A recent opinion from the Arizona Court of Appeals demonstrates the importance of being aware of varying states’ insurance laws. In Callies v. United Heritage Prop. & Cas. Ins. Co. (Mar. 18, 2014), the insureds, a husband and wife who lived in Oregon, were in the middle of a move to Arizona when their moving van and all of its contents were stolen. Their homeowner’s policy covered theft of personal property “while it was anywhere in the world.” At first, the insurer accepted coverage, leading the insureds to believe that only the valuation of their belongings stood between them and recovering for their loss. 

But this was not to be. One of the insurer’s adjusters apparently became suspicious about the reported theft and began a fraud investigation, causing the husband to begin suffering from the anxiety of the investigation and, of course, the uncertainty about his future in the face of such a huge personal loss. These insureds found themselves in a predicament that I’ve seen many times: the insurer has nothing to lose by delaying and denying claims, having collected premiums long ago and knowing the insureds have nowhere else to turn after a loss has already happened. After learning that the husband’s emotional struggles might prevent an examination under oath, the lawyer for the insurer just stopped calling — all without paying a penny on the claim — and the insureds moved back to Oregon.

This is where the putative difference between Oregon and Arizona insurance law really started to matter. The insureds sued based on the insurer’s bad-faith adjustment of their claim. In the context of “first party” insurance claims (that is, where the insured seeks coverage for its own loss, as compared with “third party” claims where the insured seeks to be indemnified for liability for arising out of a third party’s loss), Arizona law plainly permits “insurance bad faith” tort claims. But Oregon law, at least as the Arizona court saw it, does not permit such claims, limiting the insureds because, without this tort claim, emotional suffering and other damages are simply not available.

Faced with these conflicting laws, the Arizona court had to engage in the black arts known to lawyers as a “conflict of laws” analysis. Deciding which state law will apply, in cases with significant “contacts” with two or more states, presents a very difficult question that no lawyer can predict the answer for with any measure of confidence.

And so it was in the Callies case. The theft occurred in Arizona, where the insureds were moving to and where, for a short time at least, they lived after the theft. But the insureds originally lived in Oregon and moved back there after the debacle with the theft and the insurer’s refusal to pay their claim. And, significantly for the trial court at least, “Oregon’s interests stand out—it has an interest in ensuring that its citizens are treated appropriately by insurers.” Weighing these competing relationships with Arizona and Oregon, the trial court chose to apply Oregon law. And the insureds lost their bad-faith claim as a result — no matter the brow-raising irony that the state law chosen because of Oregon’s “interest in ensuring that its citizens are treated appropriately by insurers” is the same law that the trial court recognized as providing no protection for “first party bad faith” claims against insurers.

The Arizona Court of Appeals reversed, finding that the “place of the injury” was Arizona, the state where the husband first began to experience emotional troubles because of the insurer’s delays and the fact that the insureds had intended to move to Arizona when the bad-faith investigation and adjustment began. Additionally, the court relied on the fact that Arizona, which the court called the “dominant state,” provided greater protections to insureds than Oregon law. This happy result for the insureds highlights at least two important considerations before filing a coverage lawsuit for any party aggrieved by an insurer: know whether there is an advantage to one state’s law over another, and, if possible, sue in the state with that advantage. Careless coverage counsel will overlook this potential advantage, suing by default in the state where the insureds live and foregoing the finger on the scale in conflict-of-laws cases favoring the law of the forum state.

As an aside, the Arizona court’s conclusion that there is no “first party” bad-faith tort in Oregon relies solely on Employers’ Fire Ins. Co. v. Love It Ice Cream Co., an Oregon Court of Appeals decision from over 30 years ago that has been eroded in a series of decisions since then. Under a string of “special relationship” cases, including Oregon’s subsequent recognition of a tort claim arising from the insurer’s bad-faith handling of an insured’s defense, Love It may well lack the punch that the Callies court assumed. This result is not obvious, however, which accents the role that specialized coverage counsel should play in going up against the insurer’s army of seasoned lawyers with specialized insurance expertise.

Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.