Have you ever been faced with a situation where an insurance policy was issued in one state, but a motor vehicle accident involving the covered auto occurs in another? Of course, the first step is to consult the policy and locate the choice of law provision, but what do you do when there is not one contained in the policy?
Colorado has adopted and applies the Restatement (Second) Conflict of Laws’ “most significant contacts” test. The Restatement or “most significant contacts” analysis represents the modern view that the goal of any court is to apply the law of the state with the most significant relationship to the transaction and the parties on a particular issue.[i] It derives from the Introduction to the Restatement, in which the drafters opine, “civilized nations” follow special rules to “deal with such cases in a manner designed to promote the smooth functioning of the international and interstate systems and to do justice to the parties.”[ii]
Perhaps the easiest way to explain the process is by using an example. Let us assume a claim involves a motor vehicle accident in Colorado, and the policy was issued in California to a then-California resident. The policy did not contain a choice of laws provision.
Within the subject policy period, an Amended Declaration was issued by the insurance company to the insured for the covered auto, as the result of a change of address form submitted by the insured. The new address reflected on both the insurance company’s change of address form and the Amended Declaration was in Colorado. At the same time, the insurance company issued a “California Insurance Vehicle Identification Card” for the covered auto. A month or two later, still within the applicable policy period, the insured registered the covered auto in Colorado, exchanging California plates for Colorado plates. The insured is thereafter involved in a motor vehicle accident in Colorado and reports the accident to the insurance company, wishing to collect on his or her UIM coverage.
Given both states have an interest in the subject matter of the claim, the preliminary issue is whether Colorado or California law should apply to determine whether the policy provides coverage. Subject to constitutional limitations, this issue is decided by the conflict-of-law doctrine of the forum state.[iii] Thus, in the event coverage issues related to the claim are adjudicated in Colorado, a Colorado court would apply Colorado’s choice-of-law rules to determine the governing substantive law.
Colorado Follows the Restatement (Second) of Conflict of Laws
Colorado follows the Restatement (Second) of Conflict of Laws (1971) (the “Restatement”) for both contract and tort actions.[iv] In the absence of a contractual choice-of-law provision, the Restatement provides that the local law of the state with the most significant relationship to the transaction and the parties applies to determine the rights and obligations of the contracting parties. The Restatement, § 188, reads in pertinent part as follows:
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place of contracting;
(b) the place of negotiation of the contract;
(c) the place of performance;
(d) the location of the subject matter of the contract; and
(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.[v]
However, under Colorado law, insurance contracts are construed according to the general rules of construction applicable to contracts and according to the intent of the parties.[vi] Therefore, when an insurance contract is involved, Colorado courts apply contract conflict-of-laws principles.[vii] Contract principles are “applicable to all contracts and to all issues in contract.”[viii]
The Restatement provides the following with regard to insurance contracts in particular:
The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied. [ix]
The insured risk, which is “the object or activity which is the subject matter of the insurance, has its principal location . . . in the state where it will be during at least the major portion of the insurance period.”[x] The Restatement further explains, “in the case of an automobile liability policy, the parties will usually know beforehand where the automobile will be garaged at least during most of the period in question.”[xi] More specifically,
The [insurance] policy will usually be solicited in the state of the insured’s domicile and usually the insured risk will also be located there. In the normal case, therefore, the policy will have been solicited and delivered and the last act necessary to make the contract binding will have taken place in the state where the insured is domiciled or incorporated, and where the risk is located. This state, in such a situation, will usually be the state of the applicable law, at least with respect to most issues.[xii]
Finally, the Restatement indicates, if the insured risk “will be in a particular state for the major portion of the insurance period, the risk’s principal location is the most important contact to be considered in the choice of the applicable law…” because that location “has an intimate bearing upon the risk’s nature and extent and is a factor upon which the terms and conditions of the policy will frequently depend.”[xiii]
However, as a caveat, section 193 indicates circumstances may exist in which “following the issuance of the policy the principal location of the risk is shifted to some other state,” in which case, “this other state will have a natural interest in the insurance of the risk and it may be that its local law should be applied to determine at least some issues arising under the policy.”[xiv] The stated rationale for the exception from the standard practice involving insurance contracts is, “application of the local law of the other state would hardly be unfair to the insurance company…if the company had reason to foresee when it issued the policy that there might be a shift to another state of the principal location of the risk.”[xv] However, the exception is limited in its application.
Courts have held the principal location of an insured risk shifts when: (1) both the insured and the insured risk are located in a different forum than the one in which the contract was formed for the majority of the contract term; (2) the underlying contract is silent as to what law applies; and (3) the insurer had knowledge the insured risk had shifted to another location.[xvi]
Applying Colorado Law to the Example
Under Restatement section 193 and relevant case law, Colorado law would apply to the interpretation of the Policy, including the UIM provisions, because all elements for determining whether the principal location of an insured risk have shifted have been satisfied. In the example above, the insured and the covered auto were located in a different forum than the one in which the policy was formed for the majority of the policy period, the policy was silent as to what law applies, and the insurance company was provided with the change of address form and therefore had knowledge the insured risk had shifted away from California and to Colorado.
Determining what law applies can be complicated when an insured risk, like an automobile, is easily moved out of the state in which the policy covering it was negotiated and into one with a differing set of laws. While the analysis is entirely fact-specific and will vary from claim to claim, Colorado has adopted and applies the Restatement (Second) Conflict of Laws’ “most significant contacts” test, which applies the law of the state with the most significant relationship to the transaction and the parties on a particular issue.
[i] Restatement § 188(1).
[ii] Restatement, Ch. 1, § 1, comment C.
[iii] Magnolia Petroleum Co. v. Hunt, 320 U.S. 430, 440 (1943).
[iv] Kipling v. State Farm Mut. Auto. Ins. Co., 774 F.3d 1306, 1310 (10th Cir. 2014).
[v] Restatement § 188.
[vi] City of Northglenn v. Chevron U.S.A., Inc., 634 F. Supp. 217, 222 (D. Colo. 1986).
[vii] See Kipling, 774 F.3d at 1311-1312.
[viii] Restatement § 186 cmt. a.
[ix] Restatement § 193; Mitchell v. State Farm Fire & Cas. Co., 902 F.2d 793 (10th Cir. 1990) (noting that under the “most significant relationship” test, “the law of the state in which the insured property, object or other risk is located normally governs issues concerning the validity or effect of the insurance contract.”) (citations omitted).
[x] Restatement § 193 cmt. b.
[xiii] Id. at cmt. b-c.
[xiv] Id. at cmt. d.
[xvi] See Clay v. Sun Ins. Office, Ltd., 377 U.S. 179, 182 (1964) (finding Florida law applied to contract formed in Illinois when the “contract did not even attempt” to clarify what law applied and “[s]hortly after the contract was made, [the insured] moved to Florida and there he lived for several years …[h]is property was there all that time…[and] the [insurer] knew this fact”).