Clarendon National Insurance v. Arbella Mutual Insurance

Citations: 60 Mass. App. Ct. 492; 803 N.E.2d 750; 2004 Mass. App. LEXIS 211Docket: No. 02-P-230

Court: Massachusetts Appeals Court; February 24, 2004; Massachusetts; State Appellate Court

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Arbella Mutual Insurance Company (Arbella) appeals a summary judgment favoring Clarendon National Insurance Company (Clarendon), which declared Arbella the primary insurer for claims stemming from an October 16, 1998 automobile accident. The appeal centers on whether Massachusetts or Rhode Island law applies to interpret two insurance clauses. 

Bernice Michel, a Massachusetts resident and driver, owned a car insured by Arbella under a Massachusetts policy with significant bodily injury coverage. On the accident date, she borrowed a loaner car from Anchor Subaru in Rhode Island, which was insured by Clarendon under a garage policy. While driving the loaner, Michel was involved in a four-car accident in Massachusetts, leading to a lawsuit from another driver, James Castleberry. The lawsuit was settled for $55,000, with Arbella paying $50,000 and Clarendon $5,000. 

Clarendon sought a declaration that Arbella was the primary insurer responsible for any claims from the accident and that it had no duty to defend or indemnify Michel. Arbella counterclaimed for a ruling that Clarendon shared the duty to defend Michel and should contribute to any costs related to the accident. 

The core issue is whether to apply Massachusetts or Rhode Island law regarding the interaction of Arbella's excess insurance clause—which requires the owner's auto insurance to pay before Arbella covers any claims—and Clarendon's super-escape clause—which states that a customer driving a loaner car is not an insured unless no other insurance is available. The outcome hinges on this choice of law, as applying Rhode Island law would require both insurers to share the liability on a pro rata basis, as established in Brown v. Travelers Ins. Co.

The court determined that the super-escape and excess clauses in insurance policies nullify each other, leading to a total forfeiture of coverage, which is unacceptable. The Rhode Island Supreme Court adopted a pro rata liability rule to prevent coverage forfeiture and mitigate disputes between insurers' drafters. Should Massachusetts law apply, Arbella would be fully liable for the incident on October 16, 1998, as established in United States Fid. Guar. Co. v. Hanover Ins. Co., where the court ruled that a super-escape clause activates excess coverage, assigning liability to the insurer with the excess clause. The court recognized the appropriateness of super-escape clauses in car dealership contexts, allowing for reasonable limits on customer coverage based on operational realities. Acknowledging jurisdictional differences in handling conflicts between super-escape and excess clauses, the motion judge correctly applied Massachusetts conflict-of-laws rules, which follow a functional choice-of-law approach guided by the Restatement (Second) of Conflict of Laws (1971). Relevant sections include section 193, concerning insurance contracts, section 188, regarding contract disputes, and section 6, outlining general choice-of-law principles. The analysis emphasizes identifying the principal location of the insured risk, typically where the vehicle is garaged. In this case, both Anchor Subaru and Clarendon recognized that the loaner car would primarily be located in Rhode Island.

Multiple insurance policies are relevant, particularly the Arbella policy alongside Clarendon's. The insured risk, primarily associated with Michel's car, is located principally in Massachusetts, complicating the interpretation of the policies. Comment d to section 193 states that the local law of a "principal location" does not apply if the contract is invalid in that state but valid in another state with a close relationship to the transaction. Clarendon's Rhode Island policy features a super-escape clause that is unenforceable under Rhode Island law but enforceable under Massachusetts law. Since the risk cannot be confined to one state and the Clarendon policy has provisions invalid in Rhode Island but valid in Massachusetts, the determination of applicable state law requires assessing which state has the most significant relationship to the issue using factors from section 188 and section 6.

Section 188 indicates that the rights and duties related to a contract are governed by the law of the state with the most significant relationship to the transaction and parties. Key considerations include protecting justified expectations of the parties and the objectives of each state's contract rules. Arbella's justified expectations suggest it would anticipate liability if an insured driver caused an accident while using a loaner car covered by another Massachusetts insurer. Clarendon's expectations are less clear, as it might expect its super-escape provision to prevail, but this expectation is not justified against a Rhode Island policy with an excess clause, which is nullified by law in Rhode Island.

Applying Massachusetts law better protects the justified expectations of the parties. Additionally, the purpose of Massachusetts contract rules aims to honor the language of both insurance agreements, while Rhode Island's rules seek to prevent a lack of insurance coverage. Despite their differences, both states' purposes would be furthered by applying Massachusetts law, which would uphold the terms of both contracts and ensure insurance coverage.

Applying Rhode Island law would serve the purpose of ensuring more comprehensive insurance coverage by enforcing pro rata apportionment of liability among insurers based on their respective policy limits. In contrast, Massachusetts law, as established in Brown v. Travelers Insurance Co., favors the application of excess clauses, which limit the coverage to that provided by the policy containing such clauses, thereby reducing the total available insurance. Although Arbella argued for Rhode Island law on the basis of public policy, the court noted that Massachusetts law allows for super-escape clauses without contradicting public policy, as long as the policies comply with the minimum requirements of the state's motor vehicle financial responsibility law. The court emphasized that the overarching goal of protecting the traveling public and victims of accidents remains intact under Massachusetts law. Furthermore, the court determined that the considerations raised by Arbella regarding the implications of insurance policies were outside its jurisdiction, as those matters are within the purview of the Commissioner of Insurance. Ultimately, the judge's ruling to apply Massachusetts law to the case was affirmed, as it provided a clearer framework for determining the rights and obligations of the parties involved. The excerpt also references the Restatement of Conflict of Laws, outlining factors relevant to the choice of law, highlighting the importance of certainty and predictability in legal outcomes. The court distinguished between garage policies and rental car agency policies concerning public policy implications related to escape clauses, concluding that while escape clauses are permissible in garage policies, they should not apply to rental car agencies.