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Decided:  March 10, 2014

The Fourth Circuit Court of Appeals reversed the district court’s dismissal of the insurance beneficiary’s complaint against the insurance company, for bad-faith “handling” of her claim for proceeds on the policy, pursuant to the West Virginia Unfair Trade Practices Act (“WVUTPA”). The Fourth Circuit held that actions brought pursuant to the WVUTPA sound in tort and not in contract. The Fourth Circuit further held that West Virginia law governs the underlying lawsuit and that the complaint states a claim upon which relief can be granted.

On September 19, 2011, Ronald Kenney passed away, leaving his wife, Audrey Kenney (“Kenney”) as the sole beneficiary of a life-insurance policy (the “policy”) issued by The Independent Order of Foresters (“IOF”), a Canadian corporation. At the time of Mr. Kenney’s death, the Kenneys were residents of West Virginia. At the time that IOF issued the policy, the Kenneys resided in Virginia. The policy contains a choice-of-law provision that states that rights will be governed by “the laws of the State in which this certificate is delivered.” On September 21, 2011, Kenney filed a claim with IOF to collect the policy benefits, which she believed to be $130,000, but IOF responded that the policy was worth only $80,000. However, although the policy was originally worth only $80,000, Mr. Kenney subsequently applied for and received a $50,000 increase in coverage. For almost one year, IOF refused to pay $130,000 to Kenney. On July 20, 2012, IOF reversed course and agreed to pay $130,000.

Kenney sued IOF in West Virginia state court, pursuant to the WVUTPA. She acknowledged that she had obtained the coverage to which she was always entitled. However, she alleged that IOF’s conduct in connection with its handling of her claim constituted an unlawful settlement practice prohibited by the WVUTPA.

On appeal, the Fourth Circuit addressed three issues: (1) whether Kenney’s lawsuit pursuant to the WVUTPA sounds in tort or contract; (2) whether West Virginia law or Virginia law governs the outcome of the suit pursuant to West Virginia’s choice-of-law rules; and (3) whether the complaint’s factual allegations sufficiently state a claim upon which relief can be granted.

First, the Fourth Circuit concluded that Kenney’s WVUTPA claim sounds in tort. Although Kenney’s WVUTPA claim would not exist but-for the policy, her claim was not predicated on the terms of the policy itself; rather Kenney’s complaint makes clear that her cause of action stems from IOF’s allegedly bad-faith “handling” of her claim for proceeds on the policy. In other words, not withstanding the repeated references to the policy (a contract) in the complaint, the “essential claim” underlying Kenney’s lawsuit is IOF’s allegedly tortious conduct. The tort-nature of the action is further evidenced by the type of damages available under the WVUTPA and the type of relief prayed for in the complaint. A successful plaintiff suing pursuant to the WVUTPA may recovery attorney’s fees and punitive damages, which are not available in contract cases.

Second, the Fourth Circuit concluded that West Virginia law applies pursuant to the lex loci delicti approach and the Restatement approach. Under the lex loci delicti choice-of-law approach, courts apply the “law of the place of the wrong.” The Fourth Circuit rejected IOF’s argument that Kenney felt the effects of its allegedly unlawful conduct in Virginia, the state where the policy was issued and where Mr. Kenney applied for the increase in coverage. The Kenneys moved from Virginia to West Virginia in 2003 and lived there continuously until Mr. Kenney passed away in 2011. Kenney filed her claim on the policy with IOF from West Virginia and remains a West Virginia resident. Therefore, the injury to Kenney undoubtedly occurred in West Virginia, not Virginia, and West Virginia law applies pursuant to the lex loci delicti choice-of-law approach.

The Fourth Circuit then addressed the Restatement choice-of-law approach, which applies the law of the state with the most significant relationship to the occurrence and the parties under the principles stated in § 6. Section 145(2) then lists four contacts to consider determining the most significant relationship. The first is “the place where the injury occurred,” which is West Virginia. The second is “the place where the conduct causing the injury occurred,” which is Canada, the place where the letter denying the full benefit of the policy to Kenney was sent from IOF. The third is “the domicile, residence, nationality place of incorporation and place of business of the parties.” Here, Kenney is currently a West Virginia resident and IOF is headquartered in Canada. The fourth is “the place where the relationship, if any, between the parties is centered,” which is West Virginia, where Kenney sought to collect, and was denied, policy benefits. In sum, none of the contacts point to Virginia, and three of the four point to West Virginia.

However, the contacts must be analyzed against several factors set forth in section 6, which, inter alia, include: “the relevant policies of the forum;” “the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue;” “the protection of justified expectations;” and “the basic policies underlying the particular field of law.” The Fourth Circuit rejected IOF’s argument that, based on Oakes, the section 6 factors lead to applying Virginia law. In contrast to the Oakes plaintiff, who filed a claim in the nonforum state, Kenney filed a claim with the Commissioner in West Virginia- not an analogous entity in Virginia. Thus, the relevant policies of West Virginia are operative, and its public policy should be “vindicated.”

Unlike the majority of states, it is well settled that West Virginia law, and the WVUTPA specifically, allows plaintiffs to recover for unfair settlement practices independent of any claim on a policy or contract. The difference between West Virginia’s law and Virginia’s law is substantial: one state’s law allows Kenney’s cause of action to proceed and the other state’s law does not. West Virginia courts will not apply the substantive law of a foreign state when that state contravenes its public policy. Accordingly, even assuming that the majority of the section 145(2) contacts point to Virginia law–which, as analyzed above, they do not—West Virginia’s favoritism toward laws that align with its own public policy trumps any comity to Virginia’s law. Therefore, West Virginia law also applies pursuant to the Restatement approach and the district court erred in determining that Virginia law applies.

Finally, the Fourth Circuit concluded that Kenney’s complaint stated a claim upon which relief could be granted pursuant to West Virginia law. IOF’s motion to dismiss, its opposition to Kenney’s motion for reconsideration, and its brief on appeal, each focus nearly exclusively on resolving the issue of which state’s law applies and on arguing that Kenney’s complaint failed to state a claim pursuant to Virginia law. IOF never contended, however, that Kenney’s complaint would also fail to state a claim upon which relief could be granted should West Virginia law apply; consequently, IOF waived any such argument.

Full Opinion

– Sarah Bishop