Insurance Archaeology

Understanding Choice of Law in Insurance Claims

Ben Pariser


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Choice of law clauses determine the jurisdiction that will govern an insurance contract and any disputes arising from it and can significantly influence the resolution of claims. The differences between legal systems and their interpretations of the law mean the financial health of a business could depend on laws from an unfamiliar jurisdiction. It is essential for small business owners to understand the implications of this provision on their coverage and dispute outcomes.

This article aims to clarify the concept of choice of law for small business owners, exploring its determination, implications on insurance claims, and how to navigate its creation. Understanding choice of law is about strategic protection and creating clear rules in the event of a dispute to protect your business’s financial well-being.

Understanding Choice of Law

Choice of law refers to a contract clause included in insurance policies, such as general liability and environmental liability policies, specifying which jurisdiction’s substantive law will govern the agreement. This clause is particularly important in contracts that involve parties from different jurisdictions or when the insured risks are spread across multiple locations because it can affect how policies are interpreted, the rights and obligations of the parties involved, and even the types of remedies that are available in the event of a dispute.

How Do Choice of Law Clauses Work?

When it comes to insurance contracts, choice of law clauses are negotiated and agreed upon between businesses and their insurance company when the contract is formed. These clauses ensure that both parties have a mutual understanding of which law rules their agreement. Without a clear choice of law clause, courts may have to determine the applicable law based on a variety of factors, such as the location of the insured property, the domicile of the insured, the place where the contract was signed, federal law, or the principal place of business of the parties involved.

The Role of Choice of Law in Resolving Disputes

Choice of law can play an important role in insurance claim disputes. Different jurisdictions can have different laws and interpretations regarding policy exclusions, coverage limits, and the duties of policyholders and insurers. For example, some jurisdictions might strictly interpret policy exclusions, while others may favor a more expansive coverage approach. Therefore, the outcome of a dispute can vary significantly depending on the governing law.

Moreover, the choice of law affects procedural aspects of dispute resolution, such as the statute of limitations for filing claims, the availability of jury trials, and the potential for recovering attorney’s fees. These procedural differences can impact the strategy of both parties during litigation or arbitration.

Factors Determining Choice of Law Provision

Several factors play a role in deciding which state’s law will govern an insurance contract and the resolution of any claims. Understanding these factors can help small business owners appreciate choice of law decisions and their potential impact on insurance claims. Here are some factors that determine the choice of law provisions

  • Location of the Insured Risk: This is often the most significant factor, especially in policies covering property or physical assets. The law of the jurisdiction where the insured property is located usually has a substantial influence on the choice of law.
  • Domicile of the Policyholder: The policyholder’s legal residence or principal place of business can also influence the choice of law. This factor is particularly relevant in personal insurance policies or when the business operations are concentrated in a specific jurisdiction.
  • Place of Contract Formation: The location where the insurance contract was signed can be a determining factor, especially if it is distinct from the location of the insured property and the policyholder’s domicile.
  • Principal Place of Business of the Insurance Provider: The insurer’s headquarters or where they conduct most of their business may also play a role in determining the choice of law. However, it is less influential than the location of the insured property.
  • Express Choice of Law Clause: When the parties have explicitly agreed to a choice of law in the insurance contract, this agreement is typically given significant weight, provided it has a reasonable relationship to the contract or the parties involved.

How Choice of Law Can Impact Insurance Claims

Choice of law can profoundly impact the outcome of insurance claims. It influences everything from the interpretation of policy terms to the procedures for resolving disputes. Small business owners, in particular, need to understand these implications to manage their risks and ensure that their insurance coverage meets their needs.

Different Outcomes in Similar Claims

Perhaps the most important impact of the choice of law is that it can lead to different outcomes in similar claims based on the jurisdiction governing the insurance contract. This difference highlights the importance of understanding and carefully negotiating the choice of law clause in insurance contracts.

  • Coverage Determinations: Two policyholders with similar claims under similar policies could receive different outcomes depending on the state law that governs their policies.
  • Liability Assessments: The assessment of liability and damages can also vary, affecting the amount that insurers pay out on claims.

Interpretation of Insurance Policies

The interpretation of insurance policies is significantly affected by the governing law. Jurisdictions may differ in their approach to interpreting ambiguous policy language, determining the scope of coverage, and applying exclusions. For instance, some jurisdictions favor a policyholder-friendly approach that aims to provide broad coverage, while others may strictly adhere to the literal wording of the policy, potentially limiting coverage.

  • Ambiguity Resolution: Some jurisdictions resolve ambiguities in insurance policies favoring the insured. This means if the policy language is unclear, it will be interpreted in a way that favors coverage for the business.
  • Exclusion Interpretation: The application and extent of exclusions can also vary. Some laws may require exclusions to be narrowly interpreted, ensuring broader coverage for businesses.

Impact on Claim Processing and Resolution Times

Choice of law can also influence a claim’s processing and resolution timeline. Jurisdictions have different procedures and timelines for filing claims, appealing denials, and litigating disputes. This can affect how quickly claims are resolved and the cost of litigation or arbitration.

  • Statute of Limitations: Jurisdictions differ in their statutes of limitations (the deadline for filing a claim or other legal action) for insurance claims. Choosing a law with a longer statute of limitations and more lenient statutory law may provide more flexibility for businesses to file claims.
  • Dispute Resolution Options: The procedural law of the chosen jurisdiction dictates the available dispute resolution options, such as arbitration, mediation, or litigation, and the associated rules and timelines. Some jurisdictions may offer faster, more cost-effective dispute resolution options than others.

A Hypothetical Example to Show the Impact of Choice of Law

Exploring real-world scenarios provides valuable insights into how the choice of law can influence the outcome of insurance disputes. This example highlights the importance of carefully selecting the governing law in insurance contracts and underscores the complexities of resolving cross-jurisdictional insurance claims.

Hypothetical Environmental Remediation Claim

A small business involved in waste management faced environmental claims related to site contamination and consumer protection laws. The insurance policy, governed by the laws of the insurer’s home jurisdiction, included coverage for environmental remediation. A dispute arose over the extent of coverage for cleanup costs, leading to litigation.

Outcome: The choice of law proved advantageous for the small business as the governing jurisdiction had recently enacted legislation favoring comprehensive environmental cleanup coverage under insurance policies. The court ruled that the insurer was responsible for a significant portion of the remediation costs beyond what the insurer had initially argued was covered.

Lesson: This case underscores the impact of legislative differences between jurisdictions on insurance claims, particularly in areas like environmental remediation. Small business owners should consider the legal environment of the chosen jurisdiction and how it affects coverage for specific risks, such as environmental liabilities.

Navigating Choice of Law in Insurance Contracts

Choice of law can be incredibly complex, and the stakes are high for small business owners. Seeking solid legal advice is crucial for effective risk management. A lawyer can help you identify which jurisdiction’s laws are most advantageous for your specific situation, understand potential legal outcomes under different jurisdictions, and draft or review the choice of law clause to ensure it aligns with your business’s interests.

Some Ideas for Negotiating Choice of Law Clauses

For small business owners, negotiating insurance contracts with favorable terms can be as important as the coverage itself. The choice of law clause, often buried among the minutia of the policy, can significantly impact the contract’s interpretation, enforcement, and dispute resolution. Understanding how to navigate this clause is essential for securing comprehensive protection for your business.

  1. Seek Legal Expertise: Engage a lawyer who specializes in insurance law and is familiar with the nuances of choice of law. Legal counsel provides invaluable guidance on which jurisdiction’s laws will best protect your interests and how to negotiate terms accordingly.
  2. Understand Your Options: Before entering negotiations, understand the laws of potential jurisdictions that could govern your contract. This knowledge will help you assess which laws most suit your needs.
  3. Evaluate the Impact on Policy Interpretation: Consider how the laws of a potential jurisdiction interpret insurance policies, especially regarding ambiguities and exclusions. Choosing a jurisdiction that tends to interpret policies favoring you as the policyholder can provide broader coverage.
  4. Consider Dispute Resolution Options: Different jurisdictions offer different options for dispute resolution, such as arbitration, mediation, or litigation. Understand how these options work under various laws and choose a jurisdiction that provides fair resolution processes.
  5. Negotiate the Clause Proactively: Approach the choice of law clause as a negotiable part of your insurance contract. Insurers may be willing to agree to a jurisdiction that is more favorable to your business, especially if it maintains a reasonable connection to the policy or the insured risks.

Some Ideas on Dispute Resolution

Given the potential for disputes over insurance claims, consider how choice of law affects your dispute resolution options. Some ideas include:

  • Arbitration Clauses: Some businesses prefer arbitration for its confidentiality and speed. If this is your preference, ensure the chosen law supports and facilitates arbitration.
  • Mediation Before Litigation: Choose a law encouraging mediation and fair settlements before litigation or arbitration. This step can save you a lot of time and resources.
  • Litigation Considerations: If litigation seems likely in the event of a dispute, choose a jurisdiction known for its efficient legal processes and fair judgments.

Pay Close Attention to Your Choice of Law Clause

Choice of law is an essential decision with significant implications for dispute outcomes, coverage scope, and claim resolutions. Small business owners should seek legal counsel proactively, negotiate insurance contracts carefully, and stay informed on legal developments. This proactive and informed approach towards choice of law will ensure that your business secures appropriate coverage, keeps your insurance company from acting in bad faith, and enhances your ability to manage disputes effectively.

We are not attorneys, this is not legal advice. 

Ben Pariser

One of Ben’s favorite parts of insurance archeology is knowing Restorical is making a difference, helping to clean up the environment one polluted property at a time while also changing people’s lives.


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