Guidance Provided for Choice of Law Analysis for Coverage Disputes in NJ

The outcome of a conflict of laws analysis is often difficult to predict.  But a recent Appellate Division decision may provide some guidance as to how allocation of coverage issues are decided in New Jersey where there is a conflict of laws.

In the consolidated appeals of In The Matter Of The Liquidation Of Integrity Insurance Company/Sepco Corporation and In The Matter Of The Liquidation Of Integrity Insurance Company/Mine Safety Appliances Company, the Appellate Division was faced with the issue of which state’s laws should apply when apportioning insurance coverage in the mass tort context.  Both Sepco Corporation, a California-based company, and Mine Safety Appliances Company, based in Pennsylvania, were insured under excess policies with Integrity, a New Jersey insurance company, in the mid-1980s.  After Integrity’s Liquidator filed its liquidation plan, both Sepco and Mine Safety filed proofs of claim with the Liquidator for coverage under the policies.

The Liquidator denied the claims based on the utilization of an “all-sums” (joint and several) allocation methodology.  Under that methodology, “the insured may recover in full under any triggered policy that it chooses and leave the selected insurer to pursue cross-claims against other triggered carriers whose policies are also available.”     While both California and Pennsylvania utilize this approach, New Jersey has rejected the joint and several allocation method for a pro-rata allocation method.

The denials were referred to a Special Master, who affirmed the Liquidator’s decisions in both matters, citing New Jersey’s compelling interest in having its own law applied to the claims because Integrity was being liquidated pursuant to New Jersey law, and because the pro-rata approach was more equitable as to other claims filed against Integrity than was the joint and several approach.  The Special Master’s determinations were affirmed by the trial court.

On review, the Appellate Division affirmed the trial court’s decision to apply New Jersey law.  While refusing to state a blanket rule that the law of the insurer’s home state would govern the analysis, the Appellate Division found that the balance of the equities favored applying New Jersey law to the claims against Integrity, who was in its twenty-fifth year in the liquidation process, even though the policy language confusingly seemed at times to favor an “all-sums” approach.

The best way to guard against uncertainty is to add a provision as to choice of law; otherwise, an unintended and unexpected interpretation of policy terms may result.

Thanks to Christina Emerson for her contribution to this post.  If you would like further information please write to mbono@wcmlaw.com.