The first consideration in choosing where to sue an insurer is whether the Commercial General Liability (“CGL”) policy itself contains a choice of law provision. Few insurance policies do. Those that contain them are typically Directors & Officers (“D&O”) policies. Courts generally respect them. But when they specify a state law but do not incorporate the application of its substantive law, then only its choice of law rules may be enforceable.
Absent instruction from the policy, each state has its own choice of law principles for determining the governing law for a given case. For example, California courts apply the law of the “place of performance” indicated by the contract.[2] If the contract “does not indicate a place of performance,” the court will use the place of contract formation instead.[3] If suit is filed in a federal court under rules governing diversity jurisdiction, choice of law principles of the forum state will apply.[4] A few illustrative cases reveal how this seemingly innocuous question can be the determinative issue.
The Plaintiff Should Choose the Venue Strategically
In Frankenmuth Mutual Ins. Co. v. Hockey Cup, LLC,[5] a company was accused of producing counterfeit and trademark infringing sports memorabilia secured defense benefits following tender. The insurer sued its insured in Illinois where it was located in a coverage lawsuit while the underlying action was in New York. It claimed that “delayed notice” of a cease and desist letter, not a lawsuit, precluded coverage because the insurer was not apprised of the possibility of litigation evidenced by this demand letter before it issued its policy.
The insurer sued in Illinois seeking to secure New York law. Applying Illinois’ “most significant contacts” test,[6] which places “special emphasis” on the location of the insured risk,[7] the court determined that New York law applied. Had the insurer filed in New York, the court would have used New York’s “center of gravity” approach,[8] potentially resulting in the choice of Illinois law where prejudice was a factor under an umbrella policy. [9]
“Under New York law, ‘compliance with the notice provision of an insurance contract is a condition precedent to all of the insurer's duties and liability under the policy, including the duty to defend.’”[10] The policy at issue required notification “as soon as practicable” of “an offense which may result in a claim.”[11] Few entities who receive multiple cease and desist letters view their often questionable grounds for attack as an indication of a subsequent likely lawsuit, especially where there is a cogent response to letters by retained intellectual property counsel. Nonetheless, the court held that the cease and desist letters left “no doubt that the NHL intended to enforce its trademark rights against [the insured],” so the insured was aware “of [a] demand that could be defended, settled, and paid by the insurer.”[12]
This view of the law is a narrow construction shared by few courts and evidences a minority rule.[13] Even in New York, this strict requirement is often alleviated by a statute[14] requiring prejudice before defective notice can absolve an insurer of its duties in personal injury cases,[15] but it was not applicable here because the statute is limited to insurance policies issued or delivered in New York. Defense or coverage counsel who fail to advise clients of the importance choosing a forum to dispute coverage issues in certain cases may face professional liability exposure. [16]
Courts Can Disregard Plaintiff’s Choice of Venue
In Shanze Enterprises v. American Casualty Co.,[17] an insurer successfully argued for transfer from California to Texas in order to exclude “extrinsic evidence” that supported coverage. Once transferred, Texas’ “most significant relationship” choice of law principle[18] took effect. That test led to application of Texas law that, at the time, adhered to a strict “eight-corners” rule, forbidding the court from examining any evidence beyond the insurance policy and the underlying complaint in making a coverage determination.[19] This strict interpretation of the rule forbidding introduction of pages from a website referenced in the Complaint was not used in a later Texas Court of Appeals decision[20] and eventually rejected by the Texas Supreme Court when it clarified the “eight-corners” rule in a recent case.[21]
Conclusion
Examine the options, consider the choice of law principles of each forum, and judge the likelihood of each venue applying the set of substantive laws most likely to rule in favor of coverage. The decision is complicated by the possibility of new decisions altering the legal landscape. An informed decision should be made, guided by expert coverage counsel, when deciding whether to sue an insurer as well as when and where to do so.
[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[2] Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1443 (2007) (Explaining that the place of performance can be “expressly specifie[d]” or “gleaned from the nature of the contract and its surrounding circumstances.”
[4] Jupiter Aluminum Corp. v. Home Ins. Co., 225 F.3d 868, 873 (7th Cir. (Ill.) 2000) (“Federal courts sitting in diversity must look to the conflict-of-laws rules of the forum state for the applicable substantive law.”) (citing W. Suburban Bank v. Badger Mut. Ins. Co., 141 F.3d 720, 724 (7th Cir. (Ill.) 1998)).
[5] No. 18 C 8142, 2019 U.S. Dist. LEXIS 160278 (N.D. Ill. Sep. 20, 2019).
[6] Lapham–Hickey Steel Corp. v. Protection Mut. Ins. Co., 655 N.E.2d 842, 845 (1995) (“[I]nsurance policy provisions are generally governed by the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract.“) (quotation marks and citation omitted).
[7] Society of Mount Carmel v. National Ben Franklin Ins. Co. of Ill., 643 N.E.2d 1280, 1287 (Ill. 1994).
[8] Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309, 317 (1994) (The test examines several factors in order to determine the state with “the most significant relationship to the transaction and the parties.”) (quoting Restatement (Second) of Conflict of Laws § 188(1)).
[9] Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill. 2d 303, 346 (2006) (“’[A] lack of prejudice may be a factor in determining the question of whether a reasonable notice was given in a particular case’ . . . .”) (quoting Simmon v. Iowa Mut. Cas. Co., 3 Ill. 2d 318, 321 (1954)).
[10] Frankenmuth, 2019 U.S. Dist. LEXIS 160278 at *6 (quoting Gelfman v. Capitol Indem. Corp., 39 F. Supp. 3d 255, 268 (E.D.N.Y. 2014)).
[11] Frankenmuth, 2019 U.S. Dist. LEXIS 160278 at *6.
[13] Hernandez Castillo v. Prince Plaza, LLC, 2014 NY Slip Op 24049, 981 N.Y.S.2d 906, 908 (Sup. Ct. 2014) (“By contrast, the modern trend and the majority position is to use the ‘notice-prejudice’ rule. Under the notice-prejudice rule, late notice alone is insufficient for an insurer to deny coverage.”) (internal citation omitted).
[14] N.Y. Ins. Law § 3420(a)(5) (“[F]ailure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer . . . .”)
[15] See, e.g., Bullseye Rest., Inc. v. James River Ins. Co., 387 F. Supp. 3d 273, 284 (E.D.N.Y. 2019) (The insured had a personal and advertising injury policy, and the court stated “an insurer may not deny coverage under a liability policy based on the failure of the insured to give timely notice of claim unless the insurer suffers prejudice as a result of the delay.”) (citing N.Y. Ins. Law § 3420(a)(5)); Hernandez Castillo, 981 N.Y.S.2d at 912 (Holding that “notice was provided to [the insurer] within two years of the time required under the policy,” so the insurer “ha[d] the burden to prove that it ha[d] been prejudiced.”)
[17] Shanze Enters. v. Am. Cas. Co. of Reading, PA, No. 2:14-cv-02623-KJM-AC, 2015 U.S. Dist. LEXIS 27877, *8–9 (E.D. Cal. Mar. 5, 2015) (Weighing in favor of transfer because, among other reasons, “[t]he insurance agreement was negotiated and executed in Texas between Shanze, a Texas corporation with its principal place of business in Dallas, and ACCO's agent in Texas.”)
[18] Henry Schein v. Stromboe, 102 S.W.3d 675, 696 (Tex. 2002) (“’The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.’”) (quoting Restatement (Second) of Conflict of Laws § 188(1)).
[19] Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654-655 (Tex. 2009) ("Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy. [I]n deciding the duty to defend, the court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition.”)
[20] AIX Specialty Ins. Co. v. Shiwach, No. 05-18-01050-CV, 2019 Tex. App. LEXIS 11075, *8 (Tex. App. Dec. 18, 2019).
[21] Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640 S.W.3d 195, 197 (Tex. 2022).
