The recent 9th U.S. Circuit Court of Appeals ruling that Texas law governs a policyholder’s $40 million insurance dispute with an American International Group Inc. unit and two additional insurers underscores the importance of prevailing in legal disputes, legal experts say.
The decision in this case EB Holdings v. Illinois National Insurance Company et al. The case overturned a Las Vegas federal judge’s ruling that Nevada law should apply to the dispute, allowing insurers to argue they had no obligation to defend because the policyholder made a material misrepresentation in his policy renewal application.
The decision is significant because “it has a major impact on an insured’s ability to defeat an insurer’s misrepresentation defense and obtain coverage,” said Lilit Assadourian, an insurance recovery partner at Los Angeles-based Barnes & Thornburg LLP.
EB Holdings requested defense from AIG unit Illinois National Insurance Co. and two additional insurers for a Nevada state court lawsuit alleging fraud and market manipulation. The Dallas-based oil exploration supply company sued the insurers in December 2020 after they denied the request because D&O policies did not provide coverage for some of the defendants in the underlying lawsuit.
Illinois National argued in an affirmative defense that EB Holdings’ failure to list $1.6 billion in financial liabilities on its 2015 renewal application allowed it to cancel the policy. The trial judge granted summary judgment to the insurer after applying a Nevada law that would allow the insurer to cancel the policy, and EB Holdings appealed.
The trial judge will now use Texas law to decide whether EB Holdings intended to defraud its insurers by concealing financial information.
Ms. Assadourian said policyholders often tussle with insurers over point of law issues and choice of forum in D&O cases because they are so important to the outcome of a lawsuit and because there are many public policy restrictions on what is covered in D&O claims, such as punitive damages, fines and refunds.
The three-judge panel concluded that Texas law should primarily apply because that’s where EB Holdings’ policies were written and where the company is headquartered.
Lee S. Siegel of Hartford, Connecticut-based Hurwitz Fine PC, who represents insurers, said the decision was expected given the significant importance the appeals court gave to these factors.
While courts deciding on choice of law conflicts generally give more weight to factors such as a company’s state of incorporation and performance status, the number of factors favoring one state’s law does not always determine the outcome. Mr. Siegel said courts sometimes place more weight on factors that are more important to rendering justice in the situation.
Standard form insurance policies prepared by the Insurance Services Office do not include choice of law provisions because they are used in every state, each of which has its own rules and regulations. As a result, insurers provide state modification provisions that explain how that state’s law applies to the policy, Mr. Siegel said.
For businesses that own facilities in multiple states, the insurer will issue amendatory provisions for each location.
Michael S. Levin, a Washington-based insurance recovery partner at Hunton Andrews Kurth LLP, said that because insurance policies are contracts, the parties have the ability to agree to apply the law of the state specified in the dispute. For example, insurers often favor New York law, which has long been favorable to them.
When a coverage dispute arises, Mr. Levin recommends that policyholders carefully analyze which state’s laws may apply to their dispute before filing a lawsuit. The court should determine the choice of law only when there is a conflict between the laws of two states.
Essentially, “insurance contracts are governed by state law. When you think through that lens, it becomes clear that the outcome may be determined by which state’s law governs the dispute. This decision is an example of that scenario,” he said.
