On September 3, 1998, the Third Circuit Court of Appeals ruled that the environmental insurance coverage disputes before it should be decided under New York law, unless the law of the state where the contamination occurs differs, in which case the law of the state where the contamination occurs should govern. In NL Industries v. Commercial Union Ins. Co., NL Industries filed a lawsuit in the federal court for the District of New Jersey seeking coverage from its numerous insurers for potential environmental liabilities arising from its lead processing activities at approximately 200 sites in 32 states.
For the purpose of resolving the issue of which state's law should apply in interpreting the provisions of the insurance contract, the parties stipulated that the District Court should use two sites - one in Illinois and the other in Oregon - as test sites. The District Court of New Jersey concluded that the state with the most significant relationship to the insured risk was the state where the contamination occurred (i.e., Illinois and Oregon).
NL Industries and several insurers appealed the District Court decision by reasserting their arguments to the Third Circuit. NL Industries argued that the law of New Jersey should apply to interpret the insurance contract because the case was filed in New Jersey, NL Industries still has some industrial plants in New Jersey, and 34 of the sites were located in New Jersey. The insurance companies countered that the law of New York should be applied because the contract was entered into in New York with a New York broker and NL Industries has its national headquarters and principal place of business in New York. This decision was critical because New Jersey has interpreted both the "sudden and accidental" pollution exclusion and the late notice clauses in a much more pro-plaintiff manner than has New York.
The Third Circuit received clear instruction on this choice of law issue from three New Jersey Supreme Court decisions issued in June 1998. The relevant cases are Pfizer v. Employers Ins. Of Wausau, Unisys Corp. v. Insurance Co. of North America, and H.M. Holdings, Inc. v. Aetna Cas. & Sur. Co. In following the rule of law established by the New Jersey Supreme Court, the Third Circuit concluded that New Jersey would apply New York law to interpret the pollution exclusion and late notice clauses for all sites except those in states where the law differs from New York's law. For the contaminated NL Industries sites in New Jersey, the Third Circuit's decision means that New Jersey law should be applied.
The NL Industries decision should mean that federal as well as state court litigants in New Jersey will have their environmental coverage issues resolved by the state with the dominant significant relationship to the insurance contract. The place of contracting, the state in which the insurance broker is licensed and the principal places of business, the headquarters and the state of incorporation of the parties all must be considered in this determination. However, the law of the state where the contamination is located will prevail when it differs from the law of the state with the most significant relationship to the contract. This should significantly reduce the number of state laws that a court must apply in multi-state, multi-site environmental coverage litigation.
