Given the considerable cost associated with many environmental cleaups, responsible parties frequently look to their insurance carriers to bear some or all of the expense and, because of the large stakes involved, coverage litigation often ensues. New Jersey insurance law traditionally has favored policyholders in these suits. In keeping with this tradition, two New Jersey courts recently held in favor of two New Jersey companies seeking insurance coverage for out-of-state cleanups.
In 1993, in the Gilbert Spruance v. Pennsylvania Manufacturers' Association Insurance Co. case, the New Jersey Supreme Court addressed for the first time the issue of which state's law should govern the interpretation of a Comprehensive General Liability insurance policy. Gilbert Spruance involved a Pennsylvania company that was seeking insurance coverage from a Pennsylvania carrier for the cleanup of hazardous waste that had been generated in Pennsylvania and disposed of in New Jersey. Because the law in New Jersey and Pennsylvania differed with respect to the interpretation of the "sudden and accidental" pollution exclusion contained in the policy, the insured's entitlement to coverage turned upon whether the insurance law of New Jersey or Pennsylvania would be applied to the dispute. Undertaking a "state interest" analysis, the Court held that where the parties to the insurance contract could reasonably have foreseen that the insured's waste materials would come to rest in New Jersey, New Jersey law should govern because New Jersey has the dominant significant relationship with the parties, the transaction, and the outcome of the controversy. The Court accordingly applied New Jersey law and awarded coverage to the insured.
The Gilbert Spruance Court expressly gave no opinion on the question of which state's law should apply when waste generated in New Jersey is disposed of in another state. This issue was addressed in two recent federal court cases. In General Ceramics Inc. v. Fireman's Fund Insurance Co., (decided Sept. 21, 1995) the Third Circuit Court of Appeals held that New Jersey law applies to the interpretation of the "sudden and accidental" pollution exclusion clause where the insured was incorporated and principally located in New Jersey, the insurance contract was entered in New Jersey, and the waste foreseeably came to rest in Pennsylvania. Using the same state interest analysis that was followed in Gilbert Spruance, the General Ceramics court concluded that only New Jersey's purposes would be furthered by application of its laws to the matter. That is, applying New Jersey law would further that state's interest by assuring that insurers fairly recognize the legal liabilities of their insureds. This ruling again translated into an award of coverage for the insured.
The same result was reached by the Federal District Court in the Butler & Smith, Inc. v. Liberty Mutual Ins. Co. case (decided Sept. 26, 1995). There, the court determined that when waste generated in New Jersey came to rest in New York and Rhode Island landfills, New Jersey law would govern the insurer's duty to defend and indemnify the insured. Again applying the Gilbert Spruance choice of law mechanism, the Butler & Smith court considered "which state has the dominant significant interest in the issue to be resolved by the court." After weighing the public policies of New Jersey, New York and Rhode Island, and the basic policies underlying environmental laws in general, the court concluded that all interests would best be served by application of New Jersey law to the coverage issues relating to the out-of-state sites. As in the two prior cases, application of New Jersey insurance law to the coverage dispute resulted in the insurance company paying for the cleanups.
