The United States Court of Appeals for the Seventh Circuit recently remanded a choice-of-law determination to the district court for further proceedings because there was conflicting evidence about the principal place of business of one insured and the conflict could not be resolved on the paper record. Nautilus Ins. Co. v. Reuter, C.A. Nos. 06-4019, 07-1400 (August 8, 2008).

In Nautilus, numerous insureds submitted claims to their General Liability insurer for defense and indemnity for lawsuits alleging negligent hiring. The insurer filed suit against the insureds and underlying plaintiffs seeking a declaratory judgment that it had no duty to defend or indemnify under the General Liability policies.

After extensive discovery, the parties filed cross-motions for summary judgment, which ultimately turned on the court’s choice between Indiana and Illinois law. While Indiana law holds that negligent hiring is not an “occurrence” when the term is defined as an accidental event (requiring summary judgment in favor of the insured), Illinois law holds that negligent hiring can constitute “occurrence” when defined as an accidental event (requiring summary judgment for the insureds and underlying plaintiffs).

The insurance policies at issue did not contain choice-of-law provisions. The insureds were small corporations associated with a large Indiana magazine clearinghouse. Each insured was incorporated in Indiana, but listed an Illinois address on its insurance applications and policies. The insurer paid taxes on the policies in Illinois and the policies were stamped by the Illinois Department of Insurance in accordance with section 445 of the Illinois insurance code, which concerns the requirements for surplus lines policies for Illinois risk.

The trial court treated the various insureds as shell corporations of the Indiana magazine clearinghouse and noted that each insured had a registered agent in Indiana and had procured the policies from Indiana. Therefore, the trial court applied Indiana law to the dispute and granted summary judgment in favor of the insurer. None of the insureds appealed, but two of the underlying plaintiffs did, arguing that the choice of Indiana over Illinois law was in error. The Seventh Circuit Court of Appeals agreed, finding that the conflicting evidence on the insured’s principal place of business precluded summary judgment on the question of choice of law and remanding for further proceedings. In particular, the appeals court found the evidence insufficiently conclusive to support the trial court’s holding that the insureds were shell corporations. 

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