Forum-Shopping Insurance Companies' Latest Tricks

by Nossaman LLP
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Decades ago, insurance companies tried to persuade trial courts in California to apply the law of some other state to multi-party environmental and asbestos insurance coverage disputes because the insurance companies believed that the other state's substantive law could lead to a more favorable outcome. The policyholders would oppose such maneuvers, and the trial courts typically decided in such cases to apply California law. Such challenges to forum law by insurers took place in many jurisdictions.

Fast forward to the present. An insurance company and a policyholder are in coverage litigation over a new asbestos or environmental lawsuit in California. The insurance company argues that, 20 years ago, the policyholder and the insurer were in coverage litigation in a forum other than California (Massachusetts, for example) involving the same insurance policies. In that earlier coverage litigation the insurer moved to have a different state's substantive law applied to the coverage dispute (New York or Connecticut, for example). The insurance company further argues in the present case that the policyholder successfully opposed the motion in the earlier coverage litigation. Let us assume the insurance company believes Massachusetts law favors the insurer on a key issue, and California law does not. Insurers have under these circumstances argued that collateral estoppel mandates that the court in California apply Massachusetts law to the present California coverage litigation.

But collateral estoppel has no place in a choice-of-law analysis, especially when applied to a comprehensive general liability policy that covers risks throughout the U.S.; interpreting identical language in an insurance policy can vary from state to state depending on the public policy of the particular state where the claim is made. Downey Venture v. LMI Ins., 66 Cal. App 4th 478, 514 (1998) ("A liability insurance policy issued on a nationwide basis may be construed in accordance with the law of the jurisdiction in which a particular claim arises").

Insurance company collateral estoppel arguments in a choice-of-law context should be rejected because the factual circumstances and legal standards applied in a choice-of-law analysis necessarily differ from case to case and state to state, and the issues presented are not "identical." See, e.g., Bleeck v. State Bd. of Optometry, 18 Cal. App. 3d 415, 428 (1971); Don King Productions Inc. v. Douglas, 742 F. Supp. 741, 751 n.7 (S.D.N.Y. 1990) (rejecting the "peculiar form of collateral estoppel" which is employed to export choice-of-law determinations of one forum (presumably predicated on the rendering forum's choice-of-law rules) to another forum that would otherwise adhere to its own choice-of-law rules in making its selection of governing law); see also Rimkus Consulting Group Inc. v. Commarata, 257 F.R.D. 127, 138 (S.D. Tex. 2009); Maryland Cas. Co. v. W.R. Grace & CoConn., 1991 U.S. Dist. Lexis 15354 (S.D.N.Y. Oct. 24, 1991); Dracos v. Hellenic Lines Ltd., 762 F. 2d 348, 353-54 (4th Cir. 1985).

Collateral estoppel cannot be used to bind a California litigant to a principle of law adopted in a prior foreign court litigation that is contrary to California law. See American Continental Ins. Co. v. American Casualty Co., 86 Cal. App. 4th 929, 942-46 (2001); see also Wimsatt v. Beverly Hills Weight Loss Clinics Int'l., 32 Cal. App. 4th 1511, 1520-21 (1995) (forum selection clause will not be enforced if it results in a choice of law that circumvents California law). In Application Group Inc. v. Hunter Group Inc., 61 Cal. App. 4th 881, 887 n.3 (1998), the court declined to give collateral estoppel effect in a California case to a prior determination that Maryland law applied. The court held that "even if it did decide that Maryland law determines the enforceability of Hunter's covenant not to compete in all circumstances, the court's ruling on the choice-of-laws issue was not essential to the judgment in favor of Pike and AGI and, thus, need not be given issue preclusive (collateral estoppel) effect." The court cited to the requirement that an issue be necessarily decided in the final decision on the merits.

Courts outside of California have applied the same rationale for denying collateral estoppel effect to choice-of-law rulings. See, e.g., In re DES Lit., 7 F.3d 20, 23 (2d Cir. 1993) (choice-of-law ruling by district court not given collateral estoppel effect because "relitigation of an issue in a second action is precluded only if 'the judgment in the prior action was dependent upon the determination made of the issue'"); Lewis v. Horace Mann Ins. Co., 410 F. Supp. 2d 640, 653 (2005) (res judicata does not apply to choice-of-law determination because case was subsequently dismissed and choice-of-law ruling was thus "an interlocutory order since it did not completely dispose of the cause by adjudicating the rights and liabilities of the parties").

Finally, the elements of collateral estoppel present a hurdle that the insurance companies should not be able to clear if the court applies each element:

1. The issue is identical to an issue decided in a prior proceeding;
2. The issue was actually litigated;
3. The issue was necessarily decided;
4. The decision in the prior proceeding is final and on the merits;
5. The party against whom collateral estoppel is asserted was a party to the prior proceeding or in privity with a party to the prior proceeding.

Lucido v. Superior Court, 51 Cal. 3d 335, 341 (1990). If the issue decided in the prior adjudication was not identical to the issue in the current action, collateral estoppel, does not apply. Bleeck at 428; Bridgeford v. Pacific Health Corp., 202 Cal. App. 4th 1034, 1042 (2012) ("identical issue" requirement is whether "identical factual allegations" are at stake in the two proceedings, not whether the ultimate issues or dispositions are the same).

Coverage counsel for insurance companies will continue to try to persuade trial courts to apply the law of a foreign jurisdiction if the substantive law on insurance in the forum in which they have been sued by a policyholder is unfavorable on key issues. Collateral estoppel should not be applied when doing so abandons California's choice-of-law principles and public policy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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