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Lonza, Inc. v. Everest Reinsurance Company

A-0170-03T1 and A-6368-03T1 (N.J. Super. App. Div. 2006)

INSURANCE; ENVIRONMENTAL LIABILITY; CHOICE OF LAW—One New Jersey policy factor in determining the law to apply to environmental coverage disputes is maximization of insurance coverage.

A company was held liable for environmental cleanup costs at a site in Rhode Island. The company had commercial general liability insurance and excess liability insurance and sought coverage from its various insurance companies. The company’s ability to recover under its commercial general liability policy and excess liability polices from several insurers hinged on the lower court’s determination as to which state law governed New Jersey, where the policies were issued, or Rhode Island, the site of the contamination. New Jersey had adopted a “continuous trigger doctrine” that recognizes that environmental contamination cannot be linked to a single event, but is attributable to an event that begins and then intensifies over a period of time. Therefore, environmental damage is viewed as occurring continuously over time, during which time several insurance policies may have been in effect and may have been triggered. The New Jersey Supreme Court adopted a formula to allocate the losses among insurance carriers on the basis of the risk assumed, prorated on the basis of the policy limits, multiplied by the years of coverage.

Rhode Island, in contrast, had adopted a “manifestation” theory that says that the insurance policy is triggered only when the environmental damage becomes apparent during the policy period, even if the damage resulted from long-term pollution. In Rhode Island, all insurance policies in effect at the time the environmental pollution is discovered could be allocated to cover the damage, based on policy limits.

The company argued that Rhode Island law should govern, as opposed to New Jersey law. Under Rhode Island law, all of the excess liability insurers could be responsible for covering the damage. The company argued that if New Jersey law applied, then under New Jersey’s “continuous trigger doctrine” and “pro-rata allocation methodology” it would never be able to recover under any of its excess liability policies because the allocation per year would never exceed its primary coverage limits.

The lower court found that New Jersey law applied and the company appealed. The Appellate Division reversed, noting that the appropriate analysis, when dealing with choice-of-law conflicts, starts with Restatement (Second) of Conflict of Laws, Sections 6, 188, and 193. The Restatement holds that the law of the state that was the principal location of the insured risk governs, unless another state has a more significant relationship to the transaction. The Court found that the lower court analyzed New Jersey’s relationship, but ignored the fact that the environmental pollution took place in Rhode Island. The lower court, instead, concluded that because New Jersey had a meaningful nexus with the company’s insurance activities, New Jersey law applies. The Court disagreed. The lower court analyzed the policy behind New Jersey’s “continuous trigger doctrine” and “pro rata allocation methodology” and concluded that the purpose behind it was to maximize insurance coverage. The Court noted that the lower court ignored the fact New Jersey’s doctrine, as applied in this case, would not maximize insurance coverage because none of the company’s excess liability insurers would have been required to pay. The Court also noted that the application of New Jersey law was inappropriate because it resulted in a gap in insurance coverage for the company (a New Jersey insured) and resulted in a reduction in the amount of insurance proceeds needed to address the environmental contamination in Rhode Island. Further, Rhode Island, not New Jersey, had a more significant interest in the matter, because the contamination occurred in Rhode Island and needed to be cleaned up.

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