When determining whether there is coverage under an insurance policy, the governing state law under which the policy is analyzed can be extremely important. This is because the application of clauses, amendments, and exclusions can be different depending on which state’s laws apply. If a policy fails to set forth which state’s law governs the interpretation of the policy, courts are required to determine the appropriate choice of law. A majority of states rely on the standards set forth in the Restatement (Second) of Conflict of Laws to reach this determination. In a recent coverage case, where the company seeking coverage was located in a different state from the parent company that purchased the policy, the choice of law determination was dispositive.
In The Travelers Indemnity Co. v. CNH Industrial America, LLC, Case No. 420 2017, 2018 WL 3434562 (Del. July 16, 2018), the Delaware Supreme Court was asked to determine the appropriate state law to apply to three insurance policies. The defendant, CNH Industrial America, sought coverage for asbestos-related liabilities at J.I. Case, Inc. under Travelers insurance policies issued in 1972, 1978, and 1985. Many of J.I. Case’s assets were transferred to CNH by Tenneco, Inc., who was J.I. Case’s parent when the policies were issued. Tenneco purchased J.I. Case as a subsidiary in 1970. At the time, Tenneco was a Texas corporation and J.I. Case was a Wisconsin corporation. In 1972, Tenneco purchased an insurance policy from Travelers with J.I. Case as the named insured. Thereafter, Tenneco purchased general insurance policies from Travelers that provided coverage for all of its subsidiaries, including J.I. Case.
CNH later filed suit against Travelers seeking coverage for defense and indemnity costs resulting from asbestos suits against J.I. Case. As the policies did not set forth which state’s law applied, CNH argued that Wisconsin law applied to construe the terms of the policy because J.I. Case, the insured, was located in Wisconsin and all events giving rise to the asbestos cases took place in Wisconsin. In turn, Travelers Insurance argued that Texas law applied because Tenneco was located in Texas and the negotiation, payment, and management of the policies all occurred in Texas.
The Travelers policies at issue contained anti-assignment clauses that stated that an assignment of an interest in the policy was not binding on Travelers until it consented to the assignment. When Tenneco transferred many of J.I. Case’s assets to CNH in 1994, it did not seek Travelers’ consent to assign J.I. Case’s interest in the insurance policies to CNH. The question of which state law applied was particularly significant in this case because of how effective the anti-assignment provision was under the law of the states at issue. Under Wisconsin law, the parties agreed that the anti-assignment provision was ineffective and could not be used to deny coverage to CNH. On the other hand, under Texas law, the parties agreed that the anti-assignment provision would bar coverage for CNH under the Travelers insurance policies. Therefore, if Wisconsin law applied, CNH’s suit against Travelers would continue whereas, under Texas law, it would not.
The trial court held that the most important factor in determining which state law applied was the primary place of business of the insured, which was J.I. Case. Although Tenneco actually negotiated for and purchased the policies at issue, Tenneco’s place of business did not matter to the trial court because Tenneco was not a party in the dispute. As J.I. Case was the party seeking coverage, the trial court determined that Wisconsin was the state which linked the parties and had the most significant relationship to the parties and subject matter.
On appeal, the Delaware Supreme Court reversed the trial court’s decision. Applying the Second Restatement, the appellate court determined that §188 of the Restatement governed the appropriate choice of law for an insurance policy that covered companies in multiple states. Under this section, the governing state law is determined by weighing five factors: (1) the place of contracting, (2) the place of negotiation of the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties.
The Delaware Supreme Court held that weight of the five factors favored Texas law. Texas was where the insurance policies were negotiated, Tenneco paid the premiums for the policy from Texas, and the insurance program was managed in Texas. Therefore, the court held that Texas law applied and CNH’s coverage claim was barred by the anti-assignment provision included in each of the three policies.
The court’s decision, however, is problematic because it ignores one important fact with respect to the 1972 policy. While Tenneco purchased the 1972 policy from Travelers in Texas, the policy exclusively covered J.I. Case in Wisconsin. Only the later policies provided coverage for risks across multiple states. Because the 1972 policy only provided coverage for risks in one state, § 188 of the Second Restatement arguably did not apply to the 1972 policy. CNH attempted to raise a similar argument regarding the 1972 policy before the Supreme Court, but the court denied any attempt to separate the three policies on appeal because CNH had lumped the policies together before the trial court and thereby effectively waived any argument that the 1972 policy should be treated differently.
Nevertheless, the CNH Industrial America case provides an important lesson for subsidiaries seeking coverage under their parent company’s policies: the location of the risk may not be determinative of the proper choice of law. Assuming a particular state’s law applies when demanding coverage can be costly if the insured assumes wrong. If a policyholder has questions as to which state law arguably applies to a risk and how the choice of law may affect any claim for insurance coverage, it should contact coverage counsel for assistance.