LONZA, INC. v. EVEREST REINSURANCE COMPANY, et al.
Annotate this CaseNOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-0170-03T10170-03T1
DOCKET NO. A-6368-03T1
LONZA, INC.,
Plaintiff-Appellant,
v.
EVEREST REINSURANCE COMPANY,
GRANITE STATE INSURANCE COMPANY,
LEXINGTON INSURANCE COMPANY,
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, NEW
HAMPSHIRE INSURANCE COMPANY, and
AMERICAN EMPIRE SURPLUS LINES
INSURANCE COMPANY, as successor
to Transport Indemnity Company,
Defendants-Respondents,
and
THE HARTFORD ACCIDENT AND INDEMNITY
COMPANY, ZURICH INSURANCE COMPANY,
AMERICAN REINSURANCE COMPANY,
FEDERAL INSURANCE COMPANY,
ASSOCIATED INTERNATIONAL INSURANCE
COMPANY, GIBRALTAR CASUALTY COMPANY,
EMPLOYERS MUTUAL CASUALTY COMPANY,
CONTINENTAL INSURANCE COMPANY, as
successor to Harbor Insurance
Company, and BUSINESS INSURANCE
COMPANY, as successor to London
Guaranty & Accident Company of New
York,
Defendants.
HOME INSURANCE COMPANY,
Plaintiff,
v.
CORNELL-DUBILIER ELECTRONICS,
INC., and FEDERAL PACIFIC
ELECTRIC COMPANY,
Defendants-Respondents,
and
CERTAIN UNDERWRITERS AT LLOYD'S
OF LONDON and CERTAIN COMPANIES
IN THE LONDON INSURANCE MARKET,
Defendants-Appellants,
and
AETNA CASUALTY & INSURANCE COMPANY,
AIU INSURANCE COMPANY, AMERICAN
CENTENNIAL INSURANCE COMPANY,
AMERICAN INSURANCE COMPANY, AMERICAN
INTERNATIONAL INSURANCE COMPANY,
AMERICAN MOTORISTS INSURANCE COMPANY,
CALIFORNIA UNION INSURANCE COMPANY,
CNA INSURANCE COMPANY, COLUMBIA
CASUALTY COMPANY, CONTINENTAL CASUALTY
INSURANCE COMPANY, EMPLOYERS MUTUAL
CASUALTY COMPANY, FIREMAN'S FUND
INSURANCE COMPANY, FIRST STATE
INSURANCE COMPANY, GRANITE STATE
INSURANCE COMPANY, HARTFORD ACCIDENT
& INDEMNITY COMPANY, HIGHLANDS INSURANCE
COMPANY, INTERNATIONAL SURPLUS LINES
INSURANCE COMPANY, ISLANDS INSURANCE
COMPANY, LEXINGTON INSURANCE COMPANY,
LIBERTY MUTUAL INSURANCE COMPANY,
LUMBERMENS MUTUAL CASUALTY COMPANY,
MIDLAND INSURANCE COMPANY, NORTH RIVER
INSURANCE COMPANY, NORTHWESTERN NATIONAL
INSURANCE COMPANY, PRUDENTIAL REINSURANCE
COMPANY, PURITAN INSURANCE COMPANY, TRANSIT
CASUALTY COMPANY, and WRENFORD INSURANCE
COMPANY,
Defendants.
_______________________
CORNELL-DUBILIER ELECTRONICS,
INC. and FEDERAL PACIFIC
ELECTRIC COMPANY,
Plaintiffs,
v.
UNITED INSURANCE COMPANY,
Defendants.
Argued November 28, 2005 - Decided
Before Judges A. A. Rodr guez, Alley and C.S. Fisher.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. BER-L-10-37-97 (in A-0170-03T1), and on appeal from the Superior Court of New Jersey, Law Division, Mercer County, Docket Nos. MER-L-5192-96 and MER-L-2773-02 (in A-6368-03T1).
David Jay argued the cause for appellant Lonza, Inc. in A-0170-03T1 (Greenberg Traurig, attorneys; Philip R. Sellinger and Mr. Jay, of counsel; Helen E. Kleiner, on the briefs).
Karol Corbin Walker argued the cause for respondents Granite State Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, New Hampshire Insurance Company, and Everest Reinsurance Company in A-0170-03T1 (St. John & Wayne, attorneys; Smith Stratton Wise Heher & Brennan, attorneys; Budd Larner Rosenbaum Greenberg & Sade, attorneys; Ms. Walker, Vincent S. Ziccolella, William J. Brennan, III, Thomas E. Hastings, Robert F. Cossolini, and Rachel Rose Hager, of counsel and on the joint brief and on the supplemental briefs).
Christopher B. Block argued the cause for respondent American Empire Surplus Lines Insurance Company in A-0170-03T1 (L'Abbate, Balkan, Colavita & Contini, attorneys; Arthur D. Bromberg, of counsel; Mr. Block, on the briefs).
McCarter & English, attorneys for amicus curiae General Electric Company in A-0170-03T1 (Gita F. Rothschild and Gregory H. Horowitz, of counsel; Ms. Rothschild, Mr. Horowitz, Alissa Pyrich and Steven H. Weisman, on the brief).
Tompkins, McGuire, Wachenfeld, and Barry, attorneys for amicus curiae Certain Underwriters at Lloyd's London in A-0170-03T1 (William B. McGuire, of counsel; Matthew P. O'Malley, on the brief).
Martin R. Baach argued the cause for appellants Certain Underwriters at Lloyd's of London and Certain Companies in the London Insurance Market in A-6368-03T1 (Mendes & Mount, attorneys; Baach Robinson & Lewis, attorneys; Mr. Baach and Mark J. Leimkuhler of the District of Columbia bar, admitted pro hac vice, and Mary Ann D'Amato, admitted pro hac vice, Robert F. Priestly, of counsel and on the briefs).
Howard T. Weir, III argued the cause for respondents Federal Pacific Electric Company and Robert S. Sanoff argued the cause for Cornell-Dubilier Electronics, Inc. in A-6368-03T1 (Morgan, Lewis, & Bockius, attorneys; Lowenstein Sandler, attorneys; Foley Hoag, attorneys; Mr. Weir, of the District of Columbia bar, admitted pro hac vice; Mr. Sanoff, of the Massachusetts bar, admitted pro hac vice; Meredith B. Trzcinski, of counsel; Ms. Trzcinski and Thomas E. Redburn, Jr., on the joint briefs).
PER CURIAM
We calendared these appeals back-to-back and have consolidated them solely for purposes of disposing of them in the same opinion. Each appeal involves choice of law issues as they pertain to the allocation of insurer's liability. The appeal filed by Lonza, Inc. (Lonza) also concerns to some extent the triggering of liability, for the payment of environmental clean-up claims. The Lonza appeal was returned to us for our resolution of issues that were not decided in a previous appeal therein, Lonza, Inc. v. Hartford Accident & Indem. Co. (Lonza I), 359 N.J. Super. 333, 352 (App. Div. 2003).
The Home Insurance appeal involves our consideration of a Law Division decision rendered in four consolidated Mercer County matters.
The overview of the Lonza litigation is set forth in our prior opinion. Id. at 336-41. This appeal involves an action against numerous insurers to recover environmental cleanup costs for which Lonza was liable at eleven sites in eight states. The Hartford Accident and Indemnity Company (Hartford), provided primary insurance coverage to Lonza under a comprehensive general liability (CGL) policy from 1971 through 1982, while Zurich Insurance Company (Zurich) provided primary and excess coverage thereafter.
Various insurers, including Granite State Insurance Company (Granite), Lexington Insurance Company (Lexington), National Union Fire Insurance Company of Pittsburgh (National), New Hampshire Insurance Company (New Hampshire), Everest Reinsurance Company (Everest), and American Empire Surplus Lines Insurance Company (American), provided excess insurance during the period from 1977 through 1982.
By 1983, Lonza's parent corporation decided to manage its insurance purchases by divisions, including Lonza, and elected to purchase all such insurance from Zurich beginning in 1983. Accordingly, Hartford's involvement as Lonza's primary insurance provider ceased as of the end of 1982. At the same time, the AIG defendants, Everest and American, ceased to provide excess insurance to Lonza. Instead, only Zurich provided insurance coverage to Lonza after 1982.
Over time, Lonza settled all its claims, except those concerning contamination at a site in Rhode Island. Subsequently, the trial court applied choice-of-law principles and determined that New Jersey law governed "trigger and allocation" insurance issues arising out of policies Hartford and the excess insurers issued, but that Rhode Island law governed the policies Zurich issued. Effectively, this determination thwarted Lonza's efforts to obtain payment from Zurich.
Lonza appealed. In Lonza I, supra, 359 N.J. Super. at 353, we affirmed the trial court's holding that Rhode Island law governed the trigger and allocation issues concerning Zurich's primary policy, but reversed its holding concerning the excess insurance. We determined that the same state's law should be applied to primary and excess policies covering the same policy period. Ibid. We remanded the matter for a "determination of the governing law with respect to the Hartford policy and . . . the excess coverage during that period." Ibid.
On remand, the trial court determined that New Jersey law governed the issues of trigger and allocation under both the Hartford primary policy and the excess insurance policies. This determination effectively precluded any coverage for Lonza under the excess insurance policies. Lonza appeals from that order.
At issue here is whether the trial court erred in determining that New Jersey's law applies both to the trigger and allocation issues concerning Hartford's primary insurance policy and to the policies of the excess insurance associated with Hartford's policy.
After our initial decision, the AIG defendants filed a motion for reconsideration on April 17, 2003, seeking "to correct the palpably incorrect determination that the excess policies issued by AIG-related defendants should follow the choice of law determination with respect to Zurich's primary policies, instead of the choice of law analysis with respect to Hartford's primary policies."
On May 1, 2003, we issued an order denying the AIG defendants' motion for reconsideration, but, at the same time, "clarify[ing] our opinion" that decided Lonza's appeal. Essentially, we limited our holding to "the period Zurich was the primary insurer" and indicated that the remanded matter "may require a determination of the governing law with respect to the Hartford policy and therefore the excess coverage during that period." Our later published opinion reflects this clarification. Lonza, supra, 359 N.J. Super. at 337, 353.
On remand, Lonza on the one hand and the excess insurers on the other (the AIG defendants and Everest, but not American) filed cross-motions for partial summary judgment on the choice-of-law issues concerning the trigger and allocation of insurance coverage. Lonza sought to have Rhode Island's law apply to these issues under Hartford's primary insurance policy because the excess insurers would then be liable under that state's "manifestation" doctrine concerning the triggering and allocation of insurance coverage. In contrast, the excess insurers sought to have New Jersey's law applied to those issues under Hartford's policy because the excess insurance would not be triggered under the State's "continuous trigger" rule.
On July 11, 2003, the trial judge heard argument on the motions, and thereafter issued a comprehensive oral decision, in which he determined that, "for issues of trigger allocation vis- -vis the Hartford policy, New Jersey law should apply . . . ." The judge concluded that, "[i]nsofar as Hartford's primary policy of insurance is concerned, New Jersey is clearly the state with a dominant significant relationship. No state had a more meaningful nexus with [Lonza's] insurance activities."
That same day, July 11, 2003, the trial judge entered an order in conformance with his oral decision, granting the AIG defendants' and Everest's joint motion for partial summary judgment and denying Lonza's competing motion. In the order, the judge indicated that "New Jersey law shall apply to the issue[s] of 'trigger' and 'allocation' of coverage with respect to the policies issued to Lonza, by the AIG-related Defendants and Everest for the sites at issue in this litigation."
Subsequently, the AIG defendants, Everest, and American sought the entry of final judgment against Lonza, based in part on Lonza's concession that, "under the July 11, 2003 Choice-of-Law Order applying New Jersey trigger and allocation of coverage law, the damages claimed by [Lonza] will not impact the policies" of excess insurance associated with the Hartford primary insurance policy.
On July 23, 2003, the trial judge entered an "Order of Final Judgment," dismissing all claims against the AIG defendants, Everest, and American. This order, in tandem with the orders entered earlier in this litigation, Lonza, supra, 359 N.J. Super. at 339, was the final judgment that disposed of all issues concerning all parties.
Lonza now appeals from the July 11, 2003 order, dealing with the choice-of-law issue and from the final judgment entered on July 23, 2003, dismissing Lonza's claims against the AIG defendants, Everest, and American. General Electric Company (GE), moved for leave to participate in this appeal as an amicus curiae.
On May 6, 2004, we entered an order granting GE leave to participate in the Lonza appeal as amicus curiae. On July 1, 2004, we granted a motion filed by "Certain Underwriters at Lloyd's London" (Lloyds), to participate as amicus curiae in the Lonza appeal.
Lonza contends that the trial court erred in determining that New Jersey's law applied to the issues of trigger and allocation under both the Hartford primary insurance policy and the excess insurance policies associated with the Hartford policy. Lonza's argument has merit and we conclude for the following reasons that the order appealed from should be reversed and the matter remanded.
The choice-of-law conflict in this case focuses on the differing law of New Jersey and Rhode Island on issues concerning the trigger and the subsequent allocation of damages among insurers under CGL insurance contracts in an environmental contamination case. New Jersey applies a "continuous trigger and pro-rata allocation methodology" to those issues, Spaulding Composites, supra, 176 N.J. at 45, while Rhode Island applies a "manifestation" of environmental damage theory. CPC Int'l, Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647, 649-50 (R.I. 1995).
New Jersey's adoption of the continuous trigger doctrine reflects its recognition that, "[i]n environmental contamination cases the damage that triggers liability often cannot be linked to a single event. Instead, the damage usually is attributable to events that begin, develop and intensify over a sustained period of time." Quincy Mut. Fire Ins. Co., supra, 172 N.J. at 416-17. Thus, environmental damage is viewed in New Jersey as occurring along a continuous timeline, during which several successive insurance policies issued to the insured may have been in effect and thus may have been triggered. Ibid.
In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 478 (1994), the Supreme Court held that
when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy. That is the continuous-trigger theory for activating the insurers' obligation to respond under the policies.
At the same time, the Court in Owens-Illinois, Inc. recognized that its adoption of the continuous-trigger theory would affect the method that courts utilize to allocate payable damages among insurers whose policies were triggered under the theory. Id. at 459. The Court then adopted an allocation methodology among insurers based upon "both the time on the risk and the degree of risk assumed." Id. at 479. Thus, the Court determined that the "better formula" was to "allocate[] the losses among the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by the years of coverage." Id. at 475.
In Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312,
326-27 (1998), the Supreme Court applied this allocation methodology in a situation involving primary and excess insurance carriers. As an example of how such application should be made, the Court posited circumstances where the continuous trigger theory operated over a period of years to trigger multiple policies and resulted in the assignment of $325,000 in environmental damages to each particular year. Ibid. In those circumstances:
[a]ssume that primary coverage for one year was $100,000, first-level excess insurance totaled $200,000, and second-level excess coverage was $450,000. If the loss allocated to that specific year was $325,000, the primary insurer would pay $100,000, the first-level excess policy would be responsible for $200,000, and the second-level excess policy would pay $25,000.
[Ibid.]
In line with that example, Lonza here asserts that it discharged pollutants in Rhode Island from 1974 through 1985, during which time it carried at least $5 million per year of primary insurance with either Hartford (1974-1982), or Zurich (1983-1985). Assuming a total environmental-damage expense to it of about $25 million divided equally among those years, Lonza further asserts that, under New Jersey's continuous-trigger and pro-rata allocation methodology, "the total loss of approximately $25 million would be apportioned among all those years and would never exceed Lonza's primary coverage [through either Hartford or Zurich], i.e., would never reach the Excess policies in any year."
Thus, according to Lonza, the excess insurance providers have no payment obligation according to New Jersey law under the circumstances of this case, and it is for this reason that it seeks the reversal of the trial court's determination that New Jersey's law applies to the trigger and allocation issues.
Significantly, the Supreme Court has identified several public policy interests in which the continuous-trigger and pro-rata allocation methodology is "rooted," including: "(1) maximizing resources to cope with environmental injury or damage; (2) giving the greatest incentive to insureds to acquire insurance; and (3) notions of simple justice." Spaulding Composites, supra, 176 N.J. at 36. See also Owens-Illinois, Inc., supra, 138 N.J. at 472-73 (explaining the public policy interests).
In Carter-Wallace, Inc., supra, 154 N.J. at 327 (citations omitted), the Court considered the "public interest factors" underlying the continuous-trigger and pro-rata allocation methodology, stating that
[f]irstly, this approach makes efficient use of available resources because it neither minimizes nor maximizes the liability of either primary or excess insurance, thereby promoting cost efficiency by spreading costs. That method also promotes "simple justice," by respecting the distinction between primary and excess insurance while not permitting excess insurers unfairly to avoid coverage in long-term, continuous-trigger cases. Additionally, adoption of that allocation method will introduce a degree of certainty and predictability into the complex world of environmental insurance litigation in continuous-trigger cases.
In Quincy Mut. Fire Ins. Co., supra, 172 N.J. at 420 (quoting Owens-Illinois, Inc., supra, 138 N.J. at 480), the Court noted that "the continuous trigger theory would be better suited to address the public interest in enhancing available insurance coverage for environmental damages and would give courts the opportunity to 'better channel the available resources in remediation of environmental harms.'"
In contrast to New Jersey, Rhode Island has adopted the "manifestation" theory of trigger and allocation, under which an insurance policy is triggered only when property damage becomes apparent during the policy period, even if such damage is the result of long-term pollution. Truk-Away of Rhode Island, Inc. v. Aetna Cas. & Sur. Co., 723 A.2d 309, 312-14 (R.I. 1999). Under the manifestation theory, "coverage under a general liability policy is triggered by an occurrence that takes place when property damage, which includes property loss, manifests itself or is discovered or in the exercise of reasonable diligence is discoverable." CPC Int'l, Inc., supra, 668 A.2d at 650. All insurance carriers with policies, both primary and excess, in effect at the time of manifestation could be allocated part of the damages under Rhode Island law, depending upon the limits of the policies. Lonza, supra, 359 N.J. Super. at 341.
Here, we have stated that "for the purposes of Rhode Island law, the 'manifestation' [of environmental damage in Rhode Island] occurred in 1979." Id. at 336-37. While we note the 1979 date, whether that is actually the manifestation date is hotly contested. We do not decide that issue here, and we use that date simply as a working hypothesis for purpose of the present discussion.
Hartford was the primary insurance provider in 1979, while AIG defendants Lexington and Granite provided excess insurance coverage above Hartford's limits, and Everest provided even higher level excess insurance coverage above the levels Lexington and Granite provided. According to Lonza, "[u]nder Rhode Island law, the Excess Insurers would be allocated loss, in excess of $6 million primary Hartford coverage, up to the limits of their policies." Because the excess insurers would have a payment obligation under Rhode Island law, Lonza seeks to have that law, rather than New Jersey's law, applied to the trigger and allocation issues.
The "first step in this choice-of-law analysis is an inquiry into whether there is 'an actual conflict' between the laws of this state and another." Lonza, supra, 359 N.J. Super. at 342 (quoting Gantes v. Kason Corp., 145 N.J. 478, 484 (1996)). "'Any such conflict is to be determined on an issue-by-issue basis.'" Id. at 342 (quoting Veazey v. Doremus, 103 N.J. 244, 248 (1986)).
As is apparent from our foregoing discussion, there is a definite conflict between the laws of New Jersey and Rhode Island on issues concerning the trigger of insurance coverage and the allocation of resulting damages among insurers. See also Lonza, supra, 359 N.J. Super. at 342-45. The requirement of the first step of the choice-of-law analysis is thus satisfied, so only the more-involved second step remains: a court is required to "'determine the interest that each state has in resolving the specific issue in dispute.'" Id. at 345 (quoting Gantes, supra, 145 N.J. at 485).
In Gilbert Spruance Co. v. Pennsylvania Mfrs. Ass'n Ins. Co. (Gilbert Spruance), 134 N.J. 96, 102-14 (1993), we explained the application of New Jersey's choice-of-law principles to environmental insurance coverage cases involving affected sites in different states. These principles were further explicated in a subsequent trilogy of cases addressing the issues concerning multi-site, multi-state environmental pollution. See Pfizer, Inc. v. Employers Ins. of Wausau (Pfizer), 154 N.J. 187, 192-99 (1998); HM Holdings, Inc. v. Aetna Cas. & Sur. Co., 154 N.J. 208, 212-17 (1998); and Unisys Corp. v. Ins. Co. of N. Am., 154 N.J. 217, 221-24 (1998).
Under these choice-of-law principles, a court must follow the analytical framework set out in Restatement (Second) of Conflict of Laws 6, 188, and 193 (1969). Gilbert Spruance, supra, 134 N.J. at 102-04.
The Supreme Court summarized the appropriate analysis, stating that
in determining the choice-of-law rule to govern casualty-insurance contracts, such as the CGL policies in this case, we look first to Restatement section 193. As stated previously, that section provides that the law of the state that "the parties understood was to be the principal location of the insured risk * * * [governs unless] some other state has a more significant relationship under the principles stated in 6 to the transaction and the parties * * *." However, in certain cases when the "subject matter of the insurance is an operation or activity" and when "that operation or activity is predictably multistate, the significance of the principal location of the insured risk diminishes * * *." In such situations, the governing law is that of the state with the dominant significant relationship according to the principles set forth in Restatement section 6.
[Id. at 111-12 (citations omitted).]
The trial judge in Lonza appears to have generally followed this analytical framework in determining that New Jersey's law applies to the issues of trigger and allocation, with one notable exception; namely, the judge did not explicitly address section 193, which should have been the first step of his analysis. Instead, the judge essentially utilized only the factors set out in section 6. This was incorrect.
Under section 193, which a court should consider "first," New Jersey interprets CGL policies in accordance with the law of the state in which the insured risk is located, unless some other state has a more significant relationship to the transaction and the parties as illuminated by the consideration of factors listed in section 6. Pfizer, supra, 154 N.J. at 194-95. The Court referred to this focus on the situs of an insurance risk as "site-specific" analysis. Id. at 196.
Under section 193, if the insured risk, the environmental damage, and the policyholder are located in the same state, the choice-of-law determination is "straightforward," and the law of the site of the risk applies. Id. at 195. However, when the "insured operation or activity is predictably multistate, the significance of the principal location of the insured risk diminishes," and section 193 directs that the principles set forth in section 6 be applied to determine the state with the dominant significant relationship to the particular issue involved. Ibid.
The problem in the present case is that the trial court appears to have diminished out of existence the fact that the environmental pollution, and thus the insured risk, are located in Rhode Island. Stated somewhat differently, it appears that the court did not give any weight to the circumstance that the location of the insured risk and the environmental damage are in Rhode Island. This was incorrect.
As noted in Gilbert Spruance, supra, 134 N.J. at 104 (citation omitted) (emphasis added):
If the principal location of the insured risk is in a single state for a major portion of the insurance period, that location "is the most important contact to be considered in the choice of the applicable law, at least as to most issues." However the location of the risk has less significance when a movable risk is concerned or when "the policy covers a group of risks that are scattered throughout two or more states."
As is apparent, while the site of the risk may have "less significance" as a choice-of-law factor when the insured risks are located in more than one state, it is not correct to conclude that the site of the risk has no significance as the court in the present case appears to have done. This becomes evident when one considers section 188(2), which lists "the contacts to be taken into account in applying the principles of section 6 to determine the law applicable to an issue" when, as in the present case, the parties to a contract have not themselves specified a choice of law.
One of those "contacts" is "the location of the subject matter of the contract." Section 188(2)(d). Pertinently, the Restatement comment concerning the "[s]itus of the subject matter of the contract" indicates that
[w]hen the contract deals with a specific physical thing, such as land or chattel, or affords protection against a localized risk . . . the location of the thing or of the risk is significant. The state where the thing or the risk is located will have a natural interest in transactions affecting it. Also the parties will regard the location of the thing or of the risk as important. Indeed, when the thing or the risk is the principal subject of the contract, it can often be assumed that the parties, to the extent that they thought about the matter at all, would expect that the local law of the state where the thing or risk was located would be applied to determine many of the issues arising under the contract.
[Restatement (Second) of Conflict of Laws 188 cmt.e.]
See also Pfizer, supra, 154 N.J. at 205 (describing section 188 comment e as "stating that when a contract deals with a 'specific physical thing,' such as a plant or waste site, 'the location of the thing or of the risk is significant'"); NL Indus., Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 321 (3d Cir. 1995) (footnote omitted) ("Gilbert Spruance . . . establishes that, in environmental cases, the location of the site carries very substantial weight in the 'significant relationship' analysis, typically adequate to overcome the contacts of the place of contracting").
We are persuaded that even though the trial court failed to consider the Rhode Island situs of the pollution under section 193, it ought to have done so nonetheless under section 188(2)(d). The court should have given some weight to the site of the insured risk and resulting environmental damage in Rhode Island when it analyzed the factors under section 6 in the course of making its choice-of-law determination concerning the trigger and allocation issues. The court evidently did not do so, however, and its choice-of-law determination thus is markedly undercut by that circumstance.
In making its choice-of-law determination, the trial court essentially considered only the section 6 factors, as Pfizer, "refined," concluding that "New Jersey is clearly the state with a dominant significant relationship. No state had a more meaningful nexus with [Lonza's] insurance activities." An examination of the decision, however, reveals that the court's analysis was flawed.
In Pfizer, supra, 154 N.J. at 198-99, the Court collapsed the seven choice-of-law factors set out in section 6 into four "categories of interest." These categories are the "competing interests of the states," the "interests of commerce among the states," the "interests of parties," and the "interests of judicial administration." Ibid.
The competing-interests-of-the-states factor requires
courts to consider whether application of a competing state's law under the circumstances of the case "will advance the policies that the law was intended to promote." The "law" can be either the decisional or statutory law of a state. The focus of this inquiry should be on "what [policies] the legislature or court intended to protect by having that law apply to wholly domestic concerns, and then, whether those concerns will be furthered by applying that law to the multi-state situation." This is another way of saying that "[i]f a state's contacts [with the transaction] are not related to the policies underlying its law, then that state does not possess an interest in having its law apply. Consequently, the qualitative, not the quantitative, nature of a state's contacts ultimately determines whether its law should apply."
[Id. at 198 (citations omitted).]
In the present case, the trial court looked to cases dealing with pollution exclusion clauses in insurance contracts and concluded that "[t]hose same principles apply to the governmental policies and interests served by our approach to issues of trigger and allocation." The court then identified one of New Jersey's governmental interests ("securing financial resources both to remediate New Jersey toxic waste sites . . . and to compensate victims of pollution in New Jersey"), and correctly determined that this interest was not implicated when the pollution site is located in Rhode Island.
Thereafter, the trial court identified another New Jersey governmental interest as its "legitimate and substantial interest in maximizing coverage consistent with policy provisions, so as to protect policyholders who are residents, who are domiciliaries of New Jersey." But notwithstanding Lonza's argument to the contrary, the court concluded that application of New Jersey law to the issues of trigger and allocation would probably maximize the insurance benefit to Lonza. This was incorrect.
The question when dealing with the competing-interests-of-the-states factor is whether the application of the particular law at issue "'will advance the policies that the law was intended to promote.'" Pfizer, supra, 154 N.J. at 197 (quoting General Ceramics v. Firemen's Fund Ins. Cas., 66 F.3d 647, 656 (3d Cir. 1995)). The focus is on the policies that are to be protected by "'having the law apply to wholly domestic concerns and . . . whether those concerns will be furthered by applying that law to the multi-state situation.'" Ibid. As the trial court set forth, the New Jersey governmental-interest policy under consideration concerned the maximization of insurance coverage for New Jersey policyholders.
In our view, the trial court was mistaken when it concluded that this policy goal would be furthered by applying New Jersey law in the circumstances of this case. Essentially, the court determined that, because the continuous-trigger and pro-rata allocation mechanism maximized insurance coverage in most cases, the fact that it did not do so in this particular case was no reason to forego the application of New Jersey law. The trial court consequently looked beyond the factual situation before it and based its decision more upon generalities than upon the particulars in this case.
This decisional framework was flawed. The analytical pattern set forth in Gilbert Spruance, can only be applied to particular factual situations before a court for a decision concerning choice of law. Thus, a court must look to the particular factual circumstances before it and determine whether application of New Jersey law under those factual circumstances will further the New Jersey governmental policy interest at issue.
Unfortunately, the trial court erred in determining that New Jersey's governmental interest in maximizing the insurance benefit to Lonza would be furthered if New Jersey's law were applied in this case. The record indicates, rather, that Lonza will not receive any benefit from the excess insurers under New Jersey law. Instead, the excess insurance coverage Lonza purchased becomes essentially ineffective when New Jersey's continuous-trigger and pro-rata allocation methodology is applied to the particular facts of this case.
In the same vein, the trial court described the protection of New Jersey policyholders as yet another New Jersey governmental-interest policy that application of New Jersey's law in this case would promote. Its conclusion in this regard is incorrect, however, because Lonza derives no financial benefit from such application. The court's reasoning simply does not support the conclusion that application of New Jersey law to Lonza's particular circumstances somehow furthers the governmental policy favoring such financial benefit.
At this juncture, we note four New Jersey governmental interest factors that the trial court did not explicitly consider, even though they specifically concern the continuous-trigger and pro rata-allocation issue. In conducting its analysis, the court focused on cases interpreting the pollution exclusion clause in CGL contracts, presuming that the same governmental-interest factors are implicated where issues of trigger and allocation are concerned. By doing so, in our view, the trial court left unaddressed several governmental-interest factors that the Supreme Court has explicitly determined are relevant when applying the continuous-trigger and pro-rata allocation methodology.
Among these unaddressed factors, foremost is "maximizing resources to cope with environmental injury or damage." Spaulding Composites, supra, 176 N.J. at 36. "The pro-rata sharing methodology has, at its core, a public policy that favors maximizing, in a fair and just manner, insurance coverage for the cleanup of environmental disasters." Id. at 45. Thus, the continuous-trigger theory is "better suited to address the public interest in enhancing available insurance coverage for environmental damages . . . ." Quincy Mut. Fire Ins. Co., supra, 172 N.J. at 420.
While the Lonza trial court determined that application of New Jersey's continuous-trigger and pro-rata allocation methodology would maximize insurance coverage for Lonza, it did not explicitly conclude that such application would maximize financial resources to address the environmental damage and needed cleanup at the Rhode Island site. But it is impossible to accept that such maximization will take place if the excess insurers are essentially unburdened of any payment liability because of the court's choice of New Jersey law. It thus appears that this governmental interest, had it been considered, would have weighed against such a choice.
Another governmental interest the trial court did not explicitly consider concerns "giving the greatest incentive to insureds to acquire insurance." Spaulding Composites, supra, 176 N.J. at 36. Because Lonza evidently had adequate primary and excess insurance coverage for the years it operated its Rhode Island facility, however, it needed no incentive to obtain such coverage. Thus, application of New Jersey's law under the circumstances of this case would not have furthered New Jersey's policy interest in providing such an incentive.
A third New Jersey governmental-interest factor concerns "notions of simple justice," ibid., which it promotes "by respecting the distinction between primary and excess insurance while not permitting excess insurers unfairly to avoid coverage in long-term, continuous-trigger cases." Carter-Wallace, Inc., supra, 154 N.J. at 327. By applying New Jersey law, the trial court essentially excused the excess insurers from any payment liability under their policies with Lonza. Under these circumstances, it is difficult to understand how application of New Jersey law furthers the above-quoted New Jersey governmental interest.
The final unaddressed governmental-interest factor underlying New Jersey's continuous-trigger and pro-rata allocation methodology concerns the introduction of "a degree of certainty and predictability into the complex world of environmental insurance litigation in continuous-trigger cases." Ibid. As Lonza contends in arguing that the same state's law be applied to both the Hartford and Zurich primary policies, there is a dearth of certainty and predictability for an insured like Lonza when Rhode Island law is first applied. This results in Zurich's release from liability, and New Jersey's law subsequently is applied and the excess insurers are similarly released.
We have already determined that Rhode Island's law governed at least Zurich's part of the insurance coverage Lonza carried for the Rhode Island site. Lonza, supra, 359 N.J. Super. at 353. Given that circumstance, application of New Jersey's law to the remainder of Hartford's part of Lonza's coverage would not have furthered the "certainty and predictability" governmental-interest factor, especially when such application resulted in a gap in coverage for a New Jersey insured like Lonza, and a reduction in the amount of insurance proceeds to address the environmental pollution in Rhode Island.
Moreover, the circumstance we have already applied Rhode Island law to should have been considered in the choice-of-law analysis concerning the certainty-and-predictability factor to resolve part of the insurance dispute. If it had been so considered, the trial court may well have determined that, under the peculiar facts of this case, the application of Rhode Island law to the remainder of the insurance dispute would have promoted New Jersey's interest in the certainty and predictability of a result.
The result is that the New Jersey governmental-interest factors that the trial court did not explicitly address or consider, like those factors that were considered, do not weigh in favor of applying New Jersey law. There were, however, Rhode Island governmental-interest factors that weighed in favor of applying that state's law.
The trial court took an unduly restricted view of Rhode Island's governmental interest, limiting it somehow to the protection of Rhode Island insurers and dismissing that concern as essentially unimportant. States in which polluted sites exist, however, have an interest in having their laws "more fully advanced" than any other state's law, Pfizer, supra, 154 N.J. at 202, because those states' environments have been damaged, their regulatory schemes implicated, and the health and welfare of their citizens placed at risk. Permacel v. Am. Ins. Co., 299 N.J. Super. 400, 411 (App. Div. 1997).
Thus, Rhode Island had governmental interests that the trial court should have at least addressed. Those interests, if considered, would have weighed in favor of applying Rhode Island's law to the trigger and allocation issues in this case. This is so because application of Rhode Island's law would probably have resulted in a larger fund of monies targeted for the cleanup of environmental pollution in that state. As stated before, however, the trial court gave only scant consideration to any of Rhode Island's governmental interests under the competing-interests-of-the-states category.
The second choice-of-law category the Court set forth in Pfizer, 154 N.J. at 198, concerns the "interests of commerce among the states," which "require[s] courts to consider whether application of a competing state's law would frustrate the policies of other states." The trial court did not explicitly address this factor, but it appears plain that by excusing the excess insurers from any payment obligation, application of New Jersey's law frustrates Rhode Island's policies concerning the provision of sufficient funds to remediate environmentally-polluted sites within its borders.
The third choice-of-law category the Court set forth in Pfizer, concerns the "interests of parties," which "require[s] courts to focus on their [the parties'] justified expectations and their needs for predictability of result." Id. at 199. According to Pfizer, "Restatement section 188 'contacts' with the states, the domicile or residence of the parties, and places of incorporation, business, contracting, and performance, come into play here in assessing what parties might reasonably have expected to be predictable." Ibid.
The trial court was most concerned with the components of this interests-of-parties factor, focusing on the fact that Lonza was a New Jersey insured that procured and maintained its insurance coverage in New Jersey. From those circumstances, the court concluded that Lonza's "insurance-related activities were conducted in New Jersey and, as [we have] indicated, [Lonza's] relationship with its carriers other than Zurich was 'a New Jersey centered relationship.'" See Lonza, Inc., supra, 359 N.J. Super. at 352. This conclusion, for the most part, resulted in the trial court's application of New Jersey's law to the issues of trigger and allocation.
As previously indicated, however, the trial court's conclusion in this regard is flawed because it fails to take into consideration as a choice-of-law factor the circumstance that the site of the insured risk was located in Rhode Island. Under section 188(2)(d), which the Court indicates should be taken into account under any section 6 choice-of-law analysis, Pfizer, supra, 154 N.J. at 199, the trial court, in analyzing the interests-of-parties category, should have weighed the fact that the site of the insured-against pollution is in Rhode Island. The trial court, however, gave no weight to the Rhode Island location of the contamination, and that circumstance substantially undercuts its conclusion in this matter.
That aside, in Pfizer, supra, 154 N.J. at 190-91, the plaintiff-corporation sought the application of New Jersey law to issues concerning pollution exclusion clauses and late-notice defenses in CGL insurance policies. Lonza was headquartered in New York and its New York office purchased, paid for, and maintained the policies. Id. at 203. The environmental contamination for which insurance benefits were sought was located in states other than New York or New Jersey, and none of the contaminants emanated from New Jersey. Id. at 191, 203.
Analyzing the interests-of-parties factor under those circumstances, the Court in Pfizer, supra, 154 N.J. at 203, concluded that the parties could not have expected New Jersey law to govern. The Court reasoned that, based upon Lonza's New York connections and the out-of-state locations of the contaminated sites, "it could hardly have been predictable that New Jersey law would govern . . . ." Ibid. The Court further opined that, "in the absence of a choice-of-law provision [in the CGL contract], a policyholder would expect that it would be indemnified under the law in effect at the place where liability is imposed. The policies contain sweeping declarations of coverage that should be given effect where the risks arise." Ibid.
The Court in Pfizer indicated that, under the circumstances of that case, the law of New York or of the waste-site states would apply, with preference given to the law of the waste-site states if that law conflicted with New York law. Id. at 205, 207-08. New Jersey law had no application where a non-New Jersey insured, whose insurance contracts are unconnected to New Jersey, seeks insurance benefits for environmental contamination at non-New Jersey sites. Ibid.
The present case differs from Pfizer, however, because Lonza is a New Jersey insured, with insurance contracts tightly tied to this state, who seeks insurance benefits for contamination at a non-New Jersey site. A similar factual situation was presented in Pharmacia & Upjohn Co., supra, 316 N.J. Super. at 162-64, 166, where Lonza was a New Jersey corporation whose insurance contracts were heavily connected to New Jersey and sought insurance benefits for contamination of a Pennsylvania site.
We reversed the trial court's determination that Pennsylvania law applied, instead determining that New Jersey law governed the dispute about the pollution exclusion clause. Id. at 164, 167. According to the court in Pharmacia & Upjohn Co.,
most important in the context of the analysis, is the undisputed fact that irrespective of where the waste was generated and dumped, the insured was a New Jersey corporation that negotiated its insurance coverage in New Jersey and was hence entitled to look to the law of this state, intended and designed to protect New Jersey policyholders.
[Id. at 166.]
At first glance, Pharmacia & Upjohn Co. appears to support the trial court's determination in the present case that New Jersey law governs the trigger and allocation issues, but three differences between the two cases dispel any notion of such support.
First, the court in Pharmacia & Upjohn Co. was dealing with the issue of a CGL contract's pollution exclusion clause and necessarily was concerned with certain specified governmental interests when considering the competing-interests-of-the-states and the interests-of-parties factors in the choice-of-law analysis. Id. at 164-67. In the present case, however, the issues in dispute concern the trigger and allocation of coverage under a CGL policy. New Jersey's governmental interests, when trigger and allocation issues are implicated, are different from its interests when pollution exclusion clauses or late-notice defenses are in dispute, so those issues are not directly transferable to the issues actually in dispute in this appeal. See Spaulding Composites, supra, 176 N.J. at 36; Quincy Mut. Fire Ins. Co., supra, 172 N.J. at 420; and, Carter-Wallace, Inc., supra, 154 N.J. at 327.
Second, it was significant in Pharmacia & Upjohn Co., supra, 316 N.J. Super. at 163, that the "policies themselves were silent as to the specific locations of the risks." Lonza's strong insurance-related connection to New Jersey trumped any interest Pennsylvania, as the waste site, had in having its law applied. Id. at 165-66.
In contrast, in Lonza, Hartford's CGL policy plainly set forth the numerous New Jersey and non-New Jersey sites of Lonza's facilities, including the Rhode Island site. Thus, unlike the situation in Pharmacia & Upjohn Co., the insurance policies in the present case explicitly set forth that most of the insured-against risks were in states other than New Jersey.
The third difference between the present case and Pharmacia & Upjohn Co. is that, in the latter instance, we grounded the decision, in part, on New Jersey's recognized governmental policy of protecting New Jersey policyholders. Id. at 165-67. By determining that New Jersey law applied, the court in Pharmacia & Upjohn Co. indicated that this policy interest had been furthered because the application of New Jersey's law afforded Lonza the insurance benefit that provided such protection. Ibid.
In comparison to the present case, Lonza's interest in the excess insurance that it purchased was not protected when the trial court determined that New Jersey's law applied to the issues of trigger and allocation. Instead, when the trial court applied New Jersey law, Lonza effectively lost the benefit of the excess insurance it purchased. Thus, viewed with an eye toward protecting Lonza's interests, a New Jersey policyholder, the rationale of Pharmacia & Upjohn Co. suggests that New Jersey's law should not have been applied under the circumstances of the present case.
In any event, the interests-of-parties factor from the Court's choice-of-law analysis in Pfizer does not plainly weigh in favor of applying New Jersey law instead of Rhode Island law. Although the factual circumstances show that Lonza had a New Jersey centered insurance relationship, as the court below indicated, the court patently did not take into sufficient consideration that the environmental contamination was located in Rhode Island. Thus, the court did not render its choice-of-law decision with an eye toward protecting Lonza, the New Jersey policyholder, in furtherance of a New Jersey governmental policy favoring such protection.
The last choice-of-law factor the Court in Pfizer, set forth concerns the "interests of judicial administration," which "require[s] a court to consider whether the fair, just and timely disposition of controversies within the available resources of courts will be fostered by the competing law chosen." Pfizer, supra, 154 N.J. at 199. The trial court found this interest to be "inconsequential" under the circumstances of this case, and the reasoning of Pfizer, suggests that problems concerning judicial administration would have to be glaringly substantial before this factor acquired force. Id. at 203-05. Accordingly, this fourth and final choice-of-law factor weighs neither for nor against the application of New Jersey's law in this case.
The result is that, following a consideration of the four categories of interests set forth in the Pfizer choice-of-law analysis, the trial court erred when it determined that New Jersey law, rather than Rhode Island law, should be applied to the issues of trigger and allocation insofar as Hartford's primary insurance policy and the associated excess insurance policies were concerned.
The trial court's application of New Jersey law did not further the state's interests in maximizing insurance coverage and the amount of monies available to remediate environmental pollution, as well as its interest in protecting its New Jersey policyholder. Moreover, the trial court failed to consider, at least to a meaningful extent, Rhode Island's interest as the site where the pollution was located in assuring that adequate monies existed to fund such remediation. Last, the court's choice of New Jersey law did not further Lonza's interest in obtaining the insurance benefit that it purchased.
When all of these interests are weighed, it is plain that Rhode Island law should be applied in accordance with the Pfizer, choice-of-law analysis.
We thus conclude that the orders entered in the Lonza matter on October 8, 1999, March 31, and July 21, 2000, and May 23, 2001, should be reversed insofar as they provide for the application of New Jersey law to the issues of trigger and allocation, and we remand that matter to the trial court for resolution in accordance with Rhode Island law.
At this juncture, note must be made of two other matters. The first is excess-insurer American's argument that it must remain dismissed from this litigation because it has no payment obligation to Lonza under either New Jersey or Rhode Island law.
If New Jersey law is applied, all of the excess insurers, including American, are free of any liability to Lonza because the damages allocation to any particular year will not exceed the limits of Lonza's primary insurance for that year. According to American, if Rhode Island's law is applied, then it is not liable to Lonza because it provided no excess-insurance coverage to Lonza in 1979, the year that the pollution at Lonza's Rhode Island facility manifested. Thus, American asserts that its dismissal from this litigation should not be disturbed no matter what the outcome is of this appeal. We reject American's argument.
In their main brief, the AIG defendants and Everest "vigorously dispute" that the manifestation date in Rhode Island was 1979. In their supplemental brief, the AIG defendants and Everest expand on this argument, pointedly contending both that the trial judge did not decide the issue of the manifestation date and that the "trigger date has never been fully and fairly contested." For its part, Lonza argues simply that we should "refuse to entertain the AIG Defendants' arguments concerning the 1979 manifestation date" because that date has been established as the "'law of the case.'"
In light of this apparent dispute, we reject American's request essentially to affirm its dismissal from this litigation. The court below can more properly address that matter following further development of the record concerning the manifestation date of the pollution in Rhode Island.
We now turn to the appeal filed from the trial court's decision in the four consolidated GE, Home, Sterling, and Rohm Mercer County cases. These are "[f]our complex environmental cases" and involved "determining which state's (or states') law of coverage allocation should apply to a multi-site, multi-state, multi-insurer environmental coverage dispute being litigated in the courts of New Jersey." As the trial judge in those cases summarized the matters (footnotes omitted):
Each of the four environmental cases before this court began as a mammoth lawsuit seeking coverage from multiple insurers for contamination in multiple sites in multiple states. Over time, the dimensions of the cases have been pared down in various ways.
A. General Electric/RCA v. Certain Underwriters at Lloyd's London, et al. (Docket Nos. MER-L-4931-87 c/w MER-L-6432-88)
This matter involves an effort by plaintiff General Electric Corporation ("GE"), as successor in interest to RCA Corporation ("RCA"), to receive coverage under hundreds of insurance policies for environmental damages at dozens of RCA sites around the world. At the relevant times, RCA was a Delaware corporation with its principal executive offices in New York. During that period, RCA conducted substantial manufacturing and research in New Jersey at several facilities, including the headquarters of its Missile and Surface Radar Division and its Solid State Division. In addition, RCA's insurance department was located in New Jersey from 1945 through 1959 and again from 1983 through 1986.
The original defendants in GE/RCA included a host of insurance companies who wrote comprehensive general liability coverage for RCA in over four decades. As the result of settlements and other events, the remaining defendants now before this court are all London-based syndicates and companies, located primarily in England and at other locations in Europe. Each of the London policies was issued, executed and sealed by a Lloyd's representative in England. From 1950 through 1983 London sold RCA excess third-party liability coverage for RCA's worldwide operations. Subject to policy exclusions, the disputed London coverage amounts to more than $800 million over the thirty-three years at issue.
Initially, this lawsuit involved over eighty contaminated sites throughout the United States and foreign locales. Given the complexity of the matter, the Court appointed a Special Discovery Master . . . to supervise the pretrial proceedings. In addition, the Court appointed a Special Allocation Master . . . to resolve issues of allocation, subject to oversight by this court.
As the result of case management measures, the GE/RCA litigation was divided into phases. Phase I concerned former RCA sites in Lancaster, Pennsylvania and Marion, Indiana. RCA represents that it has spent more than $10 million in response costs on the Pennsylvania site clean-up and over $1 million on the Indiana site. After a bench trial . . . this court in July 2001 found London liable for coverage of the Pennsylvania and Indiana sites. The allocation issues connected with that coverage were referred to the Special Allocation Master.
Phase II of GE/RCA concerns numerous sites variously located in Colorado, New Jersey, Massachusetts, Ohio and Puerto Rico. The phasing of the remaining sites in the case has yet to be established.
On October 30, 2003 [the] Special Allocation Master . . . issued a twelve page decision, finding that the respective allocation laws of Pennsylvania and Indiana applied to coverage for the Phase I sites. In adopting that "law-of-the-site" approach to allocation, the Special Allocation Master was guided by the multi-factor analysis for environmental coverage cases, as espoused by the Supreme Court in Pfizer, Inc. v. Employers Insurance of Wausau, 154 N.J. 187 (1998). The four components of Pfizer's choice-of-law test are as follows:
(1) the competing interests of the several states;
(2) the national interests of commerce among the several states;
(3) the interests of the parties; and
(4) the interests of judicial administration.
Considering each of these factors in turn, the Special Allocation Master concluded that the greatest interests in the allocation are those of the states in which the Phase I waste sites were located, i.e., Pennsylvania and Indiana. The Special Allocation Master also concluded that none of the three other Pfizer factors (national interests in commerce; the parties' interests, and judicial administration) weighed strongly for either side.
The London defendants timely appealed the Special Allocation Master's choice-of-law ruling, pursuant to the Order of Reference which permits this court to set aside determinations of the Special Allocation Master that are clearly erroneous or contrary to law. London advocates that New Jersey allocation law, specifically the Carter-Wallace formula, should apply to all sites and phases in the GE/RCA litigation. Conversely, plaintiffs GE/RCA argue that the Special Allocation Master's ruling should be sustained, so that the law of each site will control allocation in all phases of this litigation.
B. Home Insurance Co. v. Cornell-Dubilier Electronics, Inc. and Federal Pacific Electric Co., et al. (Docket No. MER-L-5192-96 c/w MER-L-2773-02)
Cornell-Dubilier Electronics, Inc. ("CDE") was a manufacturer of electronic components from the 1930s through the 1980s. For most of its active business years, CDE had its principal place of business in New Jersey. In 1960, Federal Pacific Electric Company ("FPE"), another New Jersey-based corporation, acquired the majority of the common stock in CDE.
As part of its manufacturing processes, CDE used polychlorinated biphenyls (PCBs), trichloroethylene (TCE), and other organic chemicals which, over time, caused harm to the environment. Apart from the CDE sites that it eventually acquired, [sic] FPE itself also owned or operated other facilities in various states that discharged pollutants. Federal and state regulatory authorities have ordered CDE and FPE to fund cleanups of these sites. The contaminated CDE and FPE sites remaining for trial before this court are located in seven states: California, Connecticut, Georgia, Massachusetts, New Jersey, North Carolina and South Carolina.
Between 1959 and 1980, CDE and FPE obtained liability coverage from a host of insurance companies in various states. They sought coverage under those policies for the environmental sites in question. These claims led one of those insurers, the Home Insurance Company, a New Jersey based insurer, to bring in 1996 a declaratory judgment action in the Superior Court of New Jersey against CDE, FPE and more than a dozen other primary and excess insurers of those companies. CDE and FPE brought cross-claims against those defendant insurers to obtain coverage.
Eventually, the Home Insurance Company ceased its involvement in the lawsuit, leaving open CDE's and FPE's cross-claims against the other insurers. The case has been litigated on a site-by-site basis. Some of the CDE and FPE sites have been in "all sums" allocation law states (e.g., Massachusetts); others have been in states with horizontal allocation law (e.g., New Jersey.).
To date, two of the CDE/FPE sites (Sullivan's Ledge landfill in New Bedford, Massachusetts and the South Plainfield, New Jersey facility) have been tried in this court, and three other sites (New Bedford Harbor; the Norwood, Massachusetts plant; FPE's Vidalia, Georgia plant) have settled on the eve of trial. Also, several of the defendant insurers have attained global settlements with the policyholders covering their entire policies.
At present, there are several major sites left to resolve in the CDE/FPE litigation: Newark, New Jersey; the "Dismal Swamp" site in New Jersey; Venice, California; Edgefield, South Carolina; and various smaller sites. The remaining defendants include three groups of excess insurers: Allstate/North Brook; certain London Market Insurers ("LMI"); and the United Insurance Company ("United"); as well as two state insurance guaranty associations.
Just like their fellow policyholders in the GE/RCA case, CDE and FPE argue that the law of the state in which a particular contaminated site is located should control allocation issues. Similarly, the defendant insurers in CDE/FPE have advocated that New Jersey allocation law should govern.
C. Sterling Winthrop, Inc. v. Royal Indemnity Insurance Co., et al. (Docket Nos. MER-L-106-94 and MER-L-101-94)
This third case is distinctive from the others before this court in that it presently involves only a single unresolved site. Initially, the lawsuit was brought by plaintiff Sterling Winthrop, Inc. ("Sterling") against more than forty of its insurers to obtain coverage for environmental harm at facilities Sterling owned or operated in New Jersey, New York, Ohio, South Carolina and Puerto Rico. During the policy years in question, Sterling was a New York corporation with its principal place of business in New York City. Its former parent from 1988 to 1994, Eastman Kodak Corporation, was incorporated in New Jersey.
Following various settlements, the Sterling Winthrop case has narrowed down to a final contaminated site: the former Hilton-Davis plant in Cincinnati, Ohio. The settlement process has also winnowed down the defendant insurers to three: Century Indemnity Company, Ace Property and Casualty Company, and Central National Insurance Company of Omaha, collectively known as "the Ace defendants."
Sterling contends that the law of Ohio applies to all coverages for its Hilton-Davis site. It further argues that the present law of Ohio calls for an "all sums" approach to allocation, an argument that could work to Sterling's advantage in reaching the Ace defendants' excess layers of coverage.
The Ace defendants urge that the so-called Pfizer factors instead require the application of New Jersey allocation law to the Ohio site. The Ace defendants also contend that Sterling's claims against it are non-justiciable since, in their view, the estimated damages for the Ohio site do not trigger Ace's excess coverage under New Jersey, New York or even Ohio law. In particular, the Ace defendants dispute Sterling's interpretation of Ohio law suggesting it is an "all sums" state. Finally, the Ace defendants submit that if this court nevertheless applies Ohio law and rejects Ace's arguments of non-justiciability, then Ace should be granted leave to pursue contribution and indemnity claims from the forty or more insurers who had previously settled with Sterling.
D. Rohm & Haas Co. v. Allianz Underwriters, et al. (Docket No. MER-L-4664-95) and Rohm & Haas Co. v. United States Liability Insurance Co., et al. (Docket No. MER-L-4920-87)
This is the fourth environmental coverage action that was included in the combined oral arguments held on the allocation law issues discussed in this Opinion. Since the time of those arguments, global settlements were achieved between plaintiff Rohm & Haas and the remaining active defendants in that case. Accordingly, the factual background of that litigation is mentioned only briefly here for sake of completeness.
Rohm & Haas is a chemical manufacturer, with its principal place of business in Pennsylvania. The company produced a variety of products, using and generating several industrial substances that apparently caused environmental harm at more than a hundred sites. Rohm & Haas pursued claims from its assorted insurers to obtain coverage for the costs of cleaning up those contaminated sites.
As the coverage litigation matured, settlements were attained with many of the Rohm & Haas insurers. By the time of the initial choice-of-law arguments before this court, the major unsettled sites were located in six states: Kentucky, New Jersey, Ohio, Pennsylvania, Rhode Island and Tennessee. Consistent with the pattern of the other litigants before this court, Rohm & Haas argued that the law of each site should control allocation issues; its insurer adversaries sought the uniform application of New Jersey allocation law.
E. The Combined Arguments.
Given the common legal issue involved, this court combined these cases for argument on the choice-of-law question. Initially, it heard argument in the Home v. CDE/FPE, Rohm & Haas and Sterling Winthrop matters, and reserved decision. Thereafter, [the] Special Allocation Master . . . issued his choice-of-law ruling in GE/RCA, from which the London insurers appealed. The court then invited counsel in the other three cases to file comments on [the] Special Master['s] . . . analysis.
An omnibus argument in all four cases was conducted in December 2003, and this Opinion ensued. Counsel for certain insurers in GE/RCA and in Home v. CDE/FPE thereafter moved for reconsideration. The motions were denied.
Lloyd's primary argument is that the trial court erred in determining that there is a strong rebuttable presumption in New Jersey choice-of-law jurisprudence that the law of the state in which a contaminated site is located governs the allocation of responsibility among insurers for the payment of insured losses attributable to that contamination. This argument has merit.
In his written decision addressing the common issue in the four consolidated cases before him, the trial judge held
that the established allocation law of the state in which an insured environmental site is located presumptively shall be applied to that site. That presumption may be overcome only by a clear and convincing demonstration, based upon facts and procedural history specific to the case, of compelling reasons for applying a different state's law of allocation to the matter. The Court further concludes that the law of each site shall govern allocation in the four cases before it, the record failing to justify a departure from that basic norm.
The judge reasoned that the "competing policy interests of the affected states [that is, those states whose allocation law might be applied] are best served by a rule of decision that looks, at least presumptively, to the allocation law of the state where a contaminated site is situated." The judge concluded that
[o]n the whole, the court is persuaded that the most preferable rule of law, one consonant with the principles of Pfizer, is to presume that the established law of each site will govern allocation in environmental coverage litigation. To avoid injustice, however, that presumption may be overcome in rare situations. For the presumption to give way, there must be clear and convincing proof, based upon facts and procedural circumstances specific to the case, that compel the application of a different state's law of allocation.
Subsequently, in denying a motion for reconsideration by Lloyd's and another defendant-insurer, the judge addressed the argument that the rebuttable presumption that he applied was contrary to the choice-of-law analysis framework set forth in Pfizer.
The judge rejected that argument, indicating essentially that he had "factor[ed] in all of the considerations" set out by Pfizer and had "endeavored to balance all the competing considerations to formulate a presumptive rule that could, in [rare] circumstances, be overcome with competing proof." The judge noted that, even though the presumption he had crafted and applied was the "preferable presumptive model," it was "not immutable" and "could be overcome by a clear and convincing showing that there is more sense in adopting some other [allocation] methodology given idiosyncracies [sic] that may exist in a particular fact pattern or environmental case."
As is apparent, the judge in the Mercer County matter determined that there was a strong presumption that the allocation law of the contaminated site should be applied in multi-state environmental-contamination cases and that the presumption could only be overcome in "rare" instances. The difficulty presented is that Pfizer neither contemplated nor authorized this presumption and it is the controlling decision concerning choice-of-law analysis.
Instead, while Pfizer recognized the importance of the location of a contamination site as a factor in determining which state's law to apply in an environmental-contamination case, it refused to endorse a "bright-line rule" that the law of the state where the contaminated site is located governs legal issues concerning insurance coverage. Pfizer, supra, 154 N.J. at 196-97. Instead, Pfizer indicated that there was "no way to avoid" the "demanding" process required by choice-of-law analysis set out in Restatement (Second) of Conflict of Laws 6 (1969), "in order to choose the applicable law that governs the disputed issues . . ." in environmental-contamination cases. Pfizer, supra, 154 N.J. at 197.
Of course, Pfizer easily could have established a rebuttable presumption akin to that set out by the trial judge if it wanted to do so. After all, in another environmental-contamination case that dealt with an insurance-allocation issue, the Supreme Court stated that it "anticipate[d] that the principles of Owens-Illinois[, Inc. v. United Ins. Co., 138 N.J. 437 (1994)] as clarified by our decision today, represent the presumptive rule for resolving the allocation issue among primary and excess insurers in continuous trigger liability cases unless exceptional circumstances dictate application of a different standard." Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 328 (1998) (emphasis added).
Where the Court sees the need and wisdom for a presumptive rule concerning allocation, it will not hesitate to establish one. Tellingly, it did not establish the law-of-the-contamination-site presumption that the trial court established and applied in this case.
The result is that the trial court's decision designating the allocation law of the contamination site as controlling is suspect and untenable. This is so because, even though the court below reviewed the four Pfizer factors and commented on their general application to the four cases before it, it did not explicitly conduct the pointed choice-of-law analysis required under the Pfizer rationale.
Thus, the trial court did not conduct a specific analysis geared to the present case and, most significantly, the overarching and unauthorized rebuttable presumption that it had established clouded any analysis that it did conduct. The possible effect of the rebuttable presumption on the trial court's evaluation of the Pfizer factors that it generally considered cannot be measured. The trial court indicated that only rarely and where the proof was clear and convincing could any countering factors overcome the law-of-the-site presumption. Such a tilt is not part of the Pfizer choice-of-law analytical framework.
As Everest recognized, the issue posed by the trial court decision in the four consolidated Mercer County cases is somewhat different from that raised in the Lonza appeal because it does not concern the trigger and subsequent allocation of insurance coverage, but only the issue of allocation. This difference is not especially significant, however, because the relevance of that decision lies in the judge's view and application of New Jersey's choice-of-law analysis, and not so much in the subject matter of that analysis.
It is noteworthy that, in conducting his choice-of-law analysis, the trial judge distinguished both our decision and the trial judge's decision in Lonza on remand in that case. In doing so, the judge reasoned that "Lonza signifies only that the laws of the same state must govern both trigger and allocation, and that one state's allocation law must control both the primary and excess coverages for a particular policy period." According to the judge, "[b]y its facts, Lonza does not resolve the central issue before this court: what state's (or states') allocation rules apply to a multi-site, multi-state environmental coverage action." Rather, "Lonza leaves unresolved whether the law of the state in which that last unsettled site is situated controls allocation on all years of an insured's coverage chart, or whether it only governs certain policy periods."
After distinguishing the legal reasoning expressed in Lonza, the judge set out various "choice-of-law options" concerning which state's allocation law would govern in the four consolidated cases before him, determining that there were "no perfect solutions . . ." and that all of the available choices were "fraught with disadvantages" to one or more of the parties. The judge then examined those options "in the light of the four standards of Pfizer."
Applying Pfizer's competing-interests-of-the-states factor, he indicated that the states in which a contaminated site is located have a dominant interest in having their law applied. See Pfizer, supra, 154 N.J. at 198-99. Thus, he concluded that:
the competing policy interests of the affected states are best served by a rule of decision that looks, at least presumptively, to the allocation law of the state where a contaminated site is situated. Other options, such as the nexus of the insurers, the nexus of the insured, or the place of contracting, are less focused on those interests.
In all the circumstances, we reverse the trial court's decision in Home Insurance, and we remand the matter so that the trial court may conduct a choice-of-law analysis consistent with the requirements of Pfizer.
Finally, we address Lloyd's remaining argument, namely that the trial court's determination that the law of the contaminated site governs allocation issues violates due process because of the allegedly arbitrary and inequitable results that a trial court's sequential application of the states' differing allocation laws may produce. Stated somewhat differently, Lloyd's contends that the trial court failed "to recognize that[,] in a multi-site [and multi-state] coverage dispute[,] allocation of losses to an integrated insurance profile is a unitary issue that is not amenable to application of multiple and conflicting rules but [instead] must be governed by a single methodology, consistently applied."
Essentially, Lloyd's asserts that the allocation of responsibility among insurers is a "unitary issue" that "cannot properly be fragmented" by the application of the differing allocation laws of various states, such as occurs when the governing allocation law for a particular contaminated site is deemed to be the law of the state in which that site is located. According to Lloyd's, a trial court's sequential imposition of the possibly differing allocation laws of different states in a multi-site, multi-state environmental-contamination case can result in an inequitable depletion of available insurance proceeds that prejudices the policyholder and "produces arbitrary results."
Thus, Lloyd's asserts that, in choosing to apply the allocation law of the state where a contaminated site is located, the trial court:
elected an approach that indisputably can generate radically different outcomes - how much coverage is available for each site's losses, what portions of the losses each individual insurer must pay, and what portions are allocable to the policyholder - depending solely on the arbitrary order in which the losses are sequenced for allocation [by the courts].
Lloyd's proffers various hypothetical results arising out of a trial court's sequential application of the law-of-the-site allocation scheme to different situations, asserting that these projected results are arbitrary, unfair, and thus a violation of due process because "radically different outcomes" are possible. Lloyd's appears to have first raised this argument at a motion hearing on May 15, 2003, and to have continued its argument at another hearing on December 23, 2003. In his written decision, the trial judge directly addressed Lloyd's argument.
First, the judge noted that the:
insurers criticize this law-of-the-site approach to allocation because its effects may be skewed by the order in which sites are listed for trial. If, for instance, the sites in states with "all sums" allocation rules are disposed of first, that sequence will increase the chances that excess layers of coverage will be used up before the claims from sites in other states are resolved. Conversely, if sites[, like sites in New Jersey,] with pro rata or horizontal allocation rules are front-loaded for disposition, the excess carriers are less likely to be depleted before the remaining sites are addressed.
The judge then illustrated the effects of sequencing, applying the allocation law of the contamination site. The illustration was complete with a chart and calculations showing the insurance-proceeds payouts for an insured's contaminated sites located in Pennsylvania, which is an "all sums" jurisdiction, and in New Jersey, which is a weighted pro rata jurisdiction, where the Pennsylvania sites are addressed first and thereafter where the New Jersey sites are addressed first. In concluding, the judge stated that "[t]his exercise demonstrates that the law-of-the-site approach to allocation can be materially affected by the order in which sites are adjudicated."
The judge further noted that, contrary to the thrust of Lloyd's argument, there may be situations in which insureds would not "desire" application of the law-of-the-site approach and other situations in which insurers might not "disfavor" that approach. The judge then observed that any allocation method is "capable of leading to uncertain or skewed outcomes," and that proper case management over allocation by the court could avoid or minimize such outcomes. According to the judge, a court "itself has supervisory powers over such case management issues," and, "[i]f the proposed [allocation] sequence is inequitable, the [c]ourt has the power to reject it or make appropriate adjustments."
The judge concluded by determining that the law of the state in which the contaminated site is located would govern allocation in the present case and, pertinently, by indicating that the "court has closely managed discovery and site selection [in this case] . . ., and perceives no inequity in how the sites in that case have been sequenced to date. Indeed, the sites adjudicated so far have involved states with a mix of allocation rules."
In his oral decision denying Lloyd's motion for reconsideration, the judge expanded upon his rationale for rejecting Lloyd's due process and sequencing argument. First, the judge noted that there was no authoritative support for Lloyd's contention that "a single method of allocation or a single law of allocation necessarily must be applied in a multi-site, multi-state case."
Next, the judge addressed Lloyd's contention that arbitrary outcomes arising from application of the law-of-the-site approach result in a violation of due process. After noting that Lloyd's had provided no authoritative support for its argument, the judge indicated that the law-of-the site approach "does not inexorably lead to arbitrary outcomes" and that he had selected that approach because it was more likely to avoid such outcomes. The judge then noted that his consideration of the "actual record" before him in the four consolidated cases had convinced him that the law-of-the-site method had not produced arbitrary outcomes so far.
The judge then rejected Lloyd's argument that allocation matters were too complex for a trial court's proper case management, observing that such management involved the active participation of the parties' counsel and the judge "to alert the [c]ourt to nuances and facts that could potentially demonstrate that the law of the site . . . should not be applied for various specific reasons." Thus, according to the judge, "there is plenty of opportunity for counsel to raise points that might dissuade the [c]ourt from applying a law of the site method." In light of such active participation by the court and counsel, the judge did "not in any way believe that there is a built-in unconstitutional degree of arbitrariness in applying the law of the site to allocation."
Lastly, the judge rejected Lloyd's contention that the "sequencing" of allocation under the law-of-the-site approach would "favor states with sites that are allegedly first in line for allocation." In doing so, the judge indicated essentially that any prejudice would be minimal because the "parties would have the opportunity to weigh in on the selection of sites and the sequencing of sites that would be pursued."
On appeal, Lloyd's raises the same due process and sequencing argument that it did in the Law Division, and we also reject it here. As Lloyd's admits, "there are no decided cases in the due process arena (or in any other) quite like this one." This lack of pertinent authoritative support undercuts the whole of Lloyd's argument from its outset.
More significantly, Lloyd's does not present a convincing argument to counter the trial court's declaration that proper case management, coupled with the conscientious assistance of the parties' counsel, can and will adequately address any due process and sequencing problems arising out of the application of the law of the site approach. The judge below was definitely aware of the problem highlighted by Lloyd's argument, and he resolutely determined that the problem could be adequately addressed through assiduous court management or allocation. In our view, Lloyd's has presented nothing to indicate that the judge's determination in that regard was incorrect.
As Pfizer noted, in explaining the "judicial factor" aspect of its analysis, "[e]nvironmental insurance coverage cases tend to be extraordinarily complex, with multiple parties and multiple issues. Efficient [judicial] administration of such cases is an important factor to consider." Pfizer, supra, 154 N.J. at 199. In the present case, the court below has indicated that pointed court administration will avoid the arbitrary results and due process violations that Lloyd's essentially argues are unavoidable if the law-of-the-site approach to allocation is applied. Lloyd's provides only hypothetical support for its argument.
To summarize, the trial judges in both appeals erred in the degree of significance that they attached to the site of the environmental contamination under their respective choice-of-law analyses. The judge in Lonza gave very little, if any, consideration to the circumstance that the polluted site is located in Rhode Island. In Home Insurance, the trial judge attached conclusive significance to the location of the contamination, essentially determining that the law of the state in which the polluted site is located will almost always be applied. Thus, neither judge appears to have followed the analytical framework required by Gilbert Spruance and Pfizer.
In Lonza, we reverse the orders entered on October 8, 1999, March 31, 2000, July 21, 2000, and May 23, 2001, insofar as those orders provide for the application of New Jersey law to the issues of trigger and allocation. In that matter, we remand to the trial court for resolution in accordance with Rhode Island's law on the issues of trigger and allocation.
In Home Insurance, we reverse and remand so that the trial court may conduct a choice-of-law analysis that conforms to the requirements of the Pfizer decisional framework.
We do not retain jurisdiction in any of these matters.
"Primary insurance provides first dollar liability coverage up to the limits of the insurance contract, usually subject to a deductible. It potentially attaches upon the happening of an insured liability." Spaulding Composites Co., Inc. v. Aetna Cas. & Sur. Co. (Spaulding Composites), 176 N.J. 25, 36 n.4 (2003), cert. denied sub nom., Liberty Mut. Ins. Co. v. Caldwell Trucking PRP Group, 540 U.S. 1142, 124 S. Ct. 1061, 157 L. Ed. 2d 953 (2004).
Granite, Lexington, National, and New Hampshire are, at times, referred to in this litigation and, consequently herein as the "AIG defendants."
"Excess insurance is secondary coverage that ordinarily attaches only after a predetermined amount of primary insurance or self-insured retention has been exhausted." Spaulding Composites, supra, 176 N.J. at 36 n.4.
"Trigger" is a term describing the event that determines, according to the terms of an insurance policy, whether the policy must respond to a claim under a particular set of circumstances. Quincy Mut. Fire Ins. Co. v. Bor. of Bellmawr, 172 N.J. 409, 416 (2002).
We note Lonza's argument that "[t]his is a single site case," to which section 193's law-of-the-site presumption attaches, but Lonza is plainly mistaken, because the Hartford policies covered facilities at multiple sites in several states, and Lonza's complaint in 1997 sought recovery for damages at eleven contaminated sites in eight states under the terms of those policies. Reflecting the multiple-site nature of the insurance policies, the case began as a multiple-site case, with the trial court making choice-of-law determinations involving the laws of several states. Lonza, supra, 359 N.J. Super. at 338-39. Over time, the number of sites in dispute winnowed down until only the insurance coverage involving the Rhode Island site remained in contention. But an "insured's rights under the [casualty-insurance] policy are fixed at the time of their issuance." Pharmacia & Upjohn Co. v. Am. Ins. Co., 316 N.J. Super. 161, 166 (App. Div. 1998). The multiple-site status of this case became fixed when Hartford issued its policies covering multiple sites, and Lonza's effort to characterize this litigation as a "single site case" is singularly unpersuasive.
The appeal in this case was settled.
(continued)
(continued)
3
A-0170-03T1
May 16, 2006
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