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NL Industries, Inc. v. Commercial Union Ins. Co.

filed: September 8, 1995.

NL INDUSTRIES, INC.
v.
COMMERCIAL UNION INSURANCE COMPANY, DEFENDANT/THIRD-PARTY PLAINTIFF V. CERTAIN UNDERWRITERS AT LLOYD'S; INSURANCE COMPANY OF NORTH AMERICA; NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, THIRD-PARTY DEFENDANTS, COMMERCIAL UNION INSURANCE COMPANIES, APPELLANT



On Appeal from the United States District Court for the District of New Jersey. (D.C. Civ. No. 90-cv-02124).

Before: Becker, Scirica and Wood,*fn* Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal by defendant/third party plaintiff Commercial Union Insurance Company ("CU") arises out of a suit brought by plaintiff/appellee NL Industries ("NL") seeking a declaration that it is entitled to product liability insurance coverage for a large number of lawsuits alleging lead paint exposure. Jurisdiction is based on diversity of citizenship. CU appeals from the grant of summary judgment against it in order to contest: (1) the district court's choice of New Jersey law and its apparently consequent summary judgment requiring CU to fund NL's defense in the underlying tort actions; (2) the court's refusal to apportion the defense costs incurred in the underlying litigation between covered and non-covered claims; and (3) its denial of CU's claim for contribution against third party defendants/appellees Insurance Company of North America ("INA"), Northbrook Insurance Company, and certain underwriters at Lloyd's of London, (the "London Insurers").

We hold that the district court erred in applying New Jersey substantive law. Under New Jersey choice of law rules, which are applicable since the case was litigated in the District Court for the District of New Jersey, see Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S. Ct. 1020 (1941), the law of the place of contracting applies unless some other state has a "dominant significant relationship" to the transaction. The policy was negotiated and signed in New York, and thus the parties reasonably expected, as the district court recognized, that New York law would govern the interpretation of the contract. Moreover, at all relevant times, the parties each had their principal places of business in New York, the premiums were paid in New York, and New York taxes were paid on the policies.

In contrast, it is patent that New Jersey has none of the contacts with or interests in the litigation that could give rise to the requisite relationship. Significantly, none of the underlying tort claims involved New Jersey plaintiffs. Because the lead paint coverage actions had been joined with certain environmental coverage actions (seeking coverage for claims that NL was responsible for environmental harms at sites in New Jersey and elsewhere), the district court relied upon Gilbert Spruance Co. v. Pennsylvania Mfrs. Ass'n Ins. Co., 629 A.2d 885 (N.J. 1993), as a basis for applying New Jersey law. But since that case has no application to tort-related cases, we conclude that the court was incorrect in applying it here. And while it is arguable that the states where the lead paint claims arose had a relationship to the transaction, we do not believe that they have the "dominant and significant relationship" necessary to displace the law of New York, which is the law of the place of contracting, of performance, and of the tort.

Because the district court's application of New Jersey instead of New York law to the coverage issues was legally erroneous, we must reverse the grant of summary judgment. In view of this result, we do not reach the substantive questions of CU's duty to defend, its right to allocation, or the availability of a contribution claim against INA, for on remand these must be reconsidered pursuant to New York law.

I. Facts and Procedural History

This is one of two separate declaratory judgment actions brought by NL, a New Jersey corporation with its principal place of business in New York, against CU for insurance coverage under contracts negotiated and performed in New York. NL first sought a declaration that CU was obligated to defend it in product liability lawsuits in Massachusetts, New York, and Louisiana arising out of NL's manufacture of lead paint pigment. NL later added claims for coverage for four additional lead paint suits. The various plaintiffs in the underlying lawsuits alleged personal injuries as the result of lead paint exposure. NL did not, however, seek a declaration of CU's obligation to indemnify it with respect to the first three lead paint actions in this lawsuit; instead, NL included that issue in a separate lawsuit, the so-called "environmental action." See NL Industries, Inc. v. Commercial Union Ins. Co., No. 90-2125 (D.N.J.). In that action, NL also seeks a declaration that CU is obligated to defend and indemnify NL in connection with approximately 385 environmental claims arising from numerous sites throughout the United States.

The lead paint cases underlying this coverage suit arise from the use of lead paint or paint containing lead pigment manufactured by NL. The underlying complaints allege that NL knew since the early 1900's of the dangers posed by lead paints, and charge that NL "affirmatively misrepresented the safety, suitability and qualities of lead paint through [its] advertisements and promotional activities." (JA 21 at 1890-92; 1824-26; 1737-38; 1702-04.) They contain allegations of negligence, fraud, civil conspiracy, and other intentional torts. The plaintiffs also allege that NL organized the Lead Industries Association ("the LIA") to respond to the negative information being revealed about lead paint, and that NL's high-level executives played an active role in the LIA, which led an effort to discredit adverse medical evidence about the hazards of lead paint in order to ward off any additional government regulation. Documentary evidence submitted by CU supports these allegations of fraud and other intentional torts. Many of the meetings organizing these activities allegedly occurred in New York.

The district court found that New York was the place of contracting for all of the policies issued to NL by CU. NL had used a New York-based insurance broker to negotiate these contracts. The contracts were countersigned in CU's New York office. During the time that the relevant CU policies were in effect, NL maintained its national headquarters and principal place of business in New York. Both NL and CU's original objectively reasonable expectations were that New York law would control any disputes involving these contracts. See 7/11/91 Op. at 10.*fn1 CU coded these policies as New York contracts, and premium taxes on the policies were paid in New York.

The CU policies at issue were effective from February 1, 1966 to January 1, 1978. Some policies covered the period from February 1, 1966 to February 1, 1970 and provided coverage for bodily injury only. Other policies were effective from February 1, 1970 to January 1, 1978 and covered both bodily injury and property damage claims. The insuring agreements typically state:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

Coverage A bodily injury or

Coverage B property damage

to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent. . . .

The policies typically define "occurrence" as follows:

an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the Insured.

The policies provided by INA similarly specify that INA has the right and duty to defend bodily injury or property damage suits caused by an "occurrence," defined as an event that was "neither expected nor intended from the standpoint of the Insured."

In both cases involving the CU coverage, the allegations of intentional conduct would appear to put coverage at issue. In contrast, the London policies in effect from November 19, 1949 to May 1, 1970 provide for (even broader) coverage of property damage in the following terms:

COVERAGE. From and against all loss, costs, damages, attorney fees and expenses of whatever kind and nature which the Assured may sustain or incur by reason of or in consequence of:

(a) Any and all liability imposed by law against the Assured for damage to or destruction of property of others . . . sustained or alleged to have been sustained, arising from any cause whatsoever . . . .

Despite the fact that NL was also covered by other primary insurers during the relevant period, NL named only CU as a defendant in this action. Accordingly, CU filed a third-party complaint against those others -- the London Insurers, INA, and Northbrook Insurance Company -- seeking a declaration that any obligation owed NL with respect to the underlying actions was subject to and limited by the obligations of the third-party defendants.

NL moved for partial summary judgment against CU seeking a declaration that New Jersey law would govern the interpretation of its contracts with CU and that CU was obligated to fund NL's defense in the three original lead paint actions. In a July 11, 1991 opinion, the district court purported to address the choice of law issue for both the lead paint and environmental coverage actions. (The environmental coverage dispute, NL Industries, Inc. v. Commercial Union Ins. Co., No. 90-2125, was also pending in the District Court for the District of New Jersey.) The court apparently was under the impression that it had to interpret a given insurance policy uniformly as to both the environmental and the lead paint coverage claims. The court decided that New Jersey law was applicable and, applying it, granted NL's motion for defense costs of the three original lead paint claims.

The case was then referred to a magistrate Judge for a hearing on the amount of defense costs. On March 20, 1992, CU and NL entered into a stipulation and settlement agreement with respect to the payment of NL's defense costs incurred prior to March 1, 1992, in the three original lead paint actions. The settlement agreement was intended by the parties to be a final, binding resolution of that issue. Coverage for these three actions, dealt with in the settlement agreement, is therefore not at issue here. After the settlement agreement was finalized, NL moved to amend its complaint to add the four new lead paint lawsuits, which form the basis for this appeal.

These new lead paint actions arose in Pennsylvania and Louisiana after the settlement of the coverage issues for the original three lead paint actions.*fn2 NL then moved for summary judgment against CU alleging a duty to defend with respect to the four new actions. CU followed with a motion for summary judgment against INA and the London Insurers on its claim for contribution for a portion of the more than $4 million CU paid to NL to reimburse NL's defense costs in the three original actions. CU also sought allocation of defense costs among CU, INA, the London Insurers, and NL.

In opinions and orders dated August 6, 1993 and September 9, 1993, the magistrate Judge granted NL summary judgment on the duty to defend the four new claims and denied CU's motion for contribution and allocation.*fn3 CU filed a motion to vacate the judgment pursuant to Fed. R. Civ.P. 59(e), which the Magistrate recommended be granted, deeming his opinions to be reports and recommendations to the district court pursuant to 28 U.S.C. § 636(b).

On May 26, 1994, the district court filed an opinion adopting the magistrate Judge's findings, granting summary judgment in favor of NL on the issue of CU's duty to defend the four new actions, and denying CU's motion for contribution and/or allocation. The district court adhered to its previous determination that New Jersey law governed the interpretation of the contracts, relying in part on the law of the case doctrine (based on its Disposition in the 7/11/91 opinion) and on concerns that applying different states' laws to the various claims would be unmanageable. The court denied CU's motion for contribution from INA and the London Insurers on the basis that it was premature. The court also declined to allocate defense costs between negligence and intentional tort claims on the grounds that there was no "substantial issue" as to coverage, and, consequently, that all claims were potentially covered. This appeal followed.

Since choice of law analysis involves a purely legal question, we exercise plenary review. Armotek Industries, Inc. v. Employers Ins. of Wausau, 952 F.2d 756, 760 n.5, 762 n. 8 (3d Cir. 1991). Moreover, the district court's grant of summary judgment is also subject to plenary review. Public Interest Research of N.J. v. Powell Duffryn ...


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