Are Extracontractual Bad Faith Claims Governed Under A Choice of Law Provision?

One of the trends of insurance contract law is for insurers to place in the policy a choice of law provision applying New York law. New York has very limited bad faith remedies and laws much more favorable to insurers than most states. But do those choice of law clauses always apply to statutory extracontractual remedies?

The First Circuit Court of Appeals decision issued this week1 seems to open the door for policyholders to claim that their state statutory remedies are not impacted unless the choice of law provisions are crystal clear that they do, The court held:

This maritime insurance case from Massachusetts arises on interlocutory appeal pursuant to 28 U.S.C. § 1292(a)(3) from the district court’s grant of judgment on the pleadings in favor of the plaintiff-insurer, Great Lakes Insurance SE (GLI). The defendant, Martin Andersson, asserted that GLI engaged in unfair claim settlement practices in violation of Massachusetts General Laws chapters 176D and 93A. The district court ruled that Andersson’s claim was barred by the choice-of-law provision of the marine insurance policy he purchased from GLI. For the reasons that follow, we conclude that the choice-of-law provision is ambiguous as to what law applies to the statutorily based claim that is at issue. Consistent with the applicable principles of interpretation we construe this ambiguity against the drafter — GLI — and conclude that Andersson’s Massachusetts state law claim is not subject to the choice-of-law provision. Accordingly, we reverse.

The choice of law provision at issue stated:

It is hereby agreed that any dispute arising hereunder shall be adjudicated according to well established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice but where no such well established, entrenched precedent exists, this insuring agreement is subject to the substantive laws of the State of New York.

The court noted the winning policyholder’s argument as follows:

Andersson’s challenge centers on the proper interpretation of the choice-of-law provision when faced with an extracontractual claim that is not governed by entrenched principles of admiralty law. Andersson maintains that the second, disjunctive clause of the choice-of-law provision – which states that ‘this insuring agreement is subject to the substantive laws of the State of New York’ – ‘narrowed the application of New York law to the insuring agreement[,]’ and not to extracontractual claims. He thus asserts that his statutory extracontractual claim does not fall within the ambit of the choice-of-law provision.

The court found that the policy was ambiguous because the policyholder’s interpretation was a plausible interpretation:

When, as here, there are ‘competing plausible interpretations of the insurance policy’ doubts as to the intended meaning of the words must be resolved against the insurance company that employed them.’ …. Doing so leads to the inescapable conclusion that only contract-related claims are subject to the substantive laws of New York. Extracontractual claims do not fall within the scope of the second clause of the choice-of-law provision.

The practical implication is that this holding may apply to cases in states with extracontractual remedies. I think the finding applies to non-maritime cases as well. Many of these choice of law provisions are found in surplus lines policies which are often subject to arbitration clauses. This opinion could support the position that only the contract claims are to be arbitrated and subject to New York law while the extracontractual claims are subject to another state’s law.

So, who is in the above picture with me? My sister Emily Merlin. She is a paralegal with a degree from the University of West Florida. I made a presentation yesterday to the Tampa Bay Paralegal Association titled: Navigating Insurance Claims and Litigation: Hurricane Damage and Other Disasters.

Thought For The Day

All meanings, we know, depend on the key of interpretation.

—George Eliot

1 Great Lakes Ins. SE v. Andersson, no. 21-1648 (1st Cir. Apr. 19, 2023).