Chapter 9 Choice of Law; Anti-indemnity Provisions; Insurability of Punitive Damages

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 9 Choice of Law; Anti-indemnity Provisions; Insurability of Punitive Damages

Cathleen H. Heintz, Lisa F. Mickley, and Elayna Fiene

I. Introduction

Coverage of additional insureds can precipitate significant choice-of-law disputes. Consider, for example, a common scenario where the additional insured is domiciled in one jurisdiction, with the named insured domiciled in another. Since the insurance policy is issued for delivery at the location of the named insured, typical choice-of-law rules would operate to apply the law of the named insured's domicile rather than the domicile or principal place of business of the additional insured. Similar scenarios can occur when courts make choice-of-law determinations based upon the location of the risk, the location where a policy was executed, or where multiple locations are insured. With wide variations in state law concerning the proper construction of an insurance policy, this could become a significant issue.

Indeed, certain state law may impose severe limitations on the scope of coverage available to additional insureds based on how standard additional insured endorsements are construed. Differences between jurisdictions may also involve widely divergent regulations governing insurers in their handling of claims by additional insureds. All of these issues must be considered before an additional insured can be fully certain of the extent of coverage it actually possesses vis-a-vis the named insured.

While the additional insured may be able to negotiate governing law as part of any contract with the named insured, such agreements do not bind the insurer providing the coverage to the additional insured. While manuscripted or variable additional insured endorsements may, theoretically, be able to cure this problem, as a matter of practice they are rarely considered. Nonetheless, additional insureds may have other options to remedy this problem.

II. Choice of Law Impact on Coverage of Additional Insureds

A. Lex Loci Contractus and the Restatement

Additional insureds who share the same state of domicile as the named insured, or have their principal places of business in that same state, can be reasonably certain which body of law will govern an insurance coverage dispute. However, those entities from diverse locations face another set of challenges. As a rule of thumb, courts will consider the location where a contract was made, lex loci contractus, as the proper body of law governing such disputes.¹ This is particularly so where the contract is to be "performed" in that same location. Consider, however, what would be the "location of performance" of a liability insurance policy compared with a property insurance policy: While a property policy specifically covers property located in a specific place and as set forth in the policy declarations itself, a liability policy affects the entity generally. Accordingly, courts tend to apply the governing law where the liability policy is issued for delivery to the named insured. But there are plenty of exceptions.

Jurisdictions that have adopted the Restatement (Second) of Conflict of Laws (the "Restatement") apply a type of "center-of-gravity" test, examining all contracts with the state, rather than merely the state where the insurance policy was issued. Section 193 of the Restatement provides:

The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.²
Section 6 of the Restatement, in turn, provides that a court should consider:
(1) the statutory directives of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include

(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
(g) ease in the determination and application of the law to be applied.³

Section 188 of the Restatement also applies generally to the resolution of these issues:

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contracts to be taken into account in applying the principles of § 6 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 domicile, residence, nationality, place of incorporation and place of business of the parties.

These contracts are to be evaluated according to their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203.

Unfortunately, these broad, general rules are particularly unsatisfying when attempting to untangle which body of law an additional insured may count on as applying to its own insurance dispute. In fact, as set forth in the following sections, the courts have been quite inconsistent in establishing the governing law in light of the interests of additional insureds.

B. Governing Law and the Additional Insured Endorsement

Generally, an enforceable choice-of-law provision in a governing contract will be applied notwithstanding other considerations affecting additional insured cover-age.⁴ When enforceable choice-of-law provisions are absent, however, the California case of Frontier Oil Corp. v. RLI Insurance Co. is illustrative of the significance a court may give to additional insureds in assessing which law applies.⁵

1. In Frontier Oil, the California Court of Appeals held that California law governed a dispute between a Texas insurer and a Texas insured where an injury occurred at an oil and gas facility in California.⁶ The court found that the "intended place of performance" of a liability insurance policy could be gleaned from the circumstances surrounding the execution of the policy, including the fact that several California entities were added as additional insureds.⁷ The policy at issue also specifically referred to coverage of a site in California, among other indicia of the parties' intent to accede to California law.⁸ Accordingly, the court applied California law to resolve the dispute. In sum, the fact that additional insureds were California-domiciled entities, in conjunction with other factors, contributed to establishing which law would govern.
2. More recently, in 2016 the U.S. District Court for the Southern District of New York resolved a conflict-of-law dispute involving additional insured coverage where coverage was not limited to a specific project location.⁹ Citing a 2006 New York Court of Appeals decision, the court first acknowledged the significance of the intent of the parties entering into the insurance contract.¹⁰ The contacts of the parties purchasing and entering into the insurance policy is given preeminence in the choice-of-law analysis, whereas the contacts related to the additional insured are subordinated. Citing the state court decision, the federal court noted, "[T]he choice of law analysis should promote 'certainty, predictability and uniformity of result' and 'ease in the determination and application of the law to be applied.'"¹¹ The court recognized that including the additional insured in the analysis "would result in the application of dozens of states' law to a single policy, a result disfavored by New York law."¹²The court then noted that when a policy covers risk in multiple states, the specific contacts of the additional insured cannot control.¹³ Finally, the court acknowledged the significance of coverage issued to an additional insured when a specific project is not identified in the policy.¹⁴ In such cases, the additional insured's contacts are insufficient to overcome the overarching intent of the parties procuring the insurance on the additional insured's behalf.
3. Similarly the Iowa Supreme Court held that Iowa law, rather than Minnesota law, applied to the interpretation of a liability policy where the subcontractor involved in the accident in question was added as an additional insured by an endorsement that applied only to a project in Iowa where the accident occurred.¹⁵ Applying both §§ 188 and 193 of the Restatement, the court set aside the facts that: (1) the policy was procured in Minnesota by a Minnesota corporation with its primary place of business in Minnesota; (2) the policy was procured through a Minnesota agent; and (3) the policy provided general liability coverage for all of the corporation's operations.¹⁶ The court reasoned:
Under the terms of the United policy, the general liability coverage applied separately to each insured against whom claim is made or suit is brought. Although United issued the policy to Sovde . . . for all its business operations inside and outside the state of Minnesota, liability for the claims against Gabe arises from the endorsement . . . naming Gabe as an additional insured. The relationship between United

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