(Article from Insurance Law Alert, February 2024)
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Holding
The Ohio Supreme Court ruled that tort choice-of-law rules govern bad faith claims against an insurer, notwithstanding the contractual nature of the relationship between the parties. Scott Fetzer Co. v. Am. Home Assur. Co., 2023 Ohio LEXIS 2163 (Nov. 1, 2023).
Background
The coverage dispute arose out of environmental cleanup operations at two Superfund sites in Michigan. The Scott Fetzer Company had acquired a manufacturing facility located on one of the sites when it merged with the facility’s previous operator, an Indiana company. Fetzer sought coverage under various general liability and umbrella policies for environmental claims. When the insurers denied coverage, Fetzer filed suit, alleging breach of contract and bad faith. The court bifurcated the bad faith claim, and a discovery dispute arose in that proceeding as to the production of certain allegedly privileged documents.
Fetzer argued that under Ohio law, an insurer may not withhold documents relating to bad faith on the basis of attorney-client privilege. In response, the insurer claimed that under Ohio’s choice-of-law rules, the discovery dispute was governed by either Michigan or Indiana law. The insurer further argued that Michigan does not recognize a cause of action for bad faith and that Indiana law would not allow discovery of privileged material to establish bad faith.
An administrative judge ruled that Ohio law governed the discovery dispute and ordered production of certain documents. An appellate court affirmed. The appellate court reasoned that bad faith was a tort, and was thus governed by Section 145 of the Restatement 2d of Conflict of Laws (the section that applies to tort claims). The criteria in Section 145 focus on the place of the alleged injury of the tort, which in this case was Ohio. The Ohio Supreme Court affirmed.
Decision
The Ohio Supreme Court rejected the insurer’s assertion that the bad faith claim was subject to the choice-of-law criteria set forth in Restatement Section 188 (governing “an issue in contract”) and Section 193 (governing disputes over the “validity of a contract of fire, surety or casualty insurance and the rights created thereby”). Under those Sections, the location of the subject matter of the contract and the place of contracting, here Michigan and Indiana respectively, are paramount. The court reasoned that a bad faith claim does not concern the “validity” of a contract and that an insurer’s duty to act in good faith is not one of the “rights created thereby.”
Further, the court rejected the insurer’s assertion that the “justified expectations” of the parties mitigated in favor of applying Section 193. The court explained that the justified expectations of the parties is important in choice-of-law disputes arising out of contractual obligations because contracting parties reasonably rely on the principal location of the insured risk as a significant factor in anticipating governing law. In contrast, the justified expectations of the parties is less important in negligence and tort cases, in which a defendant allegedly acts with a conscious disregard for the legal consequences of its conduct and would not likely contemplate governing law.
Comments
In arguing that contract-based choice-of-law principles should apply to the bad faith claim, the insurer emphasized that a bad faith claim can only be litigated by the parties to the insurance contract. The court acknowledged this fact, but reasoned that a bad faith claim “is not rooted in any particular text of the contract” but rather “arises by operation of law.”