The Mystery of the Missing Choice-of-Law Clause

John F. Coyle - University of North Carolina School of Law
Vol. 56
December 2022
Page 707

There is widespread agreement among experienced contract drafters that every commercial contract should contain a choice-of-law clause. Among their many virtues, choice-of-law clauses facilitate settlement and reduce litigation costs. While most modern contracts contain these provisions, some do not. In many instances, the absence of these clauses may be attributed to outdated forms, careless drafting, inattentive lawyers, or some combination of the three. In a few instances, however, it appears that sophisticated contract drafters purposely omit choice-of-law clauses from their agreements. If these clauses add value to a contract — and there is near-universal agreement that they do — then this decision raises a perplexing question. Why would any experienced contract drafter ever consciously choose not to write a choice-of-law clause into an agreement?

This Article seeks to answer this question with respect to one type of agreement where choice-of-law clauses are routinely omitted — insurance contracts. All the available evidence suggests that many insurance contracts lack choice-of-law clauses. This is surprising because insurance companies are the epitome of the sophisticated contract drafter. To unravel the mystery of why so many insurance contracts do not contain choice-of-law clauses, the Article draws upon more than thirty interviews and email exchanges with industry experts. It argues that the absence of these provisions is attributable to a complex amalgam of legislative and regulatory hostility, judicial skepticism, standard forms, and strategic maneuvering on the part of insurers. The Article argues further that manuscript policies — which are negotiated between insurers and policyholders — sometimes lack choice-of-law clauses due to a perceived first-mover disadvantage and the absence of any body of truly neutral insurance law within the United States.

Solving the mystery of the missing choice-of-law clause in insurance contracts unlocks three important insights for contracts scholars. First, it sheds useful light on how regulatory intervention can influence the contract production process. Second, it calls into question whether insurance companies are, in fact, sophisticated contract drafters whose agreements invariably further their own interests. Third, it has the potential to change the way that contracts scholars think about the “stickiness” of absent contract terms.
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