Gilbert Spruance Co. v. Pennsylvania Manufacturers' Ass'n.

The opinion of the Court was delivered by

We granted certification, 130 N.J. 14, 611 A.2d 652 (1992), to address the sole question presented in the petition of defendant Pennsylvania Manufacturers’ Insurance Company (PMA), namely, “whether a comprehensive general liability policy containing a pollution exclusion, issued by an out-of-state carrier and covering an out-of-state defendant’s operations, should be construed pursuant to New Jersey law.” In this case the waste alleged to be the *98 source of the pollution was generated in Pennsylvania and deposited in New Jersey. The trial court balanced the factors set forth in Restatement (Second) of Conflicts of Laws (Restatement) section 6 (1971) (hereinafter section 6), and determined that Pennsylvania law should govern. The Appellate Division reversed, 254 N.J.Super. 43, 603 A.2d 61 (1992), concluding that when waste predictably comes to rest in New Jersey, this state has the dominant significant relationship with the parties, the transaction, and the outcome of the controversy, and thus New Jersey law should govern. Id. at 51, 603 A.2d 61.

We agree with the Appellate Division’s conclusion that when the parties to the insurance contract can reasonably foresee that a New Jersey waste site will receive the insured’s waste products, New Jersey law should dictate the proper interpretation of the insuring agreement because this state had the dominant significant relationship. (By “waste site” we mean the place at which the waste comes to rest, irrespective of whether that location is a designated landfill.) We therefore affirm.

I

Plaintiff, The Gilbert Spruance Company (Spruance), is a Pennsylvania corporation that manufactures paint in Philadelphia. In the course of its operations during the 1970s and 1980s, Spruance consigned its waste to independent waste haulers, who transported the waste to dumps in New Jersey. Four of those dump sites — Helen Kramer Landfill, Scientific Chemical Processing site, Gloucester Environmental Management Services Landfill, and Swope Oil and Chemical site — are the basis of multiple toxic-tort claims for personal injury and property damage against Spruance and are now the subject of public remediation-enforcement actions by the New Jersey Department of Environmental Protection (NJDEP) (now the Department of Environmental Protection and Energy).

From 1971 through 1988, Spruance purchased primary and excess Comprehensive General Liability (CGL) policies from *99 PMA, a Pennsylvania corporation. The policies listed several locations of plant operations in various states, including Pennsylvania, Virginia, and North Carolina. PMA is licensed to sell property, liability, and workers’ compensation insurance in numerous states, including Pennsylvania and New Jersey. The contracts at issue were negotiated and countersigned in Pennsylvania, and the premiums were paid there.

Each of the policies required PMA to provide a defense to Spruance for “suits” alleging liability for property damage or bodily injury that was insured under the policies in respect of occurrences or suits throughout the United States. From 1973 to 1988, the CGL policies issued by PMA to Spruance contained a standard pollution-exclusion clause, which provided that the insurance did not apply

(f) to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, release or escape is sudden and accidental * * *

When Spruance submitted notice of the claims arising from the four New Jersey waste sites, PMA disclaimed coverage based on the pollution-exclusion clause.

Between 1988 and 1989 Spruance filed complaints against PMA and Insurance Company of North America (INA) seeking a declaration of coverage. (The case against INA was dismissed after the parties settled their differences). In March 1989, Spruance filed a motion for summary judgment to establish PMA’s duty to defend. Denying that motion, the trial court conducted a section 6 analysis and declared that the law of Pennsylvania rather than that of New Jersey applied to the interpretation of the pollutionexelusion clause. The court held that under Pennsylvania law, the pollution-exclusion clause supported PMA’s disclaimer because the “discharge, dispersal release or escape” of the waste materials was not considered to be “sudden and accidental.” See Lower Paxton Township v. United States Fidelity & Guar. Co., 383 Pa.Super. *100 558, 557 A.2d 393, 399, appeal denied, 523 Pa. 649, 567 A.2d 653 (1989). Under then-existing New Jersey law, however, “sudden and accidental” discharge could include the gradual release of pollutants. See Broadwell Realty Servs., Inc. v. Fidelity & Casualty Co., 218 N.J.Super. 516, 535-36, 528 A.2d 76 (App.Div.1987). The trial court therefore granted PMA’s motion for summary judgment.

On appeal to the Appellate Division, plaintiff contended that the trial court had erroneously decided the choice-of-law issue. Relying primarily on the reasoning in Leksi, Inc. v. Federal Insurance Inc., 736 F.Supp. 1331 (D.N.J.1990), and Johnson Matthey, Inc. v. Pennsylvania Manufacturers’ Association Insurance Co., 250 N.J.Super. 51, 593 A.2d 367 (App.Div.1991), both of which were decided after the trial court had ruled in this case, the Appellate Division reversed and held that New Jersey law would apply to the interpretation of the “sudden and accidental” wording in the pollution-exclusion clause. 254 N.J.Super. at 51, 603 A.2d 61.

The court recognized that the law of the principal location of the insured risk as understood by the parties, which Restatement section 193 makes controlling unless some other state has a more significant relationship to the parties and the transaction, does not govern when the insured operation or activity is predictably multistate. 254 N.J.Super. at 50, 603 A.2d 61. In that situation, section 6 factors should be used to identify the state with the most significant relationship. Ibid.

In its section 6 analysis the Appellate Division apparently placed significant, if not controlling, emphasis on New Jersey’s interest in securing financial resources both to remediate New Jersey toxic-waste sites and to compensate victims of New Jersey pollution. Id. at 47-48, 603 A.2d 61; see J. Josephson, Inc. v. Crum & Forster Ins. Co., 265 N.J.Super. 230,235-36, 626 A.2d 81, (Law Div.), leave to appeal denied (App.Div., July 1, 1993). The court also found that the justified — i.e., objectively reasonable— expectations of the parties were protected because the parties could foresee that waste generated from a Philadelphia paint *101 factory would come- to rest in New Jersey and that generator responsibility would be measured by New Jersey law. 254 N.J.Super. at 49, 603 A.2d 61; see also Leksi supra, 736 F.Supp. at 1336 (finding foreseeable that waste generated in Pennsylvania would be deposited across Delaware River in New Jersey); cf. General Metalcraft Inc. v. Liberty Mut. Ins. Co., 796 F.Supp. 794, 802 (D.N.J.1992) (stating, “With respect to foreseeability and the expectations of the parties, we agree about the foreseeability of hazardous waste products generated in an abutting state landing in New Jersey”). The court concluded that when out-of-state-generated waste predictably comes to rest in New Jersey and imposes legal liabilities here on the insured, New Jersey has the dominant and significant relationship with the parties, the transaction, and the outcome of the controversy. 254 N.J.Super. at 51, 603 A.2d 61.

In adopting the site-specific-uniformity approach, the court rejected the uniform-contract-interpretation approach that another panel of the Appellate Division had advocated in Westinghouse Electric Corp. v. Liberty Mutual Insurance Co., 233 N.J.Super. 463, 559 A.2d 435 (1989). The court pointed out that in Johnson Matthey, it had characterized nationwide uniformity of policy interpretation as “an illusory goal, not truly achievable or necessarily preferable.” 254 N.J.Super. at 49, 603 A.2d 61. The court concluded that “[s]ite-specific uniformity, on the other hand, is achievable, and represents a choice of the law of the jurisdiction that is most concerned with the outcome.” Id. at 49-50, 603 A.2d 61. Moreover, the court noted, the failure to include a choice-of-law provision in the contracts “tends to show that uniform interpretation was not a conscious goal of the contracting parties.” Id. at 50, 603 A.2d 61.

The court remanded so that the Law Division could determine the effect of the choice-of-law decision on the substantive-coverage issue. That New Jersey’s law on the meaning of the pollution-exclusion clause, and particularly the “sudden and accidental” language therein, remains at variance with the current law in *102 Pennsylvania (the question having not been decided by that Commonwealth’s highest court) is clear from our decision today in Morton International Inc. v. General Accident Insurance Co., 134 N.J. 1, 629 A.2d 831. Were the law the same in both jurisdictions, we would not, of course, be confronted with a choice-of-law problem.

II

Traditionally, the law of the place where the contract, including an insurance contract, was entered into determined the rights of the parties under the contract. Buzzone v. Hartford Accident & Indent. Co., 23 N.J. 447, 452,129 A.2d 561 (1957). In State Farm Mutual Automobile Insurance Co. v. Estate of Simmons, 84 N.J. 28, 36-37, 417 A.2d 488 (1980), we rejected the mechanical and inflexible lex loci contractus rule in resolving conflict-of-law issues in liability-insurance contracts. Instead, our courts have adopted a more flexible approach that focuses on the state that has the most significant connections with the parties and the transaction. Bell v. Merchants & Businessmen’s Mut. Ins. Co., 241 N.J.Super. 557, 561-62, 575 A.2d 878 (App.Div.), certif. denied, 122 N.J. 395, 585 A.2d 395 (1990); McCabe v. Great Pac. Century Carp., 222 N.J.Super. 397, 399, 537 A.2d 303 (App.Div.1988). We held that because the law of the place of contract “generally comport[s] with the reasonable expectations of the parties concerning the principal situs of the insured risk,” 84 N.J. at 37, 417 A.2d 488, that forum’s law should be applied “unless the dominant and significant relationship of another state to the parties and the underlying issue dictates that this basic rule should yield.” Ibid. In making that determination, courts should rely on the factors and contacts set forth in Restatement sections 6 and 188. Id. at 34-35, 417 A.2d 488.

According to Restatement section 188, the general rule in contract actions is that the law of the state with the most significant relationship to the parties and the transaction under the principles stated in Restatement section 6 governs. State *103 Farm, supra, 84 N.J. at 34, 417 A.2d 488. Section 188 lists several relevant “contacts,” according to their relative importance, to be considered in the section 6 analysis, such as the domicile, residence, nationality, place of incorporation and place of business of the parties, and the places of contracting and performance. Under section 6, the “general considerations germane to a court’s conflict-of-law analysis” are:

(a) the needs of the interstate and international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of law,

(f) certainty, predictability, and uniformity of result, and

(g) ease in the determination and application of the law to be applied.

[State Farm, supra, 84 N.J. at 34, 417 A.2d 488.]

Although Restatement section 188 provides the choice-of-law rule in respect of contracts in general, Restatement section 193 provides guidance in applying section 188’s “relevant contacts” to the special case of casualty-insurance contracts, such as CGL policies: the court should apply the law of the state that “the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties * * Id. at 610. See Pittston Co. v. Allianz Ins. Co., 795 F.Supp. 678, 687 (D.N.J.1992) (applying section 193 and holding that New Jersey law controlled in environmental-coverage case when insured risk was located principally in New Jersey); Johnson Matthey, supra, 250 N.J.Super. at 60, 593 A.2d 367 (same); Bell, supra, 241 N.J.Super. at 563, 575 A.2d 878 (applying section 193 and holding that New Jersey law governed interpretation of “multi-peril” policy of insurance when insured risk was located in New Jersey). Section 193 is based on the rationale that for a number of reasons

the location of the risk is a matter of intense concern to the parties to the insurance contract. And it can often be assumed that the parties, to the extent that they *104 thought about the matter at all, would expect that the local law of the state where the risk is to be principally located would be applied to determine many of the issues arising under the contract. Likewise, the state where the insured risk will be principally located during the term of the policy has a natural interest in the determination of issues arising under the insurance contract.

[Restatement, supra, § 193 comment c.]

If the principal location of the insured risk is in a single state for a major portion of the insurance period, that location “is the most important contact to be considered in the choice of the applicable law, at least as to most issues.” Id. § 193 comment b. However, the location of the risk has less significance when a movable risk is concerned or when “the policy covers a group of risks that are scattered throughout two or more states.” Ibid.

Capitalizing on the flexible and interpretative nature of the “factors” set forth in Restatement section 6 and the “contacts” listed in Restatement section 188, as well as the rule of Restatement section 193 specifically pertaining to casualty-insurance contracts, our courts have created choice-of-law rules in the context of commercial insurance and pollution exclusion involving out-of-state waste generation, multi-state waste generation, and in-state waste generation with the waste ultimately coming to rest in New Jersey. The two main choice-of-law rules adopted by the Appellate Division are the uniform-contract-interpretation approach and the site-specific approach.

Under the uniform-contract-interpretation approach, the law of a single forum governs the interpretation of coverage under a casualty-insurance policy for multi-state claims arising from environmental damage in multiple jurisdictions. See, e.g., Sandefer Oil & Gas, Inc. v. AIG Oil Rig of Texas, Inc., 846 F.2d 319, 321 (5th Cir.1988) (applying Texas law for claims of coverage under occurrences in Louisiana, Texas, and Oklahoma against insurers in New Hampshire, New York, Canada, Norway, and Sweden); Borg-Warner Corp. v. Insurance Co. of North America, 174 A.D.2d 24, 577 N.Y.S.2d 953, 956 (applying New York law for coverage of damage resulting from nineteen waste sites scattered around country), leave to appeal denied, 80 N.Y.2d 753, 587 *105 N.Y.S.2d 905, 600 N.E.2d 632 (1992). Proponents of that approach contend that uniformity in contract interpretation deters forum shopping, see National Starch & Chem. Corp. v. Great Am. Ins. Cos., 743 F.Supp. 318, 323 (D.N.J.1990), and advances both predictability, in that parties can more accurately forecast potential coverage, Johnson Matthey, supra, 250 N.J.Super. at 59, 593 A.2d 367, and the expectations of purchasers of comprehensive nationwide coverage, who believe that they have bought “a single protection from liability irrespective of the particular state law under which that liability is determined so long as the risk, whether or not ultimately resulting in liability, is within the coverage.” Westinghouse, supra, 233 N.J.Super. at 476, 559 A.2d 435.

The Appellate Division in Westinghouse adopted the uniform-contract-interpretation approach. Id. at 476-77, 559 A.2d 435. See also National Starch, supra, 743 F.Supp. at 323 (following Westinghouse and applying uniform-contract-interpretation approach regarding coverage for multiple claims arising from environmental-contamination sites in New Jersey and eleven other states). The plaintiff in Westinghouse, presented with thousands of bodily-injury claims and numerous property-damage claims arising from eighty-one sites located in twenty-three states, brought Suit against 144 insurers for declarations of nationwide coverage for toxic-tort claims and site-remediation liability wherever located. 233 N.J.Super. at 465-66, 559 A.2d 435. On grounds of forum non conveniens, the Law Division severed and dismissed all claims for coverage arising out of events that had occurred outside New Jersey. Id. at 465, 559 A.2d 435. The Appellate Division reversed and held that the court should exercise jurisdiction over all claims for coverage within the insurance policies, whether the events giving rise to those claims had occurred in New Jersey or elsewhere. Id. at 475, 559 A.2d 435.

The Westinghouse court held that the plaintiff was “entitled to a single, consistent and final resolution of the choice of law question in a single comprehensive action which will bind it and all its *106 insurers,” id. at 477, 559 A.2d 435, and that “[t]his task is obviously manageable if the law of only one state is required to be restated,” id. at 478, 559 A.2d 435. The court reasoned as follows:

While not intending to deprecate the legitimacy of local concern for and control over its own environmental contamination, we nevertheless cannot conceive that the operative contract language in a single set of insurance policies issued by a group of insurers for the purpose of providing integrated comprehensive coverage for nationwide risks could mean something different in every state of the union. Obviously, the liability of the insured as a tortfeasor for the governmental and private claims against it will be determined by state law, whose applicable rules may differ from state to state, and by applicable substantive federal environmental and toxic tort law as well. But when comprehensive nationwide coverage is purchased, it is surely the expectation of both insured and insurer that what the insured has bought and the insurer has sold is a single protection from liability irrespective of the particular state law under which that liability is determined so long as the risk, whether or not ultimately resulting in liability, is within the policy coverage.

In our view, the notion that the insured’s rights under a single policy vary from state to state depending on the state in which the claim invoking the coverage arose contradicts not only the reasonable expectation of the parties but also the common understanding of the commercial community. It also seems to us anomalous, in conflict-of-law terms, to suggest that more than one body of law will apply to a single contract.

[Id. at 476, 559 A.2d 435 (citations omitted).]

Appellate Division cases since Westinghouse have acknowledged the persuasive force of its view that an insurance clause regarding pollution coverage should have only one meaning no matter where the policy applies, see Diamond Shamrock Chemicals Co. v. Aetna Casualty & Surety Co., 258 N.J.Super. 167, 198-99, 609 A.2d 440 (App.Div.1992); Johnson Matthey, supra, 250 N.J.Super. at 64, 593 A.2d 367, and that a court’s task is to identify the state with the most significant relationship with the parties and the transaction, and then to apply that state’s law, see Diamond Shamrock, supra, 258 N.J.Super. at 198, 609 A.2d 440; Gilbert Spruance, supra, 254 N.J.Super. at 50-51, 603 A.2d 61; see also General Metalcraft, supra, 796 F.Supp. at 802-03 (holding that New Jersey law governed because New Jersey, as predictable waste-site location, had most significant relationship to parties and transaction); National Starch, supra, 743 F.Supp. at 325 (applying most-significant-relationship test); Leksi, supra, 736 F.Supp. *107 at 1333-34 (same). Nevertheless, those and other eases have rejected the uniform-eontract-interpretation approach in favor of the site-specific rule. See Diamond Shamrock, supra, 258 N.J.Super. at 198-99, 609 A.2d 440; Gilbert Spruance, supra, 254 N.J.Super. at 49-50, 603 A.2d 61; Johnson Matthey, supra, 250 N.J.Super. at 62-64, 593 A.2d 367; see also General Metalcraft, supra, 796 F.Supp. at 802-03 (applying New Jersey choice-of-law rule and holding that New Jersey law governed because waste-site was located in New Jersey); Pittston, supra, 795 F.Supp. at 687 (applying New Jersey choice-of-law rule and holding that New Jersey law governed because insured risks, petroleum terminal and storage facility, were located in New Jersey); Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., 788 F.Supp. 846, 851 (D.N.J.1992) (applying New Jersey choice-of-law rule and finding that New Jersey law governed because contracting parties could reasonably foresee that waste generated at tank-truck-cleaning facility in New Jersey would come to rest in New Jersey); Leksi, supra, 736 F.Supp. at 1336 (applying New Jersey choice-of-law rule and holding that law of New Jersey waste-site location governs if reasonably foreseeable that waste would come to rest in this state). The site-specific rule, as set forth in Restatement section 193, provides that a casualty-insurance policy should be interpreted under the substantive law of the state that the parties understood to be the principal location of the insured risk, unless ano