Source: http://butler.legal/choice-of-law-in-bad-faith-cases
Timestamp: 2019-04-22 10:06:26+00:00

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This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Bad Faith, Vol. 12, #8, p. 16 (Aug. 18, 1998). Copyright Butler 1998.
When a bad faith action is filed or anticipated it is important for any insurance company quickly to evaluate potential exposure. A threshold issue in that evaluation is identification of the substantive law of bad faith that will govern the case. What must the plaintiff prove and what might he get if he does?
A Florida insured drives to North Carolina. There she collides with a pedestrian who sues in that state. Her carrier, from the home office in California, decides not to defend the suit. The insured is defaulted and sues her carrier, in Florida, for bad faith.
Which state supplies the substantive law? Florida - the forum state and place where the policy was delivered? North Carolina - where the insured was defaulted? California - where the "bad faith" decision was made? To answer these kinds of questions, a court is required to make a choice of law analysis.
This brief article cannot cover this complex field. Rather, it will outline the three common choice of law approaches. Then it will examine how they have been applied in some reported decisions involving bad faith.
The First Restatement requires categorization of the action: contract, tort, or procedural/remedial.(9) If it is a contract action, then the doctrine lex loci contract us may apply.(10) Under this doctrine, the substantive law of the state where the contract was executed will govern the validity, nature, construction, and interpretation of a contract.(11) However, if the contract was made in one state, but was to be performed in another, the substantive law of the state where the contract was to be performed will govern.(12) This is the doctrine of lex locisolutionis. In our hypothetical, if Florida law considers bad faith to sound in contract, then a Florida court probably would apply North Carolina bad faith law.
If the action sounds in tort, the First Restatement invokes the doctrine of lexloci delecti.(13) Under that rule, the law of the state where the tort was committed governs.(14) In the hypothetical, if Florida law considers bad faith an action in tort, and applies the First Restatement, then a Florida court probably would choose the law of North Carolina.
In the hypothetical, if Florida considers bad faith neither a tort nor a breach of contract, under the Second Restatement, the court will consider the above factors, and any others it deems necessary.(36) Because of this, the analysis will be subjective and the choice unpredictable.
This is more broad and progressive than the lex loci delicti doctrine. For that reason, any determination under § 145 is unpredictable. In the hypothetical, Florida might apply the law of California, North Carolina or its own law.
This rule too is more flexible and subjective than lex loci contractus. In the hypothetical, assume Florida considers bad faith failure to defend a breach of a contractual duty. Obviously, Florida has a significant relationship to the place of contracting, the place of negotiation, and the place of domicile. But, the place of performance probably is North Carolina in the hypothetical instance and the location of the "subject matter" of the contract is unclear. The carrier's place of business is California. Under such an analysis, a certain prediction of which state's law would apply is not possible.
Let us turn now and see how some courts have implemented the rules.
Arizona follows the Second Restatement to resolve choice of law issues. It also deems bad faith an action in tort.(49) In Bates v. Superior Court, the Arizona Supreme court gave a succinct analysis using the Second Restatement.
In 1975, Gloria Bates, a resident and licensed driver from Michigan, was involved in an automobile accident in Illinois. She suffered injuries which required continued treatment. She was covered under her husband's auto insurance policy with Nationwide, which was executed in Michigan. She made claims to Nationwide for treatment through her insurance agent in Michigan.
Sometime after the accident, Ms. Bates moved to Arizona. She continued to file claims through the agent in Michigan. In 1984, her agent retired, and her claims were transferred to an adjuster at the home office in Ohio. In 1985, the new adjuster requested Ms. Bates to see a doctor to determine if continued treatment was necessary. The doctor said it was not. Nationwide denied coverage for further treatment.
Ms. Bates sued Nationwide in Arizona for breach of contract and for bad faith. Nationwide filed a motion for partial summary judgment to establish which state's law should govern the bad faith claim. The choice of law question was important since not all the "interested" states had the same remedies available. Both Ohio and Arizona allowed such claims, permitting punitive damages inappropriate circumstances. However, Michigan did not recognize a cause of action for first-party bad faith.
The trial judge granted Nationwide's motion for partial summary judgment concluding that Michigan was the state with the most significant contacts. Ms. Bates petitioned the appellate court for "special action" (writ of certiorari). When the appellate court denied her petition, Ms. Bates petitioned for special action to the Arizona Supreme Court which accepted review.
The court then looked at the geographic disposition of the parties. It considered that Ms. Bates was from Arizona, and that although the defendant was headquartered in Ohio, it conducted extensive business in Arizona. Relying on comment e of §145, the court gave greater weight to the victim's residence. Despite this analysis, the court concluded that the "geographic disposition of the parties" factor was inconclusive.
In determining the center of the parties' relationship, the court found that the relationship was centered in Ohio because the claims were submitted and, subsequently, denied there. Based on this, the court stated that Arizona and Ohio had equally significant relationships to the matter. Therefore, the court examined this result in light of the general factors from § 6(2).
The only concern the court had after reviewing those factors was the "justifiable expectations of the parties." Nationwide argued that because the policy was negotiated and executed in Michigan, and because the claims originally were readjusted in Michigan, it expected Michigan law to apply. The court disagreed. First, the matter was not unique to Nationwide's Michigan business. Second, use of the Nationwide policy was not limited to Michigan. It was national. As such, Nationwide could anticipate that Ms. Bates might relocate or be involved in an accident in other states. If so the claim could be adjusted in other states. Because of this, the court found that Nationwide did not have a justifiable expectation for Michigan law to be the exclusive law of the policy. Instead, because of the contact relationships with Ohio and Arizona, the court found that either Nationwide or Ms. Bates could reasonably expect that the laws of either Arizona or Ohio would apply.
Florida is one of the minority states which continues to apply the First Restatement when there is a choice of law question of contracts.(52) Another instrictive case is Teachers Ins. Co. v. Berry. In that case, the U.S. District Court for the Northern District of Florida, interpreting Florida law, applied the doctrine of lex loci solutions to choice of law in a bad faith action.
On May 6, 1990, Dennis Nicholson was involved in an automobile/pedestrian accident which killed Alonzo James. (The location of the accident is not given in the case.) The car was owned by John Berry. Both Nicholson and Berry were insured under a Teachers automobile policy executed in Pennsylvania. The policy had a $25,000 limit for bodily injury.
The decedent's mother, Debra King, contemplated filing a wrongful death suit against Berry and Nicholson in Florida. King and Teachers agreed to settle for the $25,000 limits provided that Berry and Nicholson signed financial affidavits that each lacked recoverable assets. The deadline for King to receive these affidavits was October 29, 1990. However, Teachers did not mail the affidavits to Berry or Nicholson until after the deadline. King's counsel received Berry's affidavit late, but never Nicholson's. Thus, the matter did not settle.
On April 29, 1991, King filed for wrongful death against Berry and Nicholson in Florida. Teachers provided a defense to both. The case settled out of court for$575,000. However, a condition of this agreement was that King could not execute on the personal assets of the defendants until after the final disposition of a lawsuit by Berry and Nicholson against Teachers for failure to settle.
In the U.S. District Court for the Northern District of Florida, Teachers filed seeking a declaratory judgment that it did not act in bad faith. Berry and Nicholson counterclaimed that Teachers acted in bad faith and was negligent.
Because insurance bad faith actions focus on the performance of the policy, the court determined that the law of the place where the policy was to be performed would control. The wrongful death suit was filed, maintained, and defended in Florida. The settlement negotiations for that case commenced in Florida. Accordingly, the court held that the substantive law of Florida would govern the bad faith action.
A choice of law determination can be vexing. In many cases a practitioner may be able only to narrow it down and discuss several possible outcomes. Of course, in some instances, it will turn out not to matter very much. The law of the states involved may be similar. But in other instances, it could mean the difference between limited and unlimited exposure; between a high standard of proof and allow one. The best course may be to get an early ruling to show the way.
1. Eg. Kewen v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401 (1980).
2. Eg. McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo. 1990).
3. Eg. Beck v. State Farm Mut. Automobile Ins. Co., 54 Cal. App. 3d 347, 126 Cal.Rptr. 602 (1976).
4. Eg. Combs v. Insurance Co., 146 Ill. App. 3d 957, 797 N.E.2d 503, 100 Ill. Dec.525 (1st Dist. 1986).
5. See Recovery Of Damages For Emotional Distress In Tort, Contract And StatutoryBad Faith Actions, Mealey's Litigation Report: Bad Faith, Vol. 12, #6, July 21, 1998.
6. Jason E. Pepe, Kansas's Conflict of Laws Rules for Insurance Contract Cases: It'sTime to Change Policies, 46 Kan. L. Rev. 819, 820 (May 1998).
7. Symeon C. Symeonides; Choice of Law in the American Courts in 1998, 45 Am.J. Comp. L. 447, 457 (Summer 1997).
9. Sonya Haller; Note: Ohio Choice of law Rules: A Guide To the Labyrinth, 44 OhioSt. L.J. 239, 242 (Winter 1993); Federal Insurance Company v. National Distribution Company, 417 S.E.2d 671(Ga. App. 1992).
11. Black's Law Dictionary 911 (6th ed. 1990).
14. Black's Law Dictionary 911.
17. Lee R. Russ and Thomas F. Sagella, Couch on Insurance 3d, § 24:20 (1997).
27. Id. at 827, n.70 citing Symeon C. Symeonides, Choice of Law in the AmericanCourts in 1994: A View "From the Trenches," 43 Am. J. Comp. L. 1, 3 (1995).
28. Id. at § 6(2).
29. Id. at § 6(2)(a).
30. Id. at § 6(2)(b).
31. Id. at § 6(2)(c).
32. Id. at § 6(2)(d).
33. Id. at § 6(2)(e).
34. Id. at § 6(2)(f).
35. Id. at § 6(2)(g).
36. Id. at § 6, comment c.
37. Id. at § 145(1).
38. Id. at § 145(2)(a).
39. Id. at § 145(2)(b).
40. Id. at § 145(2)(c).
41. Id. at § 145(2)(d).
42. Id. at § 186.
43. Id. at § 188(1).
44. Id. at § 188(2)(a).
45. Id. at § 188(2)(b).
46. Id. at § 188(2)(c).
47. Id. at § 188(2)(d).
48. Id. at § 188(2)(e).
49. Bates v. Superior Court of the State of Arizona, 749 P.2d 1367 (Ariz. 1988).
53. Broyles v. Bayless, 878 F.2d 1400 (11th Cir. 1989); Klaxon Co. v. Stentor Elec.Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941).
54. See Lumbermans Mut. Cas. Co. v. August, 530 So. 2d 293 (Fla. 1988); also Sturiano v. Brooks, 523 So. 2d 1126 (Fla. 1988).
55. Government Employee Ins. Co. v. Grounds, 322 So. 2d 13 (Fla. 1976).

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