Full Text of Motion

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH DAKOTA

SOUTHERN DIVISION

Josh Brower, DDS,

Plaintiff

— versus —

Great-West Life & Annuity Insurance Company, now known as Empower Annuity Insurance Company of America,

Protective Life Insurance Company.

Protective Life and Annuity Insurance Company

Protective Life Corporation,

John/Jane Doe 1-10,

Defendants

Civil Action: 4:25-cv-04040-RAL

Hon. Roberto A. Lange

Jury Trial Demanded

PLAINTIFF’S MOTION TO DETERMINE THAT SOUTH DAKOTA LAW GOVERNS PLAINTIFF’S CLAIM FOR INSURANCE BAD FAITH

TABLE OF CONTENTS

INTRODUCTION 4

ARGUMENT 7

1. Under ordinary choice-of-law principles, South Dakota law applies to Plaintiff’s tort claim for insurance bad faith. 7

2. The policy’s choice-of-law clause does not make clear that the parties (including a 28-year old dentist) intended Illinois law to apply to tort claims — so it does not apply to tort claims. 8

2.1. The clause does not apply to tort claims unless the language would make it clear to an ordinary person that Illinois law applies to tort claims. 8

2.2. The language of the clause does not make it clear to an ordinary person that Illinois law applies to tort claims. 9

The language is not clear even to a lawyer, much less to a dentist. 9

The language does not make clear to an ordinary dentist that Illinois law governs tort claims based on improper handling. 10

3. The choice-of-law clause is unenforceable as to tort claims because it would nullify South Dakota law regulating insurance practices on a range of matters. 12

3.1. Choice-of-law clauses are unenforceable when they violate South Dakota substantive law. 12

3.2. South Dakota’s provision for full tort remedies for insurance bad faith constitutes “fundamental” public policy. It would be nullified by a broad reading of the choice-of-law clause. 13

Most courts that have considered the question have ruled choice-of-law clauses void as to insurance bad faith claims. 14

Insurance and its regulation are critical to any State. 16

South Dakota public policy provides full tort remedies, including punitive damages, for insurance bad faith. 17

Illinois policy differs fundamentally from South Dakota’s. 18

South Dakota’s choice of a tort regime is a “fundamental” policy 19

South Dakota Supreme Court Decisions 19

Tolerance vs. Intolerance for the Wrong 21

Prioritizing the Integrity of Insurance 21

Market Efficiency 23

Market Expansion 24

Protecting In-State Insurers against Predatory Pricing 24

Beyond the issue in this case, validating the choice-of-law clause as to matters other than policy interpretation would nullify other South Dakota laws on a range of matters. 25

CONCLUSION 27

INTRODUCTION

This is an insurance bad faith case involving a disability insurance policy. The insurance policy contains a choice-of-law provision that selects Illinois law. This motion addresses the question whether the policy’s choice-of-law provision nullifies South Dakota law — replacing it with Illinois law — as to matters other than interpretation of the policy. Plaintiff says that at most, the choice-of-law clause applies only to policy interpretation. The Defense says Illinois law applies to all issues in the case.

This choice-of-law question has significance far beyond this case. If the clause can be applied broadly, then it is likely any non-South Dakota insurance company writing policies in this State can sidestep South Dakota law on any issue relevant to any potential dispute with any insured. That would endanger both South Dakota residents and South Dakota insurance companies. South Dakota residents would be at greater risk of getting cheated by out-of-state insurers. South Dakota insurance companies would be at risk of getting underpriced by out-of-state insurers selling watered-down policies that look like the real thing.

South Dakota law generally recognizes that parties may agree to be bound by the law of a particular state. First, though, for a choice-of-law clause to apply to tort claims as well as contract claims, it must be clear that the parties intended that. One of the parties here was a 28-year-old dentist. The policy was not a bilateral contract negotiated by equally sophisticated parties with their own legal teams. The policy was an adhesion contract: It was offered to a young dentist on a take-it-or-leave-it basis. From the language of the choice-of-law clause, it cannot reasonably be said that this dentist (or any other ordinary person) would clearly understand that the choice-of-law clause would apply to tort claims based on improper claim-handling. So the clause does not apply to that.

Second, even if such an intention was clear, South Dakota law will not give effect to a choice-of-law clause if doing so would be contrary to the public policy of South Dakota. The insurance company here sold an insurance policy in South Dakota, under authority of South Dakota law, to a South Dakota resident. But if the choice-of-law clause is enforceable as to matters beyond construction of the policy, it would displace South Dakota law on any issue relevant to any potential dispute between any insured and the insurance company. South Dakota law does not permit nullifying substantive South Dakota insurance law by contractual agreement.

While the South Dakota Supreme Court does not rush to invalidate contracts for violating public policy, the Court is not loathe to do so either. Not long ago, the court invalidated a bilateral contract that assigned the proceeds of a lawsuit, based on the ancient common law doctrine of champerty. See A. Unruh v. De Smet, 2010 SD 36. More directly relevant here, the Court has invalidated insurance policy provisions that violate South Dakota public policy as to insurance. E.g., Earll v. Farmers Mutual, 2025 SD 20.

Several courts have addressed the validity of choice-of-law clauses that would avoid liability for insurance bad faith under law similar to South Dakota’s. The weight of opinion is that such clauses are void. Recently, a federal court in California addressed the choice of law clause at issue in this case. The court deemed the clause void:

[S]uch an application would be contrary to a fundamental policy of California insofar as it prevents Dr. Gomez from pursuing broader tort remedies for insurance bad faith…. Accordingly, the Court declines to enforce the Illinois choice-of-law provision and instead applies California law to the dispute.

Gomez v. Great-West, 638 F. Supp. 3d 1156 (SD Cal 2022).

The decision in Gomez and other cases is well-founded. The regulation of insurance is a central public concern in any State — at least as important as preventing the scourge of champerty. Reliable insurance plays a critical role in the economic life of a state. Insurance of various kinds is important to the physical health and safety as well as the financial security of the State’s residents. Thus, South Dakota has adopted an extensive legal and regulatory system to govern the conduct of insurance companies. An entire title of the statutory code is devoted to insurance. The State has created the Division of Insurance as a regulatory body devoted to policing insurance companies in the state, along with an extensive set of administrative regulations. And South Dakota’s Supreme Court has elaborated the common law pertaining to insurance over decades.

Insurance is only useful to the extent it’s honest. To the extent insurers can cheat on claims and get away with it, insurance cannot serve its public purpose. So the existence or non-existence of remedies to obtain full compensation for insurance bad faith and to punish the wrongdoer and deter other companies from acting in bad faith — the existence or non-existence of those remedies is fundamental to a State’s regulation of insurance. In South Dakota law, those remedies exist. In Illinois law, they do not.

On an issue as important as the regulation of insurance, a choice-of-law provision in an adhesion contract offered to the general public cannot override South Dakota’s public policy in favor of Illinois policy. Even if the choice-of-law clause would otherwise apply to Brower’s tort claim, the clause is void to that extent because it violates important South Dakota public policies.

———

Finally, we think the Court need not reach the question of whether the choice-of-law clause is void as against public policy, beyond matters of policy interpretation. We think the clause is not written to clearly apply to anything beyond policy interpretation. But if the Court does reach that question, we ask the Court to certify it to the South Dakota Supreme Court. The issue has potential to affect the substantive rights of many thousands of South Dakota residents, but the South Dakota Supreme Court has not addressed it.

ARGUMENT

Under ordinary choice-of-law principles, South Dakota law applies to the tort claim in this case, because South Dakota is the state with the most important contacts with the case. The policy’s choice-of-law clause selecting Illinois law does not change that. The clause is not written so that an ordinary person would clearly understand that Illinois would apply to a tort claim based on improper claim handling. And even if the clause were written clearly, South Dakota law would not enforce it as to tort claims, because the clause would nullify South Dakota law on a range of issues and replace it with materially different law.

1. Under ordinary choice-of-law principles, South Dakota law applies to Plaintiff’s tort claim for insurance bad faith.

“District courts sitting in diversity apply the choice-of-law rules of the state where they sit.” Winter v. Novartis, 739 F.3d 405 (8th Cir. 2014). “It is well-settled that South Dakota employs the most significant relationship test when determining choice of law questions.” Burhenn v. Dennis Supply, 2004 SD 91. South Dakota has the most significant relationship to the events of this case.

The policy was issued in South Dakota by a company registered to issue insurance in South Dakota. It was issued to a South Dakota resident. (Ex. 1 at JBB 6010.) The claim was made by that same resident while he lived in South Dakota, more than 20 years later. (Ex. 2 at JBB 69.) On the other side of the transaction: The company issuing the policy was organized and headquartered in Colorado. (Ex. 1 at JBB 6010.) The policy was a group disability policy for the American Dental Association, headquartered in Illinois. (Ex. 3 at JBB 3009.) The company administering the claim was a Nebraska company headquartered in Alabama. (Counterclaim for Rescission, ¶ 2.) None of the other States involved (Colorado, Illinois, Nebraska, Alabama) have contacts as significant as South Dakota’s. So under ordinary conflict-of-laws principles, South Dakota law governs Dr. Brower’s tort claim. The choice-of-law clause does not change that.

2. The policy’s choice-of-law clause does not make clear that the parties (including a 28-year old dentist) intended Illinois law to apply to tort claims — so it does not apply to tort claims.

The choice-of-law clause in the policy here does not show clearly that the parties — including Josh Brower — intended that a tort claim for insurance bad faith would be governed by Illinois law. So the clause is invalid.

2.1. The clause does not apply to tort claims unless the language would make it clear to an ordinary person that Illinois law applies to tort claims.

The general rule is that contractual choice of law provisions “will not be construed to govern tort as well as contract disputes unless it is clear that this is what the parties intended.” Kuehn v. Childrens Hospital, 119 F.3d 1296 (7th Cir. 1997). In the insurance contract, the rule applies with special force because of the principle that ambiguities are construed in favor of the insured, and against the insurer. E.g., Cornelius v. National Casualty, 2012 SD 29, ¶ 6.

In reading the intent of the parties from the language of an insurance policy, the policy “should be read as a layman would read it and not as it might be analyzed by an attorney or an insurance expert.” People v. Lozano, 101 Cal. App. 5th 366 (2024). See also Bauer v. AGA Serv. Co., 25 F.4th 587, 591 (8th Cir. 2022) (reading a contract as “an ordinary person of average understanding would interpret it”).

2.2. The language of the clause does not make it clear to an ordinary person that Illinois law applies to tort claims.

From the clause here, a normal layperson would not know what rights he or she was giving up because of the choice-of-law clause. Here’s the clause:

(Ex. 1 at JBB 3037.)

The language is not clear even to a lawyer, much less to a dentist.

Even for a lawyer reading the choice-of-law clause closely, it’s not clear what the clause means. The clause lumps together both (a) the policy itself and (b) any dispute the parties may have in connection with the policy. The clause says both those things are (i) subject to, (ii) governed by, and (iii) “shall be construed in accordance with” the law of Illinois. What does it mean to say a dispute “shall be construed in accordance with” Illinois law? That’s not clear. We know what it means to say the policy is construed according to Illinois law; but a dispute? That we do not know — and we’re lawyers. Certainly a dentist could not be expected to know.

The language of the clause is odd, but by applying the “construed in accordance with” language to disputes in connection with the policy, the clause sounds like it refers to disputes dealing with interpretation of the policy. That’s not an entirely satisfactory reading, but it’s the best we can think of. The Defense might propose another reading, but that would only establish an ambiguity to construe against the insurer and in favor of the insured.

Maybe the insurance company meant to say, “This Policy shall be construed in accordance with the law of the State of Illinois. Additionally, any dispute between an insured Member and the Company arising in connection with this Policy is subject to and governed by Illinois law.” That might have been clear enough, but it’s not what they said. Instead, they made the inscrutable statement about disputes in connection with the policy being “construed in accordance” with Illinois law — and it’s at least reasonable to read that language as dealing only with disputes about how to construe the policy.

That’s enough to decide this issue: Even to a lawyer (much less to an ordinary person), the choice-of-law clause does not make clear that it applies to anything other than disputes about how to construe the policy.

The language does not make clear to an ordinary dentist that Illinois law governs tort claims based on improper handling.

Setting aside the ambiguous language: Even if the choice-of-law clause were clear to a lawyer, the clause would not make clear to an ordinary person (or an ordinary dentist) that Illinois law governs tort claims based on bad-faith claim handling. To manifest a 28-year-old dentist’s clear intention that Illinois law apply to tort claims, the clause would have to provide enough information for a layperson to understand the effect of the clause.

The clause does not provide that information. The clause makes no reference to “contract” versus “tort” claims, much less explain the difference. A dentist may not even know the difference between contract and tort claims. Many lawyers only learn the difference in law school. An ordinary dentist is not likely to have any idea of the import of the choice-of-law clause.

———

It is not reasonable to say the choice-of-law clause here “clearly” shows that Josh Brower, then a 28-year-old dentist, intended Illinois law to govern a tort claim for insurance bad faith. First, the clause is ambiguous in its provision that disputes in connection with the policy shall be construed in accordance with Illinois law. In light of that wording, the best reading of the clause is that it applies only to disputes about how the policy is to be construed. Second, even setting aside that ambiguity, the clause does not provide enough information for an ordinary layperson to understand what it means. The language of the clause does not justify a finding that a dentist clearly intended Illinois law to apply to a claim for insurance bad faith. The clause therefore does not apply. South Dakota law governs the tort claim.

3. The choice-of-law clause is unenforceable as to tort claims because it would nullify South Dakota law regulating insurance practices on a range of matters.

If the choice-of-law clause were deemed enforceable so that Illinois law governed matters beyond policy interpretation, that would nullify South Dakota law as to a broad range of insurance matters. The main issue in this case is South Dakota’s policy to provide tort remedies, including punitive damages, for insurance bad faith. But the issue goes farther. Applying the choice-of-law clause applies beyond policy interpretation would likely mean that out-of-state insurers could avoid South Dakota’s regulation of insurance practices on issues beyond these parties and this case. South Dakota law will not enforce such a choice-of-law clause.

3.1. Choice-of-law clauses are unenforceable when they violate South Dakota substantive law.

South Dakota law will not enforce a contractual choice-of-law clause where doing so would vitiate South Dakota law. See, e.g:

• SDCL 53-9-1 (“A contract provision contrary to an express provision of law or to the policy of express law, though not expressly prohibited or otherwise contrary to good morals, is unlawful.”).

• SDCL 53-9-3 (“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for … violation of law whether willful or negligent, are against the policy of the law.”).

• State ex rel. Meierhenry v. Spiegel, 277 NW2d 298 (SD 1979) (“Generally, parties to a contract may effectively agree to be bound by the law of a particular state, but such governing law agreements are subject to limitations and invalidation by the overriding public policy of the forum state.”).

In addressing the validity of choice-of-law clauses, the SD Supreme Court has cited the Restatement 2d of Conflict of Laws, § 187, although the court has not explicitly adopted that section in its entirety. See Northland Capital v. Robinson, 2022 SD 32, ¶ 13. The Restatement says a choice-of-law clause is void where it is “contrary to a fundamental policy” of the state whose law would otherwise govern. Rest. 2d Conflict of Laws, § 187(b). Comment g to that section says the forum state decides whether the policy is “fundamental.” According to the comment, the stronger the forum state’s contacts with the transaction, the more likely that state’s policies are to count as “fundamental.” “To be ‘fundamental,’ a policy must in any event be a substantial one” rather than one pertaining only to formalities.

On the other hand, a fundamental policy may be embodied in a statute which makes one or more kinds of contracts illegal or which is designed to protect a person against the oppressive use of superior bargaining power. Statutes involving the rights of an individual insured as against an insurance company are an example of this sort (see §§ 192-193). To be “fundamental” within the meaning of the present rule, a policy need not be as strong as would be required to justify the forum in refusing to entertain suit upon a foreign cause of action under the rule of § 90.

It should be obvious that laws regulating insurance are important enough to override contrary policy provisions. Nonetheless, we discuss below.

3.2. South Dakota’s provision for full tort remedies for insurance bad faith constitutes “fundamental” public policy. It would be nullified by a broad reading of the choice-of-law clause.

“The primary sources for declarations of the South Dakota public policy in areas such as the one presently under consideration are the constitution, statutory law and judicial decisions.” Meierhenry, 277 NW2d 298 (SD 1979).

Most courts that have considered the question have ruled choice-of-law clauses void as to insurance bad faith claims.

We discuss the issue in substance below, but to put the bottom line up front: Most courts that have addressed this issue have concluded that the decision to allow full tort remedies (including punitive damages) for insurance bad faith is a fundamental policy of a State, so choice-of-law clauses that would avoid such damages are void as against public policy. See, e.g.:

• Master Pipe Distribution v. Fairbridge, No. CV 23-02745, 2024 US Dist LEXIS 148028 (CD Cal Aug. 16, 2024) (“Plaintiff argues that California public policy would be undermined because South Korea does not recognize a tort claim for insurance bad faith…. the Court finds that Master Pipe has provided sufficient support for the contention that enforcement of the clause would contravene California public policy, namely policy that strives to protect Californians from bad faith insurers.”)

• Skye Bioscience v. PartnerRe, No. 2:23-CV-01218, 2023 US Dist LEXIS 108397 (CD Cal June 20, 2023) (“[T]he Court concludes that the choice-of-law provision should not be enforced as to the claim for tortious breach of implied covenant of good faith and fair dealing. … [T]he Court concludes that the choice-of-law provision should not be enforced due to a fundamental conflict between New York and California law.”).

• Gomez v. Great-West Life, 638 F. Supp. 3d 1156 (SD Cal 2022) (“[S]uch an application would be contrary to a fundamental policy of California insofar as it prevents Dr. Gomez from pursuing broader tort remedies for insurance bad faith…. Accordingly, the Court declines to enforce the Illinois choice-of-law provision and instead applies California law to the dispute.”).

• Satterlee v. Great Lakes, No. 21-cv-01774, 2022 US Dist LEXIS 243623 (ND Cal Jan. 18, 2022) (“[T]he Court finds that the parties’ choice-of-law provision is invalid. … New York law, which does not permit insurance bad-faith claims, is contrary to a fundamental policy of California. California has demonstrated an interest in regulating the practices of insurers within this state, as well as in affording redress to California residents damaged by unfair practices of insurers.”).

• Sinclair Wyoming v. Infrassure, No. 15-CV-194, 2016 US Dist LEXIS 188762 (D. Wyo. Mar. 10, 2016) (“The Court finds Wyoming law would apply to Sinclair’s bad faith claim…. [T]he application of New York law prohibiting an independent claim for bad faith would be contrary to a fundamental policy in Wyoming….”).

• Connex v. AXA, 209 F. Supp. 3d 1147 (CD Cal 2016) (“There is a strong local interest in the present case because litigating the case in France would not provide for remedies based on Plaintiffs’ claims of bad faith against AXA. An insured’s right to bring bad faith claims for tort and punitive damages against an insurer is fundamental to California’s public policy in this area.”).

• Tutor-Saliba v. Starr, No. CV 15-1253, 2015 US Dist LEXIS 189425 (CD Cal Apr. 23, 2015) (“New York law conflicts with a relevant fundamental policy of California law because it does not recognize extra-contractual or tort remedies for an insurer’s bad faith conduct.”).

• Tri-Union Seafoods v. Starr, 88 F. Supp. 3d 1156 (SD Cal 2015) (“[T]he Court finds that recognizing a tort remedy for an insurer’s breach of the implied covenant of good faith and faith dealing implicates a substantial and thus fundamental public policy in California.”).

• Thanh Phan v. Great-West, No. CV 13-1318, 2013 US Dist LEXIS 202947 (CD Cal July 24, 2013) (“[B]ecause California case law unambiguously holds that insurance bad faith claims are rooted in a variety of important policy reasons, application of the Illinois choice of law term would conflict with and undermine California public policy.”).

• Brighton v. Lutheran Church, No. SACV 12-883, 2013 US Dist LEXIS 198211 (CD Cal Feb. 1, 2013) (“Missouri, unlike California, does not allow for the award of punitive and extra-contractual damages in insurance bad faith cases. … California’s decision to allow punitive and extra-contractual damages in insurance bad faith cases reflects a fundamental state policy of protecting California citizens from exploitative behavior by insurers.”).

• Lloyds of London v. Mallet, No. CV-11-979, 2012 US Dist LEXIS 69628 (D. Ariz. May 18, 2012) (“Eliminating the bad faith cause of action would undercut Arizona policy because Arizona courts have affirmatively created a cause of action to protect an insured from the unreasonable actions of an insurer. The choice-of-law provision will not be enforced to bar a claim of bad faith under Arizona law.”)

• Martin v. Great Lakes, No. CV-08-546, 2010 US Dist LEXIS 841 (D. Ariz. Jan. 5, 2010) (“Arizona courts have affirmatively created a cause of action to protect an insured from the unreasonable actions of an insurer. If there is some reason that applying New York law to bar the bad faith claim would not be contrary to Arizona’s fundamental policy, Defendant has not raised it.”).

The holdings of these courts are amply justified, and they apply equally in South Dakota.

Insurance and its regulation are critical to any State.

Insurance provides the ability to recover from major losses — which means insurance enables people to take the risk of making major investments (buying a house, building a factory, etc.) Insurance is therefore essential to the physical health and safety of individuals. Insurance is essential to the safety and fitness of residential dwellings and other property, and to the property of businesses. Insurance is essential to the financial security of individuals and businesses alike. In all these ways, insurance is critical to the broader economy. Insurance allows investment: Whether for an individual or a business, to make a major investment is to take a major risk. Without insurance against the potential future loss, major investments frequently could not be made. As Henry Ford is rumored to have said:

Without insurance, there would be no skyscrapers, because no workman would attempt to work at such heights, at risk of falling to his death and leaving his family destitute. Without insurance, no capitalist would invest millions to build similar buildings that a single cigarette can reduce to ashes. Without insurance, nobody would drive his car through the streets. A good driver is conscious at every moment of the risk of running over a pedestrian.

Boring as it may be, insurance is a critical part of the infrastructure of civilization. Indeed, the invention of insurance was part of a set of innovations that enabled the growth of technological progress and living standards in modern societies.

By its nature, though, insurance buyers are especially vulnerable to cheats. With most things you buy, you have decent protection against getting cheated. With most products and services, you know soon enough if you got what you paid for, and you can take relatively quick action if you didn’t. With insurance, that’s usually impossible. You buy an insurance policy hoping never to need it, and you may hold it for decades before making a claim. If you then make a claim and the company cheats you, you can’t go back in time and buy honest insurance.

For any State, the combination of the importance of insurance and the special vulnerability to cheating creates a special need for regulation by law.

South Dakota public policy provides full tort remedies, including punitive damages, for insurance bad faith.

In both the first-party context and in the third-party context, South Dakota statutes and judicial decisions embody a policy of treating insurance bad faith as a tort rather than a mere breach of contract. See, e.g., Kunkel v. United Security, 84 SD 116 (1969) (third-party); In re. Cert. of Question (Champion v. US Fidelity & Guaranty), 399 NW2d 320 (SD 1987) (workers compensation); Isaac v. State Farm, 522 NW2d 752 (SD 1994) (first-party). See also, e.g., Johnson v. UPS, 2020 SD 39 (workers compensation).

For a tort, South Dakota law allows broad damages: “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” SDCL 21-3-1. For an intentional tort (which insurance bad faith necessarily is), South Dakota law also allows punitive damages. See SDCL 21-3-2.

Illinois policy differs fundamentally from South Dakota’s.

Illinois policy contrasts sharply with that of South Dakota. In the first-party context at least (as in this case), Illinois’ public policy is nearly the opposite of South Dakota’s. Illinois recognizes no common law tort of insurance bad faith. See, e.g., Harleysville Lake States v. Lancor Equities, No. 13 C 6391, 2014 US Dist LEXIS 154685 (ND Ill Oct. 31, 2014) (“Illinois does not recognize a ‘bad faith claim’ in either tort or contract.”). Instead, Illinois provides statutory remedies for “vexatious and unreasonable” claim handling. Illinois limits those remedies to (a) attorney fees required to recover amounts owed under the policy plus (b) an additional amount that cannot exceed the lesser of (i) $60,000 or (ii) 60% of the contract damages or (iii) the difference between the adjudicated contract damages and the amount the insurance company offered as a settlement. See 215 ILCS 5/155. Beyond that statutory limit, Illinois does not allow punitive damages for insurance bad faith — regardless of how egregious the misconduct. See 215 ILCS 5/155.

Illinois effectively provides immunity for insurance bad faith in most cases. The cost of litigating such a case often exceeds $60,000. It’s a rare case in which it would make sense to litigate an insurance bad-faith case under Illinois law. And in the subset of cases in which it might make sense, Illinois policy is to forbid full compensation for the victim and not to punish the wrongdoer or deter others from similar wrongdoing (which is the purpose of punitive damages, see SDCL 21-3-2. Illinois policy is nearly the opposite of South Dakota policy.

South Dakota’s choice of a tort regime is a “fundamental” policy

For any State, the decision to treat an act as a tort rather than a mere breach of contract is fundamental. The decision reflects the State’s level of tolerance for the act, and it creates broad effects not only for the parties to any given dispute, but for the specific marketplace and for residents and businesses in the State generally.

South Dakota Supreme Court Decisions

The South Dakota Supreme Court’s decisions confirm that public policy concerning insurance is sufficiently important to override contrary provisions in insurance policies. We find no case in which the South Dakota Supreme Court has addressed whether a choice-of-law clause in an insurance policy applies to torts related to the policy. But on multiple occasions, the court has held various insurance-policy provisions governing the scope of coverage invalid because they violated public policy. E.g.:

• Earll v. Farmers Mutual, 2025 SD 20 (holding that an “owned but not insured” exclusion to UIM coverage in motor vehicle policies violates South Dakota public policy)

• MGA Insurance v. Goodsell, 2005 SD 118 (because SDCL 32-35-70 only permitted insurers to exclude coverage of relatives residing with the “named insured,” the insurer’s attempted exclusion was invalid as a violation of public policy)

• Cimarron Insurance v. Croyle, 479 NW2d 881 (SD 1992) (household exclusion in auto liability policy void as against public policy).

Those decisions confirm that South Dakota’s public policies concerning insurance are sufficiently important to override contrary contract provisions.

Decisions in other contexts provide useful comparisons. For example, in its 2010 decision in A. Unruh Chiropractic v. De Smet, the South Dakota Supreme Court voided a contractual assignment of proceeds from personal injury claims on the ground that it was contrary to public policy on champerty and maintenance. See 2010 SD 36. The court cited no statutory scheme as evidence of South Dakota public policy. The court cited only the ancient common law and a handful of South Dakota cases. It is fair to say South Dakota has evinced less governmental interest in regulating assignments of proceeds from lawsuits than in regulating insurance. But the court still deemed this public policy sufficiently important to void a contract. See also McKellips v. Mackintosh, 475 NW2d 926, 929-30 (SD 1991).

The court addressed a contractual choice-of-law provision in State ex rel. Meierhenry v. Spiegel, 277 NW2d 298 (SD 1979). A company headquartered in Illinois sold merchandise to people in various states through catalogs sent by mail. The company’s only contacts with South Dakota were by mail. The company offered credit accounts to its customers. The credit agreement specified that it was governed by Illinois law. The interest rates were allowable under Illinois law but not under South Dakota law. The Supreme Court ruled the choice-of-law clause void:

To permit the governing law agreement between the parties to control the determination of whether or not South Dakota substantive law will apply would allow a foreign corporation the privilege of conducting its business in South Dakota upon more favorable conditions than are afforded to South Dakota corporations and would provide an effective means of circumventing legislation designed to protect citizens of South Dakota. This is clearly against the express public policy of this state….

277 NW2d at 301. Again, South Dakota’s interest in regulating insurance is at least as important as its interest in regulating interest rates of loans.

Tolerance vs. Intolerance for the Wrong

Broadly speaking, the law treats torts as inherently wrongful and therefore subject to expansive remedies and consequences. (Strict liability torts are a special case, which we need not discuss here.) By contrast, the law attaches no automatic opprobrium to a breach of contract. The law recognizes that breaches of contract may be proper even though they entitle the non-breaching party to a remedy:

Our free-market system allows economically efficient breaches when it costs less for one party to breach an unwise contract and to pay the other party compensatory damages than it would cost to completely perform the contract. [T]he efficient breach principle … protects persons from being legally compelled to perform an uneconomical contract.

McKie v. Huntley, 2000 SD 160, ¶ 15.

The remedies for contract and tort claims therefore differ dramatically. For a breach of contract, damages are limited. See SDCL 21-2-1. For the breach of an obligation to pay money (as in a first-party insurance case), damages are limited to “the amount due by the terms of the obligation with interest thereon.” SDCL 21-2-2. By contrast, the recoverable damages in a tort claim are far greater: “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” SDCL 21-3-1. For an intentional tort (like insurance bad faith), South Dakota also allows punitive damages. See SDCL 21-3-2.

Prioritizing the Integrity of Insurance

A State’s choice of a tort regime over a contract regime for insurance bad faith reflects a policy decision to prioritize the integrity of the insurance market and the purchasers of insurance who end up needing the insurance. There’s no free lunch, so this comes at the cost of higher premiums. Given greater freedom to cheat on claims, insurers can offer less honest insurance at lower premiums. The more useless an insurance policy is, the cheaper it can be.

More Honesty; Less Bad Faith. A tort regime means that any insurance company has more to lose if it acts in bad faith — more than if it acts only under a contract-damages regime. Assuming rational actors, that means insurance companies will handle claims more honestly, will engage in less misconduct, in a State that treats insurance bad faith as a tort rather than as a mere breach of contract. This expectation from rational-choice analysis is borne out by empirical research. For example, a 2004 study analyzed uninsured and underinsured closed claims from over 60 insurance companies in 38 jurisdictions in 1992. Controlling for multiple other factors, the study found a positive correlation between the existence of tort remedies for bad faith and higher settlement payments — suggesting fewer improper denials or low-ball settlements.

Health, Safety, Recovery from Loss: By prioritizing the integrity of insurance, a State prioritizes the ability of individuals and businesses who have suffered an insured loss to recover from it. Businesses that suffer losses from theft or cyber threats; businesses or individuals whose residences or buildings become unusable from storm damage; individuals maimed in car crashes — in all the many ways we come to harm through insurable losses, the integrity of insurance helps us to recover. By prioritizing the integrity of insurance, a State protects part of the essential infrastructure of a modern economy.

Higher Insurance Premiums. A State’s choice of a tort regime or a contract regime for insurance bad faith reflects a trade-off. A tort regime prioritizes the integrity of insurance — and the needs of people who turn out to need the insurance — over the desire to reduce the cost of insurance. The more honest the insurer is, the higher it must price its policies. Choosing a tort regime favors unlucky people over lucky people: It favors the people and businesses who end up needing insurance over those who never need to make a claim. But insurance exists in the first place because none of us know which group we’ll turn out to be in, the lucky or the unlucky. We only have insurance at all because we’re bereft of reliable crystal balls. In any event, each State must decide whether to prioritize the integrity of insurance over lower premiums, and that decision is fundamental.

Market Efficiency

The greater likelihood of honest claim-handling under a tort regime reduces transaction costs and increases market efficiency. Insurance is usually a multi-year commitment. When you buy a policy, you need to know the company will honor their obligations if ever called upon to do so. The greater likelihood of honest claim-handling under a tort regime reduces the need to research the integrity and business practices of an insurance company before buying insurance from them. So a tort regime makes it less costly to buy insurance. Reduced transaction costs should expand the market for insurance, and empirical research tends to confirm they do.

Market Expansion

The insurance market depends on trust. The more doubt you have that an insurance company will honor its word if ever called on to do so, the less likely you are to buy the insurance. In the case of legally required insurance, the less likely you are to buy more than the minimum required coverage. In a tort regime, the reduced likelihood of insurance bad faith would be expected over time to increase trust in insurance companies and to make people more willing to buy insurance. The insurance market should be bigger under a tort regime than the same market would be under a contract-only regime. Empirical research suggests it is.

Protecting In-State Insurers against Predatory Pricing

The greater likelihood of honest claim-handling under a tort regime also supports more accurate price signaling and protects honest insurance companies from being undercut by predatory pricing from dishonest competitors. Real insurance costs more than sham insurance. A cheater can underprice honest companies and gain market share at their expense. As the National Association of Insurance Commissioners (NAIC) puts it, “Scammers may offer policies at costs that are significantly lower than competitors’ prices.” That puts pressure on even honest companies to cheat on claims-handling in order to compete on price. A contract-only regime therefore creates a vicious cycle of cheating. A tort regime, on the other hand, creates greater deterrence for cheating and protects honest companies as well as the public.

This protection against unfair competition is especially important for South Dakota’s in-state insurance companies. They would not have the option of looking for the most cheater-friendly state law and writing it into their policies. The law will not enforce arbitrary choice-of-law clauses: The law selected must be from a state with a substantial relationship to the parties. See Restat 2d of Conflict of Laws, § 187(2)(a). So under a contract-only regime, out-of-state insurers could engage in predatory pricing that forces South Dakota companies either to cheat or to leave the State.

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In these various ways, a state’s decision whether to treat insurance bad faith as a tort or as a mere breach of contract is a fundamental, substantive policy decision. Different states make different decisions, but whatever the decision, it is a fundamental policy. If applied to Plaintiff’s claim for insurance bad faith, the choice-of-law clause would nullify fundamental South Dakota policy. So the clause is unenforceable as to that claim.

Beyond the issue in this case, validating the choice-of-law clause as to matters other than policy interpretation would nullify other South Dakota laws on a range of matters.

If the choice-of-law clause were to apply beyond issues of policy interpretation, it would nullify South Dakota law on a range of issues not directly at issue in this case. South Dakota law would be nullified and replaced with Illinois law on any potential issue in any potential dispute with any insured. It’s hard to identify every South Dakota statute, regulation, or principle from caselaw that might become relevant in a dispute between insurer and insured in connection with policy at issue in this case. But we can get some sense of the range of issues by considering SDCL 58-33-46.1, which provides a private right of action for violations of SDCL 58-33-4 through 37. Section 46.1 provides for “all actual and consequential damages suffered as a result of such act or practice including reasonable attorneys’ fees to be set by the court.” Sections 4 through 37 include the following provisions, most of which are not at issue in this case but which might be at issue in other cases:

• SDCL 58-33-5 (re. false statements about the terms of policies)

• SDCL 58-33-6 (re. false public statements about insurers)

• SDCL 58-33-8 (re. misrepresentations that induce insureds to forfeit their policies)

• SDCL 58-33-13.1 (re. discrimination in policy terms based on sex or marital status)

• SDCL 58-33-13.3 (re. discrimination in policy terms based on status as a victim of domestic violence)

• SDCL 58-33-26 (re. unfair discrimination in premiums or benefits)

• SDCL 58-33-35 (re. collecting premium for insurance not provided)

• SDCL 58-33-36 (re. collecting excess premiums or other improper charges)

• SDCL 58-33-37 (re. penalty for false or fraudulent statements in applications).

Enforcing the choice-of-law clause beyond issues of policy interpretation would threaten to nullify South Dakota law on a wide variety of substantive matters. That further emphasizes the conflict with South Dakota public policy.

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South Dakota’s decision to treat insurance bad faith as a tort, rather than a mere breach of contract, is a fundamental public policy that prioritizes the integrity of the insurance market and the protection of insureds. Enforcing a choice-of-law clause that undermines this tort regime would nullify South Dakota’s core policy choices and threaten the effectiveness of its insurance regulations.

CONCLUSION

The policy’s choice-of-law clause does not clearly extend to tort claims for insurance bad faith, especially as applied to an adhesion contract offered to a South Dakota dentist without meaningful negotiation. Even if the clause were deemed clear, South Dakota law and public policy prohibit enforcing a choice-of-law provision that would nullify South Dakota’s substantive protections against insurance bad faith. Applying Illinois law would deprive South Dakota insureds of critical tort remedies and undermine the state’s regulatory framework for honest insurance practices.

Plaintiff asks the Court to declare the policy’s choice-of-law clause inapplicable to the insurance bad faith claim and hold that South Dakota law governs this dispute. If the Court finds the public-policy question unavoidable, Plaintiff further requests that the Court certify the question to the South Dakota Supreme Court.

Respectfully Submitted

June XXX, 2025

/s/ Daniel E. Holloway

Seamus Culhane

Turbak Law Office, PC

26 S. Broadway, Suite 100

Watertown, SD 57201

605-349-1722

seamus@turbaklaw.com

Daniel E. Holloway

DEH Law

2062 Promise Road, Unit 1305

Rapid City, SD 57701

404-670-6227

dan@dehlegal.com

Attorneys for Plaintiff

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH DAKOTA

SOUTHERN DIVISION

Josh Brower, DDS,

Plaintiff

— versus —

Great-West Life & Annuity Insurance Company, now known as Empower Annuity Insurance Company of America,

Protective Life Insurance Company.

Protective Life and Annuity Insurance Company

Protective Life Corporation,

John/Jane Doe 1-10,

Defendants

Civil Action: 4:25-cv-04040-RAL

Jury Trial Demanded

CERTIFICATE OF SERVICE

The undersigned has served the foregoing document on all counsel of record, by filing the document with the Court’s efiling system.

June XXX, 2025

Respectfully submitted,

/s/ Daniel E. Holloway