Texas Federal Court Denies Insurer’s Motion to Dismiss Pending Choice-of-Law Determination

The United States District Court for the Northern District of Texas largely denied an insurer’s motion to dismiss breach of contract and statutory claims against it on the bases that (1) one of the insurer’s arguments for dismissal raised an issue of policy construction better suited in the court’s view for summary judgment, and (2) an open choice-of-law question was likely dispositive of the insurer’s other arguments for dismissal.  CAPLOC LLC v. Liberty Mut. Ins. Europe Ltd., 2021 WL 2551591 (N.D. Texas June 22, 2021).

The insured, a “warehouse” lender for mortgage lenders, purchased a Financial Institutions Third Party Catastrophe Blanket Bond Insurance Policy.  The policy contained a New York choice-of-law clause and included two time-limitation provisions: (1) a notice limitation requiring notice to the insurer no later than 60 days after discovery of loss, and (2) a suit-filing limitation requiring the insured to file any suit under the policy within 24 months from the discovery of loss. 

The insured suffered a loss of approximately $34 million as a result of a mortgage lender’s allegedly fraudulent conduct and filed suit against the mortgage lender in July 2017.  Nearly one year later, in June 2018, the insured noticed the loss to the insurer.  The insurer disclaimed coverage in March 2020 on late notice grounds.  The insured subsequently instituted coverage litigation, and the insurer moved to dismiss all claims, including those alleging breach of contract and various statutory claims under the Texas Insurance and Business and Commerce Codes.

First, the court denied the insurer’s motion to dismiss the breach of contract claim on substantive grounds, finding that the insurer’s argument (as to the inapplicability of one of the Insuring Agreements) “raises an interpretation issue unsuited for a motion to dismiss.”  Specifically, the court determined that “interpretation of the Insuring Agreements is better suited to summary judgment.”  Second, the court denied the insurer’s motion to dismiss the breach of contract claim on untimeliness grounds, concluding that whether Texas or New York law governs – an issue on which the court lacked the necessary evidence and briefing – is “likely dispositive of whether [the insured’s] claim for coverage is untimely under the Policy’s suit-filing limitation or notice limitation.”  According to the court, New York law would likely uphold the policy’s time limitations, while Texas law likely would not.