Your “Choice-of-Law” Provision May Not Mean What You Think

Even when an insurance contract has a choice-of-law provision, that provision may not apply to extra-contractual bad-faith claims, held a New York federal court judge on December 28, 2023.

Choice-of-law provisions have been heavily litigated, and are often narrowed by courts in the context of insurance policies when doing so favors the insured.  An opinion and order entered late-last year by U.S. District Judge Katherine Polk Failla is no exception.  In that case, the court examined whether a choice-of-law provision stating that “New York law shall control the interpretation, application and meaning of” the insurance contract “whether in suit or otherwise” governed bad-faith claims made by an insured against an insurer for breach of the insurer’s duty of good faith and fair dealing when the insurer denied coverage.  The court held that, while the choice-of-law provision applied to contractual claims, it did not apply to extracontractual claims, such as bad-faith claims.  The court noted that if the choice-of-law provision instead used the phrase “arising out of” or “relating to”, the outcome may have been different. This is significant, given that extracontractual claims can result in large damages awards and differ dramatically by which state’s law applies (or, as in this case, dictate whether the prevailing plaintiff is entitled to attorneys’ fees).

This decision is one in a long list of cases examining the language of choice-of-law clauses, including those present in insurance policies.  In fact, in October 2023, the Supreme Court heard a case involving the application of choice-of-law clauses, including whether a choice-of-law provision can be rendered unenforceable if a court determines that it is contrary to the “strong public policy” of the state whose law would be displaced.  A decision is expected in the coming months.

Courts differ in their interpretations of choice-of-law provisions, which frequently involve a detailed analysis of the contract wording, relationship between the parties, type of contract, and public policy, among other things.

If you are uncertain how a court may resolve a contract’s choice-of-law clause, please contact a member of the HSE Insurance Coverage or Commercial Litigation teams.

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