Because the states often reach different conclusions on insurance coverage questions, it is sometimes necessary to determine which state’s law governs a particular issue. This article outlines the steps to determining which law applies when there is a choice to be made. As with many other issues, ALI Restatements play a significant role.
A threshold question is whether the substantive laws of the states differ on the disputed issues. If not, there is no conflict; the court will apply the forum state’s law. If the laws differ, do you have a choice of forum in which to file suit? (This is not a question faced by defendants.) If you can choose the forum, it helps to know what choice-of-law rules each potential forum state would apply. Federal courts in diversity cases must apply the choice-of-law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941).
Another possibly dispositive question is whether the insurance contract specifies the governing law. Most policies do not include a choice-of-law provision, but, when one exists, courts are generally inclined to honor it. See Restatement (Second) of Conflict of Laws § 187 (1971); H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., 675 F. App’x 122 (3d Cir. 2017); Ratajczak v. Beazley Sols. Ltd., 870 F.3d 650 (7th Cir. 2017). A contractual choice of law may not be enforceable, however, if the court finds it is unreasonable or violates a “fundamental policy” of a state with a “materially greater interest.” Second Restatement § 187; Hendricks v. Novae Corp. Underwriting, Ltd., 868 F.3d 542 (7th Cir. 2017).
The next question is whether a forum-state statute would resolve the conflict. “A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.” Second Restatement § 6(1). Such provisions must be narrowly construed to avoid giving them “extraterritorial effect.” Austin Bldg. Co. v. Nat’l Union Fire Ins. Co., 432 S.W.2d 697 (Tex. 1968). See, e.g., A.R.S. § 20-1101 (Arizona); Mont. Code § 28-3-102; Tex. Ins. Code § 21.42. New York’s highest court recently held a policy was “issued or delivered” in New York, and therefore subject to a New York statute “where both insureds and risks are located in this state.” Carlson v. AIG, Inc., 89 N.E.2d 100 (N.Y. 2017)
Lex Loci Contractus Test
If these threshold questions aren’t dispositive, what test will the forum court apply to resolve the conflict? The First Restatement (1934) adopted lex loci contractus, under which “the law of the place of execution governs questions regarding the formation of the contract, while the law of the place of performance governs issues relating to the performance of the contract.” Wood Bros. Homes v. Walker Adjustment Bureau, 601 P.2d 1369, 1372 (Colo. 1979). Justifications for this rule include ease of application, predictability, discouraging forum shopping, and symmetry. See Ingersoll v. Klein, 262 N.E.2d 593 (Ill. 1970). It has been criticized for being “unduly inflexible, leading to harsh and unjust results.” Wood Bros. Homes, 601 P.2d at 1372. Nevertheless, lex loci is still used in a few states. See, e.g., Interstate Fire & Cas. Co. v. Dimensions Assurance Ltd., 843 F.3d 133 (4th Cir. 2016) (Maryland); Goss v. Green, 664 F. App’x 560 (6th Cir. 2016) (Tennessee).
Second Restatement’s Multifactor Test
Most jurisdictions apply the Second Restatement’s multifactor test or some variation. Under Section 6(2), the relevant factors include needs of the interstate and international systems; relevant policies of the forum; relevant policies of other interested states and relative interests of those states in the determination of the particular issue; protection of justified expectations; basic policies underlying the particular field of law; certainty, predictability, and uniformity of result; and ease in the determination and application of the law to be applied. These considerations often require balancing the interests.
Under Section 188, courts apply the local law of the state with “the most significant relationship to the transaction and the parties under the principles stated in § 6.” Relevant contacts include place of contracting; place of negotiation; place of performance; location of the contract’s subject matter; and each party’s domicile, residence, nationality, place of incorporation, and place of business.
Section 193, which applies to fire, surety, and casualty insurance policies, requires the court to apply the law of the state the parties understood to be the principal location of the insured risk, unless “some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties.” Hartford Underwriters Ins. Co. v. Foundation Health Servs., 524 F.3d 588 (5th Cir. 2008) (no “principal location” of risk); see also Mega Construction Corp. v. XL Am. Group, 684 F. App’x 196 (3d Cir. 2017); Am. Fam. Mut. Ins. Co. v. Williams, 832 F.3d 645 (7th Cir. 2016). Similar, but slightly different, multifactor tests are applied in a few states, notably New York (“center of gravity”) and California (“governmental interest”).
Multifactor tests frequently are criticized as unnecessarily complicated, unpredictable, and subject to manipulation. For example, in Visteon Corp. v. Nat’l Union, 777 F.3d 415 (7th Cir. 2015), Judge Posner approved Indiana’s “uniform-contract-interpretation” approach, but criticized the requirement to consider multiple factors.
Finally, scholars are working on a Third Restatement. Stay tuned.