Why it matters: When insuring risks in different states, insureds should be wary of jurisdictional limitations that may preclude them from pursuing coverage actions in their home state. In this cautionary case, the California Court of Appeals considered an insurance dispute involving a California policyholder who purchased coverage for a rental property in Arkansas from a Michigan-based insurer. When two fires damaged the Arkansas property and the insurer sought to treat both fires as a single loss subject to a single limit, the policyholder filed a declaratory judgment action in California state court. The insurer moved to dismiss, arguing that it did not have connections with California adequate to support jurisdiction by a California court, and that the property damage at issue occurred outside of California. The policyholder countered that, not only did the insurer issue its policy in California, but the policy included coverage for certain risks that could have occurred in California. The Court of Appeals agreed with the insurer, affirming the trial court’s prior dismissal. In particular, the court held that the insurer’s contacts were insufficient to exercise personal jurisdiction. “What is most important here is that [the insured’s] lawsuit does not arise out of any of the risks, losses and damages covered by the policy that could have occurred in California,” the court opined.

Detailed discussion: Jacob W. Greenwell lived in Tracy, California. He acquired ownership of an apartment building in Little Rock, Arkansas in September 2007. Working through an insurance agency in Little Rock, he applied to Auto-Owners Insurance Company for commercial property and commercial general liability (CGL) coverage. The combined policy was mailed to Greenwell in California, and was renewed three times between 2007 and 2010.

In June 2010, the apartment building was damaged by a fire. A second fire the next day resulted in additional damage. Auto-Owners initially treated the incidents as two separate losses subject to two separate limits under its policy, but later reversed its position and asserted that the fires constituted a single loss subject to a single limit.

Greenwell sued Auto-Owners in California state court for breach of contract and bad faith. Auto-Owners sought to dismiss the suit for lack of personal jurisdiction, arguing that, with the exception of Greenwell’s policy, it did not do any business in California. The trial court agreed, declining to exercise personal jurisdiction over Auto-Owners and dismissing Greenwell’s lawsuit. Greenwell appealed.

Noting that “[t]his case goes to show that sometimes life can be like an essay question on a law school exam,” the Court of Appeals agreed with Auto-Owners and the trial court, affirming the trial court’s refusal to exercise personal jurisdiction. While the court acknowledged that the insurer purposefully availed itself of the privilege of conducting activities in California by writing a policy that covered various risks that could have arisen in California, it concluded that no substantial nexus existed between Auto-Owner’s activities in California and Greenwell’s lawsuit.

“[T]he owner is not suing the insurer for any California risk that came to fruition; he is suing the insurer because of something that happened to his business property in Arkansas, which is where he obtained the insurance at issue, the main purpose of which was to cover potential risks and damage to that Arkansas property,” the court explained.

No evidence existed that Auto-Owners purposefully solicited Greenwell’s business in California, the court added. Further, Greenwell could not credibly maintain that he would be prejudiced by having to pursue Auto-Owners in Arkansas because his apartment building was located there and he conducted substantial business there. “While Arkansas may not be the home state of either party, both parties were doing substantial business in Arkansas—Greenwell by owning an apartment building there and Auto-Owners by writing insurance policies on such businesses,” the court opined.

The court applied a three-prong test to determine whether California courts could exercise jurisdiction over Auto-Owners: Auto-Owners must have purposefully availed itself of California’s benefits, the controversy must be related to or arise out of Auto-Owner’s contacts with California, and the exercise of jurisdiction must comport with fair play and substantial justice.

Beginning with purposeful availment, the court found that Auto-Owners’ contacts with California were sufficient. “By entering into an insurance contract with Greenwell, Auto-Owners created continuing obligations between itself and a resident of California,” the court wrote. “Moreover, because the policy covered risks and losses that could have occurred in California, and damages that could have been imposed on Greenwell in California, and because Auto-Owners undertook an obligation to defend Greenwell against suits seeking such damages, Auto-Owners had reason to know that it might be subject to litigation in California based on the obligations it undertook to Greenwell in the insurance contract.”

However, the panel then determined that Greenwell failed to establish a substantial nexus between the current controversy and Auto-Owner’s contacts with California. Examining the “intensity” of the nature and scope of Auto-Owners’ contacts with California, “it appears with the exception of the insurance contract at issue, Auto-Owners does not conduct and has not conducted any business in California.” Specifically, Auto-Owners “is not licensed or authorized to do business in California, does not write policies in the state, does not have agents licensed to sell its products there, does not solicit business or have employees in the state, does not pay taxes to California, and has never commenced a legal action there. . . . So far as the record shows, Auto-Owners’ only contact with California is that it agreed to write a commercial policy for Greenwell, who does business in Tracy under the name Greenwell Properties,” the court concluded.

Although some of the risks covered by the policy could have arisen in California, the court held, “the primary purpose for the insurance was to cover risks related to the apartment building Greenwell owned in Arkansas.” The court further noted that the portion of the premium paid for CGL coverage was calculated by reference to the number of apartments in the building.

“What is most important here is that Greenwell’s lawsuit does not arise out of any of the risks, losses, and damages covered by the policy that could have occurred in California,” the court wrote. “Instead, the lawsuit relates directly to fires that damaged the apartment building Greenwell owned in Arkansas and Auto-Owners’ alleged bad faith refusal to pay what Greenwell contends were the full insurance proceeds due to him because of those fires. Thus, what is at issue here are losses that occurred in Arkansas that were covered (or not, as the case may be) by the commercial property coverage in the policy that Greenwell obtained through an insurance agent in Arkansas.”

To read the decision in Greenwell v. Auto-Owners Insurance Co., click here.