Reichhold Chemicals, Inc. v. Hartford Acc. and Indem. Co.

• Decision Date: 23 December 1997
• Docket Number: No. 15698,15698
• Citation: 243 Conn. 401,703 A.2d 1132
• Parties: REICHHOLD CHEMICALS, INC. v. HARTFORD ACCIDENT AND INDEMNITY COMPANY et al.
• Court: Connecticut Supreme Court

Page 1132

703 A.2d 1132

243 Conn. 401

REICHHOLD CHEMICALS, INC. v. HARTFORD ACCIDENT AND INDEMNITY COMPANY et al.

No. 15698.

Supreme Court of Connecticut.

Argued Oct. 28, 1997.

Decided Dec. 23, 1997.

Francis J. Brady, Hartford, with whom were Barry J. Fleishman, Washington, DC, pro hac vice, and, on the brief, Elizabeth J. Stewart and Leon B. Kellner, Washington, DC, pro hac vice, for appellant (plaintiff).

Stephen A. Fennell, Washington, DC, pro hac vice, with whom were John B. Farley, Hartford, and, on the brief, Steven J. Barber, Washington, DC, pro hac vice, John W. Lemega, Hartford, John L. Altieri, Jr., Norwalk, Ralph P. DeSanto, New York City, pro hac vice, Michael T. Ryan, Stamford, Kathleen F. Munroe, R. Cornelius Danaher, Frederick B. Tedford, Hartford, Sheldon Karasik, New York City, pro hac vice, and John T. Harris, Hartford, for appellees (defendant Home Insurance Company et al.).

Before CALLAHAN, C.J., and BORDEN, BERDON, NORCOTT, KATZ, PALMER and McDONALD, JJ.

CALLAHAN, Chief Justice.

The principal issue in this appeal is whether the trial court properly applied New York law to the facts of this insurance coverage dispute. We conclude that it did not.

The record reveals the following uncontroverted facts and procedural history. On October 6, 1988, the plaintiff, Reichhold Chemicals, Inc., brought an action against sixteen insurance companies from which it had purchased primary ¹ and excess comprehensive general liability insurance coverage, alleging that those policies obligated the insurers to defend and indemnify the plaintiff with respect to claims arising from chemical contamination at twenty-three sites across the United States.

As a result of settlements, successful motions for summary judgment and liquidation proceedings, there are only six remaining defendants, ² each of which is an excess liability carrier. ³ The sites for which the plaintiff is seeking coverage are located in California, Delaware, Florida, Georgia, Louisiana, Massachusetts, Michigan, Mississippi, New Jersey and Washington.

At the time the relevant liability insurance policies were issued, the plaintiff's headquarters were located in New York. The plaintiff negotiated the policies, paid the policy premiums and, in some instances, received payments on claims filed pursuant to the policies through its New York office. The plaintiff's insurance broker was located in New York. The defendants negotiated, executed and administered the policies through their New York offices. ⁴

The trial court divided the action into separate jury trials on the basis of site location. The first trial, which is the subject of this appeal, involved coverage for claims arising from chemical contamination of groundwater at a site in Tacoma, Washington (site).

Although the site is located in Washington, the court applied New York law. ⁵ Under New York law, timely compliance with a notice of occurrence provision ⁶ contained in a liability policy is a condition precedent to attachment of the insurer's duty to defend and indemnify. See Olin Corp. v. Ins. Co. of North America, 966 F.2d 718, 723 (2d Cir.1992) (applying New York law). Hence, an insurer "need not show prejudice before it can assert the defense of noncompliance." Security Mutual Ins. Co. of New York v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 293 N.E.2d 76, 340 N.Y.S.2d 902 (1972) (primary coverage carrier); American Home Assurance Co. v. International Ins. Co., 90 N.Y.2d 433, 442-43, 684 N.E.2d 14, 661 N.Y.S.2d 584 (1997) (excess coverage carrier). By contrast, although a lack of timely notice defense also is recognized under Washington law, insurers must plead and prove prejudice in order to assert the defense. Public Utility District Number One v. International Ins. Co., 124 Wash.2d 789, 803-04, 881 P.2d 1020 (1994).

The trial was bifurcated into two stages. The first stage of the proceedings was limited to the issue of whether the plaintiff had complied with the notice of occurrence provisions contained in the policies. At the close of the evidence on the issue of notice, the trial court instructed the jury that the issue was to be decided in accordance with New York law. The jury found that the plaintiff had not complied with those provisions and returned a verdict for the defendants American Home Assurance Company, Century Indemnity Company, Commercial Union Insurance Company, The Home Insurance Company and National Union Fire Insurance Company of Pittsburgh, Pennsylvania, and against the defendant Granite State Insurance Company. ⁷

The plaintiff moved to set aside the verdict, for judgment notwithstanding the verdict and for a new trial. The trial court denied all three motions and rendered judgment for the defendant American Home Assurance Company et al. in accordance with the verdict. Pursuant to Practice Book § 4002C, the plaintiff appealed from that judgment to the Appellate Court. We transferred the appeal to this court pursuant to Practice Book § 4024 and General Statutes § 51-199(c).

On appeal, the plaintiff maintains that the trial court improperly: (1) applied New York law rather than Washington law; (2) bifurcated the trial; and (3) limited the scope of the plaintiff's evidence during the notice phase and allowed the defendants to introduce impermissibly prejudicial evidence of contamination during that phase of the trial. We reverse the judgment of the trial court and remand for a new trial.

I

The plaintiff first urges this court to examine the propriety of continued adherence to the lex loci contractus doctrine set forth in the Restatement of Conflict of Laws (Restatement [First] ). Restatement, Conflict of Laws § 332 et seq. (1934). The plaintiff maintains that we should abandon use of that doctrine and adopt in its stead the "most significant relationship" test set forth in the Restatement (Second) of Conflict of Laws (Restatement [Second] ). 1 Restatement (Second), Conflict of Laws § 187 et seq. (1971 and Sup.1988). According to the plaintiff, Washington, not New York, is the jurisdiction that has, with respect to the notice issue, the "most significant relationship" with the contract claims underlying this issue. The plaintiff maintains, therefore, that Washington notice law should have been applied. We agree.

A brief overview of the various choice of law approaches is necessary to our resolution of the plaintiff's choice of law claim. Courts generally have adopted one of three approaches to resolving choice of law issues in insurance coverage cases: (1) the "lex loci contractus" rule; (2) the "center of gravity" ⁸ approach; 1 Restatement (Second), supra, § 188 (1971); ⁹ or (3) the "location of the risk" approach. Id., § 193. ¹⁰

A

The traditional test for resolving choice of law issues in contract cases is the lex loci contractus rule set forth in the Restatement (First). Restatement, supra, § 332 et seq. (1934). Under that approach, which has been used by Connecticut courts, a contract is construed according to the law of the place where the contract was made. See Williams v. State Farm Mutual Automobile Ins. Co., 229 Conn. 359, 366, 641 A.2d 783 (1994); Breen v. Aetna Casualty & Surety Co., 153 Conn. 633, 637, 220 A.2d 254 (1966).

B

A second approach to resolving choice of law issues in contract cases is the "most significant relationship" test of the Restatement (Second). Sections 187 and 188 of the Restatement (Second) set forth relevant general principles applicable to all contracts, and §§ 189 through 197 address the application of those principles to specific types of contracts. ¹¹

Section 187 pertains to cases in which a contract contains a choice of law clause; 1 Restatement (Second), supra, § 187, p. 134 (Sup.1988); ¹² and § 188 pertains to cases in which a contract does not contain such a clause. 1 Restatement (Second), supra, § 188(1) (1971). Section 188, which applies to cases that traditionally would have been decided under the lex loci contractus rule, provides that in the absence of an effective choice by the parties, "(1) [t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6."

Section 6(2) of the Restatement (Second), which is applicable to all substantive areas, sets forth seven overarching considerations in determining which state has the "most significant relationship": "(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."

Section 188(2) lists five contacts to be considered in applying the principles set forth in § 6 to a contract dispute: "(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties." Comment (e) to § 188(2) states that "the forum, in applying the principles of § 6 to determine the state of most significant relationship, should give consideration to the relevant policies of all potentially interested states and the relative interests of those states in the decision of the particular issue. The states which are most likely to be interested are those which have one or more of the [enumerated] contacts with the transaction or the parties." Id., § 188(2), comment (e), p. 579.

The appropriate starting point under § 188, therefore, is identification of the policy...