The courts of different states routinely come to wildly inconsistent conclusions about how to interpret the exact same language in a standard-form insurance policy.  In insurance coverage cases, then — more than in most other kinds of disputes – the law a court chooses to apply will determine who wins and who loses.  What happens when the only state law that exists is what a federal court predicts it will be?

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

Lewis Carroll, Through the Looking Glass (1872).

Of course you can, Alice.  Silly girl.

Humpty Dumpty’s aphorism, as it happens, has been quoted by courts in hundreds of published decisions, including by the United States Supreme Court (in Tennessee Valley Auth. v. Hill437 U.S. 153 (1978); skeptics can look it up).  You can almost pick any word or provision from a standard insurance policy and find at least two courts that interpret them in ways that mean completely different things.  It is as if we were a conglomeration of 50 different countries, each applying the law in accordance with its own interests and points of view; looking to one another occasionally for guidance, to be sure, but none bound in the least degree by the decisions of any other. This is why choice-of-law battles — usually the first disputes to be resolved in a case — between policyholders and carriers are often the only fights that matter in a coverage case.  The choice a court makes will determine the outcome of the case on some key coverage provision that one side or the other must win.

There is no body of federal insurance law.  Insurance coverage is uniquely the province of state law.  In fact, a federal statute, the McCarran-Ferguson Act, mandates that state law is “supreme” in determining the rights and obligations of insurers and policyholders under an insurance policy.  Whenever a potentially covered accident or event occurs in a state other than the one where the policyholder resides or where, for example, the policy was purchased and delivered, it potentially sets up a need to decide which of those two (or more) states has the most significant relationship to the parties and the subject matter of the contract, such that the law of one state should apply instead of the others.  In all such cases, however, the first question a court must ask before it even engages in a choice-of-law analysis is whether there is a conflict between or among the laws of the potentially applicable states.  If the answer to that question is, “No,” then the court will simply apply the law of its own state — that is, the law of the state where the action is pending.

Choice-of-law battles between policyholders and carriers are often the only fights that matter in a coverage case.

What happens when there are no state court cases on a coverage issue and the only law that the parties can find is the decision of a federal court predicting what the state’s courts would do with the issue?  That was the question the Illinois Supreme Court answered on May 22, 2014 in Bridgeview Health Care Center, Ltd. v. State Farm Fire & Casualty Co.,Docket No. 116389.  (Get a copy here.)

Erie R.R. Co. v. Tompkins, decided by the U.S. Supreme Court in 1938, stands for the rule that, in cases where federal substantive law is not at issue, the federal court must apply the law of the state where the court is located.  Although Bridgeview was pending in state court in Illinois, the Erie doctrine played an interesting part in the outcome.

Bridgeview involved a dispute about coverage for liabilities arising from the federal Telephone Consumer Protection Act of 1991.  This is the law that prevents telemarketers from making cold calls to potential customers.  The Act also applies to unsolicited marketing by fax.  It has inspired plaintiffs’ lawyers across the country to file class action lawsuits on behalf of consumers and against telemarketers whose unwanted fax promotions allegedly cause damage to the recipients through the unauthorized use of paper and toner.  The telemarketer’s liability insurance policy should cover most claims under the TCPA.  Specifically, the “Personal and Advertising Liability” provisions of most standard Commercial General Liability insurance policies cover claims of “invasion of the right to privacy.”  The ordinary definition of the word “privacy” includes “the right to be left alone.”  Thus, the Personal and Advertising Liability provision is written in a way that should cover the telemarketer for property damage that results from unsolicited fax transmissions.

Insurance companies, however, have frequently denied coverage for TCPA claims.  (Many policies now contain TCPA-specific exclusions.)  And courts across the country have reached completely inconsistent conclusions about coverage for TCPA liabilities.  The Illinois Supreme Court sided with policyholders on the question of TCPA coverage in Valley Forge Ins. Co. v. Swiderski Electronics, Inc.223 Ill. 2d 352 (2006).  Thus, if Illinois law applied to the Bridgeview case, all parties to that suit agreed that the policyholder would prevail.  But there was a connection between the parties to the lawsuit and the state of Indiana.

Although Bridgeview, itself, was a resident of Illinois, the telemarketer that had sent the offending fax solicitations to Bridgeview maintained its headquarters in Indiana and had purchased the State Farm insurance policies there.  Since Illinois law is favorable to policyholders, the insurance company naturally argued that the law of some state other than Illinois should apply.  The only other potentially applicable law in the case was that of Indiana.

Recall that, in choice-of-law fights, the threshold question is whether there is a conflict between or among the laws of the potentially applicable jurisdictions.  If not, the court will apply the law of the state where it sits.  Remarkably, perhaps, in light of the explosion since 1991 of claims under the TCPA, there are no decisions — published or unpublished — in Indiana that resolve whether such claims are covered by CGL policies.  There are, however, two unpublished Indiana federal district court decisions that, under the Erie Doctrine, predict that Indiana state courts would find no coverage for TCPA liabilities.  And the insurance company hung its figurative hat on those two decisions.

This gave rise to the central question in the case, which the Illinois Supreme Court expressed as follows: “When a federal district court sitting in a sister state makes a prediction under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), that the supreme court of that state would resolve a legal issue in a way that is at odds with Illinois law, does that prediction, in itself, establish an actual conflict between the two states’ laws for purposes of a choice-of-law analysis?”  Got that?  Does a federal court’s prediction about state law constitute, well, state law?

Whenever a federal court must resolve a question of state law for which the courts of the state have given no guidance, the Erie Doctrine requires the federal court to predict what the state courts would do with the question and to rule on the case according to that prediction.  In Bridgeview, the Illinois Supreme Court called this an “Erie guess,” which seems somewhat denigrating; as if the federal court were engaged in the equivalent of raising a wetted finger to the wind, or flipping a coin, perhaps.  But maybe the Illinois court felt particularly justified in using the word “guess” in this context.  The United States Court of Appeals for the Seventh Circuit (which hears appeals from federal courts located in Illinois, Indiana, and Wisconsin) had, in 2004, predicted that the Illinois Supreme Court would find that CGL policies do not provide coverage for TCPA liabilities.  That prediction turned out to be wrong, and the Illinois Supreme Court’s 2006 decision in Swiderskicorrected it.

The Illinois Supreme Court held, quite emphatically, that a federal court’s prediction of how a state court would rule does not constitute state law.

The carrier in Bridgeview pointed to two unpublished Indiana federal district court decisions (Ace Mortgage Funding, Inc. v. Travelers Indem. Co. of America, No. 1:05-cv-1631DFH-TAB, 2008 WL 686953 (S.D.Ind. Mar. 10, 2008) and Erie Ins. Exchange v. Kevin T. Watts, Inc., No. 1:05-cv-867-JDT-TAB, 2006 WL 1547109 (S.D.Ind. May 30, 2006)), both of which predicted (guessed?) that Indiana courts would find that there is no coverage under a CGL policy for TCPA claims.  The appeals court in Bridgeview had agreed with State Farm that these two federal cases raised a “potential” for a conflict between the laws of Indiana and Illinois, such as to require the court to conduct a choice-of-law analysis.  And since there were some fairly compelling contacts in this case with the state of Indiana, this decision was potentially very bad for the policyholder.

But the Illinois Supreme Court disagreed with the appeals court.  It held instead, and quite emphatically, that a federal court’s prediction of how a state court would rule does not constitute state law.  Citing a University of Pennsylvania Law Review article, the court noted, “even if the rule in question is embraced by the state’s highest court at a later date it remains true that the rule applied in federal court did not in fact constitute a sovereign command of the state.”  Similarly, Indiana state courts are under no obligation to accept federal district court decisions as the law of Indiana.  Furthermore, there has to be anactual conflict between the laws of the two states, not merely a potential conflict, to justify engaging in a choice-of-law analysis.

The upshot of the Supreme Court’s decision was that, in the absence of a true conflict between the laws of the states of Illinois and Indiana on the question of coverage for TCPA claims, Illinois law would apply and summary judgment would be entered in favor of Bridgeview.  In short, the words of the policy meant what the Illinois Supreme Court said they meant, and not what the Indiana federal courts predicted that they would mean.  And Humpty Dumpty continues to hold sway on questions of insurance coverage.