NJ Takes the Lead on Another Environmental Coverage Issue: Allocation Choice of Law

In one of the nation's first and most comprehensive allocation choice-of-law decisions, a court recently rejected insurers' claims that allocation law of the forum applies to property damage arising at multiple environmental sites if the policyholder's coverage action is venued in New Jersey. The decision was rendered in four companion environmental coverage cases involving a common choice-of-law issue. See General Electric Co., as successor in interest to RCA Corp. v. Certain Underwriters at Lloyd's London, Docket No. MER-L-4931-87 c/w MER-L-6432-88 (Law Div. Mar. 25, 2004), reconsid. den., (Law Div. May 12, 2004) (hereinafter “RCA“); Home Ins. Co. v. Cornell-Dubilier Electronics, Inc., Docket No. MER- L-5192-96 c/w MER-L-2773-02 (Law Div. Mar. 25, 2004), reconsid. den., (Law Div. May 12, 2004); Sterling Winthrop, Inc. v. Royal Indem. Ins. Co., Docket No. MER-L-101-94 c/w MER-L-106-94 (Law Div. Mar. 25, 2004); Rohm & Haas Co. v. Allianz Underwriters, Inc., Docket No. MER-L-4920-87 c/w MER-L-4664-95 (collectively, the “Companion Cases“). The court concluded that the law of the state in which each waste site is located presumptively applies to the allocation of damages. This decision, now the subject of pending appeals, is likely to reach New Jersey's Supreme Court because it was rendered in “high stakes” cases, and it has broad application to many other environmental coverage actions. If the Supreme Court ultimately takes up the matter ' something the court has demonstrated a willingness to do in connection with other challenging coverage issues (see, eg, Spaulding Composites Co. v. Liberty Mutual Ins. Co., 176 N.J. 25, 819 A.2d 410 (2003) (granting leave for interlocutory appeal regarding inapplicability of non-cumulation clause); Pfizer, Inc. v. Employers Ins. of Wausau, 154 N.J. 187, 721 A.2d 634 (1998) (granting leave for interlocutory appeal regarding choice-of-law governing interpretation of pollution exclusion); Carter-Wallace v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998) (granting interlocutory appeal regarding allocation) ' it will be the highest state court in the nation to resolve an allocation choice-of-law dispute in a multistate, multisite environmental coverage action.

Varying Allocation Approaches

In the environmental coverage context, allocation refers to distributing the damage resulting from a continuous discharge of pollutants among multiple triggered policy periods, and between and among insurers. See Carter-Wallace v. Admiral Ins. Co., 154 N.J. at 312, 712 A.2d at 1121. Three general approaches to allocation have developed: 1) all sums; 2) pro rata; and 3) New Jersey's pro rata by years and limits. Under an all sums approach (also known as a vertical, or joint and several allocation approach), a policyholder can elect to collapse all costs from a continuous environmental discharge into a single policy year within the discharge period. That policy year's insurers must reimburse the entire loss, subject only to their contribution rights against other triggered years' insurers. Such an approach typically is favored by policyholders because it maximizes coverage and is consistent with a liberal interpretation of the bargained-for policy language. See, e.g., Keene Corp. v. Insurance Co. of No. Am., 667 F.2d 1034 (D.C. Cir. 1981), cert. den., 455 U.S. 1007 (1982), reh'g den., 456 U.S. 951 (1982); Zurich Ins. Co. v. Raymark Indus., Inc., 118 Ill.2d 23, 514 N.E.2d 150 (1987); Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049 (Ind. 2001); Rubenstein v. Royal Ins. Co., 694 N.E.2d 381 (Mass. App. Ct. 1998); J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa. 29, 626 A.2d 502 (1993).

Under a pro rata or horizontal allocation approach, the loss is spread evenly over all triggered policy years within the discharge period. Employing a pro rata allocation method often reduces the likelihood of reaching upper-layer excess insurers, particularly in years when a policyholder purchased substantial amounts of insurance coverage.

See, e.g., Insurance Co. of North Am. v. Forty-Eight Insulations, Inc., 657 F.2d 814 (6th Cir. 1981), cert. den., 454 U.S. 1109 (1981); Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365 (5th Cir. 1993); Consolidated Edison Co. v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687 (2002).

New Jersey's allocation method, a modified pro rata by years and limits approach, grew out of its Supreme Court's dissatisfaction with the extremes of the all sums and pro rata methods. E.g., Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998); Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994). Under this approach ' which is sometimes referred to as the Carter-Wallace or Owens-Illinois allocation formula ' long-tail environmental liabilities are spread horizontally among triggered insurance policies in proportion to the degree of the risks transferred during the policy period. Id. The percentage of responsibility allocated to each policy period is determined by using the triggered policy limits in each year as the numerator and the total policy limits in all triggered years as the denominator. Carter-Wallace, 154 N.J. at 325-28, 712 A.2d at 1123-25; Owens-Illinois, 138 N.J. at 475-77, 650 A.2d at 993-95. As a result, a year in which a policyholder purchased more total insurance coverage bears a greater share of a loss than a policy year in which a policyholder purchased less coverage.

New Jersey's Allocation Approach

New Jersey's allocation method endeavors to provide a fair and efficient, albeit admittedly imperfect, resolution to the problem of allocating long-tail losses among available insurance coverage. The approach was applied to environmental coverage actions in Carter-Wallace, Inc. v. Admiral Insurance Company, a case with an undeniable New Jersey nexus. See 154 N.J. at 312, 712 A.2d at 1116. There, a pharmaceutical company with substantial New Jersey operations sought reimbursement for cleanup costs at a New Jersey landfill after it allegedly deposited waste from one of its New Jersey plants at the site. Id. Given the New Jersey connection, no choice-of-law questions were raised or addressed by the Carter-Wallace court.

The Allocation Choice-of-Law Issue

In contrast to the one-site, one-jurisdiction Carter-Wallace scenario, many environmental coverage actions are extraordinarily complex, involving numerous parties and multiple waste sites located around the country, if not worldwide. See Pfizer, Inc. v. Employers Ins. of Wausau, 154 N.J. 187, 199, 712 A.2d 634, 640 (1998); Companion Cases, Slip Op. at 18-29. They involve significant amounts of coverage, and therefore insurers (perhaps predictably) seek to minimize their substantial coverage obligations to their policyholders.

In RCA, for example, the policyholder seeks coverage for environmental losses at approximately 70 sites around the world. Slip Op. at 19. The original defendants included a number of foreign and domestic insurers that sold hundreds of insurance policies to the policyholder over approximately four decades. The action was divided into phases for trial. Id. at 20. Phase I involves two non-New Jersey sites (in Pennsylvania and Indiana), while Phase II involves numerous sites located in Colorado, New Jersey, Massachusetts, Ohio and Puerto Rico. The phasing of the remaining sites has yet to be established. Id. The remaining disputed coverage in RCA amounts to more than $800 million over a 33-year period. Id. at 19.

The highest courts of many of the states where RCA's Phase I and Phase II sites are located have rejected New Jersey's pro-rata allocation method and/or the public policy rationale underlying it. Their allocation law, therefore, conflicts with that of New Jersey. Id. at 29. Compare J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d. 502, 508 (Pa. 1993); Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835, 841 (Ohio 2002), reconsid. den., 774 N.E.2d 764 (2002); Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1058 (Ind. 2001); Rubenstein v. Royal Ins. Co., 694 N.E.2d 381 (Mass. App. Ct. 1998) with Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 721 A.2d 1116 (1998) and Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994). Nonetheless, complaining (among other things) that law of the site allocation would be unwieldy for courts to administer, insurers in RCA and other Companion Cases argue in favor of application of the allocation law of the forum state (New Jersey) to all property damage resulting from all of the policyholder's waste sites. See Companion Cases, Slip Op. at 67, 69.

Differing Allocation Outcomes

The allocation method ultimately employed in an environmental coverage case may well lead to very different outcomes. See id. at 7-16. An example may help illustrate the point. Assume that a company accidentally discharging pollutants for 10 years is faced with a $50 million environmental claim, and it has $100 million in available coverage (without exclusions) for the decade as set forth in the table below.

[IMGCAP(1)]

Under an all sums approach, the policyholder could be reimbursed for the entire $50 million loss by electing to attribute the entire loss to policy year 10. Every primary and excess insurer in that policy year (Insurers A, B, C, D and E) would pay its limits to the policyholder (and then likely seek reimbursement from triggered insurers in years 1 to 9).

Under a strict pro rata by years approach, the policyholder would be reimbursed for only $40 million of its $50 million loss. The loss would be spread evenly over the 10 triggered policy years; meaning $5 million of loss would be attributed to each policy year. In years 1 through 4, the policyholder would be “short” $10 million (having only $1 million of coverage in year 1, and $3 million of coverage in each of years 2, 3 and 4, to respond to the $5 million loss attributed to each policy year). In years 5 through 10, the balance of the policyholder's losses would be paid by insurers A and B. Insurers C, D and E would pay nothing.

Under a modified pro rata by years and limits approach, the policyholder would be fully reimbursed for its entire $50 million loss. The insurers would pay it as follows: Insurer A, $9.5 million; Insurer B, $20.5 million; Insurer C, $5 million; and, Insurer D, $15 million. Insurer E, however, would pay nothing.

The Companion Cases' Allocation Choice-of-Law Ruling

It is the rare environmental coverage case that involves only litigants from, and property in, the forum state. Because of the multistate nature of most environmental coverage cases, such matters frequently spawn choice-of-law issues respecting which jurisdiction's laws govern interpretation of “pollution exclusion” clauses, the validity of “late notice” defenses, and allocation. See, e.g., Pfizer, 154 N.J. at 193, 712 A.2d at 637; Companion Cases, Slip Op. at 29. The Companion Cases, by way of example, all began as a mammoth coverage action against hosts of insurers for reimbursement of costs at multiple sites in multiple states. Companion Cases, Slip Op. at 18. None of the insurance policies implicated by the Companion Cases contain an express choice-of-law provision. Id. at 68. The court, therefore, faced the allocation choice-of-law question in four matters pending in one New Jersey county. Id. at 4, 29. It coordinated the briefing on all four matters, heard omnibus oral argument, and issued a single opinion. Id. at 28.

The court observed that New Jersey seeks to apply the law of the state with the greatest interest in resolving the particular issue. The court applied New Jersey's four-prong choice-of-law test, considering: the competing interests of the multiple states, the national interests of commerce among the states, the parties' interests, and the interests of judicial administration. Companion Cases, Slip Op. at 32-33; see also Pfizer Inc. v. Employers Ins. of Wausau, 154 N.J. 187, 712 A.2d 634 (1998) (adopting a choice-of-law test modeled upon the Restatement (Second) of Conflict of Laws, '6 (1971)). The trial court likewise compared the competing benefits and detriments of four possible choice-of-law rubrics: the forum state's, the state where each site is located, a single nexus state, and multiple nexus states determined by policy periods. Companion Cases, Slip Op. at 44-62. In so doing, the court found an “inherent tradeoff between certainty and flexibility in choosing a state's law of allocation.” Id. at 62. The more rigid approaches (such as the law of the forum) offered some measure of predictability in simple matters, but they were “ill suited” to respond to the peculiar circumstances often characteristic of complex environmental coverage cases. See id. at 62-63. More flexible approaches (such as the law of the site) were better tailored to respond fairly to the dynamics and nuances of each environmental case. The court noted that flexible approaches, while preferable, may be somewhat harder to administer in certain circumstances. See id. at 63.

After applying the Pfizer choice-of-law factors to what the court characterized as a “range of imperfect solutions,” the court ultimately held that the allocation law of the state in which each site is located presumptively applies to the allocation of damages incurred at the site. Id. at 4-5. The presumption, however, can be overcome in rare situation by clear and convincing evidence that a different state has a greater interest in application of its allocation law. The court characterized this rule as “fair, pragmatic, reasonably predictable, and in step with general principles of choice of law and public policy.” Id. at 4. Because the Companion Cases insurers could not meet the heavy factual burden of rebutting the presumption in favor of the law of the site, the court held the allocation law of the site governed the three active cases. Id. at 4-5.

No Simple Solutions

When a policy covers risk located primarily in a single state, resolving the choice-of-law issues is relatively straightforward. There is no choice-of-law issue where, for example, a policyholder is located in one state, the environmental liability arises out of the same state, and the policies are issued by a state-based insurer for that one site. See, e.g., Robeson Indus. Corp. v. Hartford Accid. & Indem. Co., 178 F.3d 160 (3d Cir. 1999) (applying New York law to an environmental coverage dispute involving policies negotiated and issued in New York, covering risks at a New York property, and relating to claims arising from discharge of contaminants at a New York facility). But many environmental coverage actions ' like the Companion Cases ' are at the other end of the spectrum. They involve insureds with national or worldwide operations, seeking coverage under scores of insurance policies issued by dozens of domestic and foreign insurers. They also involve environmental liabilities at multiple sites in multiple jurisdictions, some of which have allocation rules conflicting with those of the forum state. Application of the allocation law of the forum state (or some other “uniform” allocation law) ' despite its theoretical and simplistic surface appeal ' is simply not a fair or viable option. As the Owens-Illinois court recognized when it announced New Jersey's allocation method: Courts can narrow the range of disputes and provide procedures to better resolve remaining disputes, but they “cannot simplify issues that are intrinsically complex.” 138 N.J. at 480, 650 A.2d at 996.

New Jersey courts expressly and appropriately recognize that “the location of the waste site carries 'very substantial weight' in the [choice of law] analysis.” HM Holdings, Inc. v. Aetna Cas. & Surety Co., 154 N.J. 208, 215, 712 A.2d at 645, 648 (1998) (quoting NL Indus., Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 321 (3d Cir. 1995)). Accord Pfizer, 154 N.J. at 205, 712 A.2d at 642 (“In the event of a conflict between the law of [another state] and the law of the waste site, the law of the waste site should be applied because under the site-specific approach it would have the dominant significant relationship to the issue.”). See also Permacel v. American Ins. Co., 299 N.J. Super. 400, 411, 691 A.2d 383, 410 (App. Div. 1997), cited with approval in Lonza, Inc. v. Hartford Acc. & Indem. Co., 359 N.J. Super. 333, 351, 820 A.2d 53, 64 (App. Div. 2003) (as amended). The states where waste sites are located have significant interests in protecting the general health and welfare of their citizens and attending to their damaged environment. A rebuttable presumption that favors application of the allocation law of the site logically follows from this view. Mechanical application of a forum state's allocation law ' particularly when it conflicts with that of the host state's allocation law ' does not.

Conclusion

Employing a rebuttable presumption in favor of the law of the waste site may, as the Companion Case court recognized, present challenges. Some states have either no precedent or imprecise guidelines respecting allocation. See Companion Case, Slip Op. at 7. That environmental coverage actions in general, and allocation issues in particular, are complex, is no new development. See Pfizer, 154 N.J. at 199. The resolution of allocation issues frequently is delegated by the court, with the consent of the parties, to a special master or mediator. Companion Cases, Slip Op. at 7. Indeed, 10 years ago, the New Jersey Supreme Court directed trial courts to “take an active role in the management and resolution of … coverage controversies,” and suggested that trial courts repose a large measure of discretion in special masters, who would “aid in developing a formula for allocation of costs of defense and indemnity.” Owens-Illinois, 138 N.J. at 480, 650 A.2d at 642. The court further directed that special masters “use specialized procedures to resolve [allocation] issues.” Id. It is likely for this reason (among others) that the New Jersey Supreme Court has expressly rejected the use of a “uniform-contract-interpretation” approach in which “one law governs the insurance contract” in complex, multisite, multiphased environmental coverage claims with decades of triggered insurance policies. See Pfizer, 154 N.J. at 193, 712 A.2d at 637. Such a ruling would make no sense if the alleged efficiency of applying the forum's law (or some other uniform law) was somehow a primary concern for choice-of-law or allocation purposes.

As more coverage actions mature, it remains to be seen how courts in various jurisdictions will resolve allocation choice-of-law. One thing, however, is virtually certain: New Jersey courts will likely be among those framing and shaping the issues.

In one of the nation's first and most comprehensive allocation choice-of-law decisions, a court recently rejected insurers' claims that allocation law of the forum applies to property damage arising at multiple environmental sites if the policyholder's coverage action is venued in New Jersey. The decision was rendered in four companion environmental coverage cases involving a common choice-of-law issue. See General Electric Co., as successor in interest to RCA Corp. v. Certain Underwriters at Lloyd's London, Docket No. MER-L-4931-87 c/w MER-L-6432-88 (Law Div. Mar. 25, 2004), reconsid. den., (Law Div. May 12, 2004) (hereinafter “RCA“); Home Ins. Co. v. Cornell-Dubilier Electronics, Inc., Docket No. MER- L-5192-96 c/w MER-L-2773-02 (Law Div. Mar. 25, 2004), reconsid. den., (Law Div. May 12, 2004); Sterling Winthrop, Inc. v. Royal Indem. Ins. Co., Docket No. MER-L-101-94 c/w MER-L-106-94 (Law Div. Mar. 25, 2004); Rohm & Haas Co. v. Allianz Underwriters, Inc., Docket No. MER-L-4920-87 c/w MER-L-4664-95 (collectively, the “Companion Cases“). The court concluded that the law of the state in which each waste site is located presumptively applies to the allocation of damages. This decision, now the subject of pending appeals, is likely to reach New Jersey's Supreme Court because it was rendered in “high stakes” cases, and it has broad application to many other environmental coverage actions. If the Supreme Court ultimately takes up the matter ' something the court has demonstrated a willingness to do in connection with other challenging coverage issues ( see, eg, Spaulding Composites Co. v. Liberty Mutual Ins. Co., 176 N.J. 25, 819 A.2d 410 (2003) (granting leave for interlocutory appeal regarding inapplicability of non-cumulation clause); Pfizer, Inc. v. Employers Ins. of Wausau , 154 N.J. 187, 721 A.2d 634 (1998) (granting leave for interlocutory appeal regarding choice-of-law governing interpretation of pollution exclusion); Carter-Wallace v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998) (granting interlocutory appeal regarding allocation) ' it will be the highest state court in the nation to resolve an allocation choice-of-law dispute in a multistate, multisite environmental coverage action.

Varying Allocation Approaches

In the environmental coverage context, allocation refers to distributing the damage resulting from a continuous discharge of pollutants among multiple triggered policy periods, and between and among insurers. See Carter-Wallace v. Admiral Ins. Co., 154 N.J. at 312, 712 A.2d at 1121. Three general approaches to allocation have developed: 1) all sums; 2) pro rata; and 3) New Jersey's pro rata by years and limits. Under an all sums approach (also known as a vertical, or joint and several allocation approach), a policyholder can elect to collapse all costs from a continuous environmental discharge into a single policy year within the discharge period. That policy year's insurers must reimburse the entire loss, subject only to their contribution rights against other triggered years' insurers. Such an approach typically is favored by policyholders because it maximizes coverage and is consistent with a liberal interpretation of the bargained-for policy language. See, e.g., Keene Corp. v. Insurance Co. of No. Am., 667 F.2d 1034 (D.C. Cir. 1981), cert. den., 455 U.S. 1007 (1982), reh'g den., 456 U.S. 951 (1982); Zurich Ins. Co. v. Raymark Indus., Inc., 118 Ill.2d 23, 514 N.E.2d 150 (1987); Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049 (Ind. 2001); Rubenstein v. Royal Ins. Co., 694 N.E.2d 381 (Mass. App. Ct. 1998); J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa. 29, 626 A.2d 502 (1993).

Under a pro rata or horizontal allocation approach, the loss is spread evenly over all triggered policy years within the discharge period. Employing a pro rata allocation method often reduces the likelihood of reaching upper-layer excess insurers, particularly in years when a policyholder purchased substantial amounts of insurance coverage.

See, e.g., Insurance Co. of North Am. v. Forty-Eight Insulations, Inc., 657 F.2d 814 (6th Cir. 1981), cert. den., 454 U.S. 1109 (1981); Gulf Chem. & Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365 (5th Cir. 1993); Consolidated Edison Co. v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687 (2002).

New Jersey's allocation method, a modified pro rata by years and limits approach, grew out of its Supreme Court's dissatisfaction with the extremes of the all sums and pro rata methods. E.g., Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998); Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994). Under this approach ' which is sometimes referred to as the Carter-Wallace or Owens-Illinois allocation formula ' long-tail environmental liabilities are spread horizontally among triggered insurance policies in proportion to the degree of the risks transferred during the policy period. Id. The percentage of responsibility allocated to each policy period is determined by using the triggered policy limits in each year as the numerator and the total policy limits in all triggered years as the denominator. Carter-Wallace, 154 N.J. at 325-28, 712 A.2d at 1123-25; Owens-Illinois, 138 N.J. at 475-77, 650 A.2d at 993-95. As a result, a year in which a policyholder purchased more total insurance coverage bears a greater share of a loss than a policy year in which a policyholder purchased less coverage.

New Jersey's Allocation Approach

New Jersey's allocation method endeavors to provide a fair and efficient, albeit admittedly imperfect, resolution to the problem of allocating long-tail losses among available insurance coverage. The approach was applied to environmental coverage actions in Carter-Wallace, Inc. v. Admiral Insurance Company, a case with an undeniable New Jersey nexus. See 154 N.J. at 312, 712 A.2d at 1116. There, a pharmaceutical company with substantial New Jersey operations sought reimbursement for cleanup costs at a New Jersey landfill after it allegedly deposited waste from one of its New Jersey plants at the site. Id. Given the New Jersey connection, no choice-of-law questions were raised or addressed by the Carter-Wallace court.

The Allocation Choice-of-Law Issue

In contrast to the one-site, one-jurisdiction Carter-Wallace scenario, many environmental coverage actions are extraordinarily complex, involving numerous parties and multiple waste sites located around the country, if not worldwide. See Pfizer, Inc. v. Employers Ins. of Wausau , 154 N.J. 187, 199, 712 A.2d 634, 640 (1998); Companion Cases, Slip Op. at 18-29. They involve significant amounts of coverage, and therefore insurers (perhaps predictably) seek to minimize their substantial coverage obligations to their policyholders.

In RCA, for example, the policyholder seeks coverage for environmental losses at approximately 70 sites around the world. Slip Op. at 19. The original defendants included a number of foreign and domestic insurers that sold hundreds of insurance policies to the policyholder over approximately four decades. The action was divided into phases for trial. Id. at 20. Phase I involves two non-New Jersey sites (in Pennsylvania and Indiana), while Phase II involves numerous sites located in Colorado, New Jersey, Massachusetts, Ohio and Puerto Rico. The phasing of the remaining sites has yet to be established. Id. The remaining disputed coverage in RCA amounts to more than $800 million over a 33-year period. Id. at 19.

The highest courts of many of the states where RCA's Phase I and Phase II sites are located have rejected New Jersey's pro-rata allocation method and/or the public policy rationale underlying it. Their allocation law, therefore, conflicts with that of New Jersey. Id. at 29. Compare J.H. France Refractories Co. v. Allstate Ins. Co. , 626 A.2d. 502, 508 (Pa. 1993); Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835, 841 (Ohio 2002), reconsid. den., 774 N.E.2d 764 (2002); Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1058 (Ind. 2001); Rubenstein v. Royal Ins. Co., 694 N.E.2d 381 (Mass. App. Ct. 1998) with Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 721 A.2d 1116 (1998) and Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994). Nonetheless, complaining (among other things) that law of the site allocation would be unwieldy for courts to administer, insurers in RCA and other Companion Cases argue in favor of application of the allocation law of the forum state (New Jersey) to all property damage resulting from all of the policyholder's waste sites. See Companion Cases, Slip Op. at 67, 69.

Differing Allocation Outcomes

The allocation method ultimately employed in an environmental coverage case may well lead to very different outcomes. See id. at 7-16. An example may help illustrate the point. Assume that a company accidentally discharging pollutants for 10 years is faced with a $50 million environmental claim, and it has $100 million in available coverage (without exclusions) for the decade as set forth in the table below.

[IMGCAP(1)]

Under an all sums approach, the policyholder could be reimbursed for the entire $50 million loss by electing to attribute the entire loss to policy year 10. Every primary and excess insurer in that policy year (Insurers A, B, C, D and E) would pay its limits to the policyholder (and then likely seek reimbursement from triggered insurers in years 1 to 9).

Under a strict pro rata by years approach, the policyholder would be reimbursed for only $40 million of its $50 million loss. The loss would be spread evenly over the 10 triggered policy years; meaning $5 million of loss would be attributed to each policy year. In years 1 through 4, the policyholder would be “short” $10 million (having only $1 million of coverage in year 1, and $3 million of coverage in each of years 2, 3 and 4, to respond to the $5 million loss attributed to each policy year). In years 5 through 10, the balance of the policyholder's losses would be paid by insurers A and B. Insurers C, D and E would pay nothing.

Under a modified pro rata by years and limits approach, the policyholder would be fully reimbursed for its entire $50 million loss. The insurers would pay it as follows: Insurer A, $9.5 million; Insurer B, $20.5 million; Insurer C, $5 million; and, Insurer D, $15 million. Insurer E, however, would pay nothing.

The Companion Cases' Allocation Choice-of-Law Ruling

It is the rare environmental coverage case that involves only litigants from, and property in, the forum state. Because of the multistate nature of most environmental coverage cases, such matters frequently spawn choice-of-law issues respecting which jurisdiction's laws govern interpretation of “pollution exclusion” clauses, the validity of “late notice” defenses, and allocation. See, e.g., Pfizer, 154 N.J. at 193, 712 A.2d at 637; Companion Cases, Slip Op. at 29. The Companion Cases, by way of example, all began as a mammoth coverage action against hosts of insurers for reimbursement of costs at multiple sites in multiple states. Companion Cases, Slip Op. at 18. None of the insurance policies implicated by the Companion Cases contain an express choice-of-law provision. Id. at 68. The court, therefore, faced the allocation choice-of-law question in four matters pending in one New Jersey county. Id. at 4, 29. It coordinated the briefing on all four matters, heard omnibus oral argument, and issued a single opinion. Id. at 28.

The court observed that New Jersey seeks to apply the law of the state with the greatest interest in resolving the particular issue. The court applied New Jersey's four-prong choice-of-law test, considering: the competing interests of the multiple states, the national interests of commerce among the states, the parties' interests, and the interests of judicial administration. Companion Cases , Slip Op. at 32-33; see also Pfizer Inc. v. Employers Ins. of Wausau , 154 N.J. 187, 712 A.2d 634 (1998) (adopting a choice-of-law test modeled upon the Restatement (Second) of Conflict of Laws, '6 (1971)). The trial court likewise compared the competing benefits and detriments of four possible choice-of-law rubrics: the forum state's, the state where each site is located, a single nexus state, and multiple nexus states determined by policy periods. Companion Cases, Slip Op. at 44-62. In so doing, the court found an “inherent tradeoff between certainty and flexibility in choosing a state's law of allocation.” Id. at 62. The more rigid approaches (such as the law of the forum) offered some measure of predictability in simple matters, but they were “ill suited” to respond to the peculiar circumstances often characteristic of complex environmental coverage cases. See id. at 62-63. More flexible approaches (such as the law of the site) were better tailored to respond fairly to the dynamics and nuances of each environmental case. The court noted that flexible approaches, while preferable, may be somewhat harder to administer in certain circumstances. See id. at 63.

After applying the Pfizer choice-of-law factors to what the court characterized as a “range of imperfect solutions,” the court ultimately held that the allocation law of the state in which each site is located presumptively applies to the allocation of damages incurred at the site. Id. at 4-5. The presumption, however, can be overcome in rare situation by clear and convincing evidence that a different state has a greater interest in application of its allocation law. The court characterized this rule as “fair, pragmatic, reasonably predictable, and in step with general principles of choice of law and public policy.” Id. at 4. Because the Companion Cases insurers could not meet the heavy factual burden of rebutting the presumption in favor of the law of the site, the court held the allocation law of the site governed the three active cases. Id. at 4-5.

No Simple Solutions

When a policy covers risk located primarily in a single state, resolving the choice-of-law issues is relatively straightforward. There is no choice-of-law issue where, for example, a policyholder is located in one state, the environmental liability arises out of the same state, and the policies are issued by a state-based insurer for that one site. See, e.g., Robeson Indus. Corp. v. Hartford Accid. & Indem. Co., 178 F.3d 160 (3d Cir. 1999) (applying New York law to an environmental coverage dispute involving policies negotiated and issued in New York, covering risks at a New York property, and relating to claims arising from discharge of contaminants at a New York facility). But many environmental coverage actions ' like the Companion Cases ' are at the other end of the spectrum. They involve insureds with national or worldwide operations, seeking coverage under scores of insurance policies issued by dozens of domestic and foreign insurers. They also involve environmental liabilities at multiple sites in multiple jurisdictions, some of which have allocation rules conflicting with those of the forum state. Application of the allocation law of the forum state (or some other “uniform” allocation law) ' despite its theoretical and simplistic surface appeal ' is simply not a fair or viable option. As the Owens-Illinois court recognized when it announced New Jersey's allocation method: Courts can narrow the range of disputes and provide procedures to better resolve remaining disputes, but they “cannot simplify issues that are intrinsically complex.” 138 N.J. at 480, 650 A.2d at 996.

New Jersey courts expressly and appropriately recognize that “the location of the waste site carries 'very substantial weight' in the [choice of law] analysis.” HM Holdings, Inc. v. Aetna Cas. & Surety Co ., 154 N.J. 208, 215, 712 A.2d at 645, 648 (1998) (quoting NL Indus., Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 321 (3d Cir. 1995)). Accord Pfizer, 154 N.J. at 205, 712 A.2d at 642 (“In the event of a conflict between the law of [another state] and the law of the waste site, the law of the waste site should be applied because under the site-specific approach it would have the dominant significant relationship to the issue.”). See also Permacel v. American Ins. Co. , 299 N.J. Super. 400, 411, 691 A.2d 383, 410 (App. Div. 1997), cited with approval in Lonza, Inc. v. Hartford Acc. & Indem. Co., 359 N.J. Super. 333, 351, 820 A.2d 53, 64 (App. Div. 2003) (as amended). The states where waste sites are located have significant interests in protecting the general health and welfare of their citizens and attending to their damaged environment. A rebuttable presumption that favors application of the allocation law of the site logically follows from this view. Mechanical application of a forum state's allocation law ' particularly when it conflicts with that of the host state's allocation law ' does not.

Conclusion

Employing a rebuttable presumption in favor of the law of the waste site may, as the Companion Case court recognized, present challenges. Some states have either no precedent or imprecise guidelines respecting allocation. See Companion Case, Slip Op. at 7. That environmental coverage actions in general, and allocation issues in particular, are complex, is no new development. See Pfizer, 154 N.J. at 199. The resolution of allocation issues frequently is delegated by the court, with the consent of the parties, to a special master or mediator. Companion Cases, Slip Op. at 7. Indeed, 10 years ago, the New Jersey Supreme Court directed trial courts to “take an active role in the management and resolution of … coverage controversies,” and suggested that trial courts repose a large measure of discretion in special masters, who would “aid in developing a formula for allocation of costs of defense and indemnity.” Owens-Illinois, 138 N.J. at 480, 650 A.2d at 642. The court further directed that special masters “use specialized procedures to resolve [allocation] issues.” Id. It is likely for this reason (among others) that the New Jersey Supreme Court has expressly rejected the use of a “uniform-contract-interpretation” approach in which “one law governs the insurance contract” in complex, multisite, multiphased environmental coverage claims with decades of triggered insurance policies. See Pfizer, 154 N.J. at 193, 712 A.2d at 637. Such a ruling would make no sense if the alleged efficiency of applying the forum's law (or some other uniform law) was somehow a primary concern for choice-of-law or allocation purposes.

As more coverage actions mature, it remains to be seen how courts in various jurisdictions will resolve allocation choice-of-law. One thing, however, is virtually certain: New Jersey courts will likely be among those framing and shaping the issues.