Beware ‘Choice-of-Law’ Clauses in Excess Line Policies
Insurance attorney Chip Merlin is out with an interesting blog post about “choice-of-law” clauses in surplus lines insurance policies. These are clauses that designate the jurisdiction in which an insured may bring a lawsuit against the insurer. These can sometimes result in significant hardship for the insured. The example he cites is a policy insuring a California project that required disputes to be litigated in New York. A California appellate court upheld the requirement.
“Surplus lines insurers have tremendous freedom. This freedom is supposed to allow markets to insure unusual, difficult, or large risks that admitted carriers may not want to write. It is not supposed to become a license to insert procedural land mines that make it more expensive, more difficult, and more dangerous for policyholders to enforce the very coverage they purchased.
Forum-selection and choice-of-law clauses are not harmless boilerplate. They are claim weapons. They change the leverage of the dispute before the loss ever happens. A California policyholder with a California property loss should not discover after disaster strikes that the courthouse has been moved across the country by a clause buried in a surplus lines policy. The clause is an obvious remedy-shrinking by the surplus lines industry. …
This is also a broker and agent issue. Agents and brokers selling surplus lines policies should be warning their clients in writing about these clauses before the policy is purchased and not after the loss. The warning should take place before the premium is paid.
A forum-selection clause can add hundreds of thousands of dollars in litigation costs. It can require new counsel in a distant jurisdiction. It can deprive the policyholder of familiar local law. It can affect bad-faith remedies, causation rules, appraisal rights, jury rights, discovery practice, and settlement leverage. It can turn a claim dispute into a war of attrition where the insurer’s first advantage is the courthouse itself.
If an agent or broker sells a policy containing a foreign or distant forum-selection clause and fails to warn the policyholder of its practical consequence, that agent or broker should expect to be sued for negligence. The policyholder is relying on the insurance professional to procure meaningful coverage, not merely a stack of paper with traps in the back pages. A policy that covers the loss but makes enforcement economically irrational is not the protection most policyholders think they are buying. …
Policyholders and risk managers should now ask three questions before buying surplus lines coverage.
- Where do I have to sue?
- What law applies?
- What rights am I giving up if the insurer disputes the claim?
If the answer is New York, London, Bermuda, or any place with no real connection to the property, the policyholder should demand a change. If the insurer refuses, the broker should document the warning, and the policyholder should consider the true price of the policy. The cheapest premium may become the most expensive insurance purchase ever made once a claim turns into litigation.”
Those of you who occasionally or more than occasionally place coverage in the excess line market should keep Chip’s words in mind. The choice-of-law provision could prove to be very expensive for your clients.
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