Insurance Law
Conflict-of-Laws
Affirmative Defense
Diversity Cases
Choice-of-Law Rules of the Forum State
Texas and Nevada Law
Appeal from the United States District Court for the District of Nevada
The Insureds are holding companies incorporated in Nevada and headquartered in Dallas, Texas. In 2015, the Insureds had dozens of subsidiaries, through which the Insureds operated battery recycling facilities and manufactured supplies for the oil exploration industry. EBH II’s principal asset was ownership of 86.9% of Eco-Bat Technologies, Ltd. (Eco-Bat), a supplier of recycled lead based in the United Kingdom. Howard Meyers was a Director and the President of both Insureds in 2015. Albert Lospinoso was the other Director of EBH II. In the summer of 2015, the Insureds sought to renew their Directors and Officers and Private Company Liability Insurance Policy with Illinois National Insurance Company (Illinois National), an American International Group, Inc. (AIG) subsidiary organized pursuant to Illinois law with a principal place of business in New York. The Insureds were seeking to renew coverage not only for themselves but also for dozens of their subsidiary companies, including Eco-Bat and Eco-Bat’s subsidiaries. To facilitate the renewal, the Insureds’ insurance broker sent numerous documents to AIG’s underwriters that summer relating to the finances of the Insureds and their subsidiaries. These documents included a consolidated balance sheet of Eco-Bat America, LLC (EBA), a wholly owned subsidiary of Eco-Bat. This document represented that the subsidiary, EBA, had $29.9 million in long-term debt.
The District Court erred in concluding that Nevada law, and not Texas law, governs the affirmative defense.
It is well-established in the federal courts that a conflict-of-laws analysis may result in the laws of different jurisdictions applying to different issues in the same case. Allstate Ins. Co. v. Hague, 449 U.S. 302, 307 (1981). “It is also well-established that in diversity cases, such as this one, ‘federal courts must apply the choice-of-law rules of the forum state.’” Rustico v. Intuitive Surgical, Inc., 993 F.3d 1085, 1091 (9th Cir. 2021) (quoting Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 (9th Cir. 1987)). Here, the forum state is Nevada. “Nevada tends to follow the Restatement . . . in determining choice-of-law questions involving contracts, generally, and insurance contracts, in particular.” Progressive Gulf Ins. Co. v. Faehnrich, 327 P.3d 1061, 1063 (Nev. 2014). That includes § 187 of the Restatement, which, according to the Nevada Supreme Court, permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie Sievers & Lake Tahoe Land Co. v. Diversified Mortg. Invs., 603 P.2d 270, 273 (Nev. 1979). Nevertheless, where an insurance policy does not evince a clear choice-of-law governing a particular issue, the Nevada Supreme Court has instructed its courts to apply § 188 of the Restatement, i.e., the “substantial relationship” test. See, e.g., Sotirakis v. United Serv. Auto. Ass’n, 787 P.2d 788, 789–90 (Nev. 1990). That test requires courts to consider: “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties.” Restatement § 188. Each factor of the test must be “evaluated according to its relative importance with respect to the particular issue” that gave rise to the choice-of-law dispute in the first place. Id.
Section 187 of the Restatement permits the parties “within broad limits to choose the law that will determine the validity and effect of their contract.” Ferdie, 603 P.2d at 273. Parties typically effectuate that choice through an express choice-of-law provision in their contract. See Restatement § 187 cmt. a (“When the parties have made such a choice, they will usually refer expressly to the state of the chosen law in their contract, and this is the best way of insuring that their desires will be given effect.”). It is undisputed that the insurance policy in this case lacks such a provision. Nevertheless, commentary to the Restatement makes clear that an express choice-of-law provision is not required for § 187 to apply to a particular issue. See Restatement § 187 cmt. a.1 “The fact that a contract contains legal expressions, or makes reference to legal doctrines, that are peculiar to the local law of a particular state may provide persuasive evidence that the parties wished to have the law of that particular state applied.” Id.
(…) Because we conclude that Texas law applies to the defense of material misrepresentation, there is no reason to entertain the Insureds’ broader argument that Texas law applies to the entire policy. Cf. George K. Baum & Co. v. Twin City Fire Ins. Co., 760 F.3d 795, 799–800 (8th Cir. 2014) (applying comment (a) to § 187 of the Restatement to hold that New York law governed an entire insurance policy that lacked an express choice-of-law clause because it “contained numerous New York-specific provisions”). (Fn. 2).
(U.S. Court of Appeals for the Ninth Circuit, July 29, 2024, EB Holdings II, Inc. v. Illinois National Insurance Comp., Docket No. 23-15556, for Publication)
