### 1998 D e c i sion s O p inion s of the U nit e d

S t a t e s C our t of Appe al s for the Thir d C ir c uit

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D ock e t 97-5028,97-5029,97-5030,97-5031

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. e du/thir dc ir c uit_1998/214Filed 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 Northbr ook 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. 97-5029Commercial 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

2ANDREW 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

3TERRY 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.

4OPINION 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 circumstance s here, New Jersey choice of law rules point to the law of the state where the insured had its principal place of busine ss and executed the policies. If, however, that law differ s 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 acti ons brought to establish the extent of insurance covera ge for a number of claims against NL Industries arising out of its nationwide lead processing activities. Instituted b y NL, these actions were brought in the United States Dis trict Court for the District of New Jersey under diversit y jurisdiction. NL was incorporated in New Jersey unt il recently and still has some industrial plants there , but its national headquarters and principal place of busine ss are located in New York. The insurance contracts were negotiated and executed by NL with a New York broke r.

NL initially filed the actions against Commercial U nion Insurance Company, which then joined as third-party defendants, among others, certain underwriters at L loyd's of London and Insurance Company of North America. N L later amended its complaint to add as defendants se veral other carriers, including International Insurance C ompany, 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 liabili ty claims at issue in that litigation would be governe d 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 Jerse y might

5treat environmental claims differently in light of the

substantial weight given to the law of the states w here 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 carr iers has
informed us that the numbers have increased to 202 sites in 34 states. Thirty-two sites are located in New J ersey.

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 qu estions basic to the litigation. Specifically, the parties dispute the meaning of the pollution exclusion and the late not ice provisions in the policies. Differing interpretatio ns of the two provisions by the various states involved prese nted the district court with complex choice of law problems.

The district court granted partial summary judgment s limited to choice of law issues, concluding that th e 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 l aw under 28 U.S.C. S 1292(b) whether the law of Illinois or Oregon, respectively, applied when interpreting the polluti on 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 Jerse y 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 Mf rs. Ass'n. Ins. Co., 629 A.2d 885 (N.J. 1993). Neither of these cases, however, involved coverage claims for multip le 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 applica tion

6of its choice of law principles to multi-site, mult i-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. & Su r. Co., 712 A.2d 645 (N.J. 1998); see generally Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941) (i n a diversity case, law of the forum provides the appli cable 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, includ ing New Jersey. Three states' laws competed for application --New Jersey's, New York's, and the waste site's. As in t his 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 que stions should be determined by analyzing the factors set f orth in the Restatement (Second) of Conflict of Laws SS 19 3 and 6. Pfizer, 712 A.2d at 638-39. Under section 193, the court should apply the law of the place that " `the parti es understood . . . to be the principal location of th e insured risk . . . unless some other state has a more signi ficant relationship under the principles stated in [sectio n] 6 to the transaction and the parties.' " Id. at 638 (citing Gilbert Spruance, 629 A.2d at 885). This site-specific appr oach to choice of law is straightforward when the policyhol der's operations are confined to one state. Id.

When an insured's business is "predictably multista te," however, less significance attaches to the principa l location of the insured risk. Id. In that scenario, New Jers ey law requires a "careful site-specific determination, ma de upon a complete record," of the state with the dominant, s ignificant relationship to the parties and transaction under s ection 6 of the Restatement. Id. at 639 (internal quotation and

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

(1) the competing interests of the relevant states; (2) the national interests of commerce among the several st ates; (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 decline d to apply New Jersey insurance law because that state's wholly domestic concerns were not at stake in a dispute in volving foreign waste sites and out-of-state parties. On th e latter point, the Court found that the policyholder's subs tantial operations in New Jersey did not implicate New Jers ey's interests to the extent that the company's principa l place of
business in New York affected that state's interest s. Id. at 641, 644. Because New Jersey was a disinterested st ate, application of another state's law would not imping e on the commercial interests of New Jersey. Id. at 641-42.

The parties' fair expectations did not favor applic ation of New Jersey law either, but weighed in favor of the law of
the waste sites or that of the state of contract ex ecution. Id. at 642. Nor did the interests of judicial managemen t require consistent application of New Jersey law. Id. at 6 42-43.

On the other hand, New York had an interest in appl ying
its insurance law because Pfizer was a New York policyholder, the contract was negotiated and execu ted in New York, and the purpose of New York's interpretat ion of the pollution exclusion clause would have been serv ed by the application of New York law. Pfizer, 712 A.2d a t 641. For that reason, applying another state's law that clashed with that of New York might have hindered interstat e commerce. Id. at 641-42. In addition, the parties c ould reasonably have expected the law of the state of co ntracting to apply. Id. at 642.

At the same time, the Court acknowledged that the s tate
where the contamination occurred had an interest in applying its law, and that applying contrary law fr om another jurisdiction could frustrate interstate com merce. Moreover, in the absence of a choice of law provisi on in the contract, a policyholder "would expect that it woul d be indemnified under the law in effect at the place wh ere liability is imposed." Id. at 642.

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

state where the waste sites were located both had a significant relationship to the coverage issues, bu t that New Jersey did not.1 The Court ultimately resolved whic h state had the most significant relationship with the foll owing
rule: "In the event of a conflict between the law o f New York and the law of the waste site, the law of the waste site should be applied because under the site-specific a pproach it would have the dominant significant relationship to the
issue." Id. at 643.

The Court applied these principles in Unisys, holdi ng 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 principa l place of business in New York during the period when contamination of the waste sites occurred, later mo ved to New Jersey. 712 A.2d at 646-47. Because the insured had become a New Jersey "domiciliary," the Court determ ined that, insofar as the late notice issue was involved , that state had an interest in applying its pro-policyhol der law that would be frustrated by New York's pro-carrier interpretation of the clause. Id. at 648-49. New Je rsey, said the Court, had an interest in performance of the co ntract 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 sim ilar to that of New York, it should yield to New Jersey law unle ss the insurance company was a domestic company of the sta te of contamination. Id. at 649. Insofar as the pollution exclusion was concerned, however, the Court held th at the

___________________________________________________ ______________

1. The Court applied similar analysis when consider ing the question of late notice, but in order to create a conflict of l aws, assumed without deciding that New York was an interested state. Pfi zer, 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 a re New York based or the waste sites are in New York).

9after-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 r e-plow the ground so thoroughly explored in Gilbert Spruan ce, NL (I), and General Ceramics. Consequently, we proc eed directly to the coverage issues at hand.

II.

The Pollution Exclusion

Under a typical pollution exclusion clause, coverag e for pollution is excluded unless the discharge is "sudd en and accidental." The conflicts problem arises because s tates construe the "sudden and accidental" language diffe rently. Some jurisdictions interpret "sudden" to mean "unexpected," while others emphasize the temporal a spect of "sudden." As may be expected, where contaminatio n 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 o f New Jersey, New York, and the waste sites. As instructe d by Pfizer, we assess the four categories of relevant i nterests to determine which state has the most significant rela tionship
to the issue.

A.

Just as in Pfizer, NL is not a New Jersey policyhol der, but has its headquarters and principal place of busines s in New York where the policy was executed and issued. Alth ough it has a presence in New Jersey, from an analytic stan dpoint 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 connec tion with this litigation is that NL was incorporated an d had some operations there." 65 F.3d at 327. New Jersey has a long history of attenuating the incorporation conta ct when conducting choice of law analysis. Gantes v. Kason Corp., 679 A.2d 106, 110-11 (N.J. 1996); Heavner v. Uniroy al, Inc., 305 A.2d 412, 414 n.3, 418 (N.J. 1973); Deemer v. S ilk City

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

App. Div. 1984); cf. Gore v. United States Steel Co rp., 104 A.2d 670, 676 (N.J. 1954) (forum non conveniens ca se). Although such minimal contacts may have a bearing i n 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 releva nt only if they relate to policy of the law).

To the extent that New Jersey is the location of so me of the contaminated sites, its interest in applying it s domestic law does not differ from that of other polluted loc ations.
The circumstances here are so similar to those in P fizer that its analysis governs. New York and the state o f the waste site have strong interests in having their la w 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 stat e"does not have a dominant and significant relationship." Pfizer, 712 A.2d at 642. Again, New York and the state of t he waste site have an interest in having their law app ly.

C.

The interests of the parties focus on their justifi ed expectations and the need for predictability of res ult. As in Pfizer, the insurance contracts are silent on the a pplicable choice of law. Consequently, "in the absence of a c hoice-oflaw provision, a policyholder would expect that it would be indemnified under the law in effect at the place wh ere liability is imposed. The policies contain sweeping declarations of coverage that should be given effec t 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 c ourt will face when cataloging and ruling on the applicable l aw at

11each 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 consolidat e the issues. Indeed, as counsel for one of the parties e xplained in the district court: "We agreed to a case managem ent structure in which two sites would go to trial firs t . . . so we could look at the outcome in those cases and hop efully 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 c ontain 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 man agement problems for the trial court are substantial, they can be resolved through the ingenuity and skill of court a nd
counsel.

In conclusion, we follow Pfizer's lead and hold tha t (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 insur ed's headquarters) and the state of contamination. "In t he event
of a conflict between the law of New York and the l aw of the waste site, the law of the waste site should be app lied because under the site-specific approach it would h ave the dominant significant relationship to the issue." Pf izer, 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 c overage. Some states, including New Jersey, require a carrie r to prove that it has been prejudiced by the untimely n otice before it may deny coverage. Other jurisdictions, i ncluding New York, do not require a demonstration of prejudi ce in
order to assert the defense of late notice.

12As Pfizer acknowledged, states where waste sites ar e

located may have adopted one of these two approache s. New Jersey added the element of prejudice for "the protection of New Jersey policyholders." Id. at 64 4. As mentioned above, however, the fact that Pfizer did business in New Jersey and was incorporated there did not ma ke it a New Jersey policyholder entitled to the protectio n of New Jersey law at the expense of the laws of the compet ing 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 Yor k.

HM Holdings is not to the contrary. In that case, t he insured was a "domiciliary" of New Jersey at the ti me notice was given. For that reason, the Court held that New Jersey law should apply. In this case, NL remained headqua rtered in New York and no significant change reduced its s trong New York presence.

IV.

To summarize, we answer the certified questions as

follows:

(1) Under the facts and circumstances of thi s case, New York law provides the rule for deciding whether the pollution exclusion clauses in t he respective policies bar coverage for environ mental
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 thi s case, New York law provides the rule for deciding whether the notice of claims were timely und er the
insurance contracts. If a conflict exists be tween 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 headquarte red in Illinois and do not insure the Oregon site. In addition, they are s olely interested in the question of late notice because their policies do n ot contain pollution

13Accordingly, we will remand this case to the distri ct court

for further proceedings consistent with this Opinio n.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

___________________________________________________ ______________

exclusion language similar to that of the other car riers. Finally, their policies provide coverage on a "claims made," rathe r than an "occurrence," basis, which may be relevant when con sidering the effect of late notice. Accordingly, Illinois law should ap ply when construing the late-notice provisions applicable to these carriers . See HM Holdings, 712
A.2d at 649.

14