Are The Choice Of Law Rules For A Bad Faith Claim Different?

Choice of law has long-been my least favorite coverage issue.  While it can be critically important – sometimes even the issue that will decide the entire case – my displeasure comes from its fact-driven aspect. 

Unless the choice of law rule says to apply the law of the state where the policy was issued (and only a handful of states still adhere to this older approach), choice of law is generally resolved by rules under the Restatement (Second) Conflict of Laws.  This requires an assessment of numerous geographic factors concerning the issuance of the policy, where the injury or damage for which coverage is being sought took place, the insured’s operations, state’s interests and perhaps other things.  These factors are all stirred together – with some being more important than others – and, voila, an answer should appear.

However, given how fact-intensive the analysis can be – by definition, more than one state has some relationship to the coverage dispute – such analysis (even a thorough one) can sometimes lead to an unsatisfactory answer.  In other words, while you’ve done a lot of work to reach a conclusion, you may end up with less certainty of the answer than you’d prefer.  In general, choice of law can be one of the harder issues for a coverage professional to handicap.     

But, despite all this, following a Restatement multi-factor analysis, the choice of law determination often ends up being the state of the insured’s address on the policy’s declarations page.  Since choice of law is for the interpretation of an insurance policy, which is a contract, the state where the policy was issued – usually the insured’s address on the dec page – often has outsized importance compared to the other factors being considered.  While the location where the claim arose, or the underlying tort took place, is important for choice of law for the underlying action, a coverage dispute is a contact action.  So, the state where the contract/policy was issued is usually given the most weight.

In Scott Fetzer Co. v. Am. Home Assur. Co., the Supreme Court of Ohio considered choice of law for a bad faith claim.  While insurance policies were at the heart of the dispute – without it, there was no dispute – the claim here was for bad faith, which is a tort.   

Did that make a difference?  Did that result in choice of law being determined by the state tied to the handling of the claim and not where the policy was issued, as is so often the result?  That was the issue before Ohio’s top court.

Coming from a state high court, and because the answer was “yes,” I chose Scott Fetzer Co. as one of the year’s ten most significant coverage cases.  If the answer had been “no,” and the law of the issuance of the policy controlled, I would not have selected it.  

In 1968, Scott Fetzer Co. acquired a manufacturing facility in Michigan when it merged with the facility’s prior owner, Kingston Products Corp.  Scott Fetzer continued to operate the facility from 1968 to 1984.

Starting in 1986, Scott Fetzer was called upon by the EPA to remediate environmental contamination at the Michigan site.  Scott Fetzer sought coverage from various insurers that issued policies to Kingston or itself.  This included a predecessor of Travelers that issued policies to Kingston from 1964 to 1968.

The insurers disclaimed coverage and litigation in Ohio ensued, with Scott Fetzer seeking a declaratory judgment that coverage was owed as well as damages for bad faith.

Scott Fetzer sought documents from Travelers “relating to its claims-handling procedures or guidelines for making coverage determinations as well as internal documents and communications relating to its handling of Scott Fetzer’s claim.  Travelers claimed that the information was covered by attorney-client privilege and was work product.”

Enter choice of law…

Scott Fetzer argued that, under Ohio law – Scott Fetzer has its headquarters in Ohio -- the attorney-client privilege does not preclude discovery of documents revealing an insurer’s bad faith.

But, as Travelers saw it, what’s Ohio got to do with it?  Travelers maintained that, under Ohio’s choice-of-law rules, the court was required to apply either Michigan law (where the Kingston manufacturing facility was located) or Indiana law (Kingston was an Indiana company that had contracted for the policies in Indiana).  Doing so, Travelers argued, would preclude the requested discovery as Michigan law does not recognize a cause of action for bad faith and Indiana law does not allow discovery of materials covered by attorney-client privilege.

Travelers was taking a traditional insurance coverage choice of law approach to the situation, arguing that, under the Restatement, choice of law, for purposes of a liability policy, is the principal location of the insured risk.  And that wasn’t Ohio when addressing coverage for a Michigan site under polices issued in Indiana. 

Scott Fetzer saw it differently.  Since bad faith is a tort, what do the Restatement’s choice of law rules for contracts got to do with it? 

But while bad faith may be a tort, Travelers argued, in the court’s words, that the bad faith claim is “effectively inseparable from an insurance contract because the contract creates the claim.”  Travelers added that the contract choice of law rules should apply because, unlike a typical tort, bad faith can only be brough by one contracting party against another.     

But the Ohio top court sided with Scott Fetzer and held that choice of law for a bad faith claim – a tort -- is governed by Restatement section 145, which provides, in general, that “(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.”  In applying the principles of § 6, consider such things as the place where the injury occurred and the place where the conduct causing the injury occurred, and a couple of others.”

If choice of law for a tort is the state that has the most significant relationship to the occurrence and the parties, then, for bad faith, it would be Ohio, as Travelers was handling a claim brought by a company located in Ohio.     
  
The court explained its decision as follows:

“So when one party to an insurance contract brings a bad-faith claim against another, Section 145 of the Restatement is the natural fit for the dispute because it focuses on factors other than the ‘principal location of the insured risk,’ Restatement, Section 193, Comment c, at 612. Here, while the parties might have justified expectations about alleged breaches of the insurance contracts, Scott Fetzer’s bad-faith claim is that Travelers acted without a conscious regard for the legal consequences of its conduct. Given this allegation, it is difficult to find any justified expectations that Travelers might have that are undermined by a complaint alleging bad faith sounding in tort. This is especially so given that Travelers has refused to participate in discovery.  As a result, instead of focusing on factors that seek to protect justified expectations, like the ‘principal location of the insured risk,’ we conclude that the factors identified in Section 145 are the appropriate ones to consider when determining the law applicable to bad-faith claims.”