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NL INDUS. v. COMMER. UNION INS. COS.

May 23, 1996

NL Industries, Inc., Plaintiff
v.
Commercial Union Ins. Cos., Defendant. Commercial Union Ins. Cos., Third-Party Plaintiff v. Certain Underwriters at Lloyd's, et al., Third-Party Defendants. NL Industries, Inc., Plaintiff v. Certain Underwriters at Lloyd's, et al., Third-Party Defendants.



The opinion of the court was delivered by: WALLS

 Walls, District Judge

 In this action, NL Industries, Inc. ("NL") seeks a declaration of the responsibilities of the defendants and third-party defendants under various comprehensive general liability ("CGL") and environmental impairment liability ("EIL") insurance policies for NL's liability for property damage and bodily injury allegedly resulting from environmental contamination at various sites (the "environmental claims") and exposure to chemicals and other substances (the "miscellaneous claims"). It also wants damages for breach of contractual duties under the policies.

 NL and seven of the insurers now move for partial summary judgment with regard to choice of law on the environmental claims.

 I. Background

 On May 30, 1990, NL filed two complaints against CU. The first, No. 90-2124, asked the Court to determine CU's duties with regard to certain products liability claims. The second, the one currently before the Court, requested the same relief with regard to the environmental and other claims. NL later identified 125 specific environmental claims as well as 224 miscellaneous claims. Subsequently, NL added 15 new environmental claims, for a total of 140. These 140 claims involve 93 sites in 28 states. Of the 140 claims, 45 are in New Jersey, 17 in Texas, 9 in Pennsylvania, 8 in Michigan, 7 in California, 6 in Illinois, 6 in Missouri, and the rest are scattered in 21 other states. See International Surplus Br., at 10-11. Of the 93 sites, 21 are in New Jersey. *fn1" Id. at 11.

 NL later filed an amended complaint, adding some claims and parties. Besides CU, the amended complaint seeks relief against 14 other defendants: Certain Underwriters at Lloyd's and other British Companies ("Lloyd's"), Northbrook Excess and Surplus Insurance Co. ("Northbrook"), Aetna Casualty & Surety Co. of America ("Aetna"), Lexington Insurance Co. ("Lexington"), Midland Insurance Co. ("Midland"), First State Insurance Co. ("First State"), Insurance Company of North America ("INA"), American Centennial Insurance Co. ("American Centennial"), Stonewall Underwriters, *fn2" Utica Mutual Insurance Co. ("Utica"), National Union Fire Insurance Co. of Pittsburgh, PA ("National Union"), International Insurance Co. ("IIC") International Surplus Lines Insurance Co. ("International Surplus"), and Evanston Insurance Co. ("Evanston"). Subsequently, the Court dismissed NL's claims against National Union, American Centennial, and Evanston.

 In January 1991, the magistrate judge ordered that discovery focus on 20 representative sites, 10 chosen by NL and 10 by the insurers. Since two of NL's sites were identical to two of the insurers, discovery focused on a total of 18 sites.

 In January 1993, the magistrate judge stayed discovery with regard to four of the 18 sites, and told the parties to select sites to be subject to summary judgment motions and trial. In April 1993, the parties jointly selected two sites--one in Granite City, Illinois (the "Granite City site") and the other in Portland, Oregon (the "Portland site"). Evidently, each site only reflects one claim.

 In May 1993, the Court granted International Surplus and IIC's motion for summary judgment as to various claims, including those arising from Portland site, and denied their motion with regard to the Granite City site.

 NL first moved for partial summary judgment against CU on choice of law with regard to both the product liability and environmental claims in November 1990. In July 1991, the then District Judge granted both motions, applying New Jersey law. In making this determination, he followed the then-controlling New Jersey Supreme Court opinion, State Farm Mutual Automobile Insurance Co. v. Estate of Simmons, 84 N.J. 28, 417 A.2d 488 (1980). CU did not appeal. Rather, NL and CU entered into a settlement under which CU agreed to pay NL's defense costs regarding the product liability claims.

 Subsequently, additional product liability claims were filed against NL. When CU declined to pay NL's defense costs for these, NL again moved for partial summary judgment against CU for choice of law. In response, CU argued that a recent New Jersey Supreme Court opinion, Gilbert Spruance Co. v. Pennsylvania Manufacturers' Association Insurance Co., 134 N.J. 96, 629 A.2d 885 (1993), had changed the law in this area. Under Gilbert Spruance, CU claimed, the Court should apply New York, rather than New Jersey, law.

 In May 1994, that District Judge granted NL's motion for partial summary judgment against CU, applying New Jersey law to both the product liability and environment claims. On appeal, the Third Circuit reversed. The Third Circuit noted that the District Court had wrongly "conflated the environmental coverage action with the lead paint coverage action." NL Industries, Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 324 n.8 (3d Cir. 1995). Further, it ruled that

 Id. at 323. While the Third Circuit held that New York law should apply to the product liability claims, it explicitly noted that "we do not reach the other claims [e.g., the environmental claims]." Id. at 329.

 Now, NL moves again for partial summary judgment, arguing that, with regard to the environmental claims, this Court should apply New Jersey law to all the sites. Seven of the insurers--CU, INA, IIC, Lloyd's, Lexington, International Surplus, and Allstate (as successor-in-interest to Northbrook)--also move for partial summary judgment. However, they contend that the Court should apply New York law or, in the alternative, Illinois and/or Oregon law.

 II. Analysis

 A. Whether a choice-of-law question arises in this matter

 NL requests that the Court make a choice of law decision for all of the environmental sites in this case, not just the two representative sites. The Court will deal with this request below. However, for now, four states clearly have an interest in the substantive issues raised in this motion: New Jersey, New York, Illinois, and Oregon.

 Before a choice-of-law question arises, though, there must actually be a conflict between the potentially applicable bodies of law. See Oil Shipping B.V. v. Sonmez Denizcilik Ve Ticaret A.S., 10 F.3d 1015, 1018 (3d Cir. 1993). If the laws of the forum state and those of the relevant foreign jurisdiction do not differ, there is a "false conflict" and the court need not decide the choice-of-law issue. In re Complaint of Bankers Trust Co., 752 F.2d 874, 882 (3d Cir. 1984).

 A choice-of-law issue arises in this matter because the Court's resolution of at least two important legal questions in this lawsuit depends in part on what state's law it applies. See Lucker Mfg. Co. v. Home Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994). First, the states have variously interpreted the "sudden and accidental" discharge exception found in the pollution-exclusion clause of the comprehensive liability policies such as those issued to NL in this case. In Morton International, Inc. v. General Accident Insurance Co. of America, 134 N.J. 1, 629 A.2d 831 (1993), the New Jersey Supreme Court interpreted the standard "sudden and accidental" exception as having a temporal element, and describing discharges of pollutants that "occur abruptly or unexpectedly and are unintended." Id. at 29. However, the court refused to enforce the standard pollution-exclusion clause as written. It noted that, in obtaining regulatory approval for this language, the insurance industry had "grossly mislead[]" New Jersey and other states' insurance regulatory agencies as to the clause's actual effect on coverage for pollution damage. Thus, the court ruled that it would give effect to the clause "only to the extent that it shall preclude coverage for pollution-caused property damage caused by an 'occurrence' if the insured intentionally discharged, dispersed, released, or caused the escape of a known pollutant." *fn3" Id. at 31. The Illinois Supreme Court also held in favor of the insured with regard to the standard pollution-exclusion clause, however on different grounds. In Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d 1204, 180 Ill. Dec. 691 (Ill. 1992), the court determined that the term "sudden," as in "sudden and accidental," was ambiguous, and thus should be construed against the insurer. Hence, it found that "sudden" should be interpreted to mean "unexpected and unintended." 607 N.E.2d at 1218.

 Conversely, the New York Appellate Division has interpreted "sudden" by its "ordinary meaning," namely, as having a "temporal significance"; it suggested one definition as "abrupt." See Technicon Electronics Corp. v. American Home Assurance Co., 141 A.D.2d 124, 533 N.Y.S.2d 91, 101, 103 (N.Y.A.D. 1988), aff'd, 74 N.Y.2d 66, 542 N.E.2d 1048, 544 N.Y.S.2d 531 (1989). The New York Court of Appeals has not clearly ruled on this question. See Technicon Electronics Corp. v. American Home Assurance Co., 74 N.Y.2d 66, 542 N.E.2d 1048, 1051, 544 N.Y.S.2d 531 (N.Y. 1989) (noting that "we need not rule on the [issue of] suddenness ... because it would be superfluous here"). Like its sister court in New York, the Oregon Court of Appeals has also determined that "sudden" is unambiguous, and that it excludes coverage for liability arising from gradual contamination. See St. Paul Fire & Marine Ins. Co. v. McCormick & Baxter Creosoting Co., 126 Ore. App. 689, 870 P.2d 260, 269 (Or. App.), modified on other grounds, 128 Ore. App. 234, 875 P.2d 537 (1994), review allowed, 907 P.2d 248 (Or. 1995). However, the Oregon Supreme Court has granted review of St. Paul, and a more definitive ruling on this issue is expected.

 Second, the states have interpreted the issue of "late notice" differently. Normally, insurance policies such as those in this case require insureds to give notice of an occurrence as soon as practicable and notice of a claim or suit immediately. If they do not, then the insurer may have a defense against coverage. Apparently, that is an issue in this case. Both New York and Illinois permit insurers to avoid coverage if the insured has provided late notice, even if the insurer did not suffer any prejudice as a result of the insured's dilatoriness. See Industrial Coatings Group, Inc. v. American Motorists Ins. Co., 276 Ill. App. 3d 799, 213 Ill. Dec. 317, 658 N.E.2d 1338, 1343 (Ill. App. 1995); Heydt Contracting Corp. v. American Home Assur. Co., 146 A.D.2d 497, 536 N.Y.S.2d 770, 773 (N.Y.A.D.), appeal dismissed, 74 N.Y.2d 651, 540 N.E.2d 715, 542 N.Y.S.2d 520 (1989). At the opposite extreme, Oregon requires an insurer to demonstrate prejudice in order to prevail on a late notice defense. Lusch v. Aetna Cas. & Sur. Co., 272 Ore. 593, 538 P.2d 902, 904 (Or. 1975). New Jersey opts for the middle ground. It requires an insurer attempting to avoid coverage because of late notice to demonstrate the likelihood of appreciable prejudice. See Peskin v. Liberty Mut. Ins. Co., 214 N.J. Super. 686, 694, 520 A.2d 852 (N.J. Super. 1986), aff'd in part, remanded in part, 219 N.J. Super. 479 (App. Div. 1987); also see Molyneaux v. Molyneaux, 230 N.J. Super. 169, 177, 553 A.2d 49 (App. Div. 1989) (noting that the Appellate Division in Peskin "reaffirmed the need to apply the appreciable prejudice test ... in cases involving late notice to a carrier").

 B. Determining choice of law

 1. New Jersey choice-of-law rules

 A federal court exercising diversity jurisdiction should apply the choice-of-law rules of the forum state. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). Hence, the Court turns to the applicable New Jersey case law.

 State Farm Mutual Automobile Insurance Co. v. Estate of Simmons, 84 N.J. 28, 417 A.2d 488 (1980), involved a situation where the New Jersey Supreme Court needed to determine whether New Jersey or Alabama law should determine coverage under an automobile insurance contract. In resolving this choice-of-law problem, the court relied primarily on §§ 6, 188, and 193 of the Restatement (Second) of Conflict of Laws (the "Restatement").

 
(a) the place of contracting,
 
(b) the place of negotiation of the contract,
 
(c) the place of performance,
 
(d) the location of the subject matter of the contract, and
 
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.

 Id. Moreover, § 188(3) provides that "these contacts are to be evaluated according to their relative importance with respect to the particular issue." Id.

 Section 6 then lists the "factors relevant to the choice of the applicable rule of law....," which are:

 
(a) the needs of the interstate and international systems,
 
(b) the relevant policies of the forum,
 
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
 
(d) the protection of justified expectations,
 
(e) the basic policies underlying the particular field of law,
 
(f) certainty, predictability and uniformity of result, and
 
(g) ease in the determination and application of the law to be applied.

 Restatement, § 6, at 10; see State Farm, 84 N.J. at 34. Section 193 provides that insurance contracts are governed

 
by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and ...

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