How Choice of Law and Forum Selection Clauses Can Hurt Your Coverage

When was the last time you carefully read through your commercial property insurance policy? Most business owners don’t realize that buried in the fine print are clauses that could have a serious impact on their ability to make claims. At Zar Law Firm, we’ve seen clients blindsided by these clauses, which often determine how and where disputes with insurance companies will be resolved.

Choice of Law Clauses: What Are You Really Agreeing To?

A choice of law clause can determine any dispute related to the validity, interpretation, performance, and even enforcement of your policy. While it sounds like standard legal jargon, the state law your policy defaults to can drastically change how your claim is handled. For instance, if your policy is governed by New York law (even though your property is in Texas), you might face stricter requirements for reporting a loss. Did you know that in New York, insurers don’t even have to prove they were harmed by a late report? In Texas, that’s not the case—insurers must show prejudice to deny coverage. But if your policy defaults to New York law, you could lose coverage simply for being, for example, 60 days late.

It’s a small detail that could have enormous consequences.

Forum Selection Clauses: Where Will You Fight?

Equally as important is the forum selection clause. Imagine that after a storm damages your Houston office, your insurer denies your claim. You prepare for a legal battle—only to discover that your policy requires you to litigate the dispute in New York. Now you’re facing the cost and hassle of hiring out-of-state attorneys and traveling for court appearances. This can be a major obstacle, especially for small businesses already dealing with the financial strain of property damage.

Real-World Examples: What’s at Stake

Let’s take a look at two scenarios where these clauses have impacted Texas policyholders:

1. Strict Reporting Requirements: A Texas business suffers storm damage but delays reporting the loss by a few days. The policy is governed by New York law, which doesn’t require the insurer to show harm due to the delay. The claim is denied, leaving the business with significant repair costs. If the policy had been governed by Texas law, the insurer would have needed to prove they were prejudiced by the delay—potentially leading to a different outcome.
2. Litigation Out of State: A Texas property owner finds themselves having to litigate an insurance dispute in New York due to the forum selection clause. The cost of traveling, hiring local counsel, and handling the case out of state becomes overwhelming. In addition, under New York law, with the exception of rare circumstances, the policyholder cannot recover attorney’s fees even if they win, adding a heavy financial burden. In contrast, under Texas law, a successful policyholder can often recover attorney’s fees, making litigation less financially daunting.

How to Protect Your Business

At Zar Law Firm, we recommend taking these steps to protect yourself:

• Negotiate the Choice of Law Clause: Insist on Texas law governing your policy. This will ensure that you have the benefit of local legal standards, including more favorable notice requirements.
• Adjust the Forum Selection Clause: Where possible, negotiate to have disputes resolved in Texas courts. It could save you time, money, and stress.
• Consult with Experienced Legal Counsel: It’s always a good idea to have an experienced attorney review your insurance policy before signing. Our team at Zar Law Firm can help identify and negotiate unfavorable terms so you don’t face surprises later.

Conclusion: Read the Provisions and Endorsements

Insurance policies are full of legal clauses that most people skim over—but ignoring them can be costly. The choice of law and forum selection clauses, in particular, can leave you vulnerable to denied claims and out-of-state litigation. By working with a knowledgeable attorney and ensuring your policy is governed by Texas law, you can better protect your business from unnecessary risk.