Chapter Sixteen

• Jurisdiction: New York

Chapter Sixteen

Choice of Law and Choice of Forum: Threshold Considerations in the Insurance Context

Peter D. Luneau, Esq. Christopher W. Healy, Esq.*

* The authors would like to acknowledge Rebekah Mott, Esq., Kent Hiebel, Esq. and Donald Munson, Esq., associates with Skadden, Arps, Slate, Meagher & Flom LLP, for their assistance in revising and updating this chapter.

I. Introduction

Choice of law and choice of forum are critical threshold issues that must be resolved at the inception of any coverage action. Resolving the choice-of-law question may well be outcome-determinative, due to variations in state law. The forum issue involves choosing between state forums or between a state and federal forum.

II. Choice of Law

Insurance coverage issues generally are state law questions.²⁰²³ A state court will apply its own choice-of-law rules to determine which state’s law applies to the action. When a federal forum is chosen, however, choice-of-law issues are slightly more complex. Even if the action is brought in federal court, the substantive law to be applied is state law.²⁰²⁴ Furthermore, a federal court applies the choice-of-law rules of the state in which it sits.²⁰²⁵ Therefore, to resolve the choice-of-law issue as a preliminary matter, a party should analyze the choice-of-law rules of the forum in which it wishes to litigate the coverage dispute.

A. Choice-of-Law Clauses

As a general rule, primary or excess insurance policies do not contain choice-of-law provisions specifying which state’s law is to apply to the contract. However, if the insurance policy does contain an express choice-of-law provision, New York courts normally will enforce the provision,²⁰²⁶ unless:

1. The provision violates a fundamental policy of New York; ²⁰²⁷

2. The chosen jurisdiction does not have a reasonable relationship to the parties or their performance; ²⁰²⁸ or

3. The law of the chosen jurisdiction contravenes a fundamental policy of a state (a) that has materially greater interest in the dispute and (b) whose law would govern in the absence of a choice-of-law provision. ²⁰²⁹

In Ministers & Missionaries Benefit Board v. Snow,²⁰³⁰ the New York Court of Appeals announced that where a contract contains a valid choice-of-law clause, New York courts should not engage in any conflict-of-law analysis. Rather, a choice-of-law clause in a contract serves as a “substitute for the conflict-of-laws analysis that otherwise would determine what law to apply.”²⁰³¹ This is true regardless of whether the provision expressly excludes New York conflicts-of-laws principles.²⁰³² If contracting parties “wish to employ New York’s conflict-of-laws principles to determine the applicable substantive law, they can expressly so designate in their contract.”²⁰³³

B. New York Choice-of-Law Approach

In the absence of a choice-of-law provision, the first step in any case presenting a potential choice-of-law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved.²⁰³⁴ When there is no actual conflict, the inquiry ends and the court applies the law of the forum state.²⁰³⁵ It is only when an actual conflict exists that courts will engage in conflict-of-laws analysis.

The traditional test to determine which state’s law should govern in a contract case is lex loci contractus, which requires that the law of the state where the contract was made apply to the contract.²⁰³⁶ However, in place of this rule, New York has adopted a “center of gravity” or “grouping of contacts” approach.²⁰³⁷ This approach looks to the facts of the particular case to apply the law of the state that has the “most significant relationship to the transaction and the parties.”²⁰³⁸

1. New York Choice-of-Law Rules in the Insurance Context

In insurance coverage disputes, New York courts hold that for choice-of-law purposes, (i) the action is viewed as a contract action, not one involving underlying insurance claims or occurrences; and (ii) contacts relevant to the parties’ insurance transactions, rather than to underlying occurrences or claims, must be considered in determining which state’s law to apply.

Where multiple insurance policies are at issue, a separate choice-of-law analysis must be conducted for each policy.²⁰³⁹ In other words, the choice-of-law analysis is policy-specific. In addition, a choice-of-law analysis must be undertaken even where the insurer has been adjudged insolvent and placed into liquidation.²⁰⁴⁰

In applying the “center of gravity” or “grouping of contacts” test in the insurance coverage context, New York courts consider the following factors in determining which state has the most significant relationship to the transaction and the parties:

1. the location of the insured risk;

2. the insured’s principal place of business;

3. where the insurance policy was negotiated and issued;

4. the location of the broker placing the policy;

5. where the premiums were paid; and

6. the insurer’s place of business. ²⁰⁴¹

The location of the insured risk is the most significant contact.²⁰⁴² Where the location of the insured risk is unclear because, for example, the insured risks are spread across multiple states, New York courts generally substitute the location of the insured risk with the insured’s domicile.²⁰⁴³ In the event that the insurance policy covers multiple insureds, the domicile of the insured with the greatest nexus to the placement of coverage, as opposed to the domicile of the insured-litigant, is controlling.²⁰⁴⁴ Nonetheless, courts frequently consider all contacts instead of simply applying the law of the location of the risk, or the insured’s domicile, as a matter of course, while according due weight to this important factor.²⁰⁴⁵

In the reinsurance context, the most significant contacts are (1) the location where the reinsurance certificate was issued and (2) the location where performance is expected (i.e., the place to which the ceding insurer must make its demand for payment).²⁰⁴⁶

2. Representative Cases

The New York Court of Appeals’ decisions in Allstate Insurance Co. v. Stolarz²⁰⁴⁷ and Zurich Insurance Co. v. Shearson Lehman Hutton, Inc.²⁰⁴⁸ illustrate the choice-of-law approach taken by New York courts.²⁰⁴⁹

In Stolarz, an auto insurance coverage dispute, the Court concluded that New Jersey law, rather than New York law applied, despite the fact that the underlying accident took place in New York, because New Jersey was where the insurance policy was sold, where the policyholder and the company that sold the insurance policy were located, and the insurance policy conformed to New Jersey, not New York, insurance laws.²⁰⁵⁰ Though the grouping of contacts approach does not take into account the policies underlying each state’s interest in the outcome, the Court conceded that policies reflecting strong governmental interests should be taken into account in making the choice-of-law determination.²⁰⁵¹

In Zurich Insurance, a declaratory judgment action brought by an insurer for a determination that a commercial general liability (CGL) policy negotiated and issued in New York did not provide coverage for punitive damages awarded in other states, the Court identified five relevant factors in determining which state has the “most significant relationship” to a contract dispute:

1. the place of contracting;

2. the place of negotiation;

3. the place of performance;

4. the location of the subject matter; and

5. the domicile or place of business of the parties. ²⁰⁵²

The Court also reinforced its position taken in Stolarz regarding the consideration to be given to public policy: “[I]n a proper case, a foreign State’s sufficiently compelling public policy could preclude an application of New York law otherwise indicated by the grouping of contacts analysis, particularly where New York’s policy is weak or uncertain.”²⁰⁵³ After analyzing the policies underlying the conflicting laws, the court nevertheless held that Texas’ view that coverage for punitive damages for vicarious liability is permitted was not sufficient to compel the court to disregard New York’s strong public policy against indemnification for punitive damages.²⁰⁵⁴

Other representative cases that illustrate the application of these contacts by New York state and federal courts in making choice-of-law determinations include the following:

1. Olin Corp. v. Insurance Co. of North America²⁰⁵⁵ applied New York law to a dispute over coverage for cleanup of mercury contamination at a site in Virginia, on the basis that the significant aspects of contract formation and performance occurred in New York. The negotiations, underwriting, issuance, execution and delivery of the various policies at issue during the policy periods of 1955 to 1974 took place in New York. The insured’s insurance broker was located in New York and, until 1970, the insured also was headquartered there. The court determined, therefore, that New York had the most significant contacts with the dispute.²⁰⁵⁶

2. Evvtex Co. v. Hartley Cooper Associates Ltd.²⁰⁵⁷ was an action brought by an insured corporation against a London broker for losses caused by the fraud of the insured’s excess line broker. The court noted “location of the insured risk, residence of the parties, and where the contract was issued and negotiated” as important factors in making a choice-of-law determination.²⁰⁵⁸ The court applied New York law as the law of the jurisdiction with the most significant contacts to the dispute, given that the risk was located in New York, the excess line broker’s place of business was New York and New York was the insured’s principal place of business.²⁰⁵⁹

3. In Maryland Casualty Co. v. Continental Casualty Co.,²⁰⁶⁰ the insurer sought a declaratory judgment that it was not liable to indemnify or defend the insured under a CGL policy with regard to alleged environmental contamination. While noting that the balance of the contacts enumerated by the Court of Appeals...