New York, New York: These Vagabond Shoes Are Longing to Sue…

Policyholders hope and expect that their insurance companies will work with them to resolve claims promptly and fairly. We are constantly being told that our insurers, like good neighbors, will be there, and that the insurer’s umbrella will protect us. Sometimes, however, the good neighbor will not welcome us, and the umbrella may spring a leak. These situations sometimes lead to litigation, and then the fight becomes where to file suit.

Problems often arise when the claim is large enough, or involves a type of claim, that the insurance company will not want to pay. Even when the insurance company will not pay the claim after a lengthy period of negotiation, many policyholders still prefer not to initiate a lawsuit, especially since they cannot believe that their trusted insurer will not eventually cover the loss. Insurance companies, however, are not always as reluctant to bring suit, especially when it will further their aims. Moreover, when they choose to commence an action, insurance companies typically bring suit in a state that tends to favor insurance companies in litigation, even if that state only has a minimal connection to the dispute.

The choice of forum may determine the outcome of the action. Although insurance policies are written on standard forms, with a goal of having the policies interpreted uniformly, every state has different law on some important insurance coverage issue. Insurance companies are acutely aware of which states tend to favor insurance companies when they resolve insurance coverage claims. When an insurance company is in a dispute with its policyholder that cannot be resolved privately, it often will race to a court in a state that favors insurance companies.

A favorite state for insurance companies long has been New York. There are numerous crucial issues of law involving insurance coverage where courts nationally have split. Many states have “mixed” law, favoring insurance companies sometimes, and policyholders other times. New York law is remarkably consistent. Insurers have the upper hand. As a result, in large coverage disputes, or those involving unsettled areas of the law, insurers often will rush to file suit in New York, even while the policyholder still holds out hope that further negotiations will resolve the claim. After it files suit in New York, the insurance company may continue to negotiate resolution of the claim, but now it will impose a substantial “New York” discount to the value of the claim.

When an insurance company sues the policyholder in New York, and the case only has a tenuous relationship to New York, the policyholder can file a second action in a state with a closer link to the dispute, and then make a motion in the first action to try to get it dismissed to allow the litigation to proceed in the more convenient forum where the second action is pending. This motion argues that the first action should be dismissed for “forum non conveniens.”

Many courts will not dismiss the first action simply on the grounds that, because it was filed first, it must be allowed to proceed where it was brought under the “first filed” rule. Courts that will dismiss the first action do so for one of three reasons: because the second action is in a forum that has a much closer tie to the action, and is where the witnesses and evidence are located; because the plaintiff chose the first forum solely because it was forum shopping to be in a venue where the law was favorable, but which has no substantial nexus to the dispute; or because the insurance company brought the first action solely in anticipation that the policyholder was about to file its own coverage action.  

At the outset of negotiations with the insurance company, a policyholder can protect itself from being “jumped” by the insurance company in an unfavorable forum by entering into a standstill agreement with the insurer. The standstill agreement prevents either party from bringing suit while the agreement is in effect, and tolls the statute of limitations during this time. The agreement should be drafted so that the policyholder has a chance to bring suit in the forum of its choosing once the agreement is terminated. On the date that the termination of the agreement becomes effective, the policyholder must be ready to file suit. It will have a lengthy period of time before it must serve the insurance company with the complaint (120 days in federal court), and it can continue to negotiate during this period, knowing that it will have secured its chance to proceed in a favorable forum to resolve the dispute if negotiations fail.