CGL ? Do You Know What Law Governs Your Policy?
CGL policies do not contain a governing law clause.
Therefore, the proper law of the insurance contract is determined
according to common law rules that apply to contracts generally.
The Supreme Court of Canada set out the test to be employed to determine
the proper law of a contract in Imperial Life Assurance Co. v.
Colmenares  S.C.R. 443. The objective is to determine
a law with which the policy appears to have the "closest and
most substantial connection". Courts have considered a number
of factors including the domicile and residence of the parties,
where the policy was issued, the place where the policy is to be
performed as well as any other fact which serves to localize the
It is probably the case that underwriters do not consider
the proper law of the contract at the time the policy is negotiated
and issued. If questioned, the insurer probably believes that the
proper law of the contract is the law where the policy was issued,
particularly if there was a local broker involved and if the named
insured is a Canadian corporation. That might well be the reasonable
expectation of the insured if asked.
Take for example the situation where there is no claim
for coverage under the policy (i.e. no loss) but a question arises
about the interpretation of a policy exclusion. This would occur,
for example, where the insured is a conglomerate of a number of
companies in various locations throughout the world and is purchasing
a several policies. The parties want policy interpretation as part
of underwriting coverage. Applying the rules, a Court would almost
certainly determine that the proper law of the contract was the
law where the policy was negotiated and issued and would interpret
the policy according to that law. In this example, the exclusion
might be given a broad scope favouring the insurer.
This approach is consistent with the fundamental conflict
of law principle that there be one proper law of the contract. It
is a fundamental principle that there be certainty. Parties to a
contract need to be able to understand their bargain and enforce
the agreement. When parties negotiate the contract, they have the
option of inserting a governing law clause so that there can be
no dispute about which law is used to interpret the contract. Or,
the parties can leave it up to the Court to determine the proper
law of the contract using the rules to do so and to then apply that
Now, consider the situation described above except
add the following facts. The named insured is a parent company and
there is a list of additional insureds, which include one or more
subsidiaries that are American corporations and carry on business
in the United States. A loss is sustained by one of these American
subsidiaries and a claim is made for coverage under the policy.
The insurer denies coverage on the basis of the policy exclusion
which, according to the law where the policy was issued, would be
interpreted in favour of the insurer as described above.
The insured, on the other hand, asks the Court of
the State where the loss occurred to interpret the exclusion. The
law where the loss occurred, if applied, would be more favourable
to the insured. The Courts where the loss occurred have established
a long line of precedent cases by which they will take jurisdiction
because there are enough connections to do so (mostly the fact the
loss occurred there). They then apply the local law.
The insurer ends up covering a loss that, according
to the law it thought applied to interpret its policy, would have
been excluded. No premium was likely charged for this.
The above scenario, when applied to a pollution loss
for example, can be extremely costly. There is a minority view,
prevalent in a number of states, which interpret pollution exclusions
very narrowly. Unless an insurer can show that the insured intended
the damage that occurred, the traditional (i.e. not the absolute)
pollution exclusion clauses do not apply and insurers pay for the
clean up of these losses. In many cases, these losses have been
ongoing over many years with a resultant contaminated site that
is very expensive to clean up.
Perhaps surprisingly, we have found only two cases
that have any discussion by our Courts about the choice of law in
an insurance policy setting, other than the Colmenares case set
out above. It should be kept in mind that in Colmenares, the Court
was dealing with a life insurance policy and since the location
of the event that triggers coverage is irrelevant, other factors
were more important. Colmenares is likely distinguishable from a
CGL policy situation.
In one case the Court considered the proper law for
an "all risks" policy. That too arguably makes this decision
distinguishable from a case involving a liability policy as there
are a host of different factors relevant to property coverage not
relevant to liability coverage.
In the only Canadian Court decision we have found
that determined the proper law of a contract in order to interpret
a liability policy, the Court found the most important factor was
where claims might be expected to arise for which coverage might
be afforded by the policy.
Should that be the case, and that interpretation is
supported by the Restatement (a codification of U.S. law), there
is no single proper law of the contract used to interpret a liability
policy. A liability policy would appear to be unique in that the
Courts, in our view, are likely to interpret its terms, conditions
and exclusions according to the law where the loss occurs. At the
time the policy is underwritten, no one knows where a loss will
occur. Indeed, underwriters cannot be expected to know the laws
that could be used to interpret the policy in all the various locations
where a loss might arise. It is submitted that while an insurer
may think it knows what it is selling and charging for, and the
insured thinks it knows what it is buying and paying for, in fact
neither party likely knows what law will apply to govern any particular
claim that may arise under the policy. Either or both could be in
for a big surprise.
The answer is, of course, to include a governing law
clause in liability policies. Such have been routinely accepted
by the Courts. It prevents an insured from arguing that the policy
is ambiguous about the proper law of the policy and invoking the
doctrine of contra proferentum to interpret an exclusion, for example,
against the insurer. One can only assume that market driven pressures
have prevented this since liability policies do not contain governing
James G. Norton
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