Court Addresses That New York Choice Of Law Clause: It Can Make It Anywhere

It’s something I’ve wondered about for a long time.  And it’s a question I get from students.  If insurance coverage is sometimes significantly tied to the interpretation of state law, and disputes often arise over which state’s law applies to a claim, then why is it so unusual for an insurance policy to include a choice of law clause?  Not to mention that commercial contracts, outside of the insurance policy context, almost always include a choice of law clause.  I have a variety of reasons why I believe this differential treatment exists; but that’s not important here. 

But despite it being highly unusual, there are some insurance policy forms that include a choice of law clause.  They often state that New York law will govern.  The meaning of one such clause was at issue in Bryce Corp. v. XL Insurance America Inc.  While the case involves a coverage dispute under a property policy, the choice of law provision, or ones like it, appear in liability policies. 

To be sure, there are decisions that have addressed the meaning of choice of law provisions in insurance policies – but it’s far from an abundant collection of cases.  What made me select Bryce Corp., as one of the year’s ten most significant coverage cases, was that the decision was tied solely to the language of the choice of law provision.  In other words, the case did not delve into the clause’s enforceability generally or considerations of public policy, as some do. 

Instead, in Bryce Corp., the Southern District of New York undertook a straight-up interpretation of the policy’s choice of law clause.  Having done it this way, and considering the outcome, insurers that use choice of law provisions in their policies may want to consider if any changes are in order.   
     
At issue in Bryce Corp. was a dispute over coverage for large printing presses that had been damaged by fire in the insured’s facilities.  The specifics of the dispute are not relevant here.  What matters is that XL sought dismissal of Bryce’s bad faith claim brought under the Tennessee Insurance Code.  XL argued that New York law applied to all disputes on account of the policy’s choice of law provision, which stated: “The Insured and the Company further agree that New York law shall control the interpretation, application and meaning of this contract, whether in suit or otherwise.”

For two reasons, the court held that the choice of law provision did not dictate that New York law applied to the bad faith claim. 

First, it was drafted too narrowly: “As a general rule of thumb, provisions applying to disputes ‘arising out of’ or ‘relating to’ a contract are capacious enough to reach [extra-contractual] claims, while provisions stating that a contract will be ‘governed by’ or ‘construed in accordance with’ the law of a state are not.” (several non-insurance citations omitted). . . .  [The XL policy] provision ‘maps neatly onto the sort of contractual language that courts applying New York law have held to be insufficient to extend to extra-contractual disputes, such as Plaintiff’s bad-faith claim, that arise in connection with the contract.’”

The court’s second reason, bolstering its first, was also tied to the policy language.  The court pointed to the forum selection clause, which was located adjacent to the choice of law clause, and provided: “In the event that any disagreement arises between the Insured and the Company requiring judicial resolution, the Insured and the Company each agree that any suit shall be brought and heard in a court of competent jurisdiction within the State of New York.”

The court read the choice of law and forum selection clauses together and reached the following conclusion: “[T]he choice-of-law clause specifies the application of New York law only to the ‘interpretation, application and meaning’ of the XL Policy.  By contrast, the forum-selection clause provides that ‘any disagreement’ arising between Plaintiff and Defendant shall be heard in the State of New York. This distinction illustrates that ‘[t]he drafters were capable of writing a choice-of-law provision sufficiently broad to cover [extra-contractual claims] by mimicking the adjacent forum selection clause, but chose not to do so.’”

The court concluded that it was “bound to respect” the “two different formulations as to the scope of these provisions.” 
   
By tying the decision to solely the interpretation of the policy language, insurers that use similarly worded choice of law and forum selection clauses in their policies may want to consider if any changes are in order.