1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-3-1998

NL Ind Inc v. Comm Union Ins Co

Precedential or Non-Precedential:

Docket 97-5028,97-5029,97-5030,97-5031

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Recommended Citation

"NL Ind Inc v. Comm Union Ins Co" (1998). 1998 Decisions. Paper 214.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/214
Filed September 3, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 97-5028, 97-5029, 97-5030 & 97-5031 

NL INDUSTRIES, INC. 

 Appellant in No. 97-5030, 

v. 

COMMERCIAL UNION INSURANCE COMPANY; 

STONEWALL INSURANCE COMPANY; AETNA CASUALTY 

& SURETY COMPANY OF AMERICA; LEXINGTON 

INSURANCE COMPANY; MIDLAND INSURANCE 

COMPANY; FIRST STATE INSURANCE COMPANY; 

INSURANCE COMPANY OF NORTH AMERICA; AMERICAN 

CENTENNIAL INSURANCE COMPANY; UTICA MUTUAL 

INSURANCE COMPANY; NATIONAL UNION FIRE 

INSURANCE COMPANY; INTERNATIONAL INSURANCE 

COMPANY; INTERNATIONAL SURPLUS LINES INSURANCE 

COMPANY; EVANSTON INSURANCE COMPANY 

COMMERCIAL UNION INSURANCE COMPANY, 

 Third-party plaintiff 

v. 

CERTAIN UNDERWRITERS AT LLOYD'S; INSURANCE 

COMPANY OF NORTH AMERICA; *ALLSTATE INSURANCE 

COMPANY, solely as successor in interest to Northbrook 

Excess and Surplus Insurance Co., formerly known as

Northbrook Insurance Company, 

 Third-party defendants 

 International Insurance Company, 

 Appellant in No. 97-5028 

 Insurance Company of North America, 

 Appellant in No. 97-5029 
 Commercial Union Insurance Company, 

 Appellant in No. 97-5031 

*Amended per Clerk's order of May 1, 1997 

APPEAL FROM THE 

UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF NEW JERSEY 

(D.C. Civ. No. 09-cv-02125) 

ARGUED APRIL 20, 1998 

Before: GREENBERG, NYGAARD and WEIS, 

Circuit Judges. 

Filed September 3, 1998 

 MARK E. FERGUSON, ESQUIRE 

 (ARGUED) 

 Bartlit, Beck, Herman, Palenchar 

 & Scott 

 54 West Hubbard Street, Room 300 

 Chicago, Illinois 60610 

 LESTER C. HOUTZ, ESQUIRE 

 Bartlit, Beck, Herman, Palenchar 

 & Scott 

 511 16th Street, Suite 700 

 Denver, Colorado 80202 

 SAMUEL A. HAUBOLD, ESQUIRE 

 Kirkland & Ellis 

 200 East Randolph Drive, 

 Suite 6100 

 Chicago, Illinois 60601 

 2 
 ANDREW T. BERRY, ESQUIRE 

 KEVIN J. CONNELL, ESQUIRE 

 McCarter & English 

 100 Mulberry Street 

 Four Gateway Center 

 Newark, New Jersey 07101 

 Counsel for NL Industries, Inc. 

 STEVEN R. BROCK, ESQUIRE 

 (ARGUED) 

 RICHARD S. FELDMAN, ESQUIRE 

 Rivkin, Radler & Kremer 

 EAB Plaza, West Tower 

 Uniondale, New York 11556-0111 

 Counsel for Commercial Union 

 Insurance Co. 

 STUART COTTON, ESQUIRE 

 DIANE P. SIMON, ESQUIRE 

 (ARGUED) 

 MITCHELL S. COHEN, ESQUIRE 

 Mound, Cotton & Wollan 

 One Battery Park Plaza 

 New York, New York 10004 

 Counsel for International Insurance 

 Co. 

 PAUL R. KOEPFF, ESQUIRE 

 (ARGUED) 

 O'Melveny & Myers 

 153 East 53rd Street, 53rd Floor 

 New York, New York 10022 

 JOSEPH R. McDONOUGH, ESQUIRE 

 Graham, Curtin & Sheridan 

 4 Headquarters Plaza 

 P.O. Box 1991 

 Morristown, New Jersey 07962 

 Counsel for Insurance Co. of 

 North America 

 3 
 TERRY M. COSGROVE, ESQUIRE 

 (ARGUED) 

 Peterson & Ross 

 200 East Randolph Drive, 

 Suite 7300 

 Chicago, Illinois 60601 

 Counsel for Certain Underwriters at 

 Lloyd's of London 

 EDWARD G. D'ALESSANDRO, 

 ESQUIRE 

 D'Alessandro & Jacovino 

 147 Columbia Turnpike, Suite 100 

 Florham Park, New Jersey 07932 

 Counsel for International Surplus 

 Lines Insurance Co. 

 JOHN H. DENTON, ESQUIRE 

 Connell, Foley & Geiser 

 85 Livingston Avenue 

 Roseland, New Jersey 07068 

 Counsel for Aetna Casualty & Surety 

 Co. of America 

 MICHAEL J. O'MARA, ESQUIRE 

 Crawshaw, Mayfield, Turner, O'Mara, 

 Donnelly & McBride 

 2201 Route 38, Suite 300 

 Cherry Hill, New Jersey 08002 

 Counsel for Lexington Insurance Co. 

 STEPHEN D. CUYLER, ESQUIRE 

 Cuyler, Burk & Matthews 

 Four Century Drive 

 Parsippany, New Jersey 07054 

 Counsel for Northbrook Excess and 

 Surplus Insurance Co. 

 4 
OPINION OF THE COURT 

WEIS, Circuit Judge, 

In this case, we are called upon to answer as a 

controlling question of law whether the law of the forum-- 

New Jersey--applies to liability insurance policies covering 

environmental damage claims arising out of numerous sites 

in many states. We answer that, in the circumstances here, 

New Jersey choice of law rules point to the law of the state 

where the insured had its principal place of business and 

executed the policies. If, however, that law differs from that 

of the state where the waste site is located, then the law of 

the waste site will apply. 

This is the second of two declaratory judgment actions 

brought to establish the extent of insurance coverage for a 

number of claims against NL Industries arising out of its 

nationwide lead processing activities. Instituted by NL, 

these actions were brought in the United States District 

Court for the District of New Jersey under diversity 

jurisdiction. NL was incorporated in New Jersey until 

recently and still has some industrial plants there, but its 

national headquarters and principal place of business are 

located in New York. The insurance contracts were 

negotiated and executed by NL with a New York broker. 

NL initially filed the actions against Commercial Union 

Insurance Company, which then joined as third-party

defendants, among others, certain underwriters at Lloyd's 

of London and Insurance Company of North America. NL 

later amended its complaint to add as defendants several 

other carriers, including International Insurance Company, 

International Surplus Lines Insurance Company, and 

Lexington Insurance Company. 

In the first case, we determined that under the law of the 

forum--New Jersey--coverage for the product liability 

claims at issue in that litigation would be governed by the 

law of the state of contracting--New York. NL Indus. v. 

Commercial Union Ins. Co., 65 F.3d 314, 329 (3d Cir. 1995) 

(NL (I)). However, we also concluded that New Jersey might 

 5 
treat environmental claims differently in light of the 

substantial weight given to the law of the states where the 

contamination occurred. Id. at 321-23. 

In this case, NL sought coverage for environmental 

pollution at 93 sites in 28 states. One of the carriers has 

informed us that the numbers have increased to 202 sites 

in 34 states. Thirty-two sites are located in New Jersey. 

In the course of pretrial proceedings, the parties agreed 

to select as representative locations contaminated sites in 

Illinois and Oregon to explore the choice of law questions 

basic to the litigation. Specifically, the parties dispute the 

meaning of the pollution exclusion and the late notice 

provisions in the policies. Differing interpretations of the 

two provisions by the various states involved presented the 

district court with complex choice of law problems.

The district court granted partial summary judgments 

limited to choice of law issues, concluding that the law of 

the contaminated sites--Illinois and Oregon--would apply, 

rather than that of New York or New Jersey. See NL Indus. 

v. Commercial Union Ins. Co., 938 F.Supp. 248 (D.N.J. 

1996), reconsidering 926 F.Supp. 1213 (D.N.J. 1996). The 

court then certified as a controlling question of law under 

28 U.S.C. S 1292(b) whether the law of Illinois or Oregon, 

respectively, applied when interpreting the pollution 

exclusion and late notice clauses of the policies. We agreed 

to accept the question for review. 

I. 

At that time, in addition to the discussion in NL (I), we 

had the benefit of two decisions applying New Jersey choice 

of law rules to environmental coverage issues. See General 

Ceramics, Inc. v. Firemen's Fund Ins. Cos., 66 F.3d 647 (3d 

Cir. 1995); Gilbert Spruance Co. v. Pennsylvania Mfrs. 

Ass'n. Ins. Co., 629 A.2d 885 (N.J. 1993). Neither of these 

cases, however, involved coverage claims for multiple sites 

in multiple states. 

After oral argument in the case presently before us, the 

New Jersey Supreme Court issued three opinions that

removed much of the uncertainty surrounding application 

 6 
of its choice of law principles to multi-site, multi-state, 

environmental insurance coverage cases. Those cases

presented facts closely analogous to those here, so we need 

not do more than briefly apply their holdings. See Pfizer, 

Inc. v. Employers Ins. of Wausau, 712 A.2d 634 (N.J. 1998); 

Unisys Corp. v. Insurance Co. of N. America, 712 A.2d 649 

(N.J. 1998); H.M. Holdings, Inc. v. Aetna Cas. & Sur. Co., 

712 A.2d 645 (N.J. 1998); see generally Klaxon Co. v. 

Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941) (in a 

diversity case, law of the forum provides the applicable 

choice of law rules). 

In Pfizer, a corporate policyholder contended that New 

Jersey law should apply to its claim for insurance coverage 

in an environmental contamination case. The insured had 

its headquarters and principal place of business in New 

York and the policies were negotiated there, but it also had 

substantial operations in many other states, including New 

Jersey. Three states' laws competed for application--New 

Jersey's, New York's, and the waste site's. As in this case, 

the choice of law issues focused on interpretation of the 

pollution exclusion and late notice clauses in the policies. 

Following Gilbert Spruance, the New Jersey Supreme 

Court held that the answer to the choice of law questions 

should be determined by analyzing the factors set forth in 

the Restatement (Second) of Conflict of Laws SS 193 and 6. 

Pfizer, 712 A.2d at 638-39. Under section 193, the court 

should apply the law of the place that " `the parties 

understood . . . to be the principal location of the insured 

risk . . . unless some other state has a more significant 

relationship under the principles stated in [section] 6 to the 

transaction and the parties.' " Id. at 638 (citing Gilbert 

Spruance, 629 A.2d at 885). This site-specific approach to 

choice of law is straightforward when the policyholder's 

operations are confined to one state. Id. 

When an insured's business is "predictably multistate," 

however, less significance attaches to the principal location 

of the insured risk. Id. In that scenario, New Jersey law 

requires a "careful site-specific determination, made upon a 

complete record," of the state with the dominant, significant 

relationship to the parties and transaction under section 6 

of the Restatement. Id. at 639 (internal quotation and 

 7 
citation omitted). The factors relevant to that inquiry are: 

(1) the competing interests of the relevant states; (2) the 

national interests of commerce among the several states; (3) 

the interests of the parties; and (4) the interests of judicial 

administration. Pfizer, 712 A.2d at 639-40. 

Assessing these interests, the Pfizer Court declined to 

apply New Jersey insurance law because that state's wholly 

domestic concerns were not at stake in a dispute involving 

foreign waste sites and out-of-state parties. On the latter 

point, the Court found that the policyholder's substantial 

operations in New Jersey did not implicate New Jersey's 

interests to the extent that the company's principal place of 

business in New York affected that state's interests. Id. at 

641, 644. Because New Jersey was a disinterested state, 

application of another state's law would not impinge on the 

commercial interests of New Jersey. Id. at 641-42. 

The parties' fair expectations did not favor application of 

New Jersey law either, but weighed in favor of the law of 

the waste sites or that of the state of contract execution. Id. 

at 642. Nor did the interests of judicial management require 

consistent application of New Jersey law. Id. at 642-43. 

On the other hand, New York had an interest in applying 

its insurance law because Pfizer was a New York 

policyholder, the contract was negotiated and executed in 

New York, and the purpose of New York's interpretation of 

the pollution exclusion clause would have been served by 

the application of New York law. Pfizer, 712 A.2d at 641. 

For that reason, applying another state's law that clashed 

with that of New York might have hindered interstate 

commerce. Id. at 641-42. In addition, the parties could 

reasonably have expected the law of the state of contracting 

to apply. Id. at 642. 

At the same time, the Court acknowledged that the state 

where the contamination occurred had an interest in

applying its law, and that applying contrary law from 

another jurisdiction could frustrate interstate commerce. 

Moreover, in the absence of a choice of law provision in the 

contract, a policyholder "would expect that it would be 

indemnified under the law in effect at the place where 

liability is imposed." Id. at 642. 

 8 
In short, the court determined that New York and the 

state where the waste sites were located both had a

significant relationship to the coverage issues, but that New 

Jersey did not.1 The Court ultimately resolved which state 

had the most significant relationship with the following 

rule: "In the event of a conflict between the law of New York 

and the law of the waste site, the law of the waste site 

should be applied because under the site-specific approach 

it would have the dominant significant relationship to the 

issue." Id. at 643. 

The Court applied these principles in Unisys, holding 

that the law of the waste sites defeated the law of New 

York, which was the state of contract execution. In that 

case, New Jersey law applied to those sites located in New 

Jersey. None of the parties had any other relevant 

connection to the forum. 712 A.2d at 651-53. 

HM Holdings presented a different factual situation. In 

that case, the policyholder, which had its principal place of 

business in New York during the period when 

contamination of the waste sites occurred, later moved to 

New Jersey. 712 A.2d at 646-47. Because the insured had 

become a New Jersey "domiciliary," the Court determined 

that, insofar as the late notice issue was involved, that 

state had an interest in applying its pro-policyholder law 

that would be frustrated by New York's pro-carrier 

interpretation of the clause. Id. at 648-49. New Jersey, said 

the Court, had an interest in performance of the contract 

because the insured was a domestic policyholder. 

Therefore, the law of New Jersey or the waste site controlled 

on that issue. If the law of the waste site was similar to that 

of New York, it should yield to New Jersey law unless the 

insurance company was a domestic company of the state of 

contamination. Id. at 649. Insofar as the pollution

exclusion was concerned, however, the Court held that the 

_________________________________________________________________ 

1. The Court applied similar analysis when considering the question of 

late notice, but in order to create a conflict of laws, assumed without 

deciding that New York was an interested state. Pfizer, 712 A.2d at 643- 

44. But see HM Holdings, 712 A.2d at 649 (New York has no interest in 

applying its late notice rule unless the carriers are New York based or 

the waste sites are in New York). 

 9 
after-acquired domicile did not affect its analysis and the 

law of the waste site was still applicable. Id. at 647-48. 

The Pfizer trilogy makes it unnecessary for us to re-plow 

the ground so thoroughly explored in Gilbert Spruance, 

NL (I), and General Ceramics. Consequently, we proceed 

directly to the coverage issues at hand. 

II. 

The Pollution Exclusion 

Under a typical pollution exclusion clause, coverage for 

pollution is excluded unless the discharge is "sudden and 

accidental." The conflicts problem arises because states 

construe the "sudden and accidental" language differently. 

Some jurisdictions interpret "sudden" to mean 

"unexpected," while others emphasize the temporal aspect 

of "sudden." As may be expected, where contamination at a 

particular site occurred gradually, interpretation of that 

clause can have a substantial bearing on coverage. Here, 

we face a conflict in construction among the laws of New 

Jersey, New York, and the waste sites. As instructed by 

Pfizer, we assess the four categories of relevant interests to 

determine which state has the most significant relationship 

to the issue. 

A. 

Just as in Pfizer, NL is not a New Jersey policyholder, but 

has its headquarters and principal place of business in New 

York where the policy was executed and issued. Although it 

has a presence in New Jersey, from an analytic standpoint 

its local activities are no different, perhaps less substantial, 

than those of the policyholder in Pfizer. 

As we remarked in NL (I), "New Jersey's only connection 

with this litigation is that NL was incorporated and had 

some operations there." 65 F.3d at 327. New Jersey has a 

long history of attenuating the incorporation contact when 

conducting choice of law analysis. Gantes v. Kason Corp., 

679 A.2d 106, 110-11 (N.J. 1996); Heavner v. Uniroyal, Inc., 

305 A.2d 412, 414 n.3, 418 (N.J. 1973); Deemer v. Silk City 

 10 
Textile Mach. Co., 475 A.2d 648, 651-53 (N.J. Super. Ct. 

App. Div. 1984); cf. Gore v. United States Steel Corp., 104 

A.2d 670, 676 (N.J. 1954) (forum non conveniens case). 

Although such minimal contacts may have a bearing in 

other contexts, they "must be viewed in perspective." Pfizer, 

712 A.2d at 644; see also Veazey v. Doremus, 510 A.2d 

1187, 1189-90 (N.J. 1986) (parties' contacts relevant only if 

they relate to policy of the law). 

To the extent that New Jersey is the location of some of 

the contaminated sites, its interest in applying its domestic 

law does not differ from that of other polluted locations. 

The circumstances here are so similar to those in Pfizer 

that its analysis governs. New York and the state of the 

waste site have strong interests in having their law apply. 

B. 

The interests of commerce parallel those in Pfizer.

Commerce would be hindered if New Jersey law were 

applied to determine a dispute with which that state"does 

not have a dominant and significant relationship." Pfizer, 

712 A.2d at 642. Again, New York and the state of the 

waste site have an interest in having their law apply. 

C. 

The interests of the parties focus on their justified 

expectations and the need for predictability of result. As in 

Pfizer, the insurance contracts are silent on the applicable 

choice of law. Consequently, "in the absence of a choice-oflaw provision, 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 [arose]." Id. at 642. This consideration militates in 

favor of having the law of the waste site apply. 

D. 

The final category examines judicial administration. We 

do not wish to underestimate the burden the trial court will 

face when cataloging and ruling on the applicable law at 

 11 
each of the many sites involved in this litigation. We 

recognize, however, that the court and the parties are free 

to work out practical ways to reduce and consolidate the 

issues. Indeed, as counsel for one of the parties explained 

in the district court: "We agreed to a case management 

structure in which two sites would go to trial first . . . so 

we could look at the outcome in those cases and hopefully 

get guidance from which we could all reach a global

solution to this hundred-forty-some claim case." J.A. 1766- 

67. 

We doubt that the laws of each of the waste sites contain 

multiple, esoteric distinctions. Rather, we expect that there 

will be a few interpretations applicable to various groups of 

sites. We agree with Pfizer that, although case management 

problems for the trial court are substantial, they can be 

resolved through the ingenuity and skill of court and 

counsel. 

In conclusion, we follow Pfizer's lead and hold that 

(except with respect to New Jersey waste sites) New Jersey 

law does not govern interpretation of the pollution

exclusion clause. The choice of law is between New York 

(the place of contracting and location of the insured's 

headquarters) and the state of contamination. "In the event 

of a conflict between the law of New York and the law of the 

waste site, the law of the waste site should be applied 

because under the site-specific approach it would have the 

dominant significant relationship to the issue." Pfizer, 712 

A.2d at 643. 

III. 

Late Notice 

Most liability policies require the insured to give prompt 

notice of an event that falls within the scope of coverage. 

Some states, including New Jersey, require a carrier to 

prove that it has been prejudiced by the untimely notice 

before it may deny coverage. Other jurisdictions, including 

New York, do not require a demonstration of prejudice in 

order to assert the defense of late notice. 

 12 
As Pfizer acknowledged, states where waste sites are 

located may have adopted one of these two approaches. 

New Jersey added the element of prejudice for "the 

protection of New Jersey policyholders." Id. at 644. As 

mentioned above, however, the fact that Pfizer did business 

in New Jersey and was incorporated there did not make it 

a New Jersey policyholder entitled to the protection of New 

Jersey law at the expense of the laws of the competing 

states. That analysis applies with equal force here. 

Accordingly, we conclude that the law of the waste site 

should govern if it differs from the law of New York. 

HM Holdings is not to the contrary. In that case, the 

insured was a "domiciliary" of New Jersey at the time notice 

was given. For that reason, the Court held that New Jersey 

law should apply. In this case, NL remained headquartered 

in New York and no significant change reduced its strong 

New York presence. 

IV. 

To summarize, we answer the certified questions as 

follows: 

 (1) Under the facts and circumstances of this case, 

 New York law provides the rule for deciding 

 whether the pollution exclusion clauses in the 

 respective policies bar coverage for environmental 

 contamination. If a conflict exists between New 

 York law and the law of the waste site, then the 

 law of the waste site shall apply. 

 (2) Under the facts and circumstances of this case, 

 New York law provides the rule for deciding 

 whether the notice of claims were timely under the 

 insurance contracts. If a conflict exists between 

 New York law and the law of the waste site, then 

 the law of the waste site shall apply.2 

_________________________________________________________________ 

2. International and International Surplus stand in a different position 

than the other carriers because they are headquartered in Illinois and do 

not insure the Oregon site. In addition, they are solely interested in the 

question of late notice because their policies do not contain pollution 

 13 
Accordingly, we will remand this case to the district court 

for further proceedings consistent with this Opinion. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

_________________________________________________________________ 

exclusion language similar to that of the other carriers. Finally, their 

policies provide coverage on a "claims made," rather than an 

"occurrence," basis, which may be relevant when considering the effect 

of late notice. Accordingly, Illinois law should apply when construing the 

late-notice provisions applicable to these carriers. See HM Holdings, 712 

A.2d at 649. 

 14