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R & R Sails, Inc. v. Insurance Co. of the State of Pennsylvania

April 11, 2008


The opinion of the court was delivered by: Marilyn L. Huff, District Judge United States District Court


On March 14, 2008, defendant Insurance Company of the State of Pennsylvania ("Defendant") filed a motion to determine that Australian law governs this lawsuit. (Doc. No. 25.) On March 31, 2008, plaintiff R & R Sails, Inc. dba Hobie Cat Company ("Plaintiff") filed an opposition. (Doc. No. 31.) On April 7, 2008, Defendant filed a reply. (Doc. No. 33.) The Court finds this motion appropriate for resolution without oral argument and submits the motion pursuant to its discretion under Local Civil Rule 7.1(d)(1). For the following reasons, the Court denies Defendant's motion without prejudice.


On June 1, 2007, Defendant removed this case from the San Diego Superior Court based on diversity jurisdiction. (Doc. No. 1.) The case involves a dispute between two United States companies over an insurance contract made in the United States. Plaintiff, a Missouri corporation, has its principal place of business in Oceanside, California. (Compl. ¶ 1.) Plaintiff and its subsidiaries are in the business of selling, manufacturing, and distributing racing sailboats and other water craft. (Id. ¶ 14.) Defendant, which writes and sells insurance, is a Pennsylvania corporation maintaining its principal places of business in New York and Pennsylvania. (Id. ¶ 2.)

As alleged, Defendant insured Plaintiff under a policy effective March 24, 2001 through March 24, 2002 ("the policy"). (Id. ¶ 6.) The policy provided commercial property insurance for property in Woolamia, Australia ("the Woolamia property"). (Id.) Hobie Cat AustraAsia Pty. Ltd. ("Hobie Cat AustraAsia"), a wholly owned subsidiary of Plaintiff, operated the Woolamia property. (Id. ¶¶ 7, 13.) The policy allegedly provided insurance benefits for property damages and related business interruption losses. (See id. ¶ 6.) A policy endorsement broadened the named insured to include certain of Plaintiff's affiliated and subsidiary companies, including Hobie Cat AustraAsia. (Id. ¶ 8.)

On December 25, 2001, wildfires in Australia destroyed the Woolamia property and virtually all of its contents. (Id. ¶ 16.) As a result, Hobie Cat AustraAsia lost most of its inventory, manufacturing equipment, and supplies, as well as all of its on-site office equipment, computers, and records. (Id.) To fulfill its existing contractual obligations, Hobie Cat AustraAsia leased a new manufacturing facility. (Id. ¶ 17.) Rebuilding the Woolamia facility and replacing records also caused a distribution delay for some of Hobie Cat AustraAsia's products. (Id. ¶ 17.)

As alleged, Plaintiff made a timely claim for insurance benefits under the policy. (Id. ¶ 19.) Plaintiff alleges that Defendant has not paid $236,619 of the policy's coverage of property damages, loss of income, and business interruption losses. (Id. ¶ 27.) The complaint alleges causes of action for breach of contract, breach of implied covenant of good faith and fair dealing, breach of California Business & Professions Code section 17200, and declaratory relief. (Id. ¶¶ 28-55.)


I. Choice of Law Standard

The policy does not contain a choice of law clause.*fn1 If the parties had specified a choice of law clause, that clause would likely control and render the subsequent analysis unnecessary. Generally speaking, a federal court sitting under diversity jurisdiction applies the forum state's choice of law rules. See Klaxon Co. V. Stentor Electric Mfg. Co., 313 U.S. 487, 497 (1941); Welles v. Turner Entm't Co., 503 F.3d 728, 738 (9th Cir. 2007). California courts have applied two different standards to choice of law determinations involving contracts: California Civil Code section 1646 and a governmental interest test. See Arno v. Club Med Inc., 22 F.3d 1464, 1468-69 n.6 (9th Cir. 1994) ("There appears to be some difference of opinion as to whether California's choice of law rule for contracts is the governmental interest test . . . or the test of Cal.Civ.Code § 1646."); Strassberg v. New England Mut. Life Ins. Co., 575 F. 2d 1262, 1263-64 (9th Cir. 1978) ("California law moved away from a mechanical choice of law process to employ the 'governmental interest analysis' approach.") The proponent of foreign law bears the burden to persuade the Court that foreign substantive law applies. McGhee v. Arabian Am. Oil Co., 871 F.2d 1412, 1422 (9th Cir. 1989); Hurtado v. Superior Court, 11 Cal. 3d 574, 581 (1974).

II. California Civil Code Section 1646

Under Civil Code section 1646, "[a] contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made." Cal. Civ. Code. § 1646. If the contract does not expressly specify a place of performance, "the place of performance sometimes can be gleaned from the nature of the contract and the surrounding circumstances." Frontier Oil Corp. V. RLI Ins. Co., 153 Cal. App. 4th 1436, 1443 (2007). Defendant contends that the insurance contract was to be performed in Australia and that Australian law should therefore apply. Defendant relies on Frontier Oil, arguing that California Civil Code section 1646 determines the choice of law applied to an insurance contract.

Here, two United States companies entered into a policy in the United States. Plaintiff purchased the insurance policy from Defendant in U.S. Dollars, and Defendant delivered the policy to Plaintiff in Oceanside, California. (Rogers Decl. ¶ 5, Mar. 31, 2008; Pl. Opp. at 6.) The policy's "Summary of Insurance," "Declarations Page," and "Schedule of Forms/Endorsements" all indicate that Plaintiff, in Oceanside, California, was the insured party. (See Notice of Removal Ex. 1 at 19-22.) Moreover, Defendant's allegedly partial performance to date has consisted only of payments made to Plaintiff in the United States: two checks made payable to Plaintiff and sent to Plaintiff in Oceanside, California; and one check made payable to Plaintiff and sent to Plaintiff's owner's home residence in Missouri. (Rogers Decl. ¶ 5.) Thus, the parties both entered into the contract in the United States and performed the contract, at least in part, in the United States.

Based on the submissions to date, the Court concludes that Defendant did not consider Australian law while handling Plaintiff's claim. First, the parties did not include a choice of law clause in the policy specifying that Australian law would apply. Second, Mr. Blaise Lombardo, the primary claim handler for Plaintiff's claim, testified at a January 9, 2008 deposition that he did not consider any Australian law in handling Plaintiff's claim. (Lombardo Dep. 37:10-13, Jan. 9, 2008.) Mr. Lombardo also testified that he did not know if anyone acting on Defendant's behalf had considered Australian law in adjusting Plaintiff's claim. (Lombardo Dep. 37:14-17.)*fn2 Third, the claims manual Defendant produced during discovery, which adopts California Fair/Unfair Claims Settlement Practices, indicates that Defendant anticipated that California law would apply. (Pl. Opp. Ex. 4 at 33.) Defendant produced the manual in response to a discovery request for "the claims manual that was in effect during the pendency of the claim at issue and upon which the adjuster did, should have, or could have relied in handling the ...

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