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In the Matter of the Liquidation

August 23, 2012

IN THE MATTER OF THE LIQUIDATION OF INTEGRITY INSURANCE COMPANY/ SEPCO CORPORATION.
IN THE MATTER OF THE LIQUIDATION OF INTEGRITY INSURANCE COMPANY/ MINE SAFETY APPLIANCES COMPANY.



On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, Docket Nos. C-63-03 and C-7022-86.

The opinion of the court was delivered by: Payne, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued May 22, 2012

Before Judges Payne, Simonelli and Hayden.

The opinion of the court was delivered by PAYNE, P.J.A.D.

These two appeals, which were argued back-to-back, raise the same issue of the application of conflict of law principles to breach of contract actions filed by claimants Sepco Corporation and Mine Safety Appliances Company (MSA) against Integrity Insurance Company in Liquidation, following the denial of the claims of each by Integrity's Liquidator, as based on an improper method of allocating loss, and the affirmance of the Liquidator's decision by the Special Master and the trial court overseeing the liquidation. Specifically, the appeals present the question whether New Jersey's pro-rata approach to allocation of coverage among triggered insurers should be applied to the present claims, or whether, under choice of law principles, a joint and several or "all-sums" approach to allocation, adopted in the states in which claimants are incorporated and maintain their principal places of business, is applicable. The choice of law question is relevant, because it is the key to a determination whether the Liquidator breached the contracts between Integrity and the claimants when he denied payment.

Because the issues raised in the two appeals are virtually identical, we have determined to decide them in a single opinion, in which we affirm the orders entered in the matters.

I.

We commence our opinion with a brief description of each claimant, the claims asserted by it, and their resolution, to date.

A. Sepco Corporation

Sepco is a California corporation that manufactured packing

products and gaskets containing asbestos in the period from 1970 to 1979. Since 1989, more than 188,000 suits have been instituted against it alleging injury as the result of asbestos-related disease. Sepco has settled approximately 127,000 of the claims for a total of approximately $51.5 million, with $20.8 million in indemnity payments and $30.7 million in defense costs.

In 1985, Sepco's parent company purchased an Integrity policy of excess insurance that covered the period from January 1, 1985 to January 31, 1986, offering coverage of a $3 million*fn1

part of an $8 million excess layer over $11 million in underlying insurance. The policy was purchased in California through two California-based insurance brokers.

The Integrity policy, which followed the form of underlying coverage, provided indemnification for "ultimate net loss" in excess of the limits of underlying insurance. The policy excluded "costs," including legal expenses, from ultimate net loss, but in a separate provision, offered coverage for such costs under certain conditions. There is no evidence in the record that Sepco met those conditions.

In accordance with the Amended Liquidation Closing Plan promulgated by Integrity's Liquidator, on September 29, 2009, Sepco filed a proof of claim for coverage under Integrity's policy seeking $6 million in indemnity payments and $21,871,009.83 in defense costs. On December 3, 2009, Integrity issued a notice of determination (NOD) disallowing the claim as the result of insufficient supporting documentation, failure to document the exhaustion of underlying limits of coverage, and the utilization of an unacceptable "all-sums" allocation methodology to support the position that Integrity's policy was triggered. Sepco objected to the determination, and the matter was referred to the Special Master, who on September 2, 2010, issued a decision upholding the NOD.

In reaching his decision, the Special Master looked to the Restatement (Second) of Conflict of Laws (Restatement) § 193 (1988), and concluded that application of that provision to the facts of the matter required him to analyze the choice of law issue that was presented by Sepco's reliance on California law for allocation purposes pursuant to the considerations set forth in § 6 of the Restatement. First focusing on the competing interests of the states involved, as required by § 6, and evaluating those interests in the context of Integrity's liquidation - a matter conducted pursuant to New Jersey's version of the Uniform Insurers Liquidation Act (UILA), N.J.S.A. 17:30C-1 to -31 - the Special Master determined that New Jersey had a compelling interest in having its own law applied to the liquidation proceeding because it was only in that fashion that it could effectuate the purpose of the UILA "'to provide for a uniform, orderly and equitable method of making and processing claims against financially troubled insurers and to provide for fair procedures for rehabilitating the business of such insurers and, if necessary, distributing their assets.'" IMO Rehabilitation of Mut. Benefit Life Ins. Co., 258 N.J. Super. 356, 368 (App. Div. 1992) (emphasis supplied). The Special Master further concluded that Sepco's approach sought "to give an unfairly disproportionate portion of Integrity's limited assets to foreign creditors from certain states at the expense of New Jersey and other similarly situated creditors," and it was therefore "not equitable."

In evaluating the interests of commerce among the states and the parties, additional factors set forth in § 6, the Special Master found that application of New Jersey law would not frustrate either. Sepco, he held, had been provided with insurance coverage under the Integrity policy, and it had no justified expectation that California's all-sums allocation approach would apply to that coverage. Thus application of New Jersey law would not interfere with the interests of commerce or Sepco's justified expectations.

As a final matter, the Special Master considered the interests of judicial administration, determining that, by applying New Jersey law, the court could most efficiently and fairly effect the equitable distribution of Integrity's remaining assets as the Legislature sought by its passage of the UILA.

On appeal to the trial court, the Special Master's views were confirmed as thorough and well reasoned. The Court held in a rider to its December 3, 2010 order "that New Jersey substantive law controls as the state has a more significant relationship to the liquidation. Integrity is being liquidated pursuant to [the] ...


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