Judge Douglas W. Stern, Case 19STCV28914 2022-10-27 Tentative Ruling

Judge: Douglas W. Stern, Case: 19STCV28914, Date: 2022-10-27 Tentative Ruling

Case Number: 19STCV28914 Hearing Date: October 27, 2022 Dept: 68

Cynthia Lea Burch vs Certain Underwriters at Lloyd’s of London, Case No. 19STCV28914

Tentative Ruling: Defendant’s Motion to Determine Applicable Law

Defendant Certain Underwriters at Lloyds of London, etc. has filed a motion asking the Court to determine that Illinois law applies to the two causes of action brought by Plaintiff Cynthia Lea Burch in this lawsuit. The Complaint alleges claims for Breach of the Contractual Duty to Pay a Covered Claim and Breach of the Covenant of Good Faith and Fair Dealing.

In May 2017 Plaintiff obtained disability insurance coverage through Defendant. (Complaint ¶ 7.) The policy was procured by her employer, Katten Muchin, and offered to Plaintiff through the firm. Plaintiff paid for the policy by deductions from her partnership draws. Plaintiff alleges that she became totally disabled and stopped working in September 2017. She submitted a claim to Defendant. (Complaint ¶ 10.) On August 20, 2018 Defendant denied Plaintiff’s claim. (Complaint ¶ 13.) Other denials of benefits were made by Defendant, and other actions took place relating to the insurance claim.

The Plaintiff’s First Cause of Action is a Breach of Contract claim asserting that she is entitled to coverage and payment of the benefits set forth in the insurance policy. The Second Cause of Action is for Breach of the Covenant of Good Faith and Fair Dealing and is similarly based upon the denial of the insurance benefits and the conduct of Defendant in denying coverage described in detail in the Complaint (and in the Plaintiff’s Opposition in some detail. (Opposition pgs. 3-6.))

The disability income insurance contract at issue specifically selects Illinois law to govern the insurance issued by the Certificate. (Desai Decl. ¶ 2; Exhibit A - UW-CF001094. “This Insurance shall be governed by the laws of the State of Illinois.”) The Certificate is an insurance contract between Defendant and Plaintiff Burch’s law firm employer Katten Muchin – a limited liability partnership “incorporated” or “registered” and headquartered in Illinois. Plaintiff is a California attorney who worked in the Los Angeles office of Katten Muchin at the time that she obtained the insurance coverage.

ANALYSIS

I. Enforcement of a Choice of Law Provision

“California law recognizes a strong public policy favoring enforcement of choice-of-law provisions[.]” (Colaco v. Cavotec SA (2018) 25 Cal.App.5th 1172, 1177.) California courts enforce choice of law provisions. (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459.)

“We have not previously considered the enforceability of a contractual choice-of-law provision. We have, however, addressed the closely related issue of the enforceability of a contractual choice-of-forum provision, and we have made clear that, “No satisfying reason of public policy has been suggested why enforcement should be denied a forum selection clause appearing in a contract entered into freely and voluntarily by parties who have negotiated at arm's length.” (Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 495–496, 131 Cal.Rptr. 374, 551 P.2d 1206 (Smith ).)” Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464 [11 Cal.Rptr.2d 330, 332, 834 P.2d 1148, 1150]

“We reaffirm this approach. In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the *465 principles set forth in Restatement section 187, which reflect a strong policy favoring enforcement of such provisions.

More specifically, Restatement section 187, subdivision (2) sets forth the following standards: “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.”

Briefly restated, the proper approach under Restatement section 187, subdivision (2) is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a “materially greater interest than the chosen state in the determination of the particular issue....” (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy.” Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464–466 [11 Cal.Rptr.2d 330, 333-334, 834 P.2d 1148, 1151-1152]

Here, Defendant provided a copy of the agreement between the parties that includes the choice of law provision. (Desai Decl., ¶ 2, Ex. A.) Because Defendant has provided this agreement, which states the parties’ intention in an express choice-of-law clause to be governed by the laws of the State of Illinois, the next step is to analyze whether the provision fails based on the above test.

A. Chosen State’s Substantial Relationship to the Parties

Here, the Owner of the certificate at issue and Plaintiff’s law firm, Katten Muchin, is “incorporated” (or “registered”) as a limited liability partnership that is headquartered in Illinois. (Desai Decl., ¶ 2, Ex. A.) Although Plaintiff suggests that there is no nexus to Illinois, that is not correct. There is a substantial relationship between Katten Muchin and Illinois. The choice of Illinois law is appropriate.

In one case cited by Defendant, the Eastern District of California found that a substantial relationship existed with Illinois because the disability plan sponsor in that case was incorporated and headquartered in Illinois. (Bajwa v. United States Life Insurance Company (E.D. Cal., June 29, 2021, 1:19-CV-00938-NONE-SAB) 2021 WL 2661836, at *6.)

B. Whether Illinois’s Law is Contrary to a Fundamental Policy of California and Whether California has a Greater Interest in the Matter than Illinois

Plaintiff claims that applying Illinois law, and in particular Section 155 of the Illinois Insurance Code (and hence displacing California bad faith law) to the claim for breach of the covenant of good faith and fair dealing contravenes a fundamental California policy. The Court disagrees.

Illinois Insurance Code § 155(1) sets maximum recoverable amounts for actions brought against insurance companies related to certain vexatious or unreasonable behavior:

“In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action [certain maximum amounts.]” Section 155

Defendant notes that the California Supreme Court in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 468 [11 Cal.Rptr.2d 330, 335, 834 P.2d 1148, 1153] found that California did not have a fundamental policy in claims arising under the covenant of good faith and fair dealing to preclude a choice of law provision.

“We next consider whether application of the law chosen by the parties would be contrary to “a fundamental policy” of California. We perceive no fundamental policy of California requiring the application of California law to Seawinds's claims based on the implied covenant of good faith and fair dealing. The covenant is not a government regulatory policy designed to restrict freedom of contract, but an implied promise inserted in an agreement to carry out the presumed intentions of contracting parties. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 689–690, 254 Cal.Rptr. 211, 765 P.2d 373 (Foley ) [“When a court enforces the implied covenant it is in essence acting to protect ‘the interest in having promises performed’ [citation]—the traditional realm of a contract action—rather than to protect some general duty to society which the law places on an employer without regard to the substance of its contractual obligations to its employee.”].)

Bajwa v. United States Life Insurance Company (E.D.Cal. 2021) 2021 WL 2661836 involved a disability insurance claim on a group policy issued to the American Medical Association. Like the policy in this case, it provided for application of Illinois law. The Court noted that Section 155 preempts claims against insurers for misconduct regarding the payment of claims or for unreasonable and vexatious conduct.

In Meshi v. United States Life Ins. Co. in the City of New York (C.D. Cal.) 2018 WL 7473961 the court found Section 155 does not conflict with any fundamental California policy because “differences in the particular remedies does not make the Illinois law contrary to a fundamental policy in California.”

Plaintiff has failed to show how the Illinois law would be contrary to a fundamental policy of California. Plaintiff makes the claim that Illinois Insurance Code Section 155 would be contrary to California’s policy to protect its insureds against bad faith claims handling. (Opposition at p. 13.) The reasons that Plaintiff gives are simply differences in how the two states handle their approaches to this type of law, which Meshi determined does not mean that the law is contrary to fundamental policy in California.

Additionally, Plaintiff has not shown that California has a greater interest in the matter than Illinois by applying the five factors from Meshi. (Id. at *5.) As Defendant argues, Katten Muchin is an Illinois registered LLP, the Certificate was issued and delivered in Illinois, all communication regarding the Certificate shall be through Katten Muchin, the official address of Katten Muchin is located in Illinois, and Katten Muchin is headquartered and registered in Illinois. (Reply at p. 10.) Absent some showing that California would have a greater interest, the choice of law provision should be upheld.

II. “Lloyd’s Motion is Improper”

Plaintiff ends her Opposition by asserting:

“Lloyds’ current motion is not proper. Instead, it is a thinly veiled end run around summary judgment. No case cited by Lloyds decided an issue of this magnitude by way of an in limine motion. The choice of law issue was decided either on summary judgment or during a pretrial evidentiary hearing. Here, Lloyds has done neither. By proceeding by motion in limine, Ms. Burch has not been provided the statutory notice required for summary judgment, during which time she could take various depositions for her opposition. Ms. Burch respectfully requests that if the Court is considering granting Lloyds’ improper motion that the Court continue the hearing to allow Ms. Burch time to depose witnesses, such as PIU, and DMS claims personnel.”

Plaintiff has not suggested what information germane to the question of the enforceability of the choice of law question is not known and could not be presented to the Court in this motion. The Court has the relevant information to make the determination. Further, the Court and the parties benefit by having this important issue resolved at this stage of the litigation. They have had ample opportunity to evaluate the legal question and present the issue to the Court in this 2019 case. There is no benefit to anyone having this important question remain an unknown. A determination by the Court allows the parties to evaluate the case with greater clarity. This Court finds that Defendant’s motion to determine applicable law was proper.

CONCLUSION

Defendant’s motion to determine applicable law in favor of Illinois law is GRANTED. Illinois law controls the breach of contract and the breach of the covenant of good faith and fair dealing claims. Section 155 pre-empts California’s claim based on the breach of the covenant of good faith and fair dealing.