Pen Coal Corp. v. William H. McGee and Co., Inc.

• Decision Date: 19 October 1995
• Docket Number: Civ. A. No. 3:95-0151.
• Citation: 903 F. Supp. 980
• Court: U.S. District Court — Southern District of West Virginia
• Parties: PEN COAL CORPORATION, a Tennessee corporation, Plaintiff, v. WILLIAM H. McGEE AND CO., INC., a New York corporation, and Phoenix Assurance Co. of New York, a New York corporation, Defendants.

903 F. Supp. 980

PEN COAL CORPORATION, a Tennessee corporation, Plaintiff, v. WILLIAM H. McGEE AND CO., INC., a New York corporation, and Phoenix Assurance Co. of New York, a New York corporation, Defendants.

Civ. A. No. 3:95-0151.

United States District Court, S.D. West Virginia, Huntington Division.

October 19, 1995.

COPYRIGHT MATERIAL OMITTED

Thomas A. Heywood, Benjamin L. Bailey, Charleston, WV, for Plaintiff.

Thomas W. Pettit, Stephen W. Graffam, Dennis A. Watson, Marty Young Brown, Huntington, WV, for Defendant.

MEMORANDUM OPINION AND ORDER

GOODWIN, District Judge.

Pending before the Court is the defendants' motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and to transfer this case to the United States District Court for the Middle District of Tennessee pursuant to 28 U.S.C. § 1404(a). For the reasons outlined below, the Court DENIES the defendants' motion to dismiss and the defendants' motion to transfer.

I. Background

The plaintiff Pen Coal Corporation (Pen Coal), with headquarters in Tennessee, operates two coal loading docks, one located in Wayne County, West Virginia, and the other located in Boyd County, Kentucky. Between August 1, 1993 and August 1, 1994, the defendant Phoenix Assurance Company of New York (Phoenix) insured both of these loading docks and a coal storage facility also located in West Virginia under a commercial industrial insurance policy. Although Phoenix insured these risks under one insurance policy, the declaration pages indicate that Phoenix valued the three risks separately. Among other things, the insurance policy provided that Phoenix would "pay for direct physical loss of or damage to covered property at the premises described...."

During late 1993 and early 1994, the West Virginia and Kentucky docks each sustained damage when the Big Sandy River flooded. Pen Coal incurred expenses exceeding $900,000 to repair the West Virginia dock and exceeding $100,000 to repair the Kentucky dock. Pen Coal filed claims with Phoenix to recover the expenses incurred in making these repairs. The defendant William H. McGee and Company, Inc. (McGee), whose relationship to Phoenix is unclear, denied both claims.

Pen Coal has filed this lawsuit against McGee and Phoenix. Pen Coal alleges that in denying insurance coverage for damage to the West Virginia and Kentucky docks, the defendants: (1) breached their insurance contract with Pen Coal; (2) breached the covenant of good faith and fair dealing implied in the insurance contract; and (3) engaged in bad faith and unfair trade practices in violation of § 33-11-3 of the West Virginia Code.

II. Choice of Law

Before addressing the substantive arguments in the defendants' motion to dismiss, the Court must determine what law to apply to these disputes. The defendants removed this case to federal court because there is diversity of citizenship and the amount in controversy for each claim exceeds $50,000. The Court therefore must apply the choice of law rules of West Virginia, the state in which this Court sits. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). The defendants argue that West Virginia courts would apply the law of Tennessee to these disputes because Tennessee is the place where the insurance contract was executed. The plaintiff, by contrast, argues that West Virginia courts would apply the law of West Virginia, the state in which the greatest damage occurred. The Court disagrees with both positions. For the reasons outlined below, the Court concludes that West Virginia courts would apply West Virginia law to the dispute involving the West Virginia dock and Kentucky law to the dispute involving the Kentucky dock.

In its Complaint, Pen Coal pleads this case as if it raises a single claim against the defendants. A review of the facts, however, reveals that Penn Coal raises two separate and distinct claims against the defendants — one arising out of damage to the West Virginia dock and one arising out of damage to the Kentucky dock. Just because the defendants insured the docks under one insurance policy, the docks are in close proximity to one another (approximately three miles apart), and the defendants denied both claims for the same reason does not make them one claim.

The first step in any choice-of-law analysis is to characterize the issues involved. The counts alleging breach of the insurance contract and breach of the implied covenant of good faith and fair dealing clearly implicate choice-of-law principles applicable to contracts because they raise insurance coverage, rather than liability, issues. Lee v. Saliga, 179 W.Va. 762, 373 S.E.2d 345, 349 (1988). The bad faith and West Virginia Unfair Trade Practices Act claim, on the other hand, can be characterized as part-contract and part-tort: part-contract because such claims do not arise in the absence of an insurance contract and part-tort because such claims can be brought by third parties and result in awards of tort-like damages.

For the purpose of choice-of-law analysis, however, bad faith and unfair trade practices claims properly should be characterized as contract, not tort, claims. See generally Nowsco Well Service, Ltd. v. Home Insurance Co., 799 F.Supp. 602 (S.D.W.Va.1991) (characterizing insurance bad faith allegation as contract question for choice-of-law analysis), aff'd, 974 F.2d 1331 (4th Cir.1992); Lee v. Saliga, supra (analyzing tort and contract law issues in insurance coverage dispute as contracts issue for purpose of conflict analysis). First, such claims do not arise in the absence of an insurance contract. Second, identifying the place of wrong in the bad faith and unfair trade practices context, which a court must do if it characterizes such claims as tort claims, can be extremely difficult. See syl. pt. 1, Paul v. National Life, 177 W.Va. 427, 352 S.E.2d 550 (1986) (adopting lex loci delicti for torts). After all, the place of wrong could be the place where the bad faith or unfair claims practices occurred, the location of the office of the insurance agent or adjustor, the place where the insured suffered the economic loss, or the location of the insured property. See Douglas G. Houser, Choice of Law for Bad Faith Insurance Claims, 30 Tort & Ins. L.J. 37, 40 (1994). Third, characterizing such claims as contract claims avoids the possibility that a contract characterization for a portion of a claim and a tort characterization for a portion of a claim would lead to application of two states' laws to the same claim.

Although the West Virginia Supreme Court of Appeals has never expressly adopted the Restatement (Second) of Conflict of Laws (Restatement (Second)) for determining what law to apply in contracts cases, the court has often relied on it when resolving conflicts questions. See, e.g., Nadler v. Liberty Mutual Fire Insurance Co., 188 W.Va. 329, 424 S.E.2d 256 (1992); Joy Technologies, Inc. v. Liberty Mutual Insurance Co., 187 W.Va. 742, 421 S.E.2d 493 (1992); Liberty Mutual Insurance Co. v. Triangle Industries Cos., 182 W.Va. 580, 390 S.E.2d 562 (1990); Lee v. Saliga, supra. Under the Restatement (Second), the law of the state with the most significant relationship to the dispute governs unless the parties' contract contains a choice-of-law provision. Restatement (Second) §§ 186-88 (1971 & Supp. 1989). States with a relationship to the dispute include the place of contracting (Tennessee), the place of negotiation of the contract (Tennessee, Kentucky, and possibly other states), the place of performance (Tennessee and/or West Virginia and Kentucky), the location of the subject matter of the contract (West Virginia and Kentucky), and the domicile, residence, nationality, place of incorporation, and place of business of the parties (Tennessee, New York, West Virginia, and Kentucky). Id. § 188.

There is a paucity of case law on the precise insurance coverage issue that is the subject of this litigation in each of the states with an interest in this dispute. Even so, it is evident that an apparent conflict exists among the interested states in their resolution of insurance coverage disputes, particularly in the area of bad faith and unfair trade practices, the subject of Count III of Pen Coal's Complaint. West Virginia, for example, permits insureds to recover punitive damages for willful, malicious, and intentional violations of its Unfair Trade Practices Act, see syl. pt. 3, Poling v. Motorists Mutual Insurance Co., 192 W.Va. 46, 450 S.E.2d 635 (1994), while Tennessee permits insureds to recover treble damages for willful and knowing violations of its Consumer Protection Act. Brungard v. Caprice Records, Inc., 608 S.W.2d 585, 591 (Tenn.Ct.App.1980). Based on its analysis of the laws of the interested states, the Court concludes that there is a conflict sufficient to justify an extensive choice-of-law analysis, even though the Court is uncertain at this early point in the litigation whether the choice-of-law issue will ultimately make a difference in the outcome of this litigation.

A. In Search of a Rule

Over the last several decades, many states have adopted methods of analysis, rather than rules, to resolve choice-of-law disputes. See Eugene F. Scoles & Peter Hay, Conflict of Laws 15-41 (2d ed.1992). Even though the West Virginia Supreme Court of Appeals, as discussed below, has not resisted this trend completely, the court always has preferred to resolve such disputes based on rules. Paul, 352 S.E.2d at 554. As Justice Neely explained in Paul: "The lesson of history is that methods of analysis ... produce protracted litigation and voluminous, inscrutable appellate opinions, while rules get cases settled quickly and cheaply." Id.

The drafters of the Restatement (Second) supplemented the sections outlined in the preceding section with §§ 188(3) and 189-221. The purpose of these sections is to provide courts with guidelines for...