EASTERN STAINLESS v. AMERICAN PROTECTION INS.

• Decision Date: 10 August 1993
• Docket Number: Civ. A. No. WN-93-304.
• Parties: EASTERN STAINLESS CORPORATION v. AMERICAN PROTECTION INSURANCE COMPANY.
• Court: U.S. District Court — District of Maryland

829 F. Supp. 797

EASTERN STAINLESS CORPORATION v. AMERICAN PROTECTION INSURANCE COMPANY.

Civ. A. No. WN-93-304.

United States District Court, D. Maryland.

August 10, 1993.

Cyril V. Smith, Donald J. McCartney, and Zuckerman, Spaeder, Goldstein, Taylor & Better, Baltimore, MD, for plaintiff.

Anthony J. Breschi, and Jordan, Coyne, Savits & Lopata, Baltimore, MD; and Ronald B. Hamilton, and Cozen & O'Connor, Philadelphia, PA, for defendant.

MEMORANDUM

NICKERSON, District Judge.

Before the Court is Defendant's Motion to Dismiss (Paper No. 4). Plaintiff has filed an Opposition (Paper No. 7) and Defendant has Replied (Paper No. 10).¹ Plaintiff has filed a Motion for Leave to Amend Complaint (Paper No. 14) which Defendant opposed (Paper No. 15). Upon a review of the motion and the applicable case law, the Court determines that no hearing is necessary (Local Rule 105.6) and Defendant's Motion to Dismiss should be denied and that Plaintiff's Motion for Leave to Amend Complaint should be granted.

I. BACKGROUND

This diversity action arises out of an insurance coverage dispute. Defendant American Protection Insurance Company "American" contracted to insure Plaintiff Eastern Stainless Corporation "Eastern" against losses under a standard fire insurance policy. On February 3, 1990 a transformer on Eastern's property failed, causing an electrical fire which damaged the surrounding plant and equipment, as well as the transformer itself. Eastern filed a claim and American made a total payment of $275,419.54 to Eastern. In its Complaint, Eastern alleges that American still owes a balance of more than $900,000.00 under the insurance policy and that American's failure to pay this amount was "willful, wrongful, without justification and in bad faith." Complaint at ¶ 13. Eastern seeks a determination of American's obligations under the insurance policy, costs and attorneys' fees, as well as compensatory and punitive damages.

American moves to dismiss the bad faith claim and the claim for punitive damages for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6). American argues that Maryland law is applicable and that Maryland does not recognize a cause of action for bad faith, nor does Maryland allow for the recovery of punitive damages based on a bad faith claim. Eastern counters that Pennsylvania law applies, and that, by statute, specifically Title 42, Section 8371, Pennsylvania created a cause of action for bad faith failure to pay an insurance claim which permits the award of punitive damages and attorneys' fees. The Court concludes that Pennsylvania law applies, that Pennsylvania recognizes a cause of action for bad faith and, therefore, American's motion should be denied.

In Plaintiff's Motion for Leave to Amend Complaint, Plaintiff seeks to add a third count to clarify its claim that American's bad faith refusal to pay entitles Eastern to attorneys' fees and punitive damages under Section 8371. In its opposition to this motion, Defendant concedes that if its Motion to Dismiss is denied, Plaintiff's Motion for Leave to Amend should be granted. The Court will grant Plaintiff's motion.

II. CHOICE OF LAW

A. The General Rule — Lex Loci Contractus

The district court sitting in diversity in Maryland applies the substantive law of the State of Maryland, and follows the decisions of Maryland state courts regarding choice of law rules. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). In Maryland, the general rule, when determining which law controls the enforceability and effect of a contract, is to apply the principle of lex loci contractus. Kramer v. Bally's Park Place, 311 Md. 387, 535 A.2d 466 (1988). Under this principle, the law of the jurisdiction where the contract was made determines the validity of the contract. Bethlehem Steel v. G.C. Zarnas & Co., 304 Md. 183, 188, 498 A.2d 605 (1985); Traylor v. Grafton, 273 Md. 649, 660, 332 A.2d 651 (1975). The place where the contract is made is "the place where the last act is performed which makes the agreement a binding contract." Riviera Beach Vol. Fire Co., Inc. v. Fidelity & Cas. Co. of New York, 388 F.Supp. 1114, 1120 (D.Md.1975) (citing Grain Dealers Mut. Ins. Co. v. Van Buskirk, 241 Md. 58, 65-66, 215 A.2d 467 (1965)).

Under Maryland conflicts rules, the last act performed which renders an insurance contract binding, is "typically ... where the policy is delivered and the premiums are paid." Sting Security, Inc. v. First Mercury Syndicate, Inc., 791 F.Supp. 555, 558 (D.Md.1992).² If, however, the insurance policy provides that "it shall not be valid until it is countersigned by an officer or agent of the company, the place of countersigning is held to be the place of the making of the contract." Ohio Casualty Insurance Co. v. Ross, 222 F.Supp. 292, 295 (D.Md. 1963) (emphasis in original); accord Maryland Casualty Co. v. Armco, Inc., 643 F.Supp. 430, 431 (D.Md.1986), aff'd, 822 F.2d 1348 (4th Cir.1987), cert. denied, 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (1988); Riviera Beach, 388 F.Supp. at 1119-20.

In the present case, the insurance policy, # 3ZG001304-02, provides, "this Policy shall not be valid unless countersigned by the duly authorized Agent of the Company." Defendant's Exhibit A at 1. The first page of the policy indicates that it was countersigned in Pennsylvania. Id. Since the insurance policy in the present case required a countersignature and because the policy was signed in Pennsylvania, the Court concludes that the place of the making of the contract was Pennsylvania. Therefore, the Court would ordinarily apply Pennsylvania law in an action concerning this policy.

B. The Renvoi doctrine

American seeks to avoid this result by arguing that the Court should apply the doctrine of "renvoi." Under that doctrine, a Maryland court would look to the law of the state whose law is applicable under lex loci contractus to determine if that state would refer back to Maryland law for deciding substantive issues. If the determination is made that the foreign state would refer to Maryland law, the Maryland court then applies Maryland law. Travelers Indemnity Co. v. Allied-Signal, Inc., 718 F.Supp. 1252, 1253-54 (D.Md.1989).

Were the Court to follow the doctrine of renvoi in the instant case, Maryland law would, most likely, be applied. Under renvoi, the Court would look to Pennsylvania law to determine what law a Pennsylvania court would apply had the action been filed there. Pennsylvania has adopted a combination of the "interest analysis" and the Restatement (Second) of Conflicts of Laws approach to resolve choice of law questions. Triangle Publications v. Liberty Mutual Ins. Co., 703 F.Supp. 367, 369 (E.D.Pa.1989). The "interest analysis", requires a court to determine which state has the most significant contacts with the controversy. Id. Under the Restatement (Second), the principle location of the risk is "given greater weight than any other single contact." Restatement (Second) of Conflicts of Laws § 193 comment b. As the risk that Eastern sought to shift, by way of insurance coverage, was located in Maryland, a Pennsylvania court would probably determine that Maryland law applies.

American contends that courts can routinely employ renvoi to pierce "false conflicts." The case law of both Maryland courts and this Court, however, dictates that renvoi is reserved for exceptional situations.

In Travelers Indemnity, this Court held that the renvoi doctrine may be applied "in cases involving issues of important public policy...." 718 F.Supp. at 1253-54. Travelers Indemnity involved the recoverability of costs incurred for pollution-related cleanup and pollution prevention measures under a liability insurance policy. This Court concluded that these issues involved "extremely important questions of insurance law and environmental policy" because they are "matters which directly impact upon Maryland's physical environment and which seriously affect the welfare of its citizens." Id. at 1254, 1255. Considering the strength of the public policy implicated in the resolution of those matters, this Court was able to distinguish the case then before it from the Fourth Circuit's statement of the general rule that, "Maryland does not apply the doctrine of renvoi." Id. at 1257 (quoting Bonstingl v. Maryland National Bank, N.A., 841 F.2d 1122 (4th Cir.1988), unpublished opinion affirming, 662 F.Supp. 882 (D.Md.1987)).

In an unreported decision, Connecticut Mutual Life Insurance Co. v. Gastman, Civ. Action No. HAR-89-1629, 1990 WL 199317 (D.Md. December 5, 1990), this Court considered, and rejected, the application of the doctrine of renvoi in the context of an insurance dispute. The plaintiff insurance company brought the action to rescind a life insurance policy for alleged misrepresentations made by the defendant in his application. The Court observed, "in general, Maryland does not apply the doctrine of renvoi. However, if the law of the other jurisdiction is contrary to a strongly voiced public policy in Maryland, Maryland courts will apply the doctrine." Id. at *14 (emphasis added, citations omitted). The Court, finding no strongly voiced public policy, concluded that the action "did not fall into the limited category in which Maryland courts will use renvoi." Id. (emphasis added).³

Eastern also cites Allstate Insurance Co. v. Hart, 327 Md. 526, 611 A.2d 100 (1992), as cautioning courts against departing from the doctrine of lex loci contractus. In Allstate, the Maryland Court of Appeals held:

There is a limited exception to the rule of lex loci contractus ... when a contractual provision is contrary to Maryland public policy. Nevertheless, for Maryland public policy to override the lex loci contractus rule, the public policy must be very strong and not merely a situation in which

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