Parsing Invalidating Statutes (Part II)

Image by Angelo Giordano from Pixabay

In a prior post, I argued that the precise language used in state statutes purporting to invalidate choice-of-law clauses and forum selection clauses can have outsized effects in litigation. In this post, I continue this discussion by highlighting several statutes that purport to invalidate choice-of-law clauses in insurance contracts. Although these statutes all have the same goal, they are not all drafted in the same way.

In Arizona, for example, the legislature has enacted a statute stating that choice-of-law clauses selecting the laws of other jurisdictions are void when they appear in certain insurance contracts:

No policy delivered or issued for delivery in [Arizona] and covering a subject of insurance resident, located or to be performed in this state, shall contain any condition, stipulation or agreement . . . requiring the policy to be construed according to the laws of any other state or country . . . Any such condition, stipulation or agreement shall be void, but such voidance shall not affect the validity of the other provisions of the policy.

In Nebraska, the legislature has enacted a statute that seeks to accomplish the same general goal using somewhat different language:

No insurance company shall issue in this state any policy or contract of insurance containing a provision, stipulation or agreement that such policy shall be construed according to the laws of any other state or country.

Careful readers will note that the Nebraska statute—unlike the Arizona statute—does not state that choice-of-law clauses selecting the laws of other jurisdictions are “void.” It is difficult to know what a court might make of this difference. In a prior post, I discussed a Texas case in which the court deemed it significant that an invalidating statute used the word “voidable” instead of the word “void.” A court called upon to interpret the Nebraska statute could conceivably attach a similar significance to the absence of the word “void” and conclude that the statute does not bar the enforcement of a choice-of-law clause selecting the laws of another country. Alternatively, that same court may deem the absence of the word “void” unimportant, enforce the statute. and invalidate the clause. Since there is no case law interpreting the Nebraska statute, there is no way to know for sure.

This is not the only interpretive issue presented by this pair of statutes. Both the Arizona and the Nebraska laws specifically refer to choice-of-law clauses stating that the policy shall be “construed” according to the laws of another jurisdiction. But what happens if a clause does not contain the word “construed”? What if the clause states that the agreement shall be “governed” by the laws of another jurisdiction? On the one hand, it seems unlikely that the legislature would have only wanted to invalidate choice-of-law clauses that used the word “construed.” On the other hand, several courts have held that “construed” and “governed by” mean very different things when those words appear in choice-of-law clauses. It is possible that a court might conclude that choice-of-law clauses that omit the word “construed” are not covered by these invalidating statutes as drafted. This conclusion, while arguably inconsistent with the spirit of the law, would not be obviously incorrect from a textualist standpoint.

Other states have enacted statutes with still different text. There is a statute in North Carolina, for example, which states:

All contracts of insurance on property, lives, or interests in [North Carolina] shall be deemed to be made therein, and all contracts of insurance the applications for which are taken within the State shall be deemed to have been made within this State and are subject to the laws thereof.

Does this statute invalidate choice-of-law clauses selecting the laws of another state? It is difficult to say. The statute states that North Carolina law shall apply to insurance contracts affecting property, lives, or interests in North Carolina. It does not, however, contain any specific reference to choice-of-law clauses. Some courts have held that a statute containing similar language precludes enforcement of choice-of-law clauses selecting the laws of another jurisdiction. Others have held that this language merely announces a background default rule that may be displaced by a choice-of-law clause selecting the laws of some other place. Since the statute does not mention choice-of-law clauses, it is susceptible to either interpretation.

All of this is a long way of saying that the task of interpretation does not end with the text of the choice-of-law clause. In some cases, it will also be necessary to parse the language of a purportedly invalidating statute to determine whether the choice-of-law clause is enforceable. Although these interpretive issues arise most frequently when the choice-of-law clause chooses the laws of a U.S. state, the same issues arise when the clause chooses the laws of another country. Insurers headquartered in London and Bermuda do a brisk business selling policies in the United States. Their policies often contain choice-of-law clauses selecting the laws of England or Bermuda. When such policies are litigated in U.S. courts, the enforceability of these choice-of-law clauses will turn on whether a state has enacted an invalidating statute. And when that statute is ambiguous in some way—as it often is—how a court interprets it will determine what law is applied to resolve the parties’ dispute.