This article was first published in Insurance Law360
To read this article in PDF format, please click here.
When faced with insurance policies covering large national or multinational companies that have insured locations scattered around the globe, courts can struggle when applying a choice of law analysis when there is no governing law provision in the insurance policy. In a recent opinion, the Delaware Supreme Court appeared to resolve conflicting Delaware lower court decisions on how to properly apply the Restatement (Second) of Choice of Law in such situations.
In Certain Underwriters at Lloyds, London, the Delaware Supreme Court was faced with a series of insurance policies originally issued by Certain Underwriters at Lloyd's, London (Lloyds) to United States Rubber Company beginning in the 1950s. Over time, United States Rubber Company changed its name to Uniroyal and was subsequently purchased by Chemtura. These policies provided coverage for United States Rubber Company’s global operations. At issue in the Lloyd’s coverage litigation was the availability of coverage for environmental cleanup costs at two locations in Ohio and Arkansas. The original dispute between Chemtura and its insurers had included as many as 33 sites in 15 states and two Canadian provinces.
In the Superior Court, Chemtura and Lloyds filed cross-motions on the choice of law issue. Chemtura argued that Arkansas law should apply to the site in Arkansas and Ohio law should apply to the site in Ohio. Lloyds, on the other hand, argued that New York law alone should apply to the interpretation and application of the policies. Not surprisingly, the choice of law determination was critical to the outcome of the parties’ dispute: Arkansas and Ohio would require each insurer to be liable for the entire risk up to the policy limits, while New York law used a pro rata allocation.
The Superior Court determined that §193 of the Second Restatement applied to the choice of law analysis. This section makes a presumption, for insurance contracts, that the principal location of the insured risk has the most “significant relationship” to the dispute. Applying §193 resulted in the application of Arkansas and Ohio law with respect to each site. In doing so, the Superior Court relied on prior Superior Court opinions that had similarly relied on §193 to apply the law of the site to policies that insured multiple locations. The Superior Court distinguished apparently contradictory precedent that had applied a singular state’s law to claims arising from multiple locations..
The Supreme Court, in reversing the Superior Court, found the Superior Court’s application of the Second Restatement was flawed. As an initial matter, the Supreme Court rejected the Superior Court’s reliance on the §193 presumption. It concluded that §193 did not necessarily require a court to consider the current location of the risk. Instead, the Supreme Court concluded that §193 was intended to examine the principal location of the risk at the time the policies were issued. Using an analysis at the time the policies were issued would lean strongly toward New York law — Uniroyal was headquartered in New York at the time the policies were issued, the policies were issued through a New York broker, and the policies listed Uniroyal’s New York address. The Supreme Court further noted the comments to §193 indicated that the importance of the location of the insured risk was less significant when the policy covered risks that were scattered throughout multiple states.
Finding §193's presumption was not conclusive, the Supreme Court focused on the §188 factors related to general contract disputes. The Supreme Court took issue with how the Superior Court had framed its analysis. The Supreme Court disagreed with the Superior Court’s framing of the dispute as an environmental coverage dispute and determined it was more properly characterized as a contract dispute. The Supreme Court also determined the Superior Court too narrowly focused the subject matter of the dispute on the specific insured locations, as opposed to a dispute over the policies themselves, which provided coverage worldwide. Finally, the Supreme Court determined the Superior Court had improperly focused on contacts as they currently existed, instead of looking at the contacts at the time when the policies issued. The Supreme Court noted that §188's factors were to be considered with Second Restatement §6, and under §6, the "protection of the justified expectations of the parties is of considerable importance.”
The Supreme Court ultimately concluded that the §188 factors — particularly the place of contracting, place of negotiation, place of performance and principal place of business pointed — to New York. The Supreme Court believed that by focusing on the contractual nature of the dispute, the broad nature of the contract and the time period when the policies were issued avoided a result where the meaning of the contract and scope and availability of coverage varied arbitrarily simply because of the location of the dispute.
While the Certain Underwriters at Lloyd's decision appears to bring Delaware courts in line with several other jurisdictions that have addressed choice of law issues where the policies insured multiple locations in multiple states, the fact-specific nature of the decision leaves some question as to its future application. For instance, the court appeared to give some weight to the fact that the policies were issued before Uniroyal had any involvement with the Arkansas site. This may indicate a different result if the locations in question were insured locations at the time the policy was issued.
The court also diminished Ohio and Arkansas' interests in the dispute by noting that the resolution of this dispute was not about who was liable for the cleanup or if either state would be left paying for the cleanup. The Supreme Court noted there was no evidence that Chemtura would be unable to respond to future costs for cleanup of the sites if necessary. Therefore, if the outcome had had more of a direct impact on the states, the court’s choice-of-law decision might have been different.
Because of these factual differences, it could be argued that, given the right factual predicate, the Supreme Court might have reached an opposite conclusion. At least for now, the law in Delaware seems to favor application of a single state’s law to coverage disputes under insurance policies that cover locations in multiple states.