AUGUST 2015 BAD FAITH CASES: COURT FINDS THAT SUBSTANTIVE LAWS OF NEW YORK APPLY BASED ON CHOICE OF FORUM CLAUSE IN POLICY, EVEN THOUGH NEW YORK, UNLIKE PENNSYLVANIA (1) DOES NOT RECOGNIZE ACTION FOR BAD FAITH DENIAL OF INSURANCE CLAIMS AND (2) DOES NOT REQUIRE INSURED HAVE SCIENTIR FOR INSURER TO SEEK RESCISSION (Western District)

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In H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., the insured and the insurer sought a declaration from the Court as to the insurer’s obligations under a policy issued to the insured, and the insurer moved for the policy to be rescinded. The issue before the Court was whether the substantive laws of Pennsylvania or New York applied, and the Court found that New York law governed the case.

The underlying action is an insurance coverage dispute between the insurer, which has a principal place of business in Pittsburgh, and the insured, which is incorporated in Texas, with a principal place of business in New York.  The insurance policy at issue contained a “Choice of Law and Forum” provision, which states that the policy would be governed by the laws of New York. The policy also contained a Service of Suit Endorsement, which provides that in the event of the insurer’s failure to pay the amount claimed to be due under the policy, the insurer would consent to the jurisdiction of any Court chosen by the insured.

The language of the endorsement also set forth that any dispute in the chosen forum would be conducted “in accordance with the law and practice of such Court.” The parties disagreed as to the interpretation of the policy and disputed the effect of the endorsement upon the Choice of Law clause.

The Court first determined whether the Service of Suit Endorsement superseded or modified the Choice of Law Clause. After an analysis under Pennsylvania’s choice of law provisions, the Court determined that the parties intended to have the substantive laws of New York apply to any legal dispute that arose with regards to the policy.

The Court pointed out a conflict in the substantive laws of Pennsylvania and New York relating to rescission and bad faith. In Pennsylvania, the standard for rescission is more stringent because it “imposes a burden on a party to demonstrate that the insured knew the representation at issue was false when it was made or the insured made the representation in bad faith.” The Court noted that New York does not have a similar scientir requirement for rescission.

The Court next acknowledged the conflict between the laws of Pennsylvania and New York particularly with regards to bad faith, in that “Pennsylvania permits a party to recover punitive damages, attorneys’ fees, and interest from an insurer if a claim is denied in bad faith, while New York does not recognize a cause of action for bad faith denial of insurance claims.” The Court noted that the competing interests between the two states are “Pennsylvania’s interest in protecting insureds and allowing them recovery of monetary funds in cases of bad faith and New York’s interest in preventing recovery from insurers, which inevitably encourages business in New York, amongst other considerations.”

Because Pennsylvania did not have a “materially greater” interest in the litigation, the Court determined that the Choice of Law provision in the policy should not be disturbed, and the substantive laws of New York should govern.

Date of Decision: July 31, 2015

H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., CIVIL ACTION NO. 15-cv-00631, 2015 U.S. Dist. LEXIS 100580 (W.D. Pa. July 31, 2015) (Schwab, J.)

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