Toni Company of Illinois (Toni) was a subsidiary of Gillette Safety Razor Company. Toni was headquartered in Massachusetts. Toni manufactured a hair-weaving product for women that contained a dangerous chemical. Employers Liability Assurance Corporation (Assurance) (defendant) issued an insurance policy to Toni in Massachusetts that contained a clause prohibiting direct actions against Assurance until related tort litigation against Toni had been finalized. Mr. and Mrs. Watson (plaintiffs) were residents of Louisiana. Mrs. Watson suffered injuries after using Toni’s hair-weaving product. The Watsons filed suit in Louisiana state court against Assurance. The Watsons argued that, in conflict with Assurance’s contract clause prohibiting their suit until Toni’s liability was determined, Louisiana law permitted direct actions against insurance companies. The matter was removed to federal district court in Louisiana on the basis of diversity jurisdiction. Assurance moved to dismiss the complaint, arguing that the Louisiana law violated the Due Process and Full Faith and Credit Clauses of the United States Constitution. Assurance claimed the laws of Massachusetts or Illinois applied because the contract was formed in those states. The district court agreed and dismissed the complaint. The Watsons appealed. The court of appeals affirmed. The United States Supreme Court granted certiorari.