.3d 469, 472 (3d Cir. ing that the policy appeared to have been insurance policy. See id. The court easily 2001); McCann v. Foster Wheeler LLC, 225 issued from Ohio, the court downplayed found that the majority of events relevant P.3d 516, 527 (Cal. 2010). Then the court the significance of the place of negotiation, to that claim, such as the underlying liti- evaluates the strength of each jurisdiction’s noting that this contact was less important gation, mediation, settlement conferences, interest in the application of its own law to because the parties did not meet in per- and the insurer’s alleged failure to settle, determine which state’s interests would be son. See id. at 787. The court found that the occurred in New York. See id. The court more impaired if its law were not applied. place of performance was normally “where also held that New York had a greater inter- See id. the funds from the policy would be put to est in applying its law, which afforded pri- Application of the “governmental inter- use,” which would be Indiana, but that this mary insurers greater latitude in handling ests” analysis is demonstrated in Denham factor was to be given little weight because claims, and that application of California’s v. Farmers Ins. Co., 262 Cal. Rptr. 146, 147 at the time of contracting it was “uncer- lower standard for imposing liability would (Cal. App. 1989), where the court consid- tain or unknown.” Id. In evaluating the offend New York’s policy choice. See id. ered which law governed a bad faith action location of the subject matter of the con- by California residents against the insurer tract, the court looked to Section 193 of Observations of a Nevada resident who had injured them the Restatement, which provides that a On balance, the Section 188 contacts tend in an automobile accident in Nevada. The policy is to be governed by “the local law to favor application of the law of the juris- court first determined that there was a con- of the state which the parties understood diction in which an insured is located. A flict between the , which was to be the principal location of the in- court that evaluates all of the contacts in permits third-party bad faith claims, and sured risk.” Id. The court observed that for the context of a bad faith claim brought by Nevada, which does not. See id. at 148. automobiles, this is normally where the an insured is likely to reach this conclusion. The court next determined that there was vehicle is “principally garaged” at the time If a bad faith claim is brought by a third a “true” conflict because each of the states the policy is issued, which in this case was party, or if a court limits its analysis to a had an interest in the application of its Michigan, the state in which the insured few of the contacts, it may be more likely to law. See id. California had a legitimate resided. See id. Because the majority of find that the claim is governed by the law interest in protecting its residents from contacts weighed in favor of Michigan, the of another jurisdiction, such as the state unfair practices by insurers, and Nevada court concluded that to the extent that the where the underlying litigation occurred. had an interest in protecting its insurers bad faith claim sounded in contract, it was from third-party claims, which were not governed by Michigan law. Other Approaches: Policy- permitted in the state and which would The court in Schwartz v. Liberty Mut. Focused Analyses adversely affect insureds by increasing Ins. Co., 539 F.3d 135, 152 (2d Cir. 2008), While a majority of jurisdictions follow the costs of insurance. See id. Undertak- also conducted a mixed analysis under Sec- one of the Restatements to resolve choice ing a “comparative impairment” analy- tions 188 and 193. At issue was whether bad of law issues, a few jurisdictions follow sis, the court considered the fact that the faith claims brought by two excess insurers other approaches, such as the “govern- California decision that authorized third- (as equitable subrogees of the insured) were mental interests” approach, or the “choice-­ party bad faith claims had recently been governed by the law of California, where influencing considerations” approach. overturned, which suggested that the pol- the policy was issued and where the named These approaches share some similarities icy underlying the rule was no longer as insured maintained the majority of its with the Second Restatement in that they strongly held. See id. at 149. The court operations, or New York, where the under- consider many of the same factors and determined that application of California lying securities class action was litigated involve weighing the interests of compet- law would abrogate Nevada’s interest in and where many of the insured company’s ing jurisdictions. the application of its law to a claim involv- executives worked. Evaluating the location ing an insurance policy written in Nevada, of the insured risk under Section 193, the The “Governmental Interests” Approach insuring a Nevada resident for an accident court found that some contacts, such as the Under the “governmental interests” that occurred in that state, and for alleged issuance of the policy and the presence of a approach, a court analyzes the interests insurer misconduct that occurred in that majority of the company’s employees in the of the competing states to determine the state. See id. Accordingly, the court con- state, pointed to California, while the fact law that most appropriately applies to the cluded that Nevada law governed the bad that all but one of the company’s executives issues in a case. See Dowis v. Mud Sling- faith claim. worked in Manhattan pointed to New York. ers, Inc., 621 S.E.2d 413 414–15 (Ga. 2005). Another court applied a similar analy- See id. at 152. Because the insurance cov- In performing the analysis, a court will sis in Geo. M. Martin Co. v. Royal Ins. Co. ered risks spread throughout several loca- (1) identify the law in each state bearing of America when it evaluated whether a bad tions, the court concluded that Section 193 on the disputed issue, (2) determine poli- faith claim brought by a California insured was not determinative. See id. The court cies that the laws were designed to serve, Choice of Law, continued on page 92

For The Defense ■ May 2017 ■ 53 Choice of Law, from page 53 law of the state where the incidents giving there is some variation in the way that over an excess verdict entered in a Minne- rise to the obligation to defend occurred,” courts apply choice of law principles in bad sota litigation was governed by California and determined that this consideration faith cases, there are some consistent pat- or Minnesota law. See 2006 WL 3804379 (D. favored application of Minnesota law. Id. terns that help inform the analysis. Under- Minn. Dec. 22, 2006) (applying California at *2–*3. Turning to the maintenance of standing these patterns and applying them law). The court determined that a conflict interstate order, the court found that this to the specific facts of a case should enable existed because California permits recovery consideration did not favor either juris- counsel to provide a thoughtful analysis of of punitive damages and damages for emo- diction because both had substantial con- any choice of law issue. tional distress, while Minnesota limits re- tacts with the claim; the insured was based covery to the amount of the excess verdict. in Wisconsin, and the underlying litiga- See id. at *4. However, the court found that tion occurred in Minnesota. See id. at *3. this was not a “true” conflict because the The next factor, simplification of the judi- policy behind Minnesota’s law was not to cial task, did not weigh in favor of either deny claimants full recovery but to protect state’s law because the court was able to Minnesota residents from “excessive finan- apply both laws properly. See id. The fourth cial burdens or exaggerated claims.” Id. at consideration, advancement of the forum’s *5. Because the defendant insurer was not governmental interest, favored application located in Minnesota, the state had no in- of Minnesota law, as the state’s interest in terest in the application of its law. See id. In policing insurance agreements and its deci- contrast, the court found that California had sion not to recognize a claim for bad faith a strong interest in the application of its law prevailed over the countervailing policy of to protect California insureds and to deter Wisconsin. See id. Finding that two con- wrongful conduct against them. See id. at *6. siderations weighed heavily in favor of the Accordingly, the court resolved the choice application of Minnesota law and that none of law question in favor of California law. of them weighed in favor of Wisconsin law, the court ruled that there was no need to The “Choice-Influencing consider the last factor, the better rule of Considerations” Approach law, which applied only when the first four The “choice-­influencing considerations” factors did not resolve the issue. See id. at approach involves evaluation of five fac- *4. The court concluded that the bad faith tors, including: (1) predictability of results, claim was governed by Minnesota law. (2) maintenance of interstate and interna- tional order, (3) simplification of the judi- Observations cial task, (4) advancement of the forum The policy-­focused analyses utilized in government’s interests, and (5) application the “governmental interests” and “choice-­ of the better rule of law. See Bell v. Kan- influencing considerations” tests makes sas City Fire and Marine Ins. Co., 616 F. it difficult to draw any firm conclusions Supp. 1305, 1306 (D. Ark. 1985). The weight about the law that they are likely to select in attached to each of these choice-­influencing the context of a bad faith claim. It is worth considerations varies with the facts of each noting that both approaches have been case. See Mark Thomson, Method or Mad- criticized as permitting judges to favor ap- ness: The Leflar Approach To Choice Of Law plication of the law of the forum over com- As Practiced In Five States, 66 Rutgers L. peting jurisdictions. See Gregory E. Smith, Rev. 81, 89 (2013). Choice of Law in The United States, 31 Hast- In JSI Indus., Inc. v. Steadfast Ins. Co., a ings L. J. 1041, 1048–49 (1987). Closely ana- court applied the “choice-­influencing con- lyzing the laws at issue and the policies that siderations” approach to resolve a choice underlie them is necessary to evaluate the of law question about whether a bad faith likely outcome for any given dispute. refusal to defend was governed by the law of Wisconsin, where the insured was Conclusion located, or the law of Minnesota, where At first blush, conflict of laws issues in bad the underlying lawsuits had been pros- faith cases can seem perplexing, but they ecuted. See 2004 WL 1088334, at *1 (D. do not have to be. Counsel must under- Minn. May 13, 2004). In evaluating the pre- stand how the forum characterizes bad dictability of results, the court noted that faith claims and the choice of law principles “an insurer should expect courts to apply that it follows. While, as discussed above,

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