Choice of law and New Jersey's unique allocation methodology; the Honeywell decision

Choice-of-law analysis is one of the threshold issues in any insurance coverage dispute. The application of one state’s law over another’s can entirely alter the outcome of the dispute. This is especially true in coverage disputes involving multiple underlying claims brought in a range of jurisdictions with differing laws (e.g., asbestos bodily injury claims).

Honeywell's Choice of Law Analysis

In June 2018, the New Jersey Supreme Court clarified New Jersey’s choice-of-law rules while also reaffirming the state’s allocation scheme for long-tail liability claims. Cont'l Ins. Co. v. Honeywell Int'l, Inc. [1] involved a dispute concerning insurance coverage owed to Honeywell, a New Jersey based company, for thousands of nationwide bodily injury claims alleging exposure to brake and clutch pads containing asbestos, which were manufactured by a predecessor company. The Court’s first task was to determine which state’s laws governed the dispute: New Jersey, where Honeywell was headquartered; or Michigan, where the predecessor company was headquartered and where several policies at issue were negotiated and delivered. The result of the choice-of-law analysis then controlled which state’s allocation model would be utilized to allocate distribute coverage obligation among insurers.

The first step in a choice-of-law analysis, the Court noted, is to determine whether there is an actual conflict between the laws of the states with interest in the litigation. Finding an actual conflict between relevant New Jersey law and Michigan law, the Court then looked to the choice of law principles of the forum state – New Jersey. New Jersey has moved from a lex-loci-contractus approach (applying the law of the place of the contract) toward a more “flexible governmental interest standard” that comes from the Restatement (Second) of Conflict of Laws. Specifically, the Court explained that the analysis should center on sections 188 and 6 of the Restatement. Section 188 looks to (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. Turning to the Restatement's factors in section 6, the question is whether New Jersey's relationship with the case is sufficiently significant to warrant application of New Jersey law.

Under this analytical framework, the Court found that the requisite relationship with New Jersey existed based on Honeywell’s longstanding domicile in the state, its liability as a New Jersey corporation for the underlying asbestos claims, and the fact that the insurers’ contractual defense and indemnification obligations under their policies commenced in New Jersey. The Court further noted that New Jersey had an interest in applying its unique allocation methodology because it maximized insurance resources. On the other hand, the Court could not determine Michigan’s state interest in having its allocation methodology apply in a dispute that no longer involved a Michigan-based company.

Applying New Jersey law

Applying New Jersey’s allocation scheme, the Court then affirmed New Jersey’s determination to follow the “unavailability” exception to the continuous-trigger method of allocation. Under New Jersey’s allocation scheme, an insured is responsible for its pro rata share of defense and indemnity payments during periods that it did not purchase insurance. But, under the “unavailability” exception, an insured need not participate in allocation for the period when insurance was y unavailable in the marketplace for the risk at issue. Accordingly, the Court held that Honeywell was not required to take on a share of liability for the period after insurance companies ceased writing policies that would cover asbestos-related losses.

Comment

The Honeywell decision makes clear that New Jersey’s unique Owen Illinois/Carter Wallace allocation methodology factors into a choice of law analysis, with the Court considering the ability to apply this methodology an important state interest.

[1] 2018 N.J. LEXIS 832 (N.J. June 27, 2018)

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