[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 03-11688 February 5, 2004
________________________ THOMAS K. KAHN
CLERK
D. C. Docket No. 99-01319-CV-S-N
COLONIAL LIFE & ACCIDENT
INSURANCE COMPANY, and
COLONIAL COMPANIES, INC.,
Plaintiffs-Appellants,
versus
HARTFORD FIRE INSURANCE
COMPANY, TWIN CITY FIRE
INSURANCE COMPANY, et al.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Middle District of Alabama
_________________________
(February 5, 2004)
Before ANDERSON, BLACK and HILL, Circuit Judges.
BLACK, Circuit Judge:
Colonial Life & Accident Insurance Company, and Colonial Companies,
Inc. (collectively Colonial) appeal the district court’s order partially dismissing
their lawsuit against Hartford Fire Insurance Company, Twin City Fire Insurance
Company, and Hartford Casualty Insurance Company (collectively Hartford). The
district court dismissed Colonial’s breach of enhanced duty of good faith claim
solely because South Carolina classifies the breach of good faith and fair dealing
as a tort, and held Alabama law controls the remedy in contract claims even
though South Carolina controls the substantive claims. We reverse.1
I. BACKGROUND
Colonial sued Hartford for breach of contract, breach of the enhanced duty
of good faith, negligence, and bad faith, in a cross-claim and third party complaint.
These claims arose out of a reservation of rights defense provided by Hartford and
Hartford’s failure to settle the Parker White lawsuit.2
1
Although the district court certified only the breach of the enhanced duty of good faith
conflict of laws question, “[w]hen a court of appeals has jurisdiction on interlocutory appeal
pursuant to 28 U.S.C. § 1292(b), the scope of appellate review is not limited to the precise
question certified by the district court because the district court’s order, not the certified question,
is brought before the court.” Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Comm.,
40 F.3d 1202, 1207 (11th Cir. 1994). We choose to address the remedy question even though it
was not specifically mentioned in the district court’s interlocutory order. We choose not to
address Colonial’s additional claims that the district court erred in restricting its bad faith claim
to a breach of the enhanced duty of good faith claim, and in holding, as a matter of law, there
could not be bad faith failure to settle.
2
The Parker White lawsuit was filed by an independent representative against Colonial
seeking damages for mental anguish, sickness, illness, physical harm, lost commissions, and lost
2
While this case was pending, the Alabama Supreme Court, in response to a
certified question in a related case, held that a claim of breach of the enhanced
duty of good faith sounds in contract. Twin City Fire Ins. Co. v. Colonial Life &
Accident Ins. Co., 839 So. 2d 614, 616 (Ala. 2002). Following briefs by the
parties, the district court conducted a hearing to discuss the impact of Twin City on
this case. Subsequently, the district court issued an order dismissing Colonial’s
claim for breach of the enhanced duty of good faith. The court held that under
Alabama choice of law provisions and the decision in Twin City, Colonial’s breach
of the enhanced duty of good faith claim sounds in contract and is governed by
South Carolina contract law. Because South Carolina recognizes the breach of the
duty of good faith and fair dealing as a tort claim, rather than a contract claim, the
district court dismissed Colonial’s claim for breach of the enhanced duty of good
faith. The district court also found that, while Colonial’s contract claims are
governed by South Carolina substantive law, in the event contract liability exists,
the remedy is governed by Alabama law. The district court’s interlocutory order
certified the following holding for immediate appeal:
In sum, this is what the court concludes. Alabama law mandates that
Colonial’s “enhanced duty” claims be construed as contract claims.
Because they are contract claims, South Carolina law governs. When
benefits.
3
the court looks to South Carolina contract law, these claims do not
exist as contract claims. Under South Carolina law, the claims are
construed as tort claims. If the court were then to apply Alabama law
to these tort claims, this avails Colonial nothing because under
Alabama law, no such tort claims exist. See Twin City, supra.
Therefore, putting aside terminological problems, counts two and four
of the cross-claim and third party complaint [breach of the enhanced
duty of good faith and bad faith] must be dismissed because they do
not exist as contract claims in South Carolina or as tort claims in
Alabama.
II. DISMISSAL OF THE BREACH OF THE ENHANCED DUTY OF GOOD
FAITH CLAIM
A. Alabama Choice of Law
“A federal court in a diversity case is required to apply the laws, including
principles of conflict of laws, of the state in which the federal court sits.” O’Neal
v. Kennamer, 958 F.2d 1044, 1046 (11th Cir. 1992). This case was brought in the
Middle District of Alabama, and the district court did not err in applying Alabama
choice of law rules.
B. Application of South Carolina Substantive Law
Alabama applies the traditional doctrines of lex loci contractus to contract
claims and lex loci delicti to tort claims. The doctrine of lex loci contractus
governs the validity, interpretation, and construction of the contract. Cherry,
Bekaert & Holland v. Brown, 582 So. 2d 502, 506 (Ala. 1991). The doctrine states
that “a contract is governed by the laws of the state where it is made except where
4
the parties have legally contracted with reference to the laws of another
jurisdiction.” Id. The doctrine of lex loci delicti, on the other hand, requires the
court to “determine the substantive rights of an injured party according to the law
of the state where the injury occurred.” Fitts v. Minnesota Mining & Mfg. Co.,
581 So. 2d 819, 820 (Ala. 1991).
The breach of the enhanced duty of good faith sounds in contract. Twin
City, 839 So. 2d at 616. The doctrine of lex loci contractus, therefore, applies to
Colonial’s breach of the enhanced duty of good faith claim. The parties agree the
insurance contracts at issue were made in South Carolina, and thus, South
Carolina law applies to any contract claims. The district court did not err in
finding Colonial’s breach of the enhanced duty of good faith claim should be
decided under South Carolina law.
C. Breach of the Enhanced Duty of Good Faith
In Alabama, insurers have an enhanced duty of good faith to defend their
insured under a reservation of rights. L & S Roofing Supply Co. v. St. Paul Fire &
Marine Ins. Co., 521 So. 2d 1298, 1303–04 (Ala. 1987). South Carolina does not
have a cause of action identical to Alabama’s breach of the enhanced duty of good
faith under L & S Roofing, but has a similar cause of action for breach of the duty
of good faith and fair dealing. See Trimper v. Nationwide Ins. Co., 540 F. Supp.
5
1188, 1193 n.2 (D.S.C. 1982) (explaining that insurers have an enhanced duty to
act in good faith and that South Carolina courts have imposed a duty of good faith
and fair dealing). A breach of the duty of good faith and fair dealing is a tort in
South Carolina.3 Tadlock Painting Co. v. Maryland Cas. Co., 473 S.E.2d 52,
54–55 (S.C. 1996).
The district court dismissed the breach of enhanced duty claim because
South Carolina characterizes a breach of the duty of good faith and fair dealing as
a tort claim rather than a contract claim. We have never addressed whether a
claim should be dismissed because another state characterizes the claim
differently. In a related case, Twin City Fire Ins. Co. v. Colonial Life & Accident
Ins. Co., Civ. A. No. 99-D-935-N (M.D. Ala. Aug. 16, 2002), however, District
Judge Ira De Ment faced the same issue and reached a different conclusion than
the district court in this case. As in the matter sub judice, Hartford argued that
Colonial had no cause of action because the claim is classified as a contract in
Alabama and a tort in South Carolina. In rejecting this argument, Judge De Ment
held:
3
The breach of the duty of good faith and fair dealing and bad faith are not separate
causes of action in South Carolina. Ocean Winds Council of Co-Owners, Inc. v. Auto-Owners
Ins. Co., 241 F. Supp. 2d 572, 577 (D.S.C. 2002).
6
Twin City draws attention to the fact that South Carolina treats the
claim as tortious rather than contractual. . . . [T]he court notes that
Twin City has not offered any persuasive reason why this fact should
matter. Conflicts rules frequently dictate the application of laws that
are different–both in form and substance–from the laws of the forum
state. These differences lend significance to conflicts analyses, but
they do not permit Twin City’s logical contortions. There is no Catch
22 for one simple reason: the court’s application of Alabama’s choice
of law rules entails that it is concerned solely with Alabama’s
characterization of the claim. Whether South Carolina bases an
analogous cause of action in tort, contract, or statutory law is
irrelevant. Alabama recognizes the duty as arising in contract, thus
requiring reference to South Carolina law to determine the scope of
that duty.
There is persuasive authority supporting this conclusion. In Waddoups v.
Amalgamated Sugar Co., 54 P.3d 1054, 1059–61 (Utah 2002), the Supreme Court
of Utah noted that under Idaho law, wrongful termination in violation of public
policy is a contract-based cause of action, and under Utah law, the same cause of
action is tort-based. The court employed Utah choice of law analysis to find Idaho
law applicable to the wrongful termination claim, and then dismissed the action
because the wrongful termination claim pled under Utah law did not state a claim
under Idaho law. The court did not dismiss the action because the cause of action
was characterized differently in the two states, but because plaintiffs pled the
wrongful termination claim under Utah law. Id; see also Backar v. Western States
Producing Co., 382 F. Supp. 1170, 1174–75 (W.D. Tex. 1974) (holding that the
7
law of the controlling state, New York, would determine whether an interest in oil
leases was classified realty or personal, regardless of the fact the forum state,
Texas, classified the interest differently).
Additionally, the Restatement (Second) of Conflict of Laws leads us to
Judge De Ment’s conclusion. It provides that choice of law rules “do not
themselves determine the rights and liabilities of the parties, but rather guide
decision as to which local law rule will be applied to determine these rights and
duties.” Restatement (Second) of Conflict of Laws § 2 cmt. a(3) (1971). The
Restatement further provides “[t]he classification and interpretation of local law
concepts and terms are determined in accordance with the law that governs the
issue involved.” Restatement (Second) of Conflict of Laws § 7(3) (1971).
We agree with Judge De Ment’s holding that whether South Carolina
classifies the breach of the duty of good faith as a tort is irrelevant.4 Colonial may
or may not have pled sufficient facts for a South Carolina breach of the duty of
4
The district court cited In re Korean Air Lines Disaster of Sept. 1, 1983, 117 F.3d 1477
(D.C. Cir. 1997), for the proposition that even in heart wrenching circumstances, there is nothing
unusual about a choice of law provision precluding claims in one forum that are available in
another forum. That case, however, dealt with a case where the cause of action was available in
one forum and not in the other. Hartford cites Thompson v. Acceptance Insurance Co., 689 So.
2d 89 (Ala. Civ. App. 1996), but similarly, that case deals with a cause of action not recognized
in the other jurisdiction. In this case, the cause of action, though named differently, is available in
South Carolina, but as a tort claim rather than a contract claim.
8
good faith claim in its complaint and the pretrial order.5 The district court erred,
however, in dismissing the claim solely because South Carolina classifies the
breach of good faith and fair dealing as a tort.
III. REMEDY
The district court also held that, while South Carolina law will govern any
claims arising under contract law, Alabama law will govern the remedy in the
event liability exists. The district court cited two older decisions of the Alabama
Supreme Court, Jones v. Jones, 18 Ala. 248, 250 (Ala. 1850) and Macey v. Crum,
30 So. 2d 666, 669 (Ala. 1947), to support this conclusion.6
More recently, however, the Alabama Supreme Court has held the law of
the state governing the substantive law must be applied when considering the
damages resulting from a breach of contract. Shelter Mut. Ins. Co. v. Barton, 822
So. 2d 1149, 1158 (Ala. 2001). The court held, “[b]ecause we have held that the
5
If the district court finds that Colonial pled sufficient facts for a breach of the duty of
good faith claim, Hartford’s conduct should be measured by South Carolina’s “simple” duty of
good faith and not Alabama’s “enhanced” duty.
6
Jones states:
It is a principle of law, admitted by all courts, that the lex loci
contractus must govern as to the validity, interpretation, and
construction of the contract. But the remedy to enforce it, or to
recover damages for its breach, must be pursued according to the
law of the forum where the suit is brought.
18 Ala. at 250. Macey provides “[t]he lex loci controls the validity and construction of the
contract but the lex fori operates on the remedy to enforce it.” 30 So. 2d at 669.
9
Shelter policy must be construed in accordance with Missouri law, we likewise
hold that Missouri law must be applied when considering the damages that
resulted from a breach of that contract.” Id. We hold, pursuant to Shelter Mutual,
that any remedy for a claim sounding in contract should also be decided under
South Carolina law.
IV. CONCLUSION
We reverse and remand for the district court to determine whether Colonial
pled a South Carolina breach of the duty of good faith and fair dealing claim. We
also reverse the district court’s holding that Alabama law will control the remedy
in any contract claims.
REVERSED AND REMANDED.
10