Opinion ID: 1929429
Heading Depth: 1
Heading Rank: 4

Heading: What law governs interpretation of the pollution-exclusion clause?

Text: We begin with the obvious. A court has to make a choice of law decision in an actual case only (1) when the case is connected with more than one state, and more importantly, (2) when the laws of the involved states differ on the point in issue. Robert A. Sedler, A Real World Perspective on Choice of Law, 48 Mercer L.Rev. 781, 783 (Winter 1997). This case is plainly connected with more than one state. The point in issue is what state's law governs the interpretation of the pollution-exclusion clause. Three states are involved  New Jersey (the law of the forum), New York (the law of the place of making of the contract and the headquarters of Pfizer), and each of the states where the waste has come to rest (the waste sites). In Morton, supra, we were asked to interpret the sudden and accidental exceptions to the pollution exclusion clause. 134 N.J. at 28, 629 A. 2d 831. That exclusion bars claims arising out of pollution events, unless the discharge of contaminants was both sudden and accidental. Insurers asserted that the term sudden could not be stripped of its temporal element. Thus, the insured must show that the pollution occurred abruptly. In contrast, parties seeking coverage contended that sudden meant only unexpected, thereby providing coverage for instances of gradual pollution. Although agreeing with the insurer's position on the plain meaning of the terms in the exclusion, we declined to enforce the exclusion as written. Id. at 29, 629 A. 2d 831. We concluded that the insurance industry misled the State insurance department that approved the exclusion. Ibid. The Court held that the exclusion should be interpreted to provide identical coverage to that provided under prior occurrence-based policies, but declined to extend coverage to those cases in which the insured intentionally discharged known contaminants. Id. at 30-31, 629 A. 2d 831. New York has a contrary view. It does not interpret the exception to afford liability coverage for gradual discharges. According to the insurance companies, New York's law on the point in issue was embodied in (1) a New York insurance statute that once mandated the inclusion of a pollution-exclusion clause in insurance policies, N.Y. Ins. Law § 46(13) & (14) (McKinney 1971), (2) New York Insurance Department directives that the statute applied to sites located outside of New York, and (3) other executive pronouncements, including speeches and comments by then Governor Nelson A. Rockefeller. The insurance companies cite decisions of federal and state courts holding that in New York there is no coverage for polluters. See, e.g., New York v. AMRO Realty Corp., 936 F. 2d 1420, 1427 (2d Cir.1991); Ogden Corp. v. Travelers Indem. Co., 924 F. 2d 39, 42 (2d Cir.1991); Powers Chemco, Inc. v. Federal Ins. Co., 74 N.Y. 2d 910, 549 N.Y.S. 2d 650, 548 N.E. 2d 1301 (1989); Technicon Elecs. Corp. v. American Home Assurance Co., 74 N.Y. 2d 66, 544 N.Y.S. 2d 531, 542 N.E. 2d 1048 (N.Y. 1989); Borg-Warner Corp. v. Insurance Co. of N. Am., 174 A.D. 2d 24, 577 N.Y.S. 2d 953, 956 (citing to New York's unique policy-based interest in the pollution exclusion clause), leave to appeal denied, 80 N.Y. 2d 753, 587 N.Y.S. 2d 905, 600 N.E. 2d 632 (1992). [4] Although there are variations on these views, we may assume that the laws of the waste sites will be similar to either New York law of New Jersey law in that the exclusion will either be operative or inoperative. We will therefore initially apply the section 6 factors to New Jersey and New York law. With respect to the first factor, Spruance, supra, had identified the purposes of New Jersey's law concerning the interpretation of the pollution-exclusion clause as New Jersey's interest in securing financial resources, both to remediate New Jersey toxic waste sites and to compensate victims of pollution in New Jersey. 134 N.J. at 100-01, 629 A. 2d 885. Those purposes are not implicated in this aspect of the case concerning out-of-state waste sites. Morton, supra, identified as purposes of its law New Jersey's interest in protecting the objectively reasonable expectations of New Jersey policyholders, 134 N.J. at 30, 629 A. 2d 831, and in deterring misrepresentation and non-disclosure [by insurance companies] to state regulatory authorities, id. at 74, 629 A. 2d 831. We do not perceive New Jersey's wholly domestic concerns, Ceramics, supra, 66 F. 3d at 656, to be significantly advanced when its law concerning interpretation of the pollution-exclusion clause is applied to a dispute involving policyholders from another state and waste sites in yet others. See Waste Management, Inc. v. Admiral Ins. Co., 138 N.J. 106, 129, 649 A. 2d 379 (1994) (finding diminished New Jersey interest when claimants are all nonresidents seeking coverage for environmental damage occurring beyond New Jersey's borders), cert. denied sub nom. WMX Techs., Inc. v. Canadian Gen. Ins. Co., 513 U.S. 1183, 115 S.Ct. 1175, 130 L.Ed. 2d 1128 (1995). In contrast, the laws of New York or of the waste sites in this case bears a closer relationship to the goals underpinning those laws. New York is the principal place of business of Pfizer. The insurance contracts were negotiated there. Because the purpose of the New York rule was in part to discourage the provision of insurance against pollution, the rule's purpose would be served by its application. In addition, the states in which the waste has come to rest would have their laws rather than New Jersey's more fully advanced if applied to the matter in issue. Concerning factor two, application of New Jersey's conflicting view of the pollution-exclusion clause would hinder the interests of commerce among the several states if that law were to be applied to determine a dispute with which New Jersey did not have a dominant and significant relationship. We do not find it offensive or repugnant, State Farm, supra, 84 N.J. at 41, 417 A. 2d 488, to New Jersey's public policy that another state, such as Indiana, might, in connection with waste sites and policyholders located there, give a literal meaning to the pollution-exclusion clause. Conversely, if New York law were applied to determine coverage at a waste site in Indiana and that state's law mirrored the law of Spruance and Morton, the interests of Indiana would be hindered. Concerning factor three, because Spruance rejected both the uniform-contract-interpretation approach and the bright-line approach of choosing the law of either the state of waste generation or waste disposal, courts have concluded that the New Jersey Supreme Court favors a government-interest sensitive approach over a predictable one. NL Industries, Inc. v. Commercial Union Ins. Cos., 926 F. Supp. 1213, 1232 (D.N.J. 1996). It is not that we favor governmental interests over private interests, but rather that unpredictability lies in the nature of the insurance contracts. Predictability appears to be a minor virtue in view of the willingness of insurers to issue multi-site policies that will be subject to the unpredictable substantive law of many states fixing the liabilities of their insureds. Johnson Matthey Inc. v. Pennsylvania Mfrs.' Ass'n Ins. Co., 250 N.J. Super. 51, 59, 593 A. 2d 367 (App.Div. 1991). It is likely that the parties could have contracted for more predictable results had they inserted choice-of-law provisions in the insurance contracts. Ibid. That the parties did not do so indicates that there would be uncertainty with respect to the interpretation of the CGL clauses in various states where the policies might provide coverage. The absence of choice-of-law clauses in the policies has been described to us as the understandable effect of market forces. If the policies were to contain choice-of-law provisions the policies might not be as readily marketable, in certain states, either because of objections on the part of regulators or consumers. That does not mean that we may or should disregard the fair expectations of the parties in the predictability of a result. Certainly in this case the interests of fair expectation and predictability of result do not favor application of New Jersey law. Given that the policies were purchased, paid for, and maintained at the principal office of Pfizer in New York, it could hardly have been predictable that New Jersey law would govern the interpretation of coverage issues in Illinois or Pennsylvania. Conversely, in the absence of a choice-of-law 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 arise. Finally, we must consider the concerns of judicial administration. In colloquy in a companion case, the trial court expressed concern that judicial administration would be hampered by requiring a jury to consider, under different standards of law, the application of the facts to the differing law at each of several waste sites. The court, in Unisys, said: I must tell you in all honesty I am not a great fan of the site specific [approach] because I think that this is a situation where facts in life have outweighed the development of traditional Anglo American common law concepts. We are ill-equipped to deal with these sorts of situations. The idea of impanelling a jury from Middlesex County and suggesting to them that we're going to try six sites and then charge them the law, assuming that I can figure it out ... correctly, of Montana, California, Kentucky, that frankly in a practical sense is just so unworkable that unless I was [forced to] I would never do it. The trial court's concerns over jury management should be considerably eased by the Court's decision in Ciba-Geigy Corp. v. Liberty Mutual Insurance Co., 144 N.J. 372, 676 A. 2d 1089 (1996), which permits, in certain circumstances, non-jury trials in environmental pollution insurance coverage cases. The mere existence of factual issues does not automatically entitle a party to a jury trial. Here, for example, a central point of dispute in both Ciba-Geigy and GEI is whether the insureds intended the environmental contamination within the meaning of the underlying policies. The right to a jury that otherwise might attach to those claims must yield to the resolution of the dominant equitable issues in a non-jury trial. [ In re Environmental Insurance Declaratory Judgment Actions, 149 N.J. 278, 301, 693 A. 2d 844 (1997).] Although we do not minimize the difficulties encountered by a court that must analyze the pollution-exclusion laws of each of the states involved in multistate environmental coverage cases, we suspect that the laws will fall into categories or groups that the court can apply to the several factual circumstances as they develop. As counsel stated, the clause will normally be found either unambiguous and operative or ambiguous and not operative. In addition, as a practical matter, we may expect (and the parties suggest this) that the proofs will be different at each of several waste sites involved. For example, the nature of the operations in Indiana may have been entirely different from the nature of the operations in Pennsylvania or Massachusetts. The question of the extent to which company officials and plant operators would have known that their activities would cause environmental pollution may be expected to be quite different. See Tim O'Brien, Cleanup Coverage Case Costs Carriers $400M, 151 N.J.L.J. 461 (Feb. 2, 1998). Hence, there is little way in which to avoid separate trials at the separate sites. This does not mean, however, that there will be separate trials over each site. The sites at issue here are referred to as Phase I or test sites. In a companion case, counsel for an insurance company suggested that normally the lead sites are contested first and once the major issues are resolved the rest fall in place. Counsel said, all of our clients would shoot us if we tried 100 sites. We are told that these cases are almost always in mediation. We have said that [s]uch disputes seem ideally suited for mediation or arbitration under court-annexed programs of alternate dispute resolution or on the parties' own initiative. General Accident Ins. Co. of Am. v. State, Dept. of Envtl. Protection, 143 N.J. 462, 477, 672 A. 2d 1154 (1996). The State of New Jersey Office of Dispute Settlement provides just such a useful mediation service. As we did in Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437, 478, 650 A. 2d 974 (1994), we urge the involved business managers to study the cost effectiveness of stonewalling. Referring to the example of another case, we said: The settlement was reasonable and the parties saved millions of dollars in litigation expense and thousands of hours of management time. Ibid. On balance, then, considering the policies to be advanced by the application of each state's law, the interest of commerce among the states, and the interest of predictability and ease of administration all point toward application in a New Jersey forum of the laws of New York or of the specific waste sites concerning pollution exclusion. 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. See NL Industries, supra, 65 F. 3d at 321 (observing that  Gilbert Spruance thus establishes that, in environmental cases, the location of the site carries very substantial weight in the `significant relationship' analysis, typically adequate to overcome the contacts of the place of contracting); Restatement, supra, § 188, comment e (stating that when a contract deals with a specific physical thing, such as a plant or waste site, the location of the thing or of the risk is significant).