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August 18, 1998

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Bad Faith, Vol. 12, #8, p. 16 (Aug. 18, 1998). Copyright Butler 1998.


The substantive law of bad faith is not uniform from state to state. Some states treat bad faith as a breach of contract;(1) some as a tort.(2) In some states, punitive damages are available.(3) In others, they are not.(4) Some allow claims for emotional distress, while others reject them.(5)

When a bad faith action is filed or anticipated it is important for any insurance company quickly to evaluate potential exposure. A threshold issue in that evaluation is identification of the substantive law of bad faith that will govern the case. What must the plaintiff prove and what might he get if he does?

Unfortunately, the identification of the substantive law may be complicated and inconclusive. Many bad faith cases include significant events which occurred in different states. Consider this hypothetical:

A Florida insured drives to North Carolina. There she collides with a pedestrian who sues in that state. Her carrier, from the home office in California, decides not to defend the suit. The insured is defaulted and sues her carrier, in Florida, for bad faith.

Which state supplies the substantive law? Florida – the forum state and place where the policy was delivered? North Carolina – where the insured was defaulted? California – where the “bad faith” decision was made? To answer these kinds of questions, a court is required to make a choice of law analysis.

There are several approaches to choice of law analysis. The result in any particular case depends on which approach the forum state has adopted. The common approaches are: (1) the doctrines of lex loci contractus, lex loci solution is, and lex loci delicti, all of the Restatement (First) of Conflicts of Law (the “First Restatement”); (2) Professor Brainerd Currie’s “governmental interest analysis, “and; (3) the “significant relationship” test of the Restatement (Second) of Conflicts of Law (the “Second Restatement”).(6)

This brief article cannot cover this complex field. Rather, it will outline the three common choice of law approaches. Then it will examine how they have been applied in some reported decisions involving bad faith.

The First Restatement

In 1934, the American Law Institute promulgated the First Restatement. Today, this is a minority approach.(7) Only twelve states apply some vestiges of First Restatement rules.(8)

The First Restatement requires categorization of the action: contract, tort, or procedural/remedial.(9) If it is a contract action, then the doctrine lex loci contract us may apply.(10) Under this doctrine, the substantive law of the state where the contract was executed will govern the validity, nature, construction, and interpretation of a contract.(11) However, if the contract was made in one state, but was to be performed in another, the substantive law of the state where the contract was to be performed will govern.(12) This is the doctrine of lex locisolutionis. In our hypothetical, if Florida law considers bad faith to sound in contract, then a Florida court probably would apply North Carolina bad faith law.

If the action sounds in tort, the First Restatement invokes the doctrine of lexloci delecti.(13) Under that rule, the law of the state where the tort was committed governs.(14) In the hypothetical, if Florida law considers bad faith an action in tort, and applies the First Restatement, then a Florida court probably would choose the law of North Carolina.

The rules of the First Restatement have been criticized as too rigid.(15) Critics have complained that these rules do not recognize policy interests of the involved states. Thus, the First Restatement may fail to achieve justice.(16)

Governmental Interest

Another approach is the governmental interest analysis. In such analysis, the forum state should apply the substantive law of the state which has the most legitimate interest in the action.(17) Although several “governmental interest “approaches have developed, that of Professor Brainerd Currie is a leading one.(18)

Professor Currie’s “governmental interest” approach follows four steps:

  1. The party seeking the benefit of another state’s law must show sufficient reason for displacing the forum state’s law.(19)
  2. The court determines if the forum state has a policy concerning the substantive law (eg. bad faith). If it does, then the forum state is considered to have an “interest” in the action.(20)
  3. The court determines if the foreign state has an interest also.(21)
  4. The court compares the identified interests and applies the following rules:
    1. Where neither state has an interest, the forum’s law governs.(22)
    2. Where the forum state has an interest, but the foreign state does not, the forum’s law governs.(23)
    3. Where the forum state has no interest, but the foreign state does, the foreign state’s law governs.(24)
    4. Where both states have interests, the forum’s law governs.(25)

Thus, applying Professor Currie’s analysis to the hypothetical, the applicable law will depend on whether Florida and/or North Carolina have policy interests concerning bad faith, and so on. While Professor Currie’s approach purports to be rational and somewhat objective, commentators note that courts are reluctant to apply it. It is said to be prone to manipulation and to promote forum bias.(26)

The Second Restatement

The last of the common choice of law approaches is the Second Restatement. The American Law Institute devised this approach in 1971 as are placement for the First Restatement. Today, it is applied by most courts in the United States.(27)

The Second Restatement contains general rules as well as more particular sets of rules applicable to tort and contract cases. Under the Second Restatement§ 6 (the general rule) the forum court must weigh several factors to determine whether the forum or foreign state law governs.(28) These factors are contained in § 6(2):

  1. The need to facilitate harmonious interstate/international choice of law systems.(29)
  2. The public policy and interest of the forum state.(30)
  3. The public policy and interest of the foreign state.(31)
  4. The protection of justified expectations.(32)
  5. The basic policies underlying the particular field of law.(33)
  6. The certainty, predictability, and uniformity of the result.(34)
  7. The ease in determining and applying the law to be applied.(35)

In the hypothetical, if Florida considers bad faith neither a tort nor a breach of contract, under the Second Restatement, the court will consider the above factors, and any others it deems necessary.(36) Because of this, the analysis will be subjective and the choice unpredictable.

The Second Restatement analysis is more detailed yet for tort actions. Under § 145, the governing the law will be that of the state that has the most significant relationship to the tortious occurrence and the parties.(37) The court should run through the factors of § 6(2) but also take into account the following:

  1. The place where the injury occurred.(38)
  2. The place where the conduct causing the injury occurred.(39)
  3. The domicile, residence, nationality, place of incorporation and place of business of the parties,(40) and
  4. The place where the relationship, if any, between the parties is centered.(41)

This is more broad and progressive than the lex loci delicti doctrine. For that reason, any determination under § 145 is unpredictable. In the hypothetical, Florida might apply the law of California, North Carolina or its own law.

As for contract actions, the Second Restatement also is subjective. Under § 186, the choice of law will be determined by the contract if it specifies an agreement.(42) If the contract does not, then the court must apply the law of the state which has the most significant relationship to the transaction and the parties in light of the factors in § 6.(43) But, as in tort, the court should may consider other factors:

  1. The place of the contract.(44)
  2. The place of the negotiation of the contract.(45)
  3. The place of performance.(46)
  4. The location of the subject matter of the contract,(47) and
  5. The domicile, residence, nationality, place of incorporation and place of business of the parties.(48)

This rule too is more flexible and subjective than lex loci contractus. In the hypothetical, assume Florida considers bad faith failure to defend a breach of a contractual duty. Obviously, Florida has a significant relationship to the place of contracting, the place of negotiation, and the place of domicile. But, the place of performance probably is North Carolina in the hypothetical instance and the location of the “subject matter” of the contract is unclear. The carrier’s place of business is California. Under such an analysis, a certain prediction of which state’s law would apply is not possible.


Let us turn now and see how some courts have implemented the rules.

Arizona follows the Second Restatement to resolve choice of law issues. It also deems bad faith an action in tort.(49) In Bates v. Superior Court, the Arizona Supreme court gave a succinct analysis using the Second Restatement.

In 1975, Gloria Bates, a resident and licensed driver from Michigan, was involved in an automobile accident in Illinois. She suffered injuries which required continued treatment. She was covered under her husband’s auto insurance policy with Nationwide, which was executed in Michigan. She made claims to Nationwide for treatment through her insurance agent in Michigan.

Sometime after the accident, Ms. Bates moved to Arizona. She continued to file claims through the agent in Michigan. In 1984, her agent retired, and her claims were transferred to an adjuster at the home office in Ohio. In 1985, the new adjuster requested Ms. Bates to see a doctor to determine if continued treatment was necessary. The doctor said it was not. Nationwide denied coverage for further treatment.

Ms. Bates sued Nationwide in Arizona for breach of contract and for bad faith. Nationwide filed a motion for partial summary judgment to establish which state’s law should govern the bad faith claim. The choice of law question was important since not all the “interested” states had the same remedies available. Both Ohio and Arizona allowed such claims, permitting punitive damages inappropriate circumstances. However, Michigan did not recognize a cause of action for first-party bad faith.

The trial judge granted Nationwide’s motion for partial summary judgment concluding that Michigan was the state with the most significant contacts. Ms. Bates petitioned the appellate court for “special action” (writ of certiorari). When the appellate court denied her petition, Ms. Bates petitioned for special action to the Arizona Supreme Court which accepted review.

Under the Second Restatement, and because bad faith in Arizona is a tort, the court applied § 145. As mentioned, this requires consideration of the factors in§ 145(2) and § 6(2). Weighing the factors from § 145(2), the supreme court first considered where the injury occurred, where the injury-causing conduct occurred, the geographic disposition of the parties, and where the parties’ relationship was centered. Because Ms. Bates suffered her alleged damages after Nationwide denied her claims and because she was living in Arizona at the time, the court determined that Arizona is the place where the injury occurred. The court held that Ohio is where the injury-causing conduct occurred because Nationwide made the decision there to cut off benefits there.(50)

The court then looked at the geographic disposition of the parties. It considered that Ms. Bates was from Arizona, and that although the defendant was headquartered in Ohio, it conducted extensive business in Arizona. Relying on comment e of §145, the court gave greater weight to the victim’s residence. Despite this analysis, the court concluded that the “geographic disposition of the parties” factor was inconclusive.

In determining the center of the parties’ relationship, the court found that the relationship was centered in Ohio because the claims were submitted and, subsequently, denied there. Based on this, the court stated that Arizona and Ohio had equally significant relationships to the matter. Therefore, the court examined this result in light of the general factors from § 6(2).

The only concern the court had after reviewing those factors was the “justifiable expectations of the parties.” Nationwide argued that because the policy was negotiated and executed in Michigan, and because the claims originally were readjusted in Michigan, it expected Michigan law to apply. The court disagreed. First, the matter was not unique to Nationwide’s Michigan business. Second, use of the Nationwide policy was not limited to Michigan. It was national. As such, Nationwide could anticipate that Ms. Bates might relocate or be involved in an accident in other states. If so the claim could be adjusted in other states. Because of this, the court found that Nationwide did not have a justifiable expectation for Michigan law to be the exclusive law of the policy. Instead, because of the contact relationships with Ohio and Arizona, the court found that either Nationwide or Ms. Bates could reasonably expect that the laws of either Arizona or Ohio would apply.

After all that, the court found that the significant contacts of Ohio and Arizona were evenly divided. But the under the Restatement, the law of the place of injury shall apply unless another state has a more significant relationship. Because Ohio did not, the court held that Arizona law should govern.(51)

Florida is one of the minority states which continues to apply the First Restatement when there is a choice of law question of contracts.(52) Another instrictive case is Teachers Ins. Co. v. Berry. In that case, the U.S. District Court for the Northern District of Florida, interpreting Florida law, applied the doctrine of lex loci solutions to choice of law in a bad faith action.

On May 6, 1990, Dennis Nicholson was involved in an automobile/pedestrian accident which killed Alonzo James. (The location of the accident is not given in the case.) The car was owned by John Berry. Both Nicholson and Berry were insured under a Teachers automobile policy executed in Pennsylvania. The policy had a $25,000 limit for bodily injury.

The decedent’s mother, Debra King, contemplated filing a wrongful death suit against Berry and Nicholson in Florida. King and Teachers agreed to settle for the $25,000 limits provided that Berry and Nicholson signed financial affidavits that each lacked recoverable assets. The deadline for King to receive these affidavits was October 29, 1990. However, Teachers did not mail the affidavits to Berry or Nicholson until after the deadline. King’s counsel received Berry’s affidavit late, but never Nicholson’s. Thus, the matter did not settle.

On April 29, 1991, King filed for wrongful death against Berry and Nicholson in Florida. Teachers provided a defense to both. The case settled out of court for$575,000. However, a condition of this agreement was that King could not execute on the personal assets of the defendants until after the final disposition of a lawsuit by Berry and Nicholson against Teachers for failure to settle.

In the U.S. District Court for the Northern District of Florida, Teachers filed seeking a declaratory judgment that it did not act in bad faith. Berry and Nicholson counterclaimed that Teachers acted in bad faith and was negligent.

The issue before the district court was Teachers’ motion to determine the applicable law in the case. Because the matter was a diversity case, the court was bound to make a choice of law decision based upon the state in which the courts is. In this case it was Florida.(53)

The court noted that Florida considers matters related to performance of insurance policies to sound in contract. In Florida, choice of law selections for contract matters depend on the issues. For actions involving coverage, lex locicontractus applies.(54) For actions relating to performance, lex loci solutionis applies.(55)

Because insurance bad faith actions focus on the performance of the policy, the court determined that the law of the place where the policy was to be performed would control. The wrongful death suit was filed, maintained, and defended in Florida. The settlement negotiations for that case commenced in Florida. Accordingly, the court held that the substantive law of Florida would govern the bad faith action.


A choice of law determination can be vexing. In many cases a practitioner may be able only to narrow it down and discuss several possible outcomes. Of course, in some instances, it will turn out not to matter very much. The law of the states involved may be similar. But in other instances, it could mean the difference between limited and unlimited exposure; between a high standard of proof and allow one. The best course may be to get an early ruling to show the way.



  1. Eg. Kewen v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401 (1980).
  2. Eg. McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo. 1990).
  3. Eg. Beck v. State Farm Mut. Automobile Ins. Co., 54 Cal. App. 3d 347, 126 Cal.Rptr. 602 (1976).
  4. Eg. Combs v. Insurance Co., 146 Ill. App. 3d 957, 797 N.E.2d 503, 100 Ill. Dec.525 (1st Dist. 1986).
  5. See Recovery Of Damages For Emotional Distress In Tort, Contract And StatutoryBad Faith Actions, Mealey’s Litigation Report: Bad Faith, Vol. 12, #6, July 21, 1998.
  6. Jason E. Pepe, Kansas’s Conflict of Laws Rules for Insurance Contract Cases: It’sTime to Change Policies, 46 Kan. L. Rev. 819, 820 (May 1998).
  7. Symeon C. Symeonides; Choice of Law in the American Courts in 1998, 45 Am.J. Comp. L. 447, 457 (Summer 1997).
  8. Id.
  9. Sonya Haller; Note: Ohio Choice of law Rules: A Guide To the Labyrinth, 44 OhioSt. L.J. 239, 242 (Winter 1993); Federal Insurance Company v. National Distribution Company, 417 S.E.2d 671(Ga. App. 1992).
  10. Haller at 242.
  11. Black’s Law Dictionary 911 (6th ed. 1990).
  12. Id.
  13. Haller at 242.
  14. Black’s Law Dictionary 911.
  15. Haller at 242.
  16. Id. at 243.
  17. Lee R. Russ and Thomas F. Sagella, Couch on Insurance 3d, § 24:20 (1997).
  18. Haller at 244.
  19. Pepe at 823—24.
  20. Id. at 824—25.
  21. Id. at 825.
  22. Id. at 825—26
  23. Id. at 826.
  24. Id.
  25. Id.
  26. Id., n. 67.
  27. Id. at 827, n.70 citing Symeon C. Symeonides, Choice of Law in the AmericanCourts in 1994: A View “From the Trenches,” 43 Am. J. Comp. L. 1, 3 (1995).
  28. Id. at § 6(2).
  29. Id. at § 6(2)(a).
  30. Id. at § 6(2)(b).
  31. Id. at § 6(2)(c).
  32. Id. at § 6(2)(d).
  33. Id. at § 6(2)(e).
  34. Id. at § 6(2)(f).
  35. Id. at § 6(2)(g).
  36. Id. at § 6, comment c.
  37. Id. at § 145(1).
  38. Id. at § 145(2)(a).
  39. Id. at § 145(2)(b).
  40. Id. at § 145(2)(c).
  41. Id. at § 145(2)(d).
  42. Id. at § 186.
  43. Id. at § 188(1).
  44. Id. at § 188(2)(a).
  45. Id. at § 188(2)(b).
  46. Id. at § 188(2)(c).
  47. Id. at § 188(2)(d).
  48. Id. at § 188(2)(e).
  49. Bates v. Superior Court of the State of Arizona, 749 P.2d 1367 (Ariz. 1988).
  50. Id. at 1371.
  51. Id.
  52. See Teachers Ins. Co. v. Berry, 901 F. Supp. 322 (N.D. Fla. 1995)
  53. Broyles v. Bayless, 878 F.2d 1400 (11th Cir. 1989); Klaxon Co. v. Stentor Elec.Mfg. Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941).
  54. See Lumbermans Mut. Cas. Co. v. August, 530 So. 2d 293 (Fla. 1988); also Sturiano v. Brooks, 523 So. 2d 1126 (Fla. 1988).
  55. Government Employee Ins. Co. v. Grounds, 322 So. 2d 13 (Fla. 1976).