Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_07-cv-00998/USCOURTS-casd-3_07-cv-00998-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

R & R SAILS, INC. dba HOBIE CAT

COMPANY,

Plaintiff,

CASE NO. 07-CV-0998 H

(POR)

ORDER DENYING WITHOUT

PREJUDICE DEFENDANT’S

MOTION TO DETERMINE

THAT AUSTRALIAN LAW

GOVERNS THIS LAWSUIT

vs.

INSURANCE COMPANY OF THE

STATE OF PENNSYLVANIA, and

DOES 1-10, inclusive,

Defendants.

On March 14, 2008, defendant Insurance Company of the State of Pennsylvania

(“Defendant”) filed a motion to determine that Australian law governs this lawsuit.

(Doc. No. 25.) On March 31, 2008, plaintiff R & R Sails, Inc. dba Hobie Cat Company

(“Plaintiff”) filed an opposition. (Doc. No. 31.) On April 7, 2008, Defendant filed a

reply. (Doc. No. 33.) The Court finds this motion appropriate for resolution without

oral argument and submits the motion pursuant to its discretion under Local Civil Rule

7.1(d)(1). For the following reasons, the Court denies Defendant’s motion without

prejudice.

Background

On June 1, 2007, Defendant removed this case from the San Diego Superior

Court based on diversity jurisdiction. (Doc. No. 1.) The case involves a dispute

Case 3:07-cv-00998-MMA-DHB Document 35 Filed 04/11/08 Page 1 of 8
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between two United States companies over an insurance contract made in the United

States. Plaintiff, a Missouri corporation, has its principal place of business in

Oceanside, California. (Compl. ¶ 1.) Plaintiff and its subsidiaries are in the business

of selling, manufacturing, and distributing racing sailboats and other water craft. (Id.

¶ 14.) Defendant, which writes and sells insurance, is a Pennsylvania corporation

maintaining its principal places of business in New York and Pennsylvania. (Id. ¶ 2.)

As alleged, Defendant insured Plaintiff under a policy effective March 24, 2001

through March 24, 2002 (“the policy”). (Id. ¶ 6.) The policy provided commercial

property insurance for property in Woolamia, Australia (“the Woolamia property”).

(Id.) Hobie Cat AustraAsia Pty. Ltd. (“Hobie Cat AustraAsia”), a wholly owned

subsidiary of Plaintiff, operated the Woolamia property. (Id. ¶¶ 7, 13.) The policy

allegedly provided insurance benefits for property damages and related business

interruption losses. (See id. ¶ 6.) A policy endorsement broadened the named insured

to include certain of Plaintiff’s affiliated and subsidiary companies, including Hobie Cat

AustraAsia. (Id. ¶ 8.)

On December 25, 2001, wildfires in Australia destroyed the Woolamia property

and virtually all of its contents. (Id. ¶ 16.) As a result, Hobie Cat AustraAsia lost most

of its inventory, manufacturing equipment, and supplies, as well as all of its on-site

office equipment, computers, and records. (Id.) To fulfill its existing contractual

obligations, Hobie Cat AustraAsia leased a new manufacturing facility. (Id. ¶ 17.)

Rebuilding the Woolamia facility and replacing records also caused a distribution delay

for some of Hobie Cat AustraAsia’s products. (Id. ¶ 17.) 

As alleged, Plaintiff made a timely claim for insurance benefits under the policy.

(Id. ¶ 19.) Plaintiff alleges that Defendant has not paid $236,619 of the policy’s

coverage of property damages, loss of income, and business interruption losses. (Id. ¶

27.) The complaint alleges causes of action for breach of contract, breach of implied

covenant of good faith and fair dealing, breach of California Business & Professions

Code section 17200, and declaratory relief. (Id. ¶¶ 28-55.)

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The policy contains two provisions that suggest a choice of law on narrow issues. The

“Appraisal” section states that “[t]he appraisers shall first select a competent and disinterested umpire

and, failing for fifteen (15) days to agree upon such umpire, then on request of the Insured or the

Company, such umpire shall be selected by a judge of a court of record in New York.” (Notice of

Removal Ex. 1 at 47.) The “Legal Proceedings” section states that “[p]rovided that if by the laws of

the state within which this insurance is issued such limitation is invalid, then any such claim shall be

void unless such action, suit or proceeding be commenced within the shortest limit of time permitted

by the laws of such state.” (Id. at 48-49.) Neither of these provisions serves as a general choice of law

clause, though when viewed together, they both suggest that the parties contemplated the application

of state laws within the United States.

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Discussion

I. Choice of Law Standard

 The policy does not contain a choice of law clause.1

 If the parties had specified

a choice of law clause, that clause would likely control and render the subsequent

analysis unnecessary. Generally speaking, a federal court sitting under diversity

jurisdiction applies the forum state’s choice of law rules. See Klaxon Co. V. Stentor

Electric Mfg. Co., 313 U.S. 487, 497 (1941); Welles v. Turner Entm’t Co., 503 F.3d

728, 738 (9th Cir. 2007). California courts have applied two different standards to

choice of law determinations involving contracts: California Civil Code section 1646

and a governmental interest test. See Arno v. Club Med Inc., 22 F.3d 1464, 1468-69

n.6 (9th Cir. 1994) (“There appears to be some difference of opinion as to whether

California’s choice of law rule for contracts is the governmental interest test . . . or the

test of Cal.Civ.Code § 1646.”); Strassberg v. New England Mut. Life Ins. Co., 575 F.

2d 1262, 1263-64 (9th Cir. 1978) (“California law moved away from a mechanical

choice of law process to employ the ‘governmental interest analysis’ approach.”) The

proponent of foreign law bears the burden to persuade the Court that foreign substantive

law applies. McGhee v. Arabian Am. Oil Co., 871 F.2d 1412, 1422 (9th Cir. 1989);

Hurtado v. Superior Court, 11 Cal. 3d 574, 581 (1974). 

II. California Civil Code Section 1646

Under Civil Code section 1646, “[a] contract is to be interpreted according to the

law and usage of the place where it is to be performed; or, if it does not indicate a place

of performance, according to the law and usage of the place where it is made.” Cal. Civ.

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Code. § 1646. If the contract does not expressly specify a place of performance, “the

place of performance sometimes can be gleaned from the nature of the contract and the

surrounding circumstances.” Frontier Oil Corp. V. RLI Ins. Co., 153 Cal. App. 4th

1436, 1443 (2007). Defendant contends that the insurance contract was to be performed

in Australia and that Australian law should therefore apply. Defendant relies on

Frontier Oil, arguing that California Civil Code section 1646 determines the choice of

law applied to an insurance contract. 

Here, two United States companies entered into a policy in the United States.

Plaintiff purchased the insurance policy from Defendant in U.S. Dollars, and Defendant

delivered the policy to Plaintiff in Oceanside, California. (Rogers Decl. ¶ 5, Mar. 31,

2008; Pl. Opp. at 6.) The policy’s “Summary of Insurance,” “Declarations Page,” and

“Schedule of Forms/Endorsements” all indicate that Plaintiff, in Oceanside, California,

was the insured party. (See Notice of Removal Ex. 1 at 19-22.) Moreover, Defendant’s

allegedly partial performance to date has consisted only of payments made to Plaintiff

in the United States: two checks made payable to Plaintiff and sent to Plaintiff in

Oceanside, California; and one check made payable to Plaintiff and sent to Plaintiff’s

owner’s home residence in Missouri. (Rogers Decl. ¶ 5.) Thus, the parties both entered

into the contract in the United States and performed the contract, at least in part, in the

United States.

Based on the submissions to date, the Court concludes that Defendant did not

consider Australian law while handling Plaintiff’s claim. First, the parties did not

include a choice of law clause in the policy specifying that Australian law would apply.

Second, Mr. Blaise Lombardo, the primary claim handler for Plaintiff’s claim, testified

at a January 9, 2008 deposition that he did not consider any Australian law in handling

Plaintiff’s claim. (Lombardo Dep. 37:10-13, Jan. 9, 2008.) Mr. Lombardo also testified

that he did not know if anyone acting on Defendant’s behalf had considered Australian

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Mr. Lombardo did testify that Australian law has been considered in the past. (Lombardo

Dep. 36:9-15.) However, he then clarified that Australian law was not considered in this case.

(Lombardo Dep. 37:10-17.)

3

Defendant argued that the claims manual was beyond the scope of discovery because

California law did not apply to the parties’ insurance dispute. (Disc. Confer. Order at 3.) Whether

or not the parties intended the manual to apply to the policy here, its production suggests that

Australian law was not considered in the claims process. If Defendant had a manual pertaining to the

treatment of Australian or international claims, it presumably would have produced that manual in

response.

4

Form GL 48008, entitled “Commercial General Liability,” contained liability defense

obligations. (Notice of Removal Ex. 1 at 57.) Based on the parties’ submissions, however, it does

not appear that Plaintiff seeks performance of those obligations in this lawsuit. Furthermore,

Defendant did not raise any arguments related to this provision.

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law in adjusting Plaintiff’s claim. (Lombardo Dep. 37:14-17.)2 Third, the claims

manual Defendant produced during discovery, which adopts California Fair/Unfair

Claims Settlement Practices, indicates that Defendant anticipated that California law

would apply. (Pl. Opp. Ex. 4 at 33.) Defendant produced the manual in response to a

discovery request for “the claims manual that was in effect during the pendency of the

claim at issue and upon which the adjuster did, should have, or could have relied in

handling the loss at issue.”3

 (Disc. Confer. Order at 3, Nov. 29, 2007.) Therefore,

though the only property insured was located in Australia, and the policy’s “Coverage

Territory” excluded property within the United States, the parties did not anticipate the

application of Australian law. 

In Frontier Oil, the court applied California law to a liability insurance dispute

between a Texas insured and a Texas insurer where the policy required performance of

defense obligations concerning an insured risk in California. Frontier Oil, 153 Cal.

App. 4th at 1443, 1446. The court defined the “place where [the policy] is to be

performed” as the location of the “risk insured” under the policy. Id. at 1443. It noted

that in a suit where the insurer’s defense obligations were at issue, the parties would

have expected to apply the law of the jurisdiction where the defense obligations would

arise. Id. Here, unlike the insurer’s foreign state defense obligations in Frontier Oil,

the coverage sought by Plaintiff requires no performance from Defendant in the foreign

state.4

 

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In Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., 14 Cal. App. 4th

637, 646 (1993), while the court stated that the location of the insured risk is given

particular emphasis in determining the choice of the applicable law, it clarified that

“[t]his is because location has an intimate bearing upon the nature of the risk and the

parties would naturally expect the local law of the state where the risk is to be

principally located to apply.” If the parties did not expect foreign law to apply,

therefore, it is not necessary for the court to give the location of the risk insured

particular emphasis. 

Based on the submissions to date, Defendant has not met its burden showing that

Australian law should apply under this statute. Absent a further showing to the

contrary, the Court concludes that California law applies to this suit under section 1646.

III. Governmental Interest Test

Defendant alternatively contends that California’s governmental interest test also

requires the application of Australian law. At this time, the Court disagrees. California

applies a three-step “governmental interest” analysis to choice-of-law questions: (1) the

court examines the substantive laws of each jurisdiction to determine whether the laws

differ as applied to the relevant transaction; (2) if the laws do differ, the court must

determine whether a true conflict exists in that each of the relevant jurisdictions has an

interest in having its law applied; and (3) if more than one jurisdiction has a legitimate

interest, the court must identify and apply the law of the jurisdiction whose interest

would be more impaired if its laws were not applied. Downing v. Abercrombie & Fitch,

265 F.3d 994, 1005 (9th Cir. 2001); Abogados v. AT&T, Inc., 223 F.3d 932, 934 (9th

Cir. 2000).

California and Australian laws differ is three key respects. First, Australian law

does not recognize tolling of a policy suit limitation clause, (Wotton Decl. ¶¶ 13-21,

March 14, 2008.), while California law tolls the period from the time the insured gives

notice of the loss until the insurer denies the claim. Prudential-LMI Commercial Ins.

v. Superior Court, 274 Cal. 3d. 674, 678 (1990); Migliore v. Mid-Century Ins. Co., 97

Cal. App. 4th 592, 604 (2002). Thus, Australian law may bar claims that Plaintiff

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would otherwise have under California law. Second, Australian law does not recognize

a cause of action for breach of the implied covenant of good faith and fair dealing,

(Wotton Decl. ¶¶ 6-9; Dogaru Decl. Ex. C., March 14, 2008.), while California law

recognizes such a cause of action. Jonathan Neil & Assoc., Inc. v. Jones, 33 Cal. 4th

917 (2004); Comunale v. Traders & Gen. Ins. Co., 50 Cal.2d 654, 659 (1958). Third,

Australian law does not recognize an insured’s right to recover punitive damages when

an insurer breaches the insurance policy, (Wotton Decl. ¶¶ 11-12), while California

recognizes such a right. Jonathan Neil, 33 Cal. 4th at 929; Cassim v. Allstate Ins. Co.,

33 Cal. 4th 780, 794 (2004). Therefore, the choice of law could determine whether or

not Plaintiff may proceed with its claims.

Given this conflict, the Court must determine whether both Australia and

California have an interest in having their laws applied. Australia and California have

competing interests at stake. For example, Australia has an interest as the location of

the losses at issue. See Stonewall, 14 Cal. App. 4th at 646. California has an interest

because Plaintiff’s primary place of business is in Oceanside, California. (Compl. ¶ 1.)

Therefore, a true conflict exists.

Finally, based on the submissions to date, the Court concludes that California’s

interest would be more impaired than Australia’s if its laws were not applied. None of

the parties reside in Australia, and the payments sought would be between United

States companies. Plaintiff has its primary place of business in California, and

Defendant is a United States insurance company that does business in California.

(Compl. ¶¶ 1, 2.) The allegations focus on Defendant’s handling of Plaintiff’s claims,

not on the fire or any other events in Australia. (Id. at ¶¶ 19-27.) Australia may have

an interest in deterring Defendant’s alleged actions because they affect Plaintiff’s

subsidiary corporation located in Australia. Defendants also argue that application of

Australian law would support Australia’s interest in promoting investment and limiting

liability for activity carried out in Australia. However, these interests would not be

furthered by the application of Australian law. To the contrary, Australian law could

bar Plaintiff’s claims and impair any interest in deterrence and promoting investment.

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California has a competing interest in deterring the alleged behavior and securing

recovery for its residents. Plaintiff was the policy’s beneficiary, and Defendant has

already made payments to Plaintiff in California. See Abogados, 223 F. 3d at 935

(placing emphasis on where the “complained of conduct” took place); Stonewall, 14

Cal. App. 4th at 649 (“California's paramount interest is in protecting its residents by

deterring tortfeasors.”); Robert McMullan & Son, Inc. v. United States Fid. & Guar.

Co., 103 Cal. App. 3d 198, 205-206 (1980) (“California is the forum state. Since the

contract was made between a California resident and a corporation doing business in

California, California has an interest in seeing that such contract is enforced according

to the law where it was made.”) Application of Australian law would impair these

interests. 

The balance of interests is not overwhelmingly in favor of California. The only

insured property is located in Australia. Moreover, the Coverage Territory of the policy

excludes property within the United States. (Notice of Removal Ex. 1 at 23.)

Nonetheless, on the facts currently presented, Defendant has not met its burden showing

that the governmental interest test supports the application of foreign law.

Conclusion

At this time, Defendant has failed to meet its burden to persuade the Court that

foreign law should apply. Therefore, the Court denies without prejudice Defendant’s

motion to determine that Australian law governs this lawsuit. The Court will continue

to consider the choice of law in light of all the circumstances of this litigation.

IT IS SO ORDERED.

DATED: April 11, 2008

MARILYN L. HUFF, District Judge

UNITED STATES DISTRICT COURT

COPIES TO:

All Parties of Record

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