Travelers Indem. Co. v. Allied-Signal, Inc.

• Decision Date: 04 August 1989
• Docket Number: Civ. No. JFM-88-99.
• Citation: 718 F. Supp. 1252
• Parties: TRAVELERS INDEMNITY CO. v. ALLIED-SIGNAL, INC.
• Court: U.S. District Court — District of Maryland

718 F. Supp. 1252

TRAVELERS INDEMNITY CO. v. ALLIED-SIGNAL, INC.

Civ. No. JFM-88-99.

United States District Court, D. Maryland.

June 20, 1989.

Supplemental Memorandum August 4, 1989.

James P. Ulwick, Kramon & Graham, P.A., Baltimore, Md., Barry R. Ostrager, Simpson, Thacher & Bartlett, New York City, and Robert H. Sand, Asst. General Counsel, Allied Corp., Morristown, N.J., for plaintiff.

Rudolph L. Rose, Semmes, Bowen & Semmes, Baltimore, Md., and Lester O. Brown and Arthur S. Olick, Anderson, Kill, Olick & Oshinsky, P.C., New York City, for defendant.

MEMORANDUM

MOTZ, District Judge.

The Travelers Indemnity Company has brought this action against Allied-Signal, Inc. seeking a declaration that it has no duty to provide insurance coverage to Allied for pollution-related clean-up costs under a series of policies issued by Travelers to Allied from 1951 to 1988. Allied has filed counterclaims for declaratory relief, breach of contract, "bad faith" and breach of fiduciary duty.

On April 22, 1988, this Court denied a motion filed by Allied to stay this action pending resolution of a declaratory judgment action filed by Allied in the Superior Court of New Jersey, Morris County, against all one hundred seventy-six of its insurance carriers seeking a determination of the scope of its pollution coverage. The basis for this ruling was a concern that, in light of the sheer magnitude of the New Jersey litigation and the foreseeable possibility that the New Jersey court would ultimately decline to provide declaratory relief as to non-New Jersey sites, resolution of the issues here presented would be inordinately delayed if the stay were granted.

Discovery has now been completed on general coverage issues, such as the history of the policy negotiations between the parties and the pattern of Travelers' payment of claims under allegedly comparable circumstances.¹ The parties have crossmoved for summary judgment. Travelers' motion will be granted, and Allied's motion denied, as to Allied's two manufacturing sites located in Maryland. All claims seeking a declaration of the parties' rights and obligations as to non-Maryland sites will be dismissed.

I.

The first — and critical — question is the one of choice of law. Allied argues that New York law should apply to the policies issued between 1951 and 1970 (the period during which Allied was headquartered in New York) and that New Jersey law should apply to policies sold after 1970 (when Allied moved its headquarters to New Jersey). Travelers argues that Maryland law governs all of the coverage questions or that, alternatively, New York law is applicable.

This Court is of the view that Maryland law applies. The law is clear that Maryland's choice-of-law rules govern. See Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); Miller v. Premier Corp., 608 F.2d 973, 985 (4th Cir.1979). Maryland generally follows the lex loci contractus rule under which a contract is construed according to the laws of the state "where the last act is performed which makes an agreement a binding contract." See Kramer v. Bally's Park Place, 311 Md. 387, 535 A.2d 466, 467 (1988); Grain Dealers Mut. Ins. Co. v. Van Buskirk, 241 Md. 58, 215 A.2d 467 (1965); Stout v. Home Life Ins. Co., 651 F.Supp. 28, 32 (D.Md. 1986), aff'd 818 F.2d 29 (4th Cir.1987). Under that rule, New York or New Jersey law would be controlling.²

The Maryland Court of Appeals, however, has recognized that in cases involving issues of important public policy, it is appropriate for a Maryland court to look to the law of the state whose law is applicable under the lex loci contractus doctrine to determine if that state would refer back to Maryland law for decision on the substantive issues presented. Thus, in Bethlehem Steel Corp. v. G.C. Zarnas & Co., 304 Md. 183, 498 A.2d 605, 609 n. 5 (1985), the Court of Appeals stated:

Pennsylvania has no strong interest in having the contract provision enforced here as suggested by the fact that, had suit on the indemnity agreement been brought in Pennsylvania, the Pennsylvania court would likely have decided the issue according to Maryland law.... In these circumstances it would be ironic if, in balancing Maryland public policy against the lex loci rule, we were to hold that principles of comity require us to apply Pennsylvania law and ignore that state's conflict of law principles.³

This use of what is known as the doctrine of renvoi to pierce through "false conflicts" is widely endorsed. Commentators have recognized it as a sensible approach which enhances uniformity and accommodates situations where "the foreign conflicts rule itself discloses a disinterest to have its own substantive law applied and a recognition of the significance of the forum's law." See Scoles & P. Hay, Conflicts of Law § 3.13, at 69-70 (1984); R. Lefler, American Conflicts Law §§ 7, 8, 92 (4th ed. 1986); R. Weintraub, Commentary on the Conflicts of Laws § 3.3, at 67-72 (3d ed. 1986); Restatement (Second) of Conflicts of Law § 8. Its application here is particularly appropriate since the substantive issues presented involve extremely important questions of insurance law and environmental policy.

The conflicts laws both of New York and of New Jersey would result in the application of the law of Maryland as the state having the most substantial interest in the outcome of the litigation. See, e.g., Steinbach v. Aetna Cas. & Sur. Co., 81 A.D.2d 382, 440 N.Y.S.2d 637, 640 (1st Dept.1981) (New York applies law of principal location of insured risk and state most intimately concerned with litigation's outcome); Puro International of New Jersey Corp. v. California Union Ins. Co., 672 F.Supp. 129, 133 (S.D.N.Y.1987) (same); State Farm Mut. Auto. Ins. Co. v. Simmons Estate, 84 N.J. 28, 417 A.2d 488 (1980) (New Jersey uses "governmental interest" test); Diamond Shamrock Corp. v. Aetna Cas. & Sur. Co., No. C-3939-84 (N.J.Super.Ct. Oct. 2, 1987) (applying laws of state where environmental pollution site located in insurance coverage controversy, under governmental interest test); Witco Corp. v. Travelers Indem. Co., No. 86-2997 (D.N.J. May 1, 1987) (same). Therefore, Maryland law is applicable here.

II.

Travelers contends, alternatively, that this case falls within the exception to the lex loci contractus rule which the Maryland Court of Appeals has recognized in cases where a strong public policy prohibits application of a foreign law contrary to that policy. See Kramer v. Bally's Park Place, 311 Md. at 390, 535 A.2d at 467 (1988); Bethlehem Steel Corp. v. E.C. Zarnas & Co., 304 Md. at 189, 498 A.2d at 607-08. Specifically, Travelers argues that Maryland public policy mandates the denial of insurance coverage to any company which deliberately pollutes the environment, regardless of what the law of another jurisdiction would decree.

Although Maryland unquestionably has a strong public policy against pollution, the conclusion urged by Travelers does not necessarily follow for two reasons. First, numerous factual questions underlie a proper determination of where the public interest actually lies, including the nature of Allied's acts causing the pollution, its state of knowledge concerning the consequences of those acts and Travelers' own knowledge of Allied's activities.⁴ Resolution of these questions would, at least, have to await completion of the site-specific discovery. Second, two different inferences can be drawn from Maryland's strong anti-pollution policy. On the one hand, that policy could be said (as Travelers argues) to prohibit a deliberate polluter from obtaining insurance for intentional misconduct. On the other hand, it might be reasoned that Maryland environmental authorities may properly look to an insurance company to provide pollution coverage for harm caused to the State where the insurer has over time collected substantial premiums to provide comprehensive liability coverage to the polluter. This would be particularly so if the insurer had contemporaneous knowledge of the insured's activities causing the pollution and might therefore be said to have been implicated, at least to some degree, in those activities.

For these reasons this Court cannot conclude that the Maryland Court of Appeals would apply the public policy exception to the lex loci contractus rule to override the law of a state imposing a duty of coverage upon Travelers. However, since the public policy considerations here involved are so important, this Court believes that in the event that the Fourth Circuit eventually certifies the questions presented in this case to the Maryland Court of Appeals (see part III, infra), the latter court might wish to consider whether, notwithstanding its general position on the question, see generally Hauch v. Connor, 295 Md. 120, 453 A.2d 1207, 1209-10 (1983), the present case is an instance in which the "governmental interests" approach to conflicts questions should be taken. As the Court of Appeals recognizes, in ordinary commercial cases public policy is furthered by the lex loci contractus rule because it provides a certainty upon which contracting parties can rely. However, it would appear to be an unseemly derogation of its sovereign power for a state to decline to apply its own substantive law to matters which directly impact upon its physical environment and which seriously affect the welfare of its citizens.

III.

The conclusion that Maryland law is applicable virtually dictates the decision which this Court must reach on the substantive issues. Applying Maryland law, the Fourth Circuit has held that environmental clean-up costs, incurred pursuant to an injunction, do not constitute "damages" within the meaning of policy language equivalent to that involved here.⁵Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348 (4th Cir.1987), cert. denied, 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (1988); accord Ft. McHenry Lumber Co. v....