Opinion
Civil File No. 03-6535 (PAM/RLE)
May 13, 2004
MEMORANDUM AND ORDER
This matter is before the Court on Defendant's Motion to Dismiss. For the reasons that follow, Defendant's Motion is granted.
BACKGROUND
Plaintiff JSI Industries, Inc. ("JSI") is a Wisconsin corporation that manufactures agricultural equipment such as grain silos. In 2001 and 2002, several Minnesota farmers sued JSI in Minnesota state court. JSI tendered the claims to its insurers, Sentry Insurance Company ("Sentry") and Defendant Steadfast Insurance Company ("Steadfast"). Steadfast refused to defend the actions. The lawsuits were settled without Steadfast contributing either to the defense costs or to the settlement costs. Sentry partially defended the lawsuits, and JSI entered into a loan receipt agreement with Sentry for some of those costs.
Steadfast now moves to dismiss Count VI of JSI's Complaint, which raises a claim for insurance bad faith. Steadfast also seeks to dismiss JSI's claim for punitive damages, which is founded on the insurance bad faith claim. According to Steadfast, Minnesota law applies to JSI's claims and Minnesota law does not recognize a cause of action for insurance bad faith. Morris v. Am. Mut. Ins. Co., 386 N.W.2d 233, 237 (Minn. 1986). Steadfast also argues that, because Minnesota law applies, JSI improperly raised punitive damages in the Complaint. Minnesota law provides that a Complaint may not seek punitive damages, but that a party must make a motion to amend the pleadings to include punitive damages. Minn. Stat. § 549.101.
JSI argues that Wisconsin law should apply, at least as to the bad-faith claim. Wisconsin law recognizes a cause of action for insurance bad faith. Anderson v. Cont'l Ins. Co., 271 N.W.2d 368, 374 (Wis. 1978). Because Wisconsin law applies, according to JSI, the punitive damages claim in the Complaint is not improper.
DISCUSSION
For the purposes of the Motion to Dismiss, the Court takes all facts alleged in the Complaint as true. Westcott v. Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). The Court must construe the allegations in the Complaint and reasonable inferences arising from the Complaint favorably to Plaintiff. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). A motion to dismiss will be granted only if "it appears beyond doubt that the Plaintiff can prove no set of facts which would entitle him to relief."Id.; see also Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
In diversity cases, the Court should apply the choice-of-law principles of the forum state. See Indep. Sch. Dist. No. 197 v. W.R. Grace Co., 752 F. Supp. 286, 298 (D. Minn. 1990) (MacLaughlin, J.). Minnesota's choice-of-law rules are well settled. The Court initially must determine whether the choice of one state's law over the other will determine the outcome of the case. See Meyers v. Gov't Employees Ins. Co., 225 N.W.2d 238, 241 (Minn. 1974). In the instant case, the laws of Minnesota and Wisconsin differ to such an extent that the choice of one over the other is outcome-determinative. If Wisconsin law applies, JSI can make out an insurance bad-faith claim. If Minnesota law applies, JSI's insurance bad-faith claim must be dismissed.
The parties agree that either state's law may constitutionally be applied in this action.
The Court examines five factors to determine which state's law should be applied. Milkovich v. Saari, 203 N.W.2d 408, 412 (Minn. 1973). These factors are:
1. predictability of result;
2. maintenance of interstate order;
3. simplification of the judicial task;
4. advancement of the forum's governmental interests; and
5. the better rule of law.
See id. (citing Robert Leflar, Choice-Influencing Considerations in Conflicts Law, 41 N.Y.U. L.Rev. 267 (1966)).
Steadfast first contends that JSI has waived any application of the five Milkovich factors. According to Steadfast, a part of JSI's claims against Steadfast depend on the loan receipt agreement between JSI and Sentry. In other words, JSI has standing to bring a part of its claims only because it entered into this loan receipt agreement. The loan receipt agreement is a creature of Minnesota law; according to Steadfast, Wisconsin law does not allow for loan receipt agreements. (JSI disputes whether Wisconsin recognizes loan receipt agreements, contending that the trend in Wisconsin is toward recognizing those agreements.) Because a part of JSI's claims are based in Minnesota law, Steadfast argues that Minnesota law should apply to all of JSI's claims.Home Ins. Co. v. Serv. Am. Corp., 654 F. Supp. 157, 158-59 (N.D. Ill. 1987).
The Home Ins. case is not on point. In that case, the court stated that the tort of bad-faith refusal to honor an insurance claim is inextricably intertwined with the underlying breach-of-insurance-contract claims, because interpretation of the contract is required to establish liability on the bad-faith claim. Id. at 159. Thus, the court must apply the same state's law to both the tort and contract claims. Here, the loan receipt agreement is not inextricably intertwined with the bad-faith claim. Rather, JSI's breach-of-contract claims are inextricably intertwined with its bad-faith claim. Thus, whatever law applies to the breach-of-contract claims also should apply to the bad-faith claim. Although the loan receipt agreement arises under Minnesota law, that loan receipt agreement can allow JSI to have standing to raise breach-of-contract claims under another state's law. The existence of the loan receipt agreement does not mandate the application of Minnesota law to all of JSI's claims. The Court will therefore engage in the choice-of-law analysis to determine which state's law should apply to JSI's bad-faith and breach-of-contract claims.
1. Predictability of Result
The Minnesota Supreme Court has directed courts to consider the predictability of the results factor in order to "fulfill the parties' justified expectations." Jepson v. Gen. Cas. Co. of Wis., 513 N.W.2d 467, 470 (Minn. 1994). Thus, the Court must examine what each party's reasonable expectation was as to which state's law would apply to this action.
JSI argues that it reasonably believed that the interpretation of the policy would be governed by the laws of Wisconsin, because the policy was issued in Wisconsin to a Wisconsin insured. As Steadfast points out, however, JSI's argument comes close to the lex loci doctrine that the Minnesota Supreme Court specifically rejected in Milkovich Milkovich, 203 N.W.2d at 162.
It is not disputed that the laws of Minnesota apply to the claims the farmers brought against JSI. Presumably, the allegations made in those lawsuits and the relative merits of the claims in those lawsuits are relevant for the purposes of determining JSI's claims here: whether Steadfast was bound to tender a defense to the farmers' claims against JSI. Moreover, JSI chose to bring this suit in Minnesota, although venue would have been proper in Wisconsin. Thus, it cannot come as a surprise to JSI that the laws of Minnesota might apply.
Similarly, Steadfast undoubtedly expected the laws of the state of Minnesota to apply to an action filed in Minnesota and relying for its claims on underlying lawsuits raising Minnesota-law issues. Moreover, precedent is clear that an insurer should expect courts to apply the law of the state where the incidents giving rise to the obligation to defend occurred. See Med. Graphics Corp. v. Hartford Fire Ins. Co., 171 F.R.D. 254, 260-61 (D. Minn 1997) (Erickson, M.J.). In this case, the incidents giving rise to Steadfast's alleged obligations were the lawsuits filed by the farmers against JSI, and all of these lawsuits were venued in Minnesota.
The reasonable expectations of both parties should have been that Minnesota law would apply to this action. Am. States Ins. Co. v. Mankato Iron Metal. Inc., 848 F. Supp. 1436, 1443 (D. Mirm. 1993) (Kyle, J.) (noting in insurance coverage context that predictability of result factor is not advanced by applying law of state in which insurance contract arose). Thus, the predictability of result factor favors the application of Minnesota law.
2. Maintenance of Interstate Order
This factor requires that the state whose laws are applied have sufficient contacts with the facts in issue. As noted above, JSI is a Wisconsin corporation and the insurance policy was issued in Wisconsin. However, the events that gave rise to the obligations that form the basis of JSI's claims against Steadfast took place in Minnesota. Both Minnesota and Wisconsin have substantial contacts with the facts in issue. This factor does not weigh in favor of the application of either state's law.
3. Simplification of the Judicial Task
This Court is able to apply either the law of Minnesota or the law of Wisconsin. This factor does not weigh in favor of either state's law.
4. Advancement of the Forum's Governmental Interest
This factor requires the Court to consider not only Minnesota's governmental interest in the application of Minnesota law, but also Wisconsin's public policy. See Gate City Fed. Sav. Loan Ass'n v. O'Connor, 410 N.W.2d 448, 451 (Minn.Ct.App. 1987). As Minnesota courts have recognized, this factor implicates "the relative policy interests of the two states" whose laws conflict. Lommen v. East Grand Forks, 522 N.W.2d 148, 152 (Minn.Ct.App. 1994).
The policy of Minnesota is clear: Minnesota does not recognize the tort of bad-faith denial of insurance coverage. The policy of Wisconsin is likewise clear, because Wisconsin does recognize the tort. As this Court has recognized, however, "[a]pplication of contrary or uncertain law from other states would be inconsistent with Minnesota's interest in policing the issuance and terms of insurance contracts in the state." Am States Ins. Co., 848 F. Supp. at 1444. This factor weighs in favor of the application of Minnesota law.
5. The Better Rule of Law
This factor applies only if the first four factors do not resolve the choice-of-law question. Mvers v. Gov't Employees Ins. Co., 225 N.W.2d 238, 244 (Minn. 1974). Because two of the four factors discussed above weigh heavily in favor of the application of Minnesota law and the other factors are neutral, it is not necessary to discuss whether Minnesota or Wisconsin has the better rule of law in this case.
6. Conclusion
Two of the five Milkovich factors weigh heavily in favor of Minnesota law. None of the factors weigh in favor of Wisconsin law. Thus, the Court must apply the law of Minnesota to JSFs claims in this case. Under Minnesota law, JSI cannot raise a claim for bad-faith denial of insurance coverage. Count IV of the Complaint, as well as the punitive damages claim based on Count IV, must be dismissed.
CONCLUSION
Accordingly, based on the files, records, and proceedings herein, IT IS HEREBY ORDERED that:
1. Defendant's Motion to Dismiss (Clerk Doc. No. 7) is GRANTED; and
2. Count IV of the Complaint and the claim for punitive damages are DISMISSED WITH PREJUDICE.