Crisis Management Coverage Alert:

Court Rejects Insureds' Forum Shopping Efforts and Enforces London
Market Policy's Choice of Law and Jurisdiction Clause

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

In today's global economy, insurers are often asked to respond to international and national crises management claims. One way insurers have mitigated the expenses of coverage litigation is by including choice of law and forum selection clauses in the policies they issue. Generally, in the United States, such clauses are enforceable, and therefore, may provide insurers and insureds with some assurance of the law under which the policy language will be construed. Additionally, such clauses provide insurers with a strong tool to combat forum shopping.

Judge Rakoff of the United States District Court for the Southern District of New York recently enforced a Choice of Law and Jurisdiction Clause contained in a product contamination insurance policy that Lloyd's Syndicate 1209 (the "Underwriters") issued to PBM Holdings, Inc. and PBM Nutritionals LLC (collectively, "PBM"). See Dornoch, Ltd. v. PBM Holdings, Inc., No. 09 CV 3258, slip op. at 7 (S.D.N.Y. Aug. 4, 2009).

PBM manufactures infant formula in a Vermont facility, and during the production process, dry ingredients are mixed with hot water to prepare each batch of formula. In January 2009, a valve in the hot water system failed, and the formula became contaminated and unfit for sale. PBM claimed that nearly $3 million worth of formula had become contaminated and sought coverage under the product contamination policy. The Underwriters issued a reservation of rights letter, and requested additional information to assist in the investigation. PBM Holdings, Inc., located in Virginia, then filed suit against the Underwriters in the Eastern District of Virginia.

Six days later, and on behalf of the Underwriters, Dornoch Ltd. ("Dornoch") sought a declaratory judgment that the policy did not provide coverage for PBM due to PBM's failure to comply with the policy's cooperation clause. Dornoch, No. 09 CV 3258, slip op. at 1. The Underwriters argued that PBM did not provide all of the information requested. Id. at 4. PBM moved to dismiss the action, alleging that its case was filed first. Id. at 1. PBM also asserted that the Underwriters failed to join three other insurers that had issued commercial property policies to PBM as indispensable parties. Id. In the alternative, PBM sought to transfer Dornoch's New York action to the Virginia venue in which PBM's own action was pending. Id. Dornoch then moved for judgment on the pleadings, contending that in its pleadings, PBM essentially admitted it had failed to comply with the policy's cooperation clause. Id. at 1-2.

The policy's Choice of Law and Jurisdiction Clause provided: "Unless otherwise stated herein . . . this Policy shall be construed according to the laws of the State of New York, and the Insured and Underwriters irrevocably consent to the jurisdiction of the United States District Court and the State courts of New York, [and] agree that any action relating to any dispute under this Policy shall only be brought in said courts." Id. at 2. The policy's Service of Suit Clause, however, provided that the Underwriters would submit to any competent jurisdiction in the United States. Id.

Construing the policy's Choice of Law and Jurisdiction Clause, Judge Rakoff reasoned that PBM's "first filed" argument did not warrant dismissal of the Underwriters New York action. Id. at 5. PBM asserted that the policy's Service of Suit Clause modified the Choice of Law and Jurisdiction Clause such that the Underwriters had consented to jurisdiction in any competent court within the United States. Id. Judge Rakoff disagreed, noting that a forum selection clause is distinguishable from a service of suit clause. Id. The former "designates the forum in which any disputes between the parties are to be litigated[,]" whereas the latter "merely ensures that Underwriters are subject to suit in the United States." Id. at 6. Concluding that the two policy provisions should be construed as complimentary, Judge Rakoff held that the Choice of Law and Jurisdiction Clause explicitly required the parties to litigate any dispute under the policy in New York. Id. Consequently, Judge Rakoff determined that PBM's argument to dismiss the Underwriters' suit in favor of the Virginia action necessarily failed. Id.

In reaching his conclusion, Judge Rakoff additionally found that several factors diminished PBM's "first filed" argument. Id. at 7. The two actions were filed only six days apart and one of the PBM entities was not a party in the Virginia action. Additionally, the judge reasoned that because the policy unambiguously provided that litigation should be brought in New York, PBM's decision to file suit in Virginia was likely the result of forum shopping. Id.

The judge also disagreed with PBM's argument that the Underwriters had failed to join PBM's other insurance carriers as indispensable parties, reasoning that PBM's property insurers provided a different kind of coverage than that provided under the product contamination policy. Id. at 8-9. As to PBM's alternative request for relief, the judge found that the Choice of Law and Jurisdiction Clause was determinative of the parties' convenience, and therefore, the New York matter should not be transferred to Virginia. Id. at 11.

Judge Rakoff further found that although PBM's answer expressly noted that PBM had complied with "most"-but not all-of the Underwriters' requests, the Underwriters did not meet the heavy burden required to demonstrate breach of the policy's cooperation clause. Id. at 11-12. As a result, Judge Rakoff denied the Underwriter's motion for judgment on the pleadings. Id. at 12.

In the Dornoch decision, London market underwriters insured products manufactured in Vermont and the insureds elected to bring suit in Virginia. The policy's unambiguous choice of law and forum selection clauses, however, required application of New York law in New York courts. Including such clauses in policies that cover international and national risks will provide insurers some level of certainty in making coverage determinations and preparing for potentially resulting litigation-at least with respect to which jurisdiction's law will apply. They are also a powerful mechanism with which to battle forum shopping.

For further analysis of Crisis Management coverage issues involving, international and domestic food contamination/product recalls; trade disruption; supply chain management; brand risk; political risk; terrorism; kidnap & ransom; cyber attack; and other emerging issues such as climate change, nanotechnology or pandemics, please contact Joe Bermudez, Jason Melichar or Suzanne Meintzer of Nelson Levine de Luca & Horst. NLdH is a nationally recognized leader in representing the insurance industry in all coverage areas.