Risk
Environmental Newsletter

Choice of Law and Choice of Forum – “Location, Location, Location”


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Aon Environmental Services Group

By M. Claire Juliana of Aon Risk Solutions

In the environmental legal context, “choice of law” (and to a potentially lesser extent, its sister clause “choice of forum and venue”) can often have critical significance upon the outcome of a case. Certainly, the wide divergence among the various courts of the United States interpreting various provisions in commercial general liability policies underscores this point. For example, whether “sudden and accidental” is ambiguous for the purpose of an “absolute pollution exclusion”1 and whether or not there is a “suit” for purposes of triggering an insurer’s duty to defend2 can often depend upon the applicable law under which the dispute is being adjudicated.

The situation in the environmental litigation context is often further complicated by the fact that the insurance contract may have been formed and made in one state, the contamination may have occurred in one or more other states, and the contract may include a provision designating an entirely different state’s law and jurisdiction for the purpose of resolving disputes. For example, in the environmental insurance market, some policies specifically include a choice of law and choice of forum provision within their contracts. These are typically designated in the policies as “conditions” and provide that the parties agree that a dispute about the interpretation of the policy will be determined in accordance with the laws of a specific state (usually New York) and that the parties submit to the exclusive jurisdiction of a specified state (again, usually New York). By “pre-selecting” the applicable law and forum, a policyholder may unwittingly have limited both its coverage options and the place where the matter can be resolved. As the following discussion shows, courts tend to strictly enforce these policy provisions, even when confronted with challenges on grounds of constitutionality.

In a recent case involving the interpretation of a pollution liability policy, the United States District Court for the Southern District of New York granted an insurer’s motion to dismiss several claims on the grounds of late notice without a showing of prejudice (i.e., a showing that the insurer was adversely impacted by the late notice), even in the face of a challenge of constitutionality. Indian Harbor Ins. Co. v. City of San Diego, 2013 U.S. Dist. LEXIS 137873 (S.D.N.Y. Sept. 25, 2013) (“City of San Diego”). In the City of San Diego case, the insured, City of San Diego (“City”), was sued in three separate actions involving allegations related to sewer gases containing hydrogen sulfide and hydrochloric gas releases from the City's sewer systems. One of the claims was tendered to the insurer thirty-one months after the City had received notice of the claim; one tendered more than twelve months after the City had received notice of the claim; and the third tendered nearly two months after the City had received notice of the claim. The insurer issued denials as to all claims on the ground that notice was not submitted “as soon as practicable” as required in the policy. The insurer then filed suit against the City seeking a declaration that it had no duty to defend or indemnify the City for any of the three claims.

The United States District Court for the Southern District of New York agreed. It noted that New York courts have construed the phrase “as soon as practicable” in insurance contracts strictly - even relatively short periods of delay (from between twenty-two and fifty-one days) have been found to be unreasonable as a matter of law. The court also rejected the City’s contention that Section 3420(a)(5) of the New York Insurance Law required that the insurer demonstrate that it was prejudiced by the late notice3. The court analyzed the provision which was enacted in 2008 by the New York legislature to change the state’s common-law no prejudice rule with respect to liability policies issued or delivered in New York. Despite the City’s efforts to persuade the court that the policy was “issued” in New York because the signatory on the policy had a New York address at the time he provided his signature for the policy, the court held that the policy was issued outside New York, and, as such, the insurer had no obligation to demonstrate prejudice.

Finally, the court rejected the City’s claim that the application of the New York choice-of-law provision was unconstitutional. In looking at whether enforcement complied with both the Due Process and Full Faith and Credit clauses, the court looked to whether the chosen state (New York) had a “significant contact or significant aggregation of contacts creating state interests, such that the choice of its law is neither arbitrary nor fundamentally unfair.” Although the insured and insured risks were located in California and the insurer was a North Dakota company with its principal place of business in Stamford, Connecticut, the court noted that the insurer conducted its business from multiple locations in the United States including New York where its CEO, General Counsel and half of its corporate directors are located, and these, the court found, to be “ample relevant contacts to justify the enforcement of the New York choice-of-law provision.”

On the choice of forum front, the United States Supreme Court recently clarified the process of enforcing a forum-selection clause in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 571 U.S. (December 2013). In that case, Atlantic Marine Construction Co. (“Atlantic”), a Virginia corporation, entered into a construction project in Texas. Atlantic then entered into a sub-contract with J-Crew Management, Inc., (“J-Crew”) a Texas corporation, for work on the project. This sub-contract included a forum-selection clause which stated that all disputes between the parties “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia.” When a dispute about payment under the subcontract arose, J-Crew sued Atlantic for failure to pay in the United States District Court in Texas. Atlantic moved to dismiss the case arguing that the forum-selection clause rendered venue in that court “wrong” or improper or, alternatively, Atlantic sought to have the case transferred to the Eastern District of Virginia. The District Court denied both motions. Giving particular weight to its findings that “compulsory process will not be available for the majority of J-Crew’s witnesses” and that there would be “significant expense for those willing witnesses”, the court found that Atlantic failed to show that a transfer would be in the interests of justice or increase the convenience to the parties and their witnesses, even though J-Crew had agreed to Virginia in the contract. The Fifth Circuit Court of Appeals affirmed finding that although the forum-selection clause was valid, the District Court had not clearly abused its discretion in refusing to the transfer the case. On appeal, the Supreme Court reversed the judgment of the Court of Appeals. The Court found that when parties have agreed to a valid forum-selection clause in their contracts, a district court should ordinarily transfer the case to the forum specified in that clause. “Only under extraordinary circumstances unrelated to the convenience of the parties” should such a motion be denied.

As the foregoing demonstrates, careful attention to choice of law and choice of forum provisions in insurance contracts is critical. The City of San Diego case, above, may have had a different outcome under California law as insurers generally need to show not only late notice but actual prejudice .4 And Atlantic demonstrates that the law of the highest court in the United States has determined that forum selection clauses will be controlling even if that provision effects a hardship on the party seeking an alternative forum. Because of this, policyholders should consult with their advisors and diligently review their policies to make sure these provisions do not appear, or if they do, attempt to negotiate their removal at the time when the policy is purchased. Otherwise, policyholders may unwittingly prejudice or economically burden themselves in a jurisdiction that may not be as favorable on a particular issue of coverage or convenient to witnesses.

 


1 For example, several states’ high courts have found the term "sudden" to be ambiguous including Colorado, Georgia, Illinois, Oregon, South Carolina, Washington, and Wisconsin. See, e.g., Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083 (Colo. 1991); Claussen v. Aetna Cas. & Sur. Co., 259 Ga. 333, 380 S.E.2d 686 (Ga. 1989); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d 90, 607 N.E.2d 1204, 180 Ill. Dec. 691 (Ill. 1992); St. Paul Fire & Marine Ins. Co., 324 Ore. 184, 923 P.2d 1200; Greenville County v. Ins. Reserve Fund, 313 S.C. 546, 443 S.E.2d 552 (S.C. 1994); Queen City Farms, 126 Wn.2d 50, 882 P.2d 703; Just, 155 Wis. 2d 737, 456 N.W.2d 570.

Conversely, there are many states whose high courts have held the term "sudden" to be unambiguous including Florida, Massachusetts, Michigan, Nebraska, Oklahoma, South Dakota, and Utah. See, e.g., Dimmitt Chevrolet, Inc. v. Se. Fid. Ins. Corp., 636 So. 2d 700 (Fla. 1993); Lumbermens Mut. Cas. Co. v. Belleville Indus., Inc., 407 Mass. 675, 555 N.E.2d 568 (Mass. 1990); Upjohn Co. v. N.H. Ins. Co., 438 Mich. 197, 476 N.W.2d 392 (Mich. 1991); Dutton-Lainson Co. v. Cont'l Ins. Co., 271 Neb. 810, 716 N.W.2d 87 (Neb. 2006); Kerr-McGee Corp. v. Admiral Ins. Co., 1995 OK 102, 905 P.2d 760 (Okla. 1995); Demaray v. De Smet Farm Mut. Ins. Co., 2011 SD 39, 801 N.W.2d 284 (S.D. 2011); Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127 (Utah 1997).

2 See, e.g., “Duty to Defend Environmental Claims”, available at http://www.irmi.com/expert/articles/2013/taylor11-risk-management-environmental.aspx

3This is generally referred to as the “notice-prejudice” rule which requires an insurance carrier to show prejudice before a claim can be barred for late notice. In the majority of jurisdictions outside of New York, including California, the notice prejudice rule applies.

4 A defense based on an insured's failure to give timely notice requires the insurer to prove that it suffered substantial prejudice. See Safeco Ins. Co. of America v. Parks, 170 Cal. App. 4th 992 (Cal. App. 2d Dist. 2009). Prejudice is not presumed from delayed notice alone; the insurer must show actual prejudice, not the mere possibility of prejudice. Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715 (Cal. App. 1st Dist. 1993)