Are non-contractual bad faith claims governed by choice of law? | Property Insurance Protection Law Blog

One of the trends in insurance contract law is for insurance companies to include in the policy a choice of law clause that applies New York law. New York has very limited bad faith remedies and laws that are much more favorable to insurance companies than most states. But do these choice-of-law clauses always apply to statutory non-contractual remedies?

The first Circuit Court of Appeals decision was made this week¹ appears to open the door for policyholders to argue that their state statutory remedies are not affected unless the choice-of-law provisions are crystal clear that they do, the court held:

This Massachusetts marine insurance case arises on interlocutory appeal under 28 USC § 1

292(a)(3) from the district court’s grant of judgment on the pleadings in favor of the plaintiff-insurer, Great Lakes Insurance SE (GLI). The defendant, Martin Andersson, alleged that GLI engaged in unfair claims settlement in violation of Massachusetts General Laws Chapters 176D and 93A. The district court ruled that Andersson’s claim was time-barred by the choice-of-law provision in the marine insurance he bought from GLI. For the reasons that follow, we conclude that the choice of law provision is unclear as to which law applies to the statutory claim at issue. Consistent with the applicable principles of interpretation, we construe this ambiguity against the originator — GLI — and conclude that Andersson’s Massachusetts state law claims are not covered by the choice of law provision. Accordingly, we reverse.

The current choice of law provision stated:

It is hereby agreed that all disputes arising hereunder shall be determined in accordance with well-settled, settled principles and precedents of substantive law and practice of the United States Federal Admiralty, but where no such well-settled, settled precedent exists, this insurance agreement is subject to the substantive laws of the State of New York.

The court noted the winning policyholder’s arguments as follows:

Andersson’s challenge revolves around the correct interpretation of the choice of law provision when faced with an extra-contractual claim that is not governed by established principles of admiralty law. Andersson argues that the second, disjunctive clause in the choice-of-law provision—which states that “this insurance contract is subject to the substantive laws of the State of New York”—”limited the application of New York law to the insurance contract[,]’ and not to non-contractual claims. He thus claims that his statutory non-contractual claim is not covered by the choice of law provision.

The court found that the policy was ambiguous because the policyholder’s interpretation was a reasonable interpretation:

When there are, as here, “competing reasonable interpretations of the policy,” doubt as to the intended meaning of the words must be resolved against the insurer that employed them.’ …. Doing so leads to the inescapable conclusion that only contractual claims are subject to New York’s substantive laws. Non-contractual claims do not fall within the scope of the second paragraph of the choice of law provision.

The practical implication is that this holding may apply to cases in states with extra-contractual remedies. I think the finding applies to non-maritime cases as well. Many of these choice of law provisions are found in excess insurance policies that are often subject to arbitration clauses. This opinion could support the position that only the contractual claims should be brought and governed by New York law while the non-contractual claims are subject to the law of another state.

So who is with me in the picture above? My sister Emily Merlin. She holds a law degree from the University of West Florida. I gave a presentation yesterday to the Tampa Bay Paralegal Association entitled: Navigating Insurance Claims and Litigation: Hurricane Damage and Other Disasters.

Today’s thought

All meanings, we know, depend on the key of interpretation.