It's no secret that California permits policyholders to assert either contract or tort remedies for an insurer's breach of the implied covenant of good faith and fair dealing.  The difference between the two remedies, available at the policyholder's election, is significant; "[i]f the insured elects to proceed in tort, recovery is possible for not only all unpaid policy benefits and other contract damages, but also extra-contractual damages such as those for emotional distress, punitive damages and attorney fees."[2]  The ability to seek punitive damages, in addition to other potential tort recovery, makes California an attractive forum for policyholders seeking to maximum damages for an insurer's unreasonable or unjustified denial of policy benefits.[3]

New York, on the other hand, does not permit tort recovery for bad faith, thereby also precluding an insured from recovering punitive damages.[4]  Because California potentially allows a broad spectrum of damages for an insurer's bad faith and New York allows much less, it is not surprising that many policyholders elect to pursue their bad faith actions in California while many insurers seek to confine any action on the policy to New York by including a choice-of-law provision in their policy.  But are such provisions enforceable with respect to claims for breach of the implied covenant of good faith and fair dealing asserted under California law?

Recently, a federal district court in California held a choice-of-law provision in an insurance policy was not enforceable with respect to a policyholder's claim for breach of the implied covenant of good faith and fair dealing.  See Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co., 2015 U.S. Dist. Lexis 23441 (Feb. 5, 2015).  Although federal decisions are not binding on California courts with respect to issues of state law,[5] Tri-Union raises the issue of whether California will enforce a valid choice-of-law provision where doing so would deprive a policyholder of potential tort and punitive damages for the insurer's bad faith.  In other words, do California policyholders have a public policy right to recover tort and punitive damages against an insurer for its bad faith?  The Tri-Union court answered this question in the affirmative, but would a California court do the same?