On July 20, 2016, the New Jersey Superior Court, Appellate Division, issued its opinion affirming the trial court’s entry of final judgment in favor of the policyholder, Honeywell International Inc. (“Honeywell”), on its claims for coverage for its asbestos bodily injury claims arising from its manufacture and sale of friction-brake products (referred to by the Court as “Bendix” claims).  See Continental Ins. Co. v. Honeywell International, Inc., Nos. A-1071-13T1, A-1100-13T1 (N.J. Super. App. Div. July 20, 2016).  In so doing, the Appellate Division confirmed and clarified New Jersey law on several issues, including most notably on (1) New Jersey’s choice-of-law rules and (2) whether costs may be allocated to the policyholder after the mid-1980’s when the insurance industry ceased to make asbestos insurance reasonably available to corporate policyholders like Honeywell.

Choice of Law

First, with respect to choice of law, the Appellate Division affirmed that the allocation of Honeywell’s Bendix asbestos liabilities would be governed by New Jersey law (as advocated by Honeywell) and not Michigan law (as contended by the appellant, Travelers Casualty and Surety Company).  See Honeywell, slip op. at 33.

As a threshold matter, the Court examined whether a conflict existed between New Jersey and Michigan law on the issue of allocation of asbestos liabilities.  The Court noted that New Jersey law, beginning with the seminal case of Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), had clearly adopted a unique pro-rata allocation that considers both the time that each insurer is on the risk as well as the limits of its policies.  See Honeywell, slip op. at 21-22.  In contrast, while the Michigan Supreme Court had not addressed the issue and hence Michigan law remained unsettled, the only published decision by the Michigan Court of Appeals had adopted a methodology that did not consider the limits of the relevant policies, unlike New Jersey’s approach.  See Honeywell, slip op. at 22-24.  Thus, the Appellate Division found a conflict between New Jersey and Michigan law on the allocation of asbestos liabilities.

To resolve this conflict, the Appellate Division addressed New Jersey’s choice-of-law rules for contracts.  In so doing, the Court did not adopt Travelers’ position that a presumption existed in favor of the place of contracting, instead noting that New Jersey has rejected the doctrine of lex loci contractus.  Rather, the Court focused on Section 6 of the Restatement (Second) of Conflicts of Laws.[1]

Following earlier New Jersey decisions, the Court held that the Section 6 interests could be distilled down to four principal factors:  (1) the competing interests of the states; (2) the interests of commerce among the states; (3) the interests of the parties; and (4) the interests of judicial administration.  In applying these factors, the Court relied heavily on the fact that New Jersey’s allocation approach serves several key public policies, including maximizing resources to cope with environmental injury or damage, including asbestos-related injuries, incentivizing insureds to acquire insurance, and notions of simple justice.  Based primarily on these public policies, the Court concluded that a majority of the factors supported the choice of New Jersey law.  See Honeywell, slip op. at 29-33.

Travelers argued that, because the policyholder was located in Michigan at the time its policies were issued, Michigan was also the place of contracting, the place of negotiation, and the place of performance of its many policies, and that such contacts supported the choice of Michigan law under Section 188 of the Restatement.  The Court, though, dismissed these contacts, noting that the parties would have known that the policyholder was selling products throughout the country and further that neither party could have anticipated that Michigan was going to adopt a “time-on-the-risk” allocation approach.  See Honeywell, slip op. at 31-32.

In sum, despite the fact that the policyholder was domiciled in Michigan and the policies were brokered, negotiated, underwritten, issued and delivered to the policyholder in Michigan, the Court affirmed the trial court’s ruling applying New Jersey law because doing so better promoted New Jersey’s relevant public policies.

No Allocation to the Policyholder on Account of the Post-Mid-1980’s Time Period

Having decided that New Jersey allocation law applied, the Appellate Division next addressed whether, under New Jersey law, the policyholder must share in the allocation on account of bodily injuries taking place after the mid-1980’s when asbestos insurance was no longer reasonably available to the specific policyholder at issue.

Specifically, Honeywell was seeking coverage for asbestos claims in which one or more policies were triggered by the claim but which, in nearly all instances, involved bodily injury that, under a continuous trigger, continued after it could no longer reasonably purchase asbestos insurance.[2] Honeywell argued that, under Owens-Illinois, New Jersey law is clear that a policyholder is not liable for time periods in which asbestos insurance was not reasonably available to it, and the trial court had ruled (and no party appealed) that asbestos insurance was not reasonably available to Honeywell’s relevant predecessor after the mid-1980’s.  Accordingly, Honeywell contended that the New Jersey Supreme Court had made clear in Owens-Illinois that there was to be no allocation of any share of the costs for such claims to Honeywell.

Disputing Honeywell’s position, Travelers argued that, because Honeywell’s predecessor had continued to manufacture and sell certain friction-brake products containing asbestos after the expiration of its asbestos insurance in the mid-1980’s, Honeywell should share in the allocation.  Travelers alleged that Honeywell had “assumed the risk” by continuing to sell asbestos-containing products after it could no longer purchase asbestos insurance and hence that New Jersey law permitted the allocation of asbestos costs to the policyholder under such circumstances.  See Honeywell, slip op. at 36-37.

Rejecting Travelers’ position, the Appellate Division agreed with Honeywell that the issue under Owens-Illinois turned exclusively on whether asbestos insurance was reasonably available to the specific policyholder at issue.  See Honeywell, slip op. at 38.  Because there was no dispute that such insurance was not available to Honeywell’s predecessor after the mid-1980’s, Honeywell had not “assumed the risk” even if it did continue to manufacture and sell certain asbestos-containing products after that time.  Accordingly, the Appellate Division affirmed the trial court’s decision, which had rejected any allocation to Honeywell on account of the period after the mid-1980’s.  See Honeywell, slip op. at 39-40.

Conclusion

In sum, the New Jersey Appellate Division’s decision in Honeywell confirmed (1) that the benefits and protections of New Jersey law may extend to insureds, including those not located in New Jersey at the time of contracting, where the facts implicate New Jersey’s public policies and (2) that asbestos liabilities may not be allocated to the policyholder on account of time periods when asbestos insurance was not reasonably available to it for purchase.  The Honeywell decision thus stands as a victory for policyholders faced with insurers who are trying to avoid paying their fair shares of asbestos liabilities.