Federal Court Holds Location of Broker Acting as Intermediary Carries Little Weight in Choice-of-Law Analysis
When determining which state’s law applies to an insurance policy without a choice-of-law provision, Illinois courts use a multi-factor “most significant contacts” test.
Absent an express choice of law, insurance policy provisions are generally “governed by the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract.” Lapham-Hickey Steel Corp. v. Protection Mutual Insurance Co., 166 Ill.2d 520, 655 N.E.2d 842, 845, 211 Ill.Dec. 459 (1995), as modified on denial of reh’g (Oct. 2, 1995).
Many insureds employ a broker to assist them in placing insurance. The broker generally acts as an intermediary for the insured, sometimes receiving copies of the policy on behalf of the insured or paying premium on behalf of the insured. Questions about how to apply the factors of the “most significant contacts” test can arise when interpreting a policy issued to an insured in one state who used the services of a broker intermediary in another state. For example, if the insurer mails a copy of the policy to a broker in State A who then forwards it to an insured in State B, was the policy issued in State A or State B? If the insured pays its premium from State A to a broker in State B, who forwarded the premium to the insurer, was the premium paid from State A or from State B? This can be important since the policy often comes into effect when premium is paid, meaning the place premium was paid is the place of the last act to give rise to a valid contract.
In National Surety Corp. v. Bedivere Insurance Co., No. 17 C 3455, 2019 WL 2743485 (N.D.Ill. Jul. 1, 2019), the court directly addressed these questions. In National Surety, National Surety and Bedivere settled underlying lawsuits against their mutual insured. National Surety’s contribution to the settlements was subject to its right to recoup its settlement contribution from Bedivere in the event that National Surety succeeded in demonstrating that it did not owe coverage. National Surety then sued Bedivere on the theory that its coverage was not triggered by the underlying claims, and therefore Bedivere was responsible for reimbursing National Surety for National Surety’s settlement contribution. 2019 WL 2743485 at **1 – 2.
National Surety argued that Illinois law applied to the interpretation of its policies and that, under Illinois law, its coverage was not triggered (meaning that Bedivere had to reimburse National Surety). Bedivere argued that Ohio law applied to the interpretation of National Surety’s policies and that, under Ohio law, National Surety’s coverage was triggered (meaning that Bedivere did not have to reimburse National Surety). The court determined that choice-of-law determined the outcome of the coverage action. 2019 WL 2743485 at **4 – 5.
In applying the “most significant contacts” choice-of-law test, the court considered the location of the place of delivery of the National Surety policies. The parties agreed that National Surety issued two copies of National Surety’s policies to the insured’s broker in Illinois, who kept one copy and forwarded the other to the insured’s headquarters in Ohio. However, the parties disputed whether another copy of the National Surety policies was also mailed directly to the insured’s headquarters in Ohio. 2019 WL 2743485 at *6.
The court also considered the location of payment and the location of the last act giving rise to the contract. National Surety argued that the premium had been paid by the insured in Ohio to its broker in Illinois and then the broker in Illinois paid the premium to National Surety. Bedivere argued that the premium had been paid directly to National Surety from the insured’s headquarters in Ohio. Therefore, according to National Surety, the contract was made in Illinois when the broker paid the premium in Illinois, while according to Bedivere the contract was made in Ohio when the insured paid the premium in Ohio. Id.
The court found that whatever the broker’s involvement in receiving the policies or paying premium, the broker’s location carries little weight for the purposes of the choice-of-law analysis when the broker is being used as an intermediary. 2019 WL 2743485 at *7. Instead, in light of the dispute between the parties over what exactly the broker did, the court found that Illinois law defers to the insured’s place of business, in this case Ohio. Id.
After considering all the choice-of-law factors under the “most significant contacts” test, the court concluded that Ohio law applied. 2019 WL 2743485 at *8. Accordingly, National Surety’s coverage was triggered and National Surety was not entitled to recover its settlement contribution from Bedivere. Id.
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