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Appellate Ruling Shows The Importance of Choice of Law for Insurance

Mar. 10, 2020

On February 25, 2020, a California court of appeal rendered its decision in Textron, Inc. v. Travelers Casualty & Surety Co., 219 DJDAR 1701 (2019). In that action, Textron, the insured, sought coverage for an underlying lawsuit alleging injuries from exposure to asbestos. Textron argued that California law governed the insurance policies. The insurer argued that Rhode Island law applied.

Those policies previously had been interpreted in an action brought by Textron in Rhode Island in 1987 against multiple insurers. Textron had argued there that Rhode Island law governed the interpretation of its insurance policies to environmental claims.

After being sued in California in the asbestos-related lawsuit, Textron sued Travelers, one of its insurers. Textron argued that the place of performance for the underlying lawsuit was California, where the insurer’s duty to defend was to be rendered. See Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1442-43 (2007) (choice of law regarding interpretation of a contract is the law of the place of performance). Travelers argued that Rhode Island law applied, urging that Textra be bound by its earlier position and assertions of Rhode Island law.

This issue was important because under California law, coverage for asbestos-related claims could be continuously triggered under policies in effect from the first inhalation of asbestos fibers through the time that an asbestos- related disease was diagnosable, while under Rhode Island law, coverage would be triggered only at the time that an asbestos-related disease was diagnosable. Travelers would be liable only under the California approach.

Travelers first argued that Textron could not claim that California law applied under the doctrine of collateral estoppel. The court rejected this argument for several reasons. It said that the issue before it was not whether Textron sought and received a ruling that Rhode Island law applied “to interpret the same policy language.” It said, “the determinative point is whether the Rhode Island ruling that Rhode Island law applied to interpret the . . . policies decided the identical choice of law issue presented here.” The court held, “It clearly did not.”

The court pointed out that “the specific legal issue is whether the [underlying] action presents a covered occurrence under the Textron policies. Actually, the [underlying] action involves an alleged occurrence of continuing personal injury . . . suffered by a single California resident from exposure to asbestos in California, caused by Textron’s activities in California.” The court then concluded, “Obviously, that specific issue—which trigger rule should apply to the [underlying] action—was not litigated and decided more than 24 years earlier in the Rhode Island action.”

The court also emphasized the difference between the earlier Rhode Island action and the action before it: “[T]he Rhode Island case was against 49 insurance carriers (incorporated in 15 different states), seeking coverage under 258 policies for multiple occurrences of ‘property damage’ and ‘personal injury’ occurring in 19 different states          Textron’s motion for partial summary judgment in the Rhode Island identified no specific conflict between Rhode Island law and the law of the 19 other states, much less a specific conflict with California law.”

The court then turned to the question of which state had a greater interest in having its law apply. It concluded that California had a greater interest than did Rhode Island: “California has an overriding interest in applying its continuous trigger rule to the [underlying] action (involving a continuing injury suffered by a California resident, caused by Textron’s activities in California and only California) to ensure that there are adequate insurance proceeds available as compensation.”

Travelers next argued that Textron was judicially estopped from asserting California law. The court noted that judicial estoppel “prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or an earlier proceeding.” It pointed out that the “fundamental basis of the doctrine is that the party to be estopped was successful in asserting a position in a prior case that is totally inconsistent with its position in the current case.” It held that because the issue decided and presented in Rhode Island was not identical to the issue before it, Textron’s argument that California’s continuous trigger rule applies “is not inconsistent with its argument that Rhode Island law applied in the Rhode Island action.”

Textron thus stands for the proposition that even if a court has applied one jurisdiction’s law to the interpretation of insurance policies in a prior action, that does not mean that a later court will apply the same law to the same policies in a subsequent dispute. The simple fact is that neither collateral estoppel nor judicial estoppel will necessarily mandate that prior chosen law will govern all future disputes between an insured and its insurers.

Indeed, California courts have recognized that even if an insured and an insurer agree in an insurance policy to the choice of law governing the interpretation of that policy, their choice might not be subsequently enforced.

In Pitzer College v. Indian Harbor Insurance Co., 8 Cal. 5th 93 (2019), the California Supreme Court was asked by the U.S. Ninth Circuit Court of Appeals to address two questions—whether California’s so-called “notice-prejudice” rule is a fundamental public policy and, if so, whether it applied to a policy condition stating that the insurer only need pay for settlements to which it consented.

The policy at issue contained a choice-of-law clause stating that New York law applied. Under New York law, “policies issued and delivered outside New York . . . are subject to a strict no-prejudice rule under New York common law, which denies coverage where timely notice is not provided.” However, under California’s “notice-prejudice” rule, an insurer cannot rely on an insured’s delay in notice to avoid its duties under a policy unless it proves that the delay actually and substantially prejudiced it. As the California Supreme Court noted, “California’s notice-prejudice rule is designed “to protect insurers from prejudice, . . . not . . . to shield them from their contractual obligations through a technical escape-hatch.”

The court then addressed the choice-of-law law. It stated, “The crux of this case lies in the choice of law provision” and its enforceability.” It noted that “the parties’ choice of law generally governs unless (1) it conflicts with a state’s fundamental public policy, and (2) that state has a materially greater interest in the determination of the issue than the contractually chosen state.” The court held that California’s “notice-prejudice rule is a fundamental public policy of our state . . . that applies to consent provisions in first party insurance policies.” The court left it to the Ninth Circuit to decide whether “California has a materially greater interest than New York in determining the coverage issue, such that the contract’s choice of law would be unenforceable because it is contrary to our fundamental public policy.”

Given Textron and Pitzer, it is important to remember that even if a party has argued that one jurisdiction’s law governs the interpretation of a policy, or has agreed in the policy that one jurisdiction’s law govern policy interpretation, that may not turn out to be the case.

© 2020. All Rights Reserved. Daily Journal Corp.

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Kirk Pasich
Daily Journal — Named a member of the “Legal Dream Team” as one of California’s Top 25 litigators

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