is that CU is relieved from its obligation to defend.
The Court disagrees. First, CU's argument that NL delayed one to two months, and in one occasion ten months, before providing notice is not so -- CU arrives at these numbers by counting from the time the complaints were filed, rather than from when they were served upon NL. In fact, NL provided notice to CU within ten days to two weeks of receiving process in all of these action. The four new lead paint actions are unlike, for example, auto accidents for which every moment of delay potentially prejudices the insurer; there, the insurer needs to examine the relative position of the cars and the condition of the road, so it can most accurately determine what transpired, as well as record statements from witnesses while memories are most fresh. Here, on the other hand, the claims asserted concern conduct by NL that spanned much of the twentieth century, and the knowledge of NL executives during that period. The timeliness of the investigation an insurer would have to perform to defend against these claims would not be quite so important. That does not mean that under no circumstances could NL have provided late notice thereby extinguishing its right to coverage. However, this Court concludes that the two week lag between NL's receipt of process and its notification to CU does not constitute a breach of the policies.
In addition, as NL notes, before these four lead paint cases had been served upon it, CU had already denied coverage on other lead paint actions on the ground that NL expected or intended the harm. A repudiation of liability by the insurer on the ground that the loss is not covered operates as a waiver of the notice requirements of the insurance contract and other conditions precedent. H.S. Equities, Inc. v. Hartford Accident and Indem. Co., 661 F.2d 264, 270 (2d Cir. 1981). Indeed, Professor Williston, in his treatise on contracts, explains the general doctrine whereby the performance of a condition is excused when it is obvious that the other party is not going to keep its promise to perform whether or not the condition is fulfilled. Williston on Contracts, Third Edition § 699 at 344-48. To illustrate this principle he states: "For instance, if an insurance company indicates that it is not going to pay an insurance loss in any event, the insured is excused from compliance with a condition requiring proof of loss, or arbitration or other preliminary acts." Id. at 349. Accordingly, this Court holds that CU's previous disavowal of coverage of lead paint claims against NL on the basis that NL engaged in intentional conduct served as a repudiation of coverage for the later claims as well, and thus excused NL's duty of timely notification of the claims in dispute here.
As to CU's argument that NL breached the "cooperation" clause of the policies by hiring outside counsel before CU was notified of the four suits, this too is without merit. Under New York law, it "is firmly established by the case law and commentators that where conflicts of interest between an insurer and its insured arise, such that a question of loyalty of the insured's counsel to that insured is raised, the insured is entitled to select its counsel, whose reasonable fee is paid by the insurer." Emons Industries, Inc. v. Liberty Mutual Ins. Co., 749 F. Supp. 1289, 1297 (S.D.N.Y. 1990). Here, the conflict between NL and CU is manifest: CU wants to establish that NL intentionally brought about the harm to the plaintiffs in the underlying suit to bring the claims without the policies; NL's interest is to prove the contrary. That NL hired outside counsel to represent it, under the circumstances, was reasonable, and does not constitute a breach of its duty to cooperate.
3. CU's Defense that Orleans Parish Contains Only Uncovered Claims
The policies at issue provide coverage for claims seeking damages for "bodily injury" or "property damage." CU maintains that the harms alleged in Orleans Parish do not fall within these terms, as the complaint avers that "the presence of lead based paint in the various school buildings owned by petitioner represents a potential hazard to the children who are students at these schools." Furthermore, this suit seeks the reimbursement or payment for abatement expenses taken or to be taken to prevent injury or damage that has yet to occur. NL counters that such remedial costs do fall within the policies.
The Court of Appeals of New York has not addressed the breadth of the term "damages" in insurance contracts and whether it includes abatement costs. The Second Circuit, in Avondale Indus. Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1206-07 (2d Cir. 1989), was called upon to determine whether "damages" included the remedial costs of cleaning up a hazardous waste site. Because the policy did not define "damages," the Court, in accord with New York law, sought to divine the "natural and reasonable meaning" of the term, "corresponding to the 'reasonable expectation and purpose of the ordinary businessman.'" Id. (quoting Ace Wire & Cable Co. v. Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 398, 469 N.Y.S.2d 655, 457 N.E.2d 761 (1983)). The Court, agreeing with the district court's conclusion, held that "damages" "include funds necessary for restoration of third parties' properties." Id.
Avondale is persuasive, although not controlling, because the disputed terms here are at least somewhat defined: "bodily injury" is "bodily injury, sickness or disease suffered by any person"; "property damage" is "injury to or destruction of tangible property." Moreover, the Court does find troubling NL's attempt to interpret "bodily injury" to encompass the potential bodily injuries alleged in Orleans Parish. But, the Court need not resolve the limits of "bodily injury," for it concludes that the abatement costs associated with the removal of lead paint from the schools in Orleans Parish constitute at least "property damage" under the policies. Indeed, damages "to real property have always been measured either by the cost to restore it to its former condition or to compensate for any reduction in value." American Motorists Ins. Co. v. Levelor Lorentzen, Inc., 1988 U.S. Dist. LEXIS 11631, 1988 WL 112142, *3 (D.N.J. October 14, 1988) (under New York law insurer liable for defense costs where underlying suit sought clean-up costs under CERCLA). The lead paint covering the schools in Orleans Parish is like graffiti: both reduce the value of the property by their mere existence and require an expenditure to be removed. Just as graffiti undoubtedly qualifies as property damage, so must the lead paint damage at issue here. Moreover, this Court need not conclude definitively that the Orleans Parish allegations are covered, but only that they "may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer's responsibility to pay." Seaboard, 64 N.Y.2d at 310-11.
And, the Court's conclusion that the abatement costs may rationally said to be covered by the policy and require CU to defend means that CU must defend against the entire action, even though other claims may not be covered. Continental, 80 N.Y.2d at 648. Accordingly, the policy requires that CU defend the Orleans Parish action.
4. CU's Defense that the Pollution Exclusion Bars Coverage
Certain CU policies, those effective from January 1, 1970 to January 1, 1978, contain a pollution exclusion clause which states that the insurance does not apply:
to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.
CU claims that lead paint is a pollutant within the meaning of this clause, and that therefore coverage does not extend to the injuries and damages alleged in the underlying suits. NL asserts that lead paint can not be considered a pollutant and thus the exclusion does not apply.
"When an exclusion clause is relied upon to deny coverage, the insurer has the burden of demonstrating that the allegations of the complaint cast that pleading solely and entirely within the policy exclusions, and further, that the allegations, in toto, are subject to no other interpretation." Technicon Electronics Corp. v. American Home Assurance Co., 74 N.Y.2d 66, 73-74, 542 N.E.2d 1048, 544 N.Y.S.2d 531 (1989) (citations omitted). This burden on CU, the minimal requirement that the claims against the insured reasonably fall within the policies' coverage, and the unresolved nature of the breadth of the pollution exclusion, lead this Court to conclude that CU must defend.
The Court of Appeals of New York has not addressed whether lead paint claims fall within the pollution exclusion, and there is a split among those lower New York courts which have. In Oates v. State of New York, 157 Misc. 2d 618, 623, 597 N.Y.S.2d 550 (N.Y.Ct.Cl. 1993), the New York Court of Claims found that "lead paint is a chemical and a contaminant that can irritate or poison," and thus fell within a pollution exclusion worded similarly to the one in dispute here. Id. On the other hand, in Generali-U.S. Branch v. Caribe Realty Corp., 160 Misc. 2d 1056, 1061-62, 612 N.Y.S.2d 296 (Sup.Ct. 1994), a New York trial court granted summary judgment to an insured seeking a declaration that the insurer had to defend lead paint claims where the insurer sought shelter behind the pollution exclusion. That court relied in part upon the Massachusetts Supreme Court's analysis in Atlantic Mutual Ins. Co. v. McFadden, 413 Mass. 90, 92, 595 N.E.2d 762 (1992):
There simply is no language in the exclusion provision from which to infer that the provision was drafted with a view toward limiting liability for lead paint-related injuries. The definition of "pollutant" in the policy does not indicate that leaded materials fall within its scope. Rather, the terms used in the pollution exclusion, such as "discharge", "dispersal", "release", and "escape", are terms of art in environmental law which generally are used with reference to damage or injury caused by improper disposal or containment of hazardous waste.
This Court does not, now, hold that as a matter of law, lead paint is not a pollutant and therefore the pollution exclusion does not bar coverage. However, this Court agrees with Generali-U.S. Branch to the extent that there exists a "reasonable interpretation of the exclusion other than that it applies to claims based on lead poisoning -- that the exclusion clause only applies to claims for injuries based on environmental pollution." Id. The presence of this reasonable interpretation, where the Court of Appeals has not spoken definitively, compels this Court to conclude that CU must defend these claims.
5. CU's Defense that the Damages and Injuries in Question Occurred Outside the Time Period of the Policies
The policies, which run from February 1, 1966 to January 1, 1978, provide coverage for "occurrence[s] . . . which result, during the policy period, in bodily or property damage. CU contends that it has no duty to defend because the complaints contain allegations of damages outside the duration of the policy. NL argues that all four of the suits concern conduct and damages before, but also including, the policy period, and thus CU must defend entirely.
The Court agrees with NL. The complaints in question contain broad allegations spanning much of the twentieth century. And, "if the allegations of the complaint are ambiguous or incomplete, the insurer is nevertheless obligated to defend if the case is potentially within the coverage of the policy." Ogden Corp. v. Travelers Indem. Co., 681 F. Supp. 169, 172-73 (S.D.N.Y. 1988) (citing Commercial Pipe & Supply Corp. v. Allstate Ins. Co., 36 A.D.2d 412, 321 N.Y.S.2d 219, 221 (4th Dept. 1971), aff'd, 30 N.Y.2d 619, 331 N.Y.S.2d 42, 282 N.E.2d 128 (1972)). The four underlying suits allege activity by NL which clearly encompass the period in which these policies were operable. Accordingly, because the Court concludes that the ambiguous allegations of the complaints are potentially within the coverage period, CU is required to defend.
6. CU's Alternative Arguments
a. Request for Discovery
CU argues that if this Court concludes that CU may have a duty to defend, it should be permitted to conduct discovery on this issue before a final judgment is entered. This request is denied. The standard under New York law for determining whether an insurer must defend is whether the allegations of the underlying complaints suggest that a reasonable possibility of coverage exists. Continental, 80 N.Y.2d at 648. Because the Court must resolve this issue based on the four corners of the complaint, id., additional discovery on the issue of the duty to defend would simply not assist the Court.
b. CU's Claim for Contribution
CU seeks a declaration that it is entitled to contribution from NL. This is the same argument CU advances in its cross-motion for summary judgment, and will be addressed below.
c. CU's Argument that NL is Not Entitled to Attorney Fees in Connection With This Motion
NL charges that it is entitled to recover its attorney fees in this action. CU maintains that under New York law, an insured may only recover such fees where it prevails after being put on the defensive by the insurer: because NL is the plaintiff, it is not entitled to attorney fees.
In Mighty Midgets, Inc. v. Centennial Insurance Co., 47 N.Y.2d 12, 21, 416 N.Y.S.2d 559, 389 N.E.2d 1080 (1979), the Court of Appeals of New York, in a case concerning an insurer's duty to defend, relied upon "the rule in New York that such a recovery [attorney fees in bringing the action] may not be had in an affirmative action brought by an assured to settle its rights, but only when he has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations." Id. (citations omitted). NL maintains that, nevertheless, this Court may, under New York law, still award attorney fees here because there has been an unreasonable, bad faith denial of coverage by CU. However, Mighty Midgets forecloses that option by making clear that New York law does not permit fee shifting in the circumstances presented here.
For this reason, the Court also declines NL's invitation to award attorney fees under the Court's inherent power or under 28 U.S.C. § 1927. Only in the most egregious of cases would the Court, sitting in diversity, consider exercising its power as a Federal Court in contravention of a clear mandate from the highest court of the state whose law is applicable. Third Circuit case law suggests that under these circumstances this Court is, in fact, precluded from doing so. See, e.g., First State Underwriters Agency of New England Reinsurance Corp. V. Travelers Ins. Co., 803 F.2d 1308, 1318 (3d Cir. 1986). NL's motion for attorney fees in connection with this action is denied.
II. CU'S CROSS-MOTIONS
CU moves for summary judgment against INA and Lloyd's for contribution for past and future defense costs in the three original suits. Lloyd's has cross-moved for summary judgment against CU on its claim that it has no obligation to contribute. CU also moves for summary judgement against NL for contribution for defense costs in the old lead paint actions since March 1, 1992. In addition, CU moves for summary judgment against NL declaring that NL must pay its share of defense costs for non-covered claims in all seven underlying actions.
CHOICE OF LAW
A federal court sitting in diversity must apply the choice of law principles of the forum state. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496-97, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Therefore New Jersey choice of laws principles will determine which law governs the contribution claims asserted herein. New Jersey follows the flexible governmental interest analysis to resolve choice of law questions. Pfau v. Trent Aluminum Co., 55 N.J. 511, 263 A.2d 129 (1970). However, "in approaching the choice of law problem, the nature of the action must first be ascertained." McBride v. Minstar, Inc., 1995 WL 434034, *4 (N.J.Super 1994). Here, all claims sound in contract. The New Jersey Supreme Court has adopted the Restatement standard - "significant contacts" - to determine which law governs contract claims. State Farm Mut. Auto Ins. Co. v. Estate of Simmons, 84 N.J. 28, 34, 417 A.2d 488 (1980). New Jersey looks to the jurisdiction "having the most significant relation and closest contacts with the occurrence and the parties." Rohm & Haas Co. v. Adco Chemical Co., 689 F.2d 424, 429 (3d Cir. 1982). The relevant factors to be considered are: the domicile of the parties, the place of contracting, the place of performance, the location of the subject matter, the reasonable expectations of the parties and the governmental and legislative interests of the states involved. Restatement Conflict of Laws (Second) § 188 (1988). While the place of contracting still has meaning, it is no longer the sole and determining criterion for choice of law purposes. State Farm, 84 N.J. at 37.
In State Farm, though, the New Jersey Supreme Court found that
in an action involving the interpretation of an automobile liability insurance contract, the law of the place of the contract will govern the determination of the rights and liabilities of the parties under the insurance policy. This rule is to be applied unless the dominant and significant relationship of another state to the parties and the underlying issue dictates that this basic rule should yield.
Id. In NL Industries, 65 F.3d at 319, in which the Third Circuit reversed and remanded the earlier District Judge's decision to apply New Jersey, rather than New York law to the policies at issue here, the Court quoted the above passage from State Farm -- although it omitted the qualifying: "in an action involving the interpretation of an automobile liability insurance contract . . . ." Id. Nevertheless, the Court interpreted New Jersey law to require that in the ordinary dispute involving the interpretation of an insurance contract, a strong presumption should be accorded to the place of contracting when determining the choice of which law to apply. Id. In deciding whether this presumption should be overcome and whether "the law of a state other than that of contracting has the requisite 'dominant relationship,'" courts are to consider the following factors:
(a) the needs of interstate and international systems,