Established by a seminal U.S. Supreme Court case, Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). Holds that federal courts cannot make common law of their own and must therefore apply the common law of the state in which they sit. Hence, a federal court in California must follow California state court decisions, a federal court in New York must follow New York state court decisions, and so forth. For insurance coverage matters, this means that federal courts must apply state court decisions interpreting insurance policy language and cannot develop contrary interpretations of their own.