Opinion ID: 808087
Heading Depth: 2
Heading Rank: 4

Heading: Which State’s Law Applies?

Text: Given our assumption about Pennsylvania law, we are confronted with a true conflict. Applying a must-showprejudice rule would promote Pennsylvania‘s assumed interest in protecting its reinsureds from losing coverage that they have already paid for in the absence of a sound reason for doing so. In contrast, applying New York law here would promote its interest in protecting sophisticated business 10 See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938) (holding that substantive state law applies in diversity cases). 37 parties‘ freedom to enter into contracts without having their terms disregarded or rewritten by courts. In this context, applying one state‘s law would impair the interests of the other, and there is a true conflict. Because we assume a true conflict exists, we ―determine which state has the greater interest in the application of its law.‖ Hammersmith, 480 F.3d at 231 (quotation marks omitted). To do so, we use a methodology that combines the approaches of the Restatement (Second) of Conflicts of Law and governmental interest analysis. Id. We begin ―the analysis by assessing each state‘s contacts under the Second Restatement,‖ and ―turn to § 188(2) (the general provision governing contracts), which directs us to take the following contacts into account: (1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties.‖ Id. at 232-33.11 This requires ―more than a mere counting of contacts.‖ Id. at 231 (quotation marks omitted). Instead, ―we must weigh the contacts on a qualitative scale according to the policies and interests underlying the particular issue.‖ Id. (quotation marks omitted). Here, the precise place of contracting is somewhat unclear, but New York certainly had a more significant relationship to the Certificate‘s formation than Pennsylvania did, given that Pennsylvania had no relationship whatsoever in 1980. ―[T]he place of contracting is the place where . . . the last act necessary, under the forum‘s rules of offer and acceptance, [occurred] to give the contract binding effect . . . .‖ Restatement (Second) of Conflicts of Law § 188 11 PEIC concedes that § 188 is the proper section of the Restatement to consider. See PEIC Br. 30. 38 cmt. e. Insurance contracts often designate that place as the place of delivery Crawford v. Manhattan Life Ins. Co. of N.Y., 221 A.2d 877,880 (Pa. Super. Ct. 1966). Here, Constitution delivered the Certificate to PEIC‘s broker in Minnesota, but the parties do not address whether delivery was in fact the last act necessary.12 The District Court found that offer and acceptance became complete in New York when Constitution confirmed by cable dated June 5, 1980, its agreement to participate for 25% of the $4 million excess layer. Thus, ―the place of contract formation was New York,‖ which ―PEIC concedes . . . is arguably the case.‖ 2011 WL 2003359, at . There were no meaningful negotiations concerning the Certificate. PEIC‘s Minnesota broker exchanged telexes with Constitution in New York, but the terms and conditions were never in dispute. Thus, it is difficult to speak at all of a ―place of negotiation.‖ Both possible places of performance that we discussed in Hammersmith — ―where the premiums are received‖ and ―the state in which notice should have been provided‖ — point to New York. 480 F.3d at 234, 234 n.13. In this case, Buffalo Forge sent its premiums under the Excess Policy to 12 For example, the Court of Appeals of New York has explained that in ―the London market — the Mecca of the reinsurance world,‖ an exchange of telexes constitutes a binding agreement, and ―[d]elivery of the original insurance policy to the reinsurer and issuance by the latter of a formal certificate of reinsurance may not occur until much later, and indeed are technically unnecessary for a binding agreement.‖ Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v. Cologne Reinsurance Co. of Am., 552 N.E.2d 139, 142 (N.Y. 1990). 39 PEIC‘s broker in Minnesota, which then sent Constitution in New York its share under the Certificate. As for ―the state in which notice should have been provided,‖ notice is due where the entity to be notified is located, which in this case is, and has always been, New York. Id. at 234. For our purposes, it is the place of performance. The subject matter of the Certificate, a contract of indemnity, is PEIC‘s liability to Buffalo Forge. It is difficult to pinpoint an actual location for such an abstract subject matter. To the extent it is located anywhere, an insurer's liability on a policy simply shares a location with the insurer itself. In that context, the location of the subject matter of the Certificate is the same as the location of PEIC. Turning to the location of the parties, we reiterate that while PEIC is now a Pennsylvania corporation domiciled in Pennsylvania, it was a California stock insurance company located in Los Angeles when the Certificate was issued in 1980. PEIC only became a Pennsylvania insurance company in 1999. In contrast, Constitution was (and Global is) a New York corporation domiciled in New York. Having identified the contacts that § 188 deems important, we calibrate our qualitative scale to ensure that we weigh the contacts according to the policies and interests underlying the particular issue before us. Id. at 231. According to PEIC, ―the issue at hand is the nature of the obligations imposed by the contract rather than the validity of the contract.‖ PEIC Br. 34 (quotations and alterations omitted). The opposite is in fact true. We have already decided much of the nature of the relevant obligation imposed, namely Paragraph D‘s DSOL provision. We have decided when that obligation arises and whether it qualifies as a condition precedent to coverage or as something else, and 40 we have done so without first conducting a choice-of-law analysis because the basic rules of interpretation do not differ between New York and Pennsylvania. What is before us is whether a prompt notice provision that is expressly stated as a condition precedent to coverage is valid and enforceable as written. With this mind, we acknowledge that the Restatement (Second) instructs courts to consider various fundamental principles when conducting a choice-of-law analysis. See Restatement (Second) of Conflicts of Law § 6(2). When determining which state has the most significant relationship to a contract and the issue concerns the validity of a contractual provision, the protection of the parties‘ justified expectations is ―of considerable importance.‖ Id. at § 188 cmt. b. This comes as no surprise because ―[p]rotection of the justified expectations of the parties is the basic policy underlying the field of contracts.‖ Id. at § 188 cmt. b. When the validity of a contractual provision is at stake, the parties‘ expectations should be measured from their vantage point at the time of contracting, because ―[p]arties entering a contract will expect at the very least, subject perhaps to rare exceptions, that the provisions of the contract will be binding upon them.‖ Id. ―Their expectations should not be disappointed by application of the local law rule of a state which would strike down the contract or a provision thereof unless the value of protecting the expectations of the parties is substantially outweighed in the particular case by the interest of the state with the invalidating rule in having this rule applied.‖ Id. When we use the protection of justified expectations to adjust the weight of the contacts discussed above, we are convinced that New York has the most significant relationship to the Certificate. A New York reinsurer accepted, in New York, the terms and conditions proposed by 41 a Minnesota broker, acting on behalf of the New York underwriting office of a California company located in Los Angeles. At the time, there would have been simply no reason for the parties to expect that Pennsylvania law would govern whether particular provisions of the contract they were entering into were valid as written. Pennsylvania entered the picture, as a matter of pure happenstance, 19 years later when PEIC relocated to Pennsylvania. PEIC has not pointed us to any authority that would justify allowing this unilateral decision to blur our focus on the facts and the protection of the parties‘ justified expectations at the time of contracting.13 Finally, we must consider the ―interests and policies that may be validly asserted by each jurisdiction.‖ Hammersmith, 480 F.3d at 235 (quotation marks omitted). New York has an interest in protecting the rights of sophisticated parties, particularly New York reinsurers and insurers who operate out of New York offices, to enter into contracts and to have their terms enforced predictably, with administrative ease, and without second guesses from the courts after costly litigation. Our comments in Hammersmith about New York‘s interest in the primary insurance context in 13 Citing our decision in Amica Mut. Ins. Co. v. Fogel, 656 F.3d 167 (3d Cir. 2011), PEIC claims that we should assess the parties‘ justified expectations about the validity of Paragraph D‘s DSOL provision at the time when it moved to Pennsylvania. Amica holds that when a district court transfers an action sua sponte under 28 U.S.C. § 1404(a), the transferor forum‘s choice-of-law rules travel with the action to the transferee forum. Id. at 169-70. It neither says nor implies anything about one party‘s post-contract move to another jurisdiction changing the parties‘ justified expectations about the validity of their contract provisions. 42 having a need-not-show-prejudice rule are also relevant here: ―New York has decided that requiring strict compliance with notice provisions is the most effective means of protecting certain interests of insurance carriers. We will not substitute our judgment for that of the New York courts by concluding that a prejudice rule would just as effectively serve these interests.‖ Id. at 232 n.12. Pennsylvania has an interest in ensuring that its cedants receive coverage that they have paid for and that reinsurers avoid ―technical escape-hatches‖ to coverage in the absence of prejudice. The District Court also found that ―Pennsylvania has an interest in achieving uniformity in a situation where the ceding company [like PEIC here] has ceded portions of its risk to various reinsurers.‖ 2011 WL 2003359 at  (citing Ario, 996 A.2d at 596-97). But in this case, having multiple jurisdictions‘ laws apply to the same risk is an undesirable consequence entirely of PEIC‘s own doing. PEIC chose to purchase reinsurance from two New York companies, an Illinois company, and a Massachusetts company, rather than four companies from the same jurisdiction. Ultimately, while both New York and Pennsylvania have interests in applying their law here, PEIC has undermined and lessened Pennsylvania‘s interests and has failed to persuade us that those interests, even if unimpaired, substantially outweigh the parties‘ justified expectation that the provisions of their contract would be valid. In sum, we conclude that New York has the most significant relationship to the Certificate and the greater interest in having its law applied, especially because applying its law would protect the parties‘ justified expectations at the time of contracting. Thus, New York‘s law applies and the Certificate‘s DSOL provision is enforceable as we read it. 43