Opinion
No. 02-0171-PHX-FJM
September 9, 2002
ORDER
The court has before it Defendants' Motion for Summary Judgment (Doc. #20) and Plaintiff's Cross-Motion for Summary Judgment (Doc. #29).
I. INTRODUCTION
Plaintiff, Rosemary Wright, alleges that Defendants UNUM Life Insurance Co. and UNUM/Provident Corporation (collectively referred to as "UNUM" or "Defendants") breached the duty of good faith and fair dealing when they terminated her disability benefits. Plaintiff's complaint only alleges a bad faith tort claim; there no claim for breach of contract.
The UNUM Group Long Term Disability Policy ("policy") was obtained by the Aurora East School District, Aurora, Illinois, for its employees in 1990. The policy was entered into in Illinois and the Plaintiff was initially insured under the policy while she was a resident of Illinois. In 1999, Plaintiff submitted a claim to UNUM for long term disability benefits, the claim was approved, and UNUN begun issuing disability benefits to Plaintiff. Soon after Plaintiff began to receive benefits under the policy, she moved to Arizona. Plaintiff continued to receive benefits for 24 months. In 2001, UNUN terminated Plaintiff's benefits because she no longer met the definition of disabled under the policy. The decision to terminate benefits was made at UNUN's corporate headquarters in Tennessee.
Defendants move for summary judgment on the basis that, because of a choice of law provision in the policy, Plaintiff's bad faith claim is governed by Illinois law and Illinois does not recognize a cause of action for bad faith. Plaintiff's cross-motion requests that the court deny Defendants' motion and instead find that Arizona law applies.
The choice of law provision in the policy is found on the policy's cover page and states:
Governing Jurisdiction: ILLINOIS
. . .
This policy is delivered in and governed by the laws of the governing jurisdiction.
II. CHOICE OF LAW ANALYSIS
When a federal court sits in diversity, it must look to the forum state's choice of law rules to determine the controlling substantive law. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Therefore, Arizona's choice of law principles govern this analysis. Arizona courts follow the Restatement (Second) of Conflicts of Laws ("Restatement") in determining choice of law questions. See, e.g., Cardon v. Cotton Lane Holdings, Inc., 841 P.2d 198 (Ariz. 1992) (applying Restatement §§ 187, 188 to a contract action); Bates v. Superior Court, 749 P.2d 1367, 1369 (Ariz. 1988) (applying Restatement §§ 145, 146 to a bad faith tort action).
Defendant argues that, where the parties have included a valid choice of law provision, Arizona courts will apply the law specified by the parties, pursuant to Restatement § 187, and not resort to any other conflict of law rules. Here, there is a valid choice of law provision specifying that Illinois law will govern the policy. Therefore, according to the Defendant, the only question for the court to decide is whether the choice of law provision in the policy applies, not only to actions in contract, but to the tort of bad faith as well.
Restatement § 187 Law of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
Defendants assert that a broadly termed choice of law provision, such as the one in this policy, should be construed to include tort claims that are closely related to the contract, such as breach of the implied duty of good faith. The parties do not cite and the court was unable to locate any Arizona cases that have addressed the issue of whether the scope of a contractual choice of law provision includes closely related tort claims.
Plaintiff, on the other hand, bases her argument for the application of Arizona law to her claim on the Restatement standards for choice of law applicable to tort actions. According to Plaintiff, a contractual choice of law provision applies only to contract claims and does not control a claim arising in tort, even if it is related to the performance of the contract. Instead, tort issues are resolved under the law of the state that has "the most significant relationship to the occurrence and the parties." Restatement § 145(1).
Restatement § 145 The General Principle
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and
(d) the place where the relationship, if any, between the parties is centered. These contacts are to be evaluated according to their relative importance with respect to the particular issue.
§ 146 Personal Injuries
In an action for personal injury, the local law of the state where the injury occurred determines the rights and liabilities of the parties, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the occurrence and the parties, in which event the local law of the other state will be applied.
Plaintiff relies on Sutter Home Winery, Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992), which in turn relies on Bates v. Superior Court, 749 P.2d 1367, 1369-70 (Ariz. 1988). But Bates did not involve a contract with a choice of law provision in it. Thus it never reached the question whether a contractual choice of law provision applies to the breach of the covenant of good faith in the very contract in which the choice of law provision is found.
In contrast, Manetti-Farrow Inc. v. Gucci America, Inc., 858 F.2d 509 (9th Cir. 1988) held that where a tort claim relates to the interpretation of the underlying contract, it is "within the scope of the forum selection clause." Id. at 514.
Because there is no controlling Arizona authority, we decide the issue in the first instance. We believe the approach Defendants suggest is logical. First, the court must determine whether the contractual choice of law provision is valid under Restatement § 187. Second, assuming the choice of law provision is valid, the court must decide whether its scope extends to tort claims that are closely related to the contract, such as bad faith.
We do not certify the question because (1) of the extraordinary delay involved in the certification process, and (2) an authoritative state law resolution would not assist us in avoiding the resolution of a federal constitutional question. In other words, this is a garden variety issue.
The Supreme Court of California has adopted essentially this same approach. See Nedlloyd Lines v. Seawinds Ltd., 834 P.2d 1148 (Cal. 1992). The Supreme Court of California held that
a valid choice of law clause, which provides that a specified body of law "governs" the "agreement" between the parties, encompasses all causes of actions arising from or related to that agreement, regardless of how they are characterized, including tortious breaches of duties emanating from the agreement or the legal relationships it creates.Id. at 1155.
The Nedlloyd court first applied the approach under Restatement § 187(2) to determine whether the contractual choice of law provision was enforceable. As called for in that section, the court decided whether either (1) the chosen state had a substantial relationship to the parties or their transaction, or (2) there was any other reasonable basis for the parties' choice of law. Finding that there was a substantial relationship with and a reasonable basis for the parties' choice, the court went on to determine whether the chosen state's law was contrary to a fundamental policy of another state with a materially greater interest than the chosen state (in this case, whether the chosen state's law was contrary to a fundamental policy of California). The court found that there was no fundamental California policy at issue, and, both prongs of § 187(2) having been met, the contractual choice of law provision was valid. Id. at 1153-54.
The Nedlloyd court then went on to determine whether the scope of the valid choice of law provision encompassed "all causes of action arising from or related to [the] contract." In particular, the plaintiff inNedlloyd was alleging a breach of the implied covenant of good faith and fair dealing (in both contract and tort) and a breach of fiduciary duties arising out of the contract. The court reasoned that the phrase "governed by" is "a broad one signifying a relationship of absolute direction, control, and restraint," and that "the clause reflects the parties' clear contemplation that `the agreement' is to be completely and absolutely controlled by [the chosen state's] law." Id. at 1154. The fiduciary and good faith duties "arise from — and can exist only because of" the agreement. Therefore, in order for the chosen state's law to "control completely the agreement" it must also govern "the legal duties created by or emanating from" the agreement. Id.
actually appears that the California Supreme Court simply assumed that a valid contractual choice of law provision would apply to a claim for breach of the implied covenant of good faith, because its discussion of the scope of the choice of law clause centers only around the breach of fiduciary duty claim. Nonetheless, although imprecisely applied, the approach outlined by the Nedlloyd court is sound.
Furthermore, the court explained, concluding that the choice of law provision controls closely related tort actions "comports with common sense and commercial reality," because
[w]hen a rational businessperson enters into an agreement establishing a transaction or relationship and provides that disputes arising from the agreement shall be governed by the law of an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. [It is doubtful] that any rational businessperson, attempting to provide by contract for an efficient and business-like resolution of possible future disputes, would intend that the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based relationship.Id. (emphasis in original).
The California court's reasoning makes sense. Furthermore, since effectuating the parties' intent is the primary goal of contract interpretation, Ahwatukee Custom Estates Mgmt. Ass'n Inc. v. Bach, 973 P.2d 106, 109 (Ariz. 1999), it follows that Arizona courts would effectuate the intent of parties who drafted a broadly termed choice of law provision by applying the chosen law to all claims that arise from or are closely related to the agreement.
Applying this analytical framework to the instant case, the choice of law provision in the policy is valid under Restatement § 187. First, the chosen state (Illinois) has a "substantial relationship to the parties or the transaction." The group long term disability policy was obtained in Illinois, by an Illinois school district, for its employees, who were all residents of Illinois at the time the policy was contracted. The Plaintiff was a resident of Illinois when she was initially insured under the group policy.
Second, there is no evidence that Arizona has a "materially greater interest" than Illinois in the determination of the Plaintiff's bad faith claim. The only nexus that Arizona has is that the Plaintiff, after obtaining coverage and receiving benefits under the policy, chose to reside in Arizona. Even if Arizona did have a "materially greater interest," there is no authority to support Plaintiff's assertion that Arizona has a fundamental public policy that is contravened by the application Illinois law. The recognition of a cause of action for bad faith indicates Arizona's interest in protecting its citizens from insurer misconduct. However, even though Illinois does not recognize a tort of bad faith, it does provide a statutory remedy to policyholders whose insurers engage in unreasonable and vexatious conduct in handling or denying a claim. As such, assuming that Arizona's interest in protecting its citizens from insurer bad faith rises to the level of a "fundamental policy," applying Illinois law would not be contrary to such a policy.
Since the choice of law provision is enforceable under the guidelines of § 187 of the Restatement, the next step is to determine whether the scope of this particular choice of law provision encompasses a tort claim for bad faith. The provision here uses the same broad language as in Nedlloyd ("governed by"). Plaintiff's claim for unreasonable termination of benefits in bad faith arises from and is closely related to the agreement. The claim turns on contract construction. Therefore, borrowing the rationale of the California Supreme Court in Nedlloyd, the scope of the choice of law provision in the policy includes plaintiff's claim for bad faith.
Finally, as the choice of law provision designating Illinois law as the governing law is applicable to the tort claim for bad faith, and since Illinois does not recognize the tort of bad faith, Defendants' Motion for Summary Judgment is granted. Plaintiff, however, may file an Amended Complaint, within fourteen (14) days, to assert whatever claims may be available to her on the contract and any statutory remedies provided under Illinois law.
Accordingly,
IT IS ORDERED granting Defendants' Motion for Summary Judgment (Doc. #20).
IT IS FURTHER ORDERED denying Plaintiff's Cross-Motion for Summary Judgment (Doc. #29).
Because Plaintiff's medical condition continues to evolve, we direct entry of final judgment on the tort claim and we expressly determine that there is no just reason to delay within the meaning of Rule 54(b), Fed.R.Civ.P. This will allow Plaintiff to amend her complaint in contract in this court while simultaneously seeking review of the dismissal of the tort claim.