Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-01192/USCOURTS-ca10-89-01192-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

---

PUBLISH 

FILED 

United States Court of A 

Temhc·-· ; P.Peals Jrcu.t 

UNITED STATES COURT OF APPEALS APR 2 5 1990 

ROBERT L. HOECKER 

Clerk 

TENTH CIRCUIT 

RICHARD MITCHELL; LARRY COTTEN; FIRST ) 

NATIONAL BANK OF FORT SMITH, ARKANSAS, ) 

) 

Plaintiffs-Appellees, ) 

) 

Vo } 

) 

STATE FARM FIRE & CASUALTY COMPANY, ) 

) 

Defendant-Appellant. ) 

NOo 89-1192 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 86-Z-2171) 

Phillip S. Figa (Emily Kahn Kemme with him on the briefs) of Burns 

& Figa, P.C., Denver, Colorado, for Plaintiffs-Appellees. 

Alan Epstein of Hall & Evans (William J. Hunsaker of Makris and 

Hunsaker, with him on the briefs), Denver, Colorado, for 

Defendant-Appellant. 

Before BRORBY, EBEL, Circuit Judges, and JOHNSON*, District Judge. 

*Honorable Alan B. Johnson, District Judge, United States District 

Court for the District of Wyoming, sitting by designation. 

PER CURIAM. 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 1 
Defendant-appellant State Farm Fire and Casualty Company 

(State Farm) appeals the trial court's grant of partial summary 

judgment to plaintiffs-appellees on the ground that Arkansas law, 

rather than Colorado law, governs determination of the amount due 

to plaintiffs under an insurance policy issued by State Farm on a 

Colorado property destroyed by fire. We reverseo 

Facts 

The following facts are undisputed unless otherwise noted: 

On September 6, 1976, State Farm, an Illinois corporation, 

issued an insurance policy for fire and extended coverage (Policy) 

on a property described as Units 1, 2, 3 and 4, Westerly 

Condominiums (Property) in the town of Mt. Crested Butte, 

Colorado. The insureds under the Policy, which was issued and 

serviced out of State Farm's office in Englewood, Colorado, were 

Colorado residents. In late 1981, the Policy was assigned to 

plaintiffs-appellees Larry Cotten and Richard Mitchell in 

connection with 

and Mitchell are 

National Bank of 

mortgagee on the 

beneficiary, is 

their acquisition of the Property. Both Cotten 

Arkansas residents. Plaintiff-appellee First 

Fort Smith, Arkansas (FNB), which is the 

Property and hence the principal Policy 

also an Arkansas resident. The Policy does not 

indicate what state law governs issues regarding its operation and 

effect. 

On May 27, 1985, the Property was totally destroyed by fire. 

Under the terms of the Policy, Mitchell and Cotten were entitled 

to the following recovery for this loss: 

2 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 2 
l. Replacement cost. 

a. Unless otherwise specified, loss 

adjusted on the basis of the replacement cost 

the property insured hereunder, but the 

liability of the Company shall not exceed the 

shall be 

value of 

limit of 

least of: 

(1) the full cost of replacement of such 

property at the same site with new material of like kind 

and quality, without deduction for depreciation; 

(2) the cost of repairing 

property within reasonable time; 

the insured 

(3) the limit of liability under this policy 

applicable to such property at the time of loss; or 

(4) the amount actually and necessarily 

expended in repairing or replacing such property or any 

part thereof. 

b. The Company shall not be liable for payment of 

loss on a replacement cost basis unless and until actual 

repair or replacement is completed. 

Unless the time is extended by the Company in writing, 

loss to the property not repaired or replaced within one 

year after the loss will be settled on an actual cash 

value basis rather than on a replacement cost basis. 

State Farm Policy No. 96-83-8571-2. The Property was not repaired 

or replaced within one year after the fire, allegedly because 

zoning and building ordinances adopted by the town of 

Mt. Crested Butte prior to the Property's destruction did not 

permit it to be rebuilt on its original foundation. State Farm's 

limit of liability under the Policy at the time of the fire was 

$450,000. 

After the parties failed to reach an agreement as to the 

amount due to Mitchell and Cotten under the Policy, plaintiffs 

initiated this action against State Farm in the United States 

3 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 3 
District Court for the Western District of Arkansas. This action 

was subsequently transferred to the federal district court for the 

District of Colorado pursuant to 28 u.s.c. § 1404(a). 

In their complaint, plaintiffs alleged, among other things, 

that they were entitled to payment of $450,000, the maximum 

permitted under the Policy, rather than to the amount of the 

Property's actual cash value or replacement cost as stated in the 

Policy. In a March 31, 1988 motion for partial summary judgment 

on this issue, plaintiffs argued that this result was required by 

Arkansas' Valued Policy Statute, which states in pertinent part: 

A fire insurance policy, in case of a total loss by fire 

of the property insured, shall be held and considered to 

be a liquidated demand and against the company taking 

the risk, for the full amount stated in the policy, or 

the full amount upon which the company charges, collects 

or receives a premium •••• 

Ark. Stat. Ann. § 23-88-101 (1987)(formerly § 66-39-01). 

In a cross-motion for partial summary judgment filed soon 

thereafter, State Farm responded that Colorado rather than 

Arkansas law governed determination of the amount due under the 

Policy and, further, that Colorado law required enforcement of the 

Policy as written and hence limited Mitchell and Cotten's recovery 

to the actual cash value of the Property. Both parties apparently 

agree that this value is approximately $200,000. 

After a hearing, the district court granted plaintiffs' 

motion for partial summary judgment and denied State Farm's motion 

upon ruling that Arkansas law governs this action and requires 

State Farm to pay plaintiffs the $450,000 limit of liability under 

the Policy. Order of November 7, 1988. On May 4, 1989, the 

4 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 4 
district court granted the parties' stipulated motion for 

certification for appeal of its interlocutory order pursuant to 

28 u.s.c. § 1292(b). This appeal followed upon our grant of State 

Farm's petition for leave to appeal. 

Discussion 

A. Standard of Review 

We review choice of law determinations de novo. See Zipfel 

v. Halliburton Co., 832 F.2d 1477, 1482 (9th Cir. 1987), cert. 

denied, 108 s. Ct. 2819 (1988). Any findings of fact underlying 

such determinations are reviewed under the clearly erroneous 

standard. Id. We will affirm the district court's grant of 

partial summary judgment on the choice of law issue only if it is 

clear from the record that there are no genuine issues of material 

fact and that plaintiffs are entitled to judgment as a matter of 

law. Willner v. Budig, 848 F.2d 1032, 1033-34 (10th Cir. 1988), 

cert. denied, 109 s. Ct. 840 (1989). 

B. Choice of Law 

The parties assert that either Arkansas or Colorado law 

governs determination of the amount due to plaintiffs under the 

terms of the Policy and the circumstances of this case. It is 

undisputed that the law of these two states are in conflict on 

this issue and that the parties have not effectively chosen which 

state's law applies. Accordingly, we must determine which state's 

law governs this dispute. See Coldwell Banker & Co. v. Karlock, 

686 F.2d 596, 599-600 & n.4 (7th Cir. 1982). Because this 

5 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 5 
diversity case was initiated in federal district court · in 

Arkansas, Arkansas choice of law rules apply. See Van Dusen v. 

Barrack, 376 U.S. 612, 639 (1964). 

Arkansas generally applies the "most significant 

relationship" test to determine the applicable law in a conflicts 

situation. See Standard Leasing Corp. v. Schmidt Aviation, Inc., 

264 Ark. 851, 576 S.W.2d 181, 184 (1979); Williams v. Carr, 

263 Ark. 326, 565 S.W.2d 400, 403-04 (1978); Williams v. State 

~~~~~~~~~~~~~~~~ 

Farm Mut. Auto. Ins. Co., 737 F.2d 741, 743 (8th Cir. 

1984)(applying Arkansas law), cert. denied, 469 U.S. 1159 (1985); 

Roofing & Sheet Metal Servs., Inc. v. La Quinta Motor Inns, Inc., 

689 F.2d 982, 994 (11th Cir. 1982)(summarizing Ark. law). This 

test, as stated in section 6 of the Restatement (Second) of 

Conflict of Laws (197l)(Restatement), requires consideration of 

the following general principles in determining the state law 

applicable to a particular issue: 

(a) the needs of the interstate and international 

systems, 

(b) the relevant policies of the forum, 

(c) the relevant policies of other interested states 

and the relative interests of those states in the 

determination of the particular issue, 

(d) the protection of justified expectations, 

(e) the basic policies underlying the particular field 

of law, 

(f) certainty, predictability and uniformity of result, 

and 

6 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 6 
(g) ease in the determination and application of the 

law to be applied. 

Id.; see Williams v. Carr, 565 S.W.2d at 404. 

In a case such as this one, involving interpretation and 

enforcement of a contract that does not contain a choice of law 

provision 

the contacts to be taken into account in applying the 

principles of [the most significant relationship test] 

to determine the law applicable to an issue include: 

(a) the place of contracting, 

(b) the place of negotiation of the contract, 

(c) the place of performance, 

(d) the location of the subject matter of the 

contract, and 

(e) the domicil, residence, nationality, place of 

incorporation and place of business of the parties. 

These contacts are 

relative importance 

issue. 

to be evaluated according to their 

with respect to the particular 

Restatement§ 188; see Williams v. State Farm Mut. Auto. Ins. Co., 

737 F.2d at 743 (applying § 188 contacts analysis under Arkansas 

law); Roofing & Sheet Metal Servs., 689 F.2d at 994-95 (same). 

As suggested above, a particular contact may play an 

especially important role in determining the state having the most 

significant relationship to issues arising out of certain kinds of 

contracts. For contracts of fire, surety or casualty insurance, 

that contact is "the principal location of the insured risk during 

the term of the policy." Restatement § 193. Thus, in 

jurisdictions following the "most significant relationship" test, 

the law of the state in which the insured property, object or 

7 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 7 
other risk is located normally governs issues concerning the 

validity or effect of the insurance contract, see id.; Industrial 

Indem. Ins. Co. v. United States, 757 F.2d 982, 986 (9th Cir. 

1985); Diamond Int'l Corp. v. Allstate Ins. Co., 712 F.2d 1498, 

1501 (1st Cir. 1983); McAllaster v. Bruton, 655 F. Supp. 1371, 

1373 (D. Me. 1987); United States v. Aid Ins. Co., 

642 F. Supp. 535, 537 (E.D. Mo. 1986), including "whether in the 

case of destruction or loss the insured's recovery will be limited 

to the actual value of the thing despite the fact that it was 

insured for a larger amount." Restatement § 193 comment a. 

Although no Arkansas court has expressly adopted this rule in 

general or section 193 of the Restatement in particular, we agree 

with both the parties and the district court that the Arkansas 

Supreme Court would do so if given the opportunity. See Roofing & 

Sheet Metal Servs., 689 F.2d at 994 (concluding, upon review of 

Arkansas case law, that the Arkansas Supreme Court would apply 

"most significant relationship" test to breach of contract issue); 

cf. Bank of Oak Grove v. Wilmot State Bank, 279 Ark. 107, 

648 S.W.2d 802, 804 (1983)(holding that Arkansas law applies to 

all transactions involving lands within the state). Accordingly, 

we hold that the choice of law principles stated in Restatement 

section 193 govern determination of the choice of law issue before 

this court. 

In this case, the district court applied section 193 to hold, 

contrary to the general rule, that Arkansas had a more significant 

relationship to a determination of the plaintiffs' rights under 

the Policy than did Colorado, the location of the Property. As 

8 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 8 
grounds therefor, the district court cited the plaintiffs' alleged 

expectation that the $450,000 policy limit was recoverable in case 

of total destruction of the Property, Arkansas' public policy, as 

evidenced by its Valued Policy Statute, that insureds be able to 

recover the full amount upon which they paid premiums and the fact 

that plaintiffs resided in Arkansas and negotiated and performed 

their obligations under the insurance contract there. Tr. at 32. 

In addition, the district court found that "the equities in this 

case strongly pointed to the application of the [more favorable] 

Arkansas law" because Mitchell and Cotten had paid premiums on a 

liability limit of $450,0000 and had allegedly been unable to 

replace or repair the Property due to changes in Mt. Crested Butte 

zoning ordinances. 1 Id. at 30-32. Overall, the court found that 

"other than the [State Farm] agent residing in Colorado ••• and 

the property being actually located here ••• it seems to me all 

other relationships and all other significant tests would point to 

the law of the state of Arkansas being applied in this 

case." Id. at 31. 

We must disagree both with the district court's analysis and 

its conclusion. As the above discussion and vast majority of case 

law makes clear, the location of an insured property is not merely 

one factor to be balanced against others in determining the law 

1 It appears from the record before us that there was some 

dispute as to whether Mitchell and Cotten were precluded from 

rebuilding the Property or only from rebuilding on the original 

foundation. Because we reverse the district court's grant of 

partial summary judgment on other grounds, we need not address 

this question or any implications it might have for the 

plaintiffs' recovery under the Policy. 

9 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 9 
governing the parties' rights under an insurance contract~ 

Instead, it is the single most important factor in making this 

choice of law determination, see, e.g., Restatement § 193; 

Industrial Indem. Ins. Co., 757 F.2d at 986; Diamond Int'l Corp., 

712 F.2d at 1501-02; McAllaster, 655 F. Supp. at 1373; Aid Ins. 

Co., 642 F. Supp. at 537, and, as the case law demonstrates, is 

almost invariably controlling. 2 Thus, absent some special 

circumstances or other factors distinguishing this case from those 

following the general rule, Colorado, as the state in which the 

Property is located, has the most significant relationship to 

issues arising out of the Policy and its law will govern this 

action. 

Neither the record nor the district court's stated rationale 

in choosing Arkansas law justify a departure from the general rule 

in this case. There is no evidence in the record, for example, 

that the parties to this action either chose or expected, 

justifiably or otherwise, Arkansas law to govern issues arising 

under the Policy. In the absence of such evidence, it can 

2 In fact, plaintiffs have found but a single case, Coffin v. 

London & Edinburgh Ins. Co., 27 F.2d 616 (N.D. Ga. 1928), in which 

a court applied some law other than that of the state in which an 

insured property was continually located to determine the parties' 

rights under an insurance contract. In that case, the district 

court chose to apply the second state's law because application of 

the law of the state of location would have invalidated the 

insurance contract and thus defeated the expectations of both 

parties that a valid contract existed. Id. at 617-18. In this 

case, application of Arkansas law rather than the law of the state 

in which the Property is located would have the opposite effect 

because it would invalidate the liability clause of what otherwise 

appears to be a valid and binding contract. Thus, Coffin is 

readily distinguishable from this case. 

10 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 10 
generally be assumed that the parties, if they thought about the 

choice of law issue at all, expected Colorado law, as the law of 

the state in which the Property was located, to be applicable. 

See Restatement § 193 comment c. The fact that Arkansas law looks 

more favorably on plaintiffs' claim, and that plaintiffs would 

thus benefit from its application in this case, is also not 

determinative of which state has the most significant relationship 

to the recovery issue. See Dorr v. Briggs, 709 F. Supp. 1005, 

1007 (D. Colo. 1989)(applying most significant relationship test 

to choose state law that potentially limited plaintiffs' 

recovery); Grand Sheet Metal Prods. Co. v. Aetna Casualty & Sur. 

Co., 500 F. Supp. 904, 908-09 (D. Conn. 1980)(same). Finally, the 

fact that the insureds were Arkansas residents, and hence paid 

premiums and otherwise acted on the Policy from that base, is 

certainly not sufficient to overcome Colorado's interest in 

applying its law to an insurance contract on property located 

within its borders. 

Accordingly, the district court's holding that Arkansas law 

governs determination of the amount of plaintiffs' recovery under 

the Policy is REVERSED, as is its order granting partial summary 

judgment to plaintiffs. Because there are no material issues of 

fact remaining and we have determined that State Farm is entitled 

as a matter of law to have Colorado law applied to the contract 

issues raised in this action, we also enter partial summary 

judgment for State Farm on this choice of law issue. We do not, 

however, consider or decide whether Colorado law limits 

plaintiffs' recovery under the Policy to the actual cash value of 

11 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 11 
the Property as argued by State Farm in the district court below7 

but rather, consistent with the parties' stipulated motion 

certifying this appeal, remand this issue to the district court 

for determination. 

This matter is hereby REVERSED and REMANDED to the district 

court for further proceedings consistent with this decision and 

the district court's May 4, 1989, order certifying this appeal. 

12 

Appellate Case: 89-1192 Document: 01019583844 Date Filed: 04/25/1990 Page: 12