At the outset of litigation, coverage lawyers are often forced to grapple with determining which state’s law most favors their client. For example, when dealing with environmental liabilities, the application of one state’s law regarding pollution exclusions over another may be entirely dispositive of coverage. Choice of law analysis becomes difficult, however, when dealing with legal issues that have yet to be definitively resolved. In such cases, we rely on our best judgment to anticipate how a court would interpret state law and apply it to our case. The “Erie guesses” of federal courts—essentially their interpretation of state law—serve as valuable guidance in that regard. Yet, it is important to recognize that not all Erie guesses carry the same practical weight. In states with multiple federal districts and a wealth of coverage cases in state court, a court’s Erie guess may represent just one perspective among many. But in single-district states and those where federal jurisdiction in coverage cases abounds, an Erie guess may be the next best thing to a ruling from a state supreme court.
An “Erie guess,” for those who may not know, refers to a federal court’s endeavor to anticipate state law. The term "Erie" originates from the landmark case Erie Railroad Co. v. Tompkins (1938), wherein the Supreme Court held that federal courts must apply state law in diversity cases. Consequently, when confronted with an unanswered question of state law, federal judges must make an informed estimation of how the highest court of the state would rule in a similar situation.
Unlike binding precedent, a district court’s Erie guess does not impose an obligation on state courts or on other federal courts—even within the same state. This can result in a patchwork of conflicting decisions within a state, both between federal districts and between federal courts and lower state courts. Such discord at the federal level may find resolution through a ruling from a higher federal court. However, even that appellate decision is merely an Erie guess. Ultimately, Erie guesses only find true resolution when the state’s highest court provides clarification. A perfect example of this was last year’s merciful resolution of the cacophony of opinions in Texas regarding the consideration of extrinsic evidence when determining the duty to defend. Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640 S.W.3d 195 (Tex. 2022).
In states with a single federal district, however, like Colorado and New Mexico (among others), the impact of an Erie guess can be far more significant than in those with multiple federal districts, like Texas or New York. In single-district states, the influential effect of a district court’s ruling, at least at the federal level, applies statewide. And while intra-district disagreements among judges do occur, they are far less common than inter-district disagreements. As a result, these Erie guesses hold greater weight because (1) they encompass all federal cases brought within the state, and (2) they present an uncommonly unified perspective when state courts consider federal decisions in attempting to define state law, which they often do when faced with unresolved issues.
The influence of Erie guesses within these single-district states can become even more pronounced in insurance coverage cases. Take again for example Colorado and New Mexico. Due to a lack of insurance companies headquartered or incorporated in those states, achieving diversity of citizenship is very common. Additionally, Colorado and New Mexico, like so many other states, have bad faith statutes, which can allow for substantial (e.g., treble) damages. Liability under these statues, which is often plead as a matter of course, ensures that the federal diversity statute’s amount-in-controversy requirement is met even in smaller cases. This means that in Colorado and in New Mexico, insurance coverage cases are brought in federal court far more often than is seen in other states.
This has a twofold effect on the strength and durability of insurance coverage-related Erie guesses. First, a district court’s Erie guess will be applied more often due to the disproportionate number of coverage cases being litigated in federal court, all of which will find themselves in the same district. Second, the state’s highest court will have fewer occasions to address and overturn that Erie guess because there are fewer cases being brought in state court to provide such an opportunity. Consequently, in these states, an Erie guess is highly prone to becoming a self-fulfilling prophecy, effectively establishing itself as the de facto law of that state.
By way of example, one Erie guess that seems well-positioned to endure (provided it is not reversed on appeal) comes from Chisholm’s Village Plaza, LLC v. Travelers Commercial Ins. Co., a District of New Mexico case dealing with an absolute pollution exclusion. 621 F. Supp. 3d 1195 (D.N.M. 2022). In Chisholm’s Village, the court made the Erie guess that under New Mexico law, standard-form absolute pollution exclusions are inoperable if they do not expressly identify the substances that constitute a “pollutant.” Id. at 1258 (explaining that “pollutant” as defined is “inherently ambiguous”). The last time the New Mexico Supreme Court weighed in on any form of pollution exclusion, much less an absolute pollution exclusion, was over a decade ago.
In sum, when evaluating state law, it is crucial to understand not only what an Erie guess is, but to understand the factors at play that impact the practical weight of that guess. In states like Texas or New York, which have four federal districts and an ample supply of state-court insurance cases, an Erie guess may merely be a voice in a crowded room. However, in single-district states like Colorado and New Mexico, an Erie guess may serve as the final word.
