EVERY claim requires, at the outset, a determination as to what state's law applies. There are vast differences in how states interpret the myriad of potential coverage issues ranging from what an insurer must consider to determine its duty to defend, what the substantive provisions of the policy mean, what are the insurer's settlement duties, and what an insurer must do to protect its rights to seek reimbursement for uncovered defense and/ or indemnity payments. This is exactly when and why choice of law is crucial when there is an actual conflict between how the potentially applicable state's laws would decide the issue. The first step for the insurer is to determine what state's law applies.
Oftentimes, a choice of law determination is made, and the insurer then proceeds to carry out its duties according to that state's laws. However, coverage issues can arise during the claims handling process, or facts might change during the claim, which can affect choice of law and which can result in application of a different state's law than the law the insurer had determined initially would apply. The insurer may be surprised to learn that courts have applied more than one state's laws to an insurer's obligations with respect to a single claim. While a comprehensive reservation of rights letter provides the insurer with a roadmap for the claim, the insurer should not assume that the choice of law determination made originally applies to other issues that arise during the case. The law that applies to interpret the insurer's duty to defend may not govern all the issues in the case, and the insurer should be aware that the place where it performs its claims handling may provide another set of applicable laws.
I. Preliminary Considerations
The choice of law inquiry starts with determining whether the policy has an express choice of law provision. If it does, the insurer should determine whether the issue falls within the scope of the choice of law provision. If the choice of law provision is limited to matters that arise under the contract, there is a possibility it may not apply to issues that arise during the claim, which courts have characterized as place of performance, claims handling, and non-contract interpretation issues.
If the policy does not have a governing law provision, the Restatement (Second) of Conflicts of Law [section] 6 notes, preliminarily, that "[a] court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law." The insurer should next examine whether the state whose law might apply has a statutory directive on choice of law. There are two general types of statutory directives. The first type sets out the choice of law test to be applied. For example, California Civil Code [section] 1646 provides that "[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." (1) California Civil Code [section] 1646 provides a statutory directive for choice of law with respect to contract interpretation issues.
The second type of statutory directive is one that actually purports to select the governing law. An example of this type of statutory directive is found in Texas Insurance Code Article 21.42 Texas Laws Govern Policies, which provides "[a]ny contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same. …