Venue Selection Is Key To Determining Coverage

True to form, state courts in 2016 have continued their divergence on key coverage issues. Conflicting coverage rulings can madden policyholders and insurers alike by hampering their ability to forecast outcomes and assess risk. Although little can be done to change the state of the law, the existence of conflicting decisions presents an opportunity that can transform a losing coverage position into a winner. Seizing the opportunity means filing coverage litigation in the most favorable venue available. The options can be surprising.

Although the coverage issues on which state courts disagree are many, the phenomenon has displayed itself this year with rulings on whether standard commercial general liability policies cover losses resulting from defective construction. Decisions have been handed down in 2016 by the Supreme Courts of New Jersey and Iowa.[1] Both courts ruled that defective workmanship may constitute an “occurrence” under a standard CGL policy. Other states have contrary law, and the decisions’ many permutations create a hodgepodge of jurisprudence.[2] The point is that possible coverage for losses resulting from defective construction — and other important coverage issues — can depend in large part on governing law. Governing law, in turn, can depend on venue.

It may be reasonable to presume that venue should not affect governing law. If for no other reason, there is something perverse about rewarding litigants for forum shopping and winning the courthouse “race.” However, we are a nation of sovereign states, each entitled to create and enforce its own laws within constitutional boundaries. As the U.S. Supreme Court has recognized, “in many situations a state court may be free to apply one of several choices of law,” prompting wise plaintiffs to “select that forum whose choice-of-law rules are most advantageous.”[3] Like it or not, venue often determines governing law, and thereby dictates outcomes. Failing to take account of this reality can be a costly mistake.

Identifying the available venue offering the most favorable substantive law begins with the universal principle that the forum state’s choice-of-law rules govern.[4] There are several approaches to the choice-of-law analysis. Many states apply § 193 of the Restatement (Second) of Conflict of Laws, under which a coverage dispute is governed by the law of “the state which the parties understood was to be the principal location of the insured risk, unless with respect to the particular issue, some other state has a more significant relationship ... to the transaction and the parties.”[5] States often rely on § 193, as well as the multifactor “most significant relationship” test under Restatement § 188(2).[6] Other states adhere to the more traditional, and inflexible, lex loci contractus doctrine, under which a court applies the substantive law of the state where the contract is made and/or is to be performed.[7] Some states have statutes affording special treatment to insurance disputes.[8] Where a coverage action involves a tort or statutory unfair trade practices claim, the court may turn to the lex loci delicti rule, under which the claim is governed by the law of the state where the injury was sustained.[9] The choice of law analysis can be dizzying under each of these rules. For example, a coverage dispute may involve contract, tort and statutory claims, multiple policies and insurers, multiple insureds/additional insureds, and the location and duration of the loss may be spread over several states and coverage periods. Irrespective of how complex the analysis may be in any given matter, the lesson is that a party contemplating a coverage lawsuit is well advised to assess the choice-of-law rules in each state where the suit may be filed.

Realizing the potential importance of venue, a prospective plaintiff must identify the state and federal courts in which a coverage action may properly be brought. The list may be long, because “[j]urisdiction and venue requirements are often easily satisfied.”[10] Indeed, particularly for businesses, venue and personal jurisdiction are coextensive under the federal general venue statute, 28 U.S.C. § 1391.[11] The same holds true under many state venue statutes.[12] A coverage action, therefore, may be proper in multiple states with little or no connection to the dispute (think asbestos litigation).

Coverage litigation is predisposed to venue selection options. This is because a coverage dispute may involve multiple insureds, insurers and brokers located in different states, multiple policies entered into in different states, facts giving rise to the claim that occurred in yet another state, and loss that occurred in several states or even nationally.

Venue choices and considerations can be affected where insureds are limited liability companies, now the most favored form of business. Some states consider an LLC to reside wherever any of its members reside.[13] All federal circuits to have considered the matter have ruled that the citizenship of an LLC for diversity purposes is determined by the citizenship of each LLC member.[14] However, “personal jurisdiction over a limited liability company does not automatically extend to its members, as membership in an LLC is not sufficient in-and-of itself to confer personal jurisdiction over its members.”[15] Sorting through the implications can be especially onerous where members of an LLC are themselves LLCs or partnerships.

Of course, no matter where a lawsuit is filed, the defendants must be subject to personal jurisdiction in the forum state. States’ long-arm statutes generally extend personal jurisdiction to the limits of due process, invoking International Shoe’s “minimum contracts” test.[16] Volumes have been written on constitutional minimum contacts, but suffice to say here that the standard subjects most insurance companies to personal jurisdiction in every state. Therefore, personal jurisdiction disputes almost always arise where the defendant is a policyholder. An insurer contemplating a coverage action in a particular state must evaluate whether the policyholder is subject to personal jurisdiction in the selected forum.

For various reasons, a large majority of coverage actions brought by policyholders are commenced in state courts. Where diversity of citizenship exists, as it often does, insurers typically remove to federal court under 28 U.S.C. § 1446. Once removed to federal court, a coverage action may be transferred to a more convenient federal district in a different state, under 28 U.S.C. § 1404(a). This raises the question of whether removal and transfer will deprive the policyholder of application of the more favorable law it sought in the first place. The answer is no, because the Supreme Court has ruled that where a defendant secures transfer under 28 U.S.C. § 1404(a), “the transferee district must be obligated to apply the state law that would have been applied if there had been no change of venue.”[17]

In summary, venue can mean the difference between coverage and no coverage. Insurers and policyholders contemplating coverage litigation should evaluate the courts where venue would be proper, and determine which forum would potentially offer the most favorable substantive law. This often complex process should be performed as early as practicable, because the first-filed lawsuit will likely take precedence.

[1] Cypress Point Condominium Association v. Adria Towers LLC, __ A.3d __, 2016 WL 4131662 (N.J. Aug. 4, 2016); National Surety Corp. v. Westlake Investments LLC, 880 N.W.2d 724 (Iowa 2016).

[2] E.g., McBride v. Acuity, 510 Fed.Appx. 451 (6th Cir. 2013)(Kentucky law); Allied Property & Casualty Ins. Co. v. Metro North Condominium Association, 2016 WL 1270480 (N.D. Ill. 2016)(Illinois law).

[3] Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985); Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981).

[4] E.g., Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941); Tanges v. Heidelberg North America Inc., 93 N.Y.Supp.2d 48, 710 N.E.2d 250 (1999).

[5] E.g., Progressive Ins. Co. v. Faehnrich, 327 P.3d 1061 (Nev. 2014); American States Ins. Co. v. Allstate Ins. Co., 282 Conn. 454, 922 A.2d 1043 (2007).

[6] E.g., Zurich Ins. Co. v. Shearson Lehman Hutton Inc., 84 N.Y.2d 309, 642 N.E.2d 1065 (NY 1994).

[7] E.g., Griffith Energy Services Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 224 Md. App. 252, 120 A.3d 808 (2015); State Farm Mut. Auto. Ins. Co. v. Roach, 945 So.2d 1160 (Fla. 2006).

[8] E.g., N.C. Gen. Stat. § 58-3-1 (policies insuring property, lives or interests in North Carolina are deemed to have been made there, and subject to the laws of North Carolina).

[9] E.g., Bullard v. MRA Holding LLC, 292 Ga. 748, 740 S.E.2d 622 (2013).

[10] Piper Aircraft Co. v. Reyno, 454 U.S. 235, 250 (1981).

[11] Lafferty v. Riel, 495 F.3d 72, 82 n. 13 (3rd Cir. 2007); Roberts v. Keith, 2007 WL 2712853 at *6 (S.D.N.Y. 2007).

[12] E.g., 775 ILCS § 5/2-103; RI Gen L §§ 9-4-4, 9-4-5; Reagor v. Travelers Ins. Co., 92 Ill.App.3d 99, 104, 415 N.E.2d 512, 516 (1980) (“suits on insurance contracts are ordinarily considered transitory actions which may be brought wherever jurisdiction of the parties may be obtained, regardless of where the contract was made or was to be performed.”)

[13] E.g., Ex parte WMS, LLC, 170 So.3d 645, 650 (Ala. 2014).

[14] E.g., Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3rd Cir. 2010).

[15] V-E2 LLC v. Callbutton LLC, 2012 WL 6108245 at *3 (W.D.N.C. 2012), citing, Shaffer v. Heitner, 433 U.S. 186 (1977). Accord, Compass Financial Partners LLC v. Unlimited Holdings Inc., 2008 WL 2945585 at *4 (D. Ariz. 2008).

[16] International Shoe v. State of Washington, 326 U.S. 310 (1945).

[17] Van Dusen v. Barrack, 376 U.S. 612, 639 (1964).