Amicus Curiae Brief — Insurance Co. of North America v. Morton International, Inc.

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= o No. 93-1797

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b —

— In THE

Supreme Canut of the United States

OCTOBER TERM, 1993

INSURANCE COMPANY OF NORTH AMERICA, ef al.,

= Petitioners,

MORTON INTERNATIONAL, INC.,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of New Jersey

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

AND BRIEF AMICUS CURIAE OF

THE INSURANCE ENVIRONMENTAL

LITIGATION ASSOCIATION

IN SUPPORT OF PETITIONERS

BERT W. REIN *

THOMAS W. BRUNNER

LAURA A. FOGGAN

DANIEL E. Troy

DENNIS A. TosH

WILEY, REIN & FIELDING

1776 K Street, N.W.

Washington, D.C. 20006

(202) 429-7000

Counsel for Amicus Curiae

Insurance Environmental

Litigation Association

* Counsel of Record

June 13, 1994

WILSON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

No. 93-1797

INSURANCE COMPANY OF NORTH AMERICA, ef al.,

y Petitioners,

MorTON INTERNATIONAL, INC.,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of New Jersey

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE

The Insurance Environmental Litigation Association

(“IELA”), by its undersigned attorneys, hereby moves

the Court for leave, pursuant to Rule 37 of the Rules of

the Supreme Court of the United States, to appear as

amicus curiae in support of the Petition for a Writ of

Certiorari.. IELA is an association of major property and

casualty insurers which, since 1986, has participated as

amicus curiae in more than 260 cases in nearly seventy

state and federal courts addressing environmentally re-

lated insurance coverage cases. This is IELA’s first filing

in support of certiorari.

IELA’s motion and the accompanying conditionally

filed brief are submitted within the time specified by

Rule 37.2. The written consent of all the petitioners, as

well as of respondents Underwriters at Lloyd’s, London,

and Certain Subscribing London Market Insurance Com-

panies and Affiliated FM Insurance Company accom-

panies this motion and the proposed brief. Respondent

Morton International, Inc. has refused to consent to the

filing of the proposed brief.

This case jeopardizes the health of the domestic and

worldwide insurance and reinsurance markets. The pay-

ment of literally hundreds of millions of dollars turns on

the New Jersey court’s decision in Morton—a decision

reached in a manner that utterly deprived the insurer par-

ties of their due process rights under the United States

Constitution. The decision will also have immense con-

sequences for future insureds who will bear the financial

burden of the liability coverage created by the proce-

durally flawed Morton decision. Insurers and reinsurers

who never agreed to cover the risks imposed by Morton

will be forced to devote funds covering other risks to pay

what amounts to a pollution tax decreed by the New

Jersey court in an adjudication devoid of procedural

safeguards.

The effect of Morton also is to deprive the petitioners

and each of IELA’s members of their contractual prop-

erty rights without due process. The Morton court denied

the party insurers notice and an opportunity to be heard

on the “regulatory estoppel” issue upon which the deci-

sion turned—an issue that arose only when the court

raised it sua sponte in its decision on the merits. Through

this blatant denial of the most fundamental due process

protections, the Morton court deprived insurers of valu-

able property and contract rights by taking from them

the right to rely upon and enforce an insurance policy

provision precluding liability coverage for harms caused

by gradual pollution discharges.

IELA members, most of whom have regularly used the

pollution exclusion clause at issue here in New Jersey and

throughout the nation, are painfully aware that the peti-

tion before the Court involves a dispute of huge propor-

tions. More than $100 billion is at stake in the debate

over the application of the pollution exclusion at issue,

and this case is a key component in the $480 billion to

$1 trillion controversy about who will pay to clean up

America. The preservation of the due process rights guar-

anteed to all civil litigants is now very much at risk in

the nationwide struggle over insurance coverage for envi-

ronmental harms given the decision below.

As an association representing most of the nation’s

major property and casualty insurers,* [ELA is uniquely

positioned to demonstrate to the Court ‘ow failure to

overturn Morton would countenance a serious violation

of due process and could have a dramatic adverse effect

on insurers worldwide.

WHEREFORE, the Insurance Environmental Litiga-

tion Association respectfully requests that this Court grant

its motion for leave to file an amicus curiae brief in sup-

port of the Petition for a Writ of Certiorari.

*IELA submits this motion and proposed brief on behalf of

IELA members Aetna Life and Casualty Company, Allstate Insur-

ance Company, Chubb Group of Insurance Companies, Continental

Insurance Company, Crum & Forster Corporation, Fireman’s Fund

Insurance Companies, Hanover Insurance Company, Home Insur-

ance Company, Maryland Insurance Group, Prudential Reinsurance

Company, Royal Insurance Company, St. Paul Companies, Selective

Insurance Group of America, State Farm Fire & Casualty Com-

pany, The Travelers Insurance Companies, United States Fidelity

& Guaranty Company, and Zurich-American Insurance Group.

IELA member Liberty Mutual Insurance Company and affiliates of

IELA members American International Group, CIGNA Property

and Casualty Companies, and Hartford Insurance Group are peti-

tioners; accordingly, this motion and proposed brief are not sub-

mitted on their behalf. Petitioners Continental Casualty Company

and General Accident Insurance Company of America and respond-

ents Underwriters at Lloyd’s, London, and Certain Subscribing

London Market Insurance Companies and Affiliated FM Insurance

Company are not members of IELA.

a

June 13, 1994

Respectfully submitted,

BERT W. REIN *

THOMAS W. BRUNNER

LAURA A, FOGGAN

DANIEL E. Troy

DENNIs A. TosH

WILEY, REIN & FIELDING

1776 K Street, N.W.

Washington, D.C. 20006

(202) 429-7000

Counsel for Amicus Curiae

Insurance Environmental

Litigation Association

* Counsel of Record

TABLE OF CONTENTS

Page

pe Be BN, iii

INTEREST OF THE AMICUS CURIAE ....................-- 1

SUMMARY OF THE ARGUMENT ............................... 2

REASONS FOR GRANTING THE WRIT ..................... 4

I. MORTON THREATENS SERIOUS HARM TO

THE DOMESTIC AND WORLDWIDE INSUR-

ANCE AND REINSURANCE MARKETS........ 4

A. Shifting The Huge Costs Of Environmental

Cleanup To Insurers As Morton Proposes

Could Endanger The Insurance Mechanism.. 4

1. The Threat Morton Poses to Domestic

RS A Rn a ae ee 5

2. The Threat Morton Poses to Foreign

aia chicicssieitlienicininitiinas beikiaanshcta tdci 7

B. The Value Of Insurance Contracts Nation-

wide Is At Risk If Insurers May Be Deprived

Without Due Process Of The Benefit Of Reg-

ulatory Approved Exclusions ......................... 9

Il. THE WAY THE MORTON COURT ARRIVED

AT ITS “REGULATORY ESTOPPEL” RULE

VIOLATED FUNDAMENTAL PRINCIPLES

OF DUE PROCESS ................. pcasednaunndaadiopenpeatonss 11

A. Morton’s Disregard Of The Petitioners’ Due

Process Rights And Its Purported Applica-

tion Of A Rule To The Entire “Insurance

Industry” Reveal That It Was Not Acting In

A Manner Appropriate To A Court ............... 12

1. In Arriving at its Regulatory Estoppel

Theory, the Morton Court Wrongly De-

nied the Petitioners Notice and an Oppor-

CT Bb ie Fe ivicccsscdansninchtnatrtahiatentteties 12

ii

TABLE OF CONTENTS—Continued

Page

2. The Morton Court’s Refusal to Consider

the Individual Circumstances of Various

Insurers Confirms that the Court Was

DT FI ticccttintetihttennitiven 14

B. The Due Process Clause Forbids Procedurally

Deficient Judicial Actions Whose Effect Is

To Rewrite Contracts Or Expropriate Valu-

Able Property PIGS .........ccccccccccccccccecccccceeee: 16

CONCLUSION ...................... senniideciandecesbenscesachams alae 19

iii

TABLE OF AUTHORITIES

Cases Page

Asahi Metals Industry Co. v. Superior Court, 480

if ff § 9

Bell v. Burson, 402 U.S. 535 (1971) -.....................-.. 13

Brinkerhoff-Faris Trust & Savings Co. v. Hill, 281

) Fm i aR 3, 17, 18

Central Dauphin School District v. Pennsylvania

Manufacturers’ Association Insurance Co., No.

552 M.D. Alloc. Dkt. 1993, 1994 Pa. LEXIS 155

OD ———————E———EE 10

City of Philadelphia v. New Jersey, 437 U. S. 617

TTI sencstdeisensiemdinnietinnteiabesstuendiimmmeetepeinctidamaneanenee 16

Connecticut v. Doehr, 111 8. Ct. 2105 (1991) .......... 16

Continental Insurance Co. v. Beecham, Inc., 836

I I OE 9

Coombes v. Getz, 285 U.S. 434 (1932) ............ 16-17, 17-18

Ettor v. City of Tacoma, 228 U.S. 148 (1913) ........ 18

Garvey v. State Farm Fire & Casualty Co., 770

A & § = 2

Hartford Fire Insurance Co. v. California, 113

* § 4 es 6

Hughes v. Washington, 389 U.S. 290 (1967) .......... 18

Kaiser Aluminum & Chemical Corp. v. Bonjorno,

ri yy) 6S. Se 18

Logan v. Zimmerman Brush Co., 455 US. 422

A A a ae 17

Lynch v. United States, 292 U.S. 571 (1934) ..12, 16, 17, 18

Mardan Corp. v. CGC Music, Inc., 804 F.2d 1454

ey 11

Mullane v. Central Hanover Bank & Trust Co.,

S'S Yo —_ 12-13

New Jersey Turnpike v. Sisselman, 255 A.2d 810

(N.J. Super. Ct. App. Div.), certif. denied, 258

NOD tf — 14

Saunders v. Shaw, 244 U.S. 317 (1917) a iistenaiaiashenel 13

South Central Bell Telephone Co. v. Ka-Jon Food

Stores, No. 98-CC-2926, 1994 WL 201749 (La.

ff —_ 10-11

TXO Products Corp. v. Alliance Resources Corp.,

Pe Ae, ls Se CED ccctsenteneeecceengnnee 16

United States v. Morgan, 313 U.S. 409 (1941) ........ 14

tates

iv

TABLE OF AUTHORITIES—Continued

Statutes Page

Comprehensive Environmental Response, Compen-

sation, and Liability Act, 42 U.S.C. §§ 9601-9657

bg RE AS RE 4,11

H.R. 3800, “Superfund Reform Act of 1994,”

108d Cong., 2d Sess. (1994) ................ccccccccccceneeee 5

New Jersey Industrial Site Remediation Act, 1993

Bee nn eusaionnees 4

New Jersey Spill Compensation and Control Act

of 1976, N.J.S.A. §$§58.10-23.11 to -23.24

TET ATR ec ae A EE meena ia acto 4,5

Miscellaneous

Robert D. Chesler et al., Patterns of Judicial In-

terpretations of Insurance Coverage for Haz-

ardous Waste Site Liability, 18 Rutgers L.J. 9

ell AlN a El Mie tN Ta ts i: A. SER 9

Christopher Dauer, Pollution Liability Threatens

Solvency, National Underwriters, Aug. 24, 1992,

fp Perens Et i Te tS artes Ute lhe tie 5

EPA, National Priorities List for Uncontrolled

Hazardous Waste Sites, 59 Fed. Reg. 8,724

EE Si a eee 7

Insurer Liability for Cleanup Costs at Hazardous

Waste Sites: Hearing Before the Subcomm. on

Policy Research and Insurance of the House

Comm. on Banking, Finance and Urban Affairs,

101st Cong., 2d Sess. (1990) ................................. 5

Robert E. Keeton & Alan I. Widiss, Insurance Law

REA AOR, cee i Sa a 6

Peter Kerr, “Insurers’ Florida Tab: $7.3 Billion,”

New York Times, Sept. 2, 1992, at D1 _............... 5

Richard Lapper, Business and the Environment:

Stuck with the Bill—Europe’s Insurers Could

Learn from US Experience, Financial Times,

Ry Ge CE UE cetetdcctenmetnanieetdidnintesieiteencans 7

Note, Insurance as Contract: The Argument for

Abandoning the Ambiguity Doctrine, 88 Colum.

Bi es I I rae eecercieedlinnnieatesietteaateens 6

Vv

TABLE OF AUTHORITIES—Continued

George Pendygraft et al., Who Pays For Environ-

mental Damage: Recent Developments in

CERCLA Liability and Insurance Coverage Liti-

gation, 21 Ind. L. Rev. 117 (1988) .......................

Milton Russell, E. William Colgazier, & Mary R.

English, Hazardous Waste Remediation: The

Task Ahead, University of Tennessee Waste

Management Research and Education Institute

(Dec. 1991) .......... nth is AEE ARERR eee

Gary Spencer, Pollution Coverage Suit Reinstated

Against Insurer, N.Y.L.J., Nov. 15, 1989, at 1....

Page

1

BRIEF AMICUS CURIAE OF

THE INSURANCE ENVIRONMENTAL

LITIGATION ASSOCIATION

IN SUPPORT OF PETITIONERS

Amicus Curiae The Insurance Environmental Litiga-

tion Association (“IELA”) hereby supports the petition

for a writ of certiorari to review the judgment of the

Supreme Court of New Jersey in this case.

INTEREST OF THE AMICUS CURIAE

This case is crucial to IELA’s members. It deprives

them of their contractual property rights without due

process, and jeopardizes the health of the domestic and

worldwide insurance and reinsurance markets. IELA is

an association of major property-casualty insurers which,

since 1986, has participated as amicus curiae in more

than 260 cases addressing environmentaliy related insur-

ance coverage cases. The importance of this case prompts

IELA to make its first filing in support of certiorari.’

Most IELA members have regularly used the pollution

exclusion at issue here throughout the nation. More than

$100 billion is at stake in the debate over the exclusion’s

application,* and this case is a key component in the

$480 billion to $1 trillion controversy about who will pay

to clean up America. While state courts interpret the

pollution exclusion in hundreds of cases nationwide, the

preservation of the core requisites of due process is plainly

within the province of this Court. IELA believes it is

uniquely positioned to demonstrate to the Court how

1 For a list of IELA members on whose behalf this brief is filed,

see the attached Motion for Leave to File Brief Amicus Curiae.

2 The definition of the words “sudden and accidental,” especially

“sudden,” has been said to be a $100 billion question. Gary

Spencer, Pollution Coverage Suit Reinstated Against Insurer,

N.Y.LJ., Nov. 15, 1989, at 1.

2

failure to overturn Morton would countenance a serious

violation of due process and could dramatically, ad-

versely, and improperly affect insurers worldwide.

SUMMARY OF THE ARGUMENT

The decision below is not a conventional contractual

adjudication between an insurer and its policyholder.

Here, a state supreme court acknowledged that the con-

tracts at issue exclude coverage for pollution damage.

Nonetheless, the court imposed vast pollution liability

upon all insurers doing business in New Jersey, “finding,”

without notice, hearing, or evidence, that the “insurance

industry” somehow misrepresented the impact of the ad-

mittedly “plain and unambiguous” pollution exclusion to

expert state insurance regulators who consequently ap-

proved the exclusion without an appropriate rate adjust-

ment. This perplexing, fact-bound conclusion was reached,

sua sponte, only at the second level of appellate review,

and the petitioners were denied any opportunity for fac-

tual refutation. Indeed, the New Jersey court based its

“fact-finding” primarily on articles written by lawyers who

represent large industrial companies like respondent Mor-

ton International, Inc. (“Morton”) in disputes with in-

surers.

Insurance cannot operate with economic rationality if

courts disregard policy limitations and grant insurance

coverage ex post facto. As the California Supreme Court

has noted, judicially created insurance leaves “ordinary

insureds to bear the expense of increased premiums neces-

sitated by the erroneous expansion of their insurers’ poten-

tial liabilities.” Garvey v. State Farm Fire & Casualty

Co., 770 P.2d 704, 711 (Cal. 1989). Here, the erroneous

expansion was both huge and unanticipated and could

severely and adversely affect the price and availability of

insurance for millions of Americans.

Critically, these harmful consequences would result

from a state court proceeding that afforded the petitioners

3

not one scintilla of due process protection. Like criminal

defendants, government employees, and other property

owners, insurers should have the right, disregarded here,

to present their evidence and to test their adversaries’ evi-

dence in an impartial hearing before they are faced with

negative legal consequences. Without an _ evidentiary

hearing, the court estopped the entire “insurance industry”

from enforcing the exclusion at issue. Its refusal to con-

sider the circumstances of the individual litigants, some

of whom had no connection at all with the alleged mis-

representations, highlights its desire to achieve a legislative

redistribution of funds without the even-handed adjudica-

tion mandated by the Fourteenth Amendment.

This Court has long held that “[w]hether acting through

its judiciary or through its legislature, a State may not

deprive a person of all existing remedies for the enforce-

ment of a right, which the State has no power to destroy,

unless there is, or was, afforded to him some real oppor-

tunity to protect it.” Brinkerhoff-Faris Trust and Sav. Co.

v. Hill, 281 U.S. 673, 682 (1930) (Brandeis, J.). Here,

the New Jersey court, after conceding that the pollution

exclusion gives rise to a valuable property right, has none-

theless deprived all insurers of “existing remedies” for

enforcing that right. And, in contravention of the Four-

teenth Amendment, the court has done so without afford-

ing insurers any “real opportunity” to protect that valu-

able property right.

New Jersey would receive a parochial benefit under

Morton for use in remedying the state’s pervasive environ-

mental problems. But the national and international costs

of the New Jersey Supreme Court’s approach are severe:

insurers and reinsurers that never agreed to cover dam-

ages from gradual pollution and, consequently, never col-

lected premiums for such risks, will be forced to use funds

supporting other risks to pay a state pollution tax not

sanctioned by the legislature or tested by due process ad-

judication. Accordingly, this case plainly merits a grant

of certiorari.

4

REASONS FOR GRANTING THE WRIT

I. MORTON THREATENS SERIOUS HARM TO THE

DOMESTIC AND WORLDWIDE INSURANCE

AND REINSURANCE MARKETS.

The New Jersey court’s decision to override the plain

terms of the insurance contracts could, if not reversed,

financially impair insurers here and abroad. The enor-

mous costs of cleaning up all hazardous waste sites sub-

stantially exceed the total reserves of all insurers. Morton

Suggests that the supposedly “deep pocket” of insurers

should be picked by “equitable” sleight-of-hand notwith-

standing clear contractual limitations on insurance cover-

age. If this tempting rationale is extended to the hundreds

of cases nationwide involving the pollution exclusion at

issue, insurers will be stuck with massive unfunded—and

potentially unfundable—liabilities.

A. Shifting The Huge Costs Of Environmental Cleanup

To Insurers As Morton Proposes Could Endanger

The Insurance Mechanism.

The nationwide costs of environmental cleanup, im-

posed retroactively under a variety of state and federal

environmental statutes,* are so enormous that insurers

could not possibly bear them even if they had agreed to

cover risks of this type. But where they did not agree to

cover, or charge premiums for, the risks that the decision

below would force them to bear, the monumental eco-

nomic impact is intolerable.

% Among these statutes are the Comprehensive Environmental

Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601-9657

(1988 & Supp. IV 1992) (“CERCLA”), which includes the Super-

fund program; state statutes that resemble CERCLA, and other

applicable federal and state statutes, such as the New Jersey In-

dustrial Site Remediation Act, 1993 N.J. Laws ch. 139. Private

rights of action have also become the basis for huge environmental]

cleanup liabilities. The dispute in Morton arises under the New

Jersey Spill Compensation and Control Act of 1976, N.J.S.A.

§§ 58:10-23.11 to -23.24 (1992) (“Spill Act’).

5

1. The Threat Morton Poses to Domestic Insurers.

Morton has the potential economic force of one hun-

dred hurricanes. Hurricane Andrew was “by far the most

expensive catastrophe ever for insurers in the United

States.” * Yet Andrew’s total covered loss of $7.3 billion

is dwarfed by the cost of cleaning up the nation’s hazard-

ous waste sites—estimated to be between $480 billion and

$1 trillion. By contrast, insurers’ surplus to secure all

risks, not just environmental ones, is estimated at $157

billion—less than one-third the most conservative estimate

of the cost of remediating America’s waste problem.® Al-

though Congress is now considering reform of the Super-

fund program,” such reform would not eliminate the threat

to insurers posed by Morton. Even if enacted, it would

leave untouched a myriad of other federal and state en-

vironmental enforcement mechanisms, such as the New

Jersey Spill Act under which the environmental liabilities

in Morton arose.

Insurers assume certain risks defined by their policies

‘n return for premiums. Premiums are calculated by

equalizing the predictable, but unpredictably distributed,

4 Peter Kerr, “Insurers’ Florida Tab: $7.3 Billion,” New York

Times, Sept. 2, 1992, at D1.

5 Milton Russell, E. William Colgazier, & Mary R. English,

Hazardous Waste Remediation: The Task Ahead, University of

Tennessee Waste Management Research and Education Institute

15-16 (Dec. 1991).

® See, e.g., Christopher Dauer, Pollution Liability Threatens

Solvency, National Underwriter, Aug. 24, 1992, at 1, 20 (comparing

the $700 billion to $1 trillion in costs to domestic insurers’ $157

billion surplus) ; Insurer Liability for Cleanup Costs at Hazardeus

Waste Sites: Hearing Before the Subcomm. on Policy Research

and Insurance of the House Comm. on Banking, Finance and Urban

Affairs, 101st Cong., 2d Sess. 50 (1990) (GAO statement that the

projected cost of CERCLA alone is as much as five times the total

surplus of U.S. property-casualty insurers).

7 See H.R. 3800, “Superfund Reform Act of 1994,” 103d Cong.,

2d Sess. (1994).

6

costs of covered occurrences incurred by the policyholders

within the risk pool. Through actuarial science, insurers

are able to respond to the random catastrophes that strike

individuals precisely because, on a large scale, the fre-

quency of such events becomes reasonably predictable.°

In order to spread risks rationally, insurers must set

contractual boundaries on their overall coverage obliga-

tions.” When those boundaries are ignored ex post facto,

insurers bear liabilities for which they have collected no

premiums and established-no reserves. Under favorable

market conditions, where all insurers are affected, these

liabilities may be shifted partially to future policyholders.

But even given this best-case assumption, imposition of

massive gradual pollution cleanup liability under Morton

would invade the insurer surplus substantially and grossly

distort the insurance mechanism. And, in any event,

Morton will force policyholders nationwide to subsidize

New Jersey’s cleanup efforts.

Also, while reinsurance practices are designed to ame-

liorate insurers’ risks, Morton in fact aggregates the bene-

ficial function of reinsurance. Reinsurers also rely on the

meaning of the underlying insurance contract to estimate

the risks they will undertake and to set the premiums

charged to insurers. Hartford Fire Ins. Co. v. California,

113 S. Ct. 2891, 2915 (1993) (“[T]he scope and pre-

dictability of the risks assumed in a reinsurance contract

depend entirely upon the terms of the primary policies

that are reinsured.”). Retroactive expansion of policy

coverage, whether by a court or by a legislature, under-

cuts these calculations. Thus, reinsurance participation

redistributes but does not lessen the pain of Morton-like

decisions.

8 See generally Robert E. Keeton & Alan I. Widiss, Insurance

Law § 1.3(b), at 12-13 (West 1988).

9 See, e.g., Note, Insurance as Contract: The Argument for

Abandoning the Ambiguity Doctrine, 88 Colum. L. Rev. 1849,

1860-61 (1988).

\

7

2. The Threat Morton Poses to Foreign Insurers.

The effect of expansive United States liability and

coverage decisions on British and other foreign insurers

and reinsurers has been well-documented.” Much of

Lloyd’s of London now teeters on the brink of bank-

ruptcy, in part because of insurance coverage created by

courts in the United States to pay environmental cleanup

costs.”

Under the circumstances, some foreign insurers under-

standably view decisions like Morton as a form of expro-

priation by American courts under the false color of con-

tract adjudication. Whether as insurers or as reinsurers,

these carriers have entered into contracts that plainly and

unambiguously preclude coverage for environmental

claims, other than those arising from a “sudden and acci-

dental” discharge. These terms, as Morton agreed, “vir-

tually eliminate[] pollution-caused property-damage . . .

coverage” except for the classic “accident” or “boom”

event. Ptr. App. 36a.

When presented with Morton’s gradual pollution claims,

its insurers properly denied coverage based on this

policy language. They were then called upon to defend

their decision in a court in New Jersey, the nation‘s most

polluted state.” They defended the denial of coverage by

© See Brief of Respondents Underwriters at Lloyd’s, London,

and Certain Subscribing London Market Insurance Companies, and

Affiliated FM Insurance Company in Support of Petition for a Writ

of Certiorari 1-4 (May 27, 1994).

1! See, e.g., Richard Lapper, Business and the Environment:

Stuck with the Bill—Europe’s Insurers Could Learn from US

Experience, Financial Times, May 6, 1992, at 14 (Lloyd’s faces

“potentially crippling losses” if United States courts continue to

interpret policy language so as to order insurers to pay to clean

up polluted sites).

12 New Jersey is the state with the most hazardous waste sites

on EPA’s National Priority List for the Superfund program, with

almost ten percent of the national total. EPA, National Priorities

List for Uncontrolled Hazardous Waste Sites, 59 Fed. Reg. 8,724,

8,729 (Feb. 23, 1994).

8

pointing to, among other things, the six state supreme

courts * and numerous state intermediate appellate courts “

and federal courts of appeals * that have read the word

“sudden” in the pollution exclusion as necessarily refer-

ring to an event that occurs quickly, hastily, immediately,

or abruptly.

The New Jersey Supreme Court agreed that the exclu-

sion’s language plainly warranted denial. Nonetheless, the

court estopped the entire “insurance industry” from re-

lying on the exclusion to deny coverage for unintentional

gradual pollution, Ptr. App. 86a-92a, based on a

determination that the expert state insurance regulators

who approved this unquestionably clear exclusion in 1970

were somehow fooled about what it meant. Ptr. App.

51a." The court proposed and adopted this novel “regu-

latory estoppel” theory sua sponte. Also, without permit-

ting the petitioners to create an evidentiary record in

rebuttal, Morton relied on the characterization of selected

documents in articles written by counsel who regularly

represent policyholders in insurance coverage litigation.

It then labelled these articles “independent commentary”

and determined that a hearing was unnecessary.’ What

13 These include the highest courts in Florida, Massachusetts,

Michigan, New York, North Carolina, and Ohio.

14 These include courts in California, Indiana, Iowa, Kansas,

Maryland, Minnesota, Oregon, Pennsylvania, and Utah.

15 These include the First, Second, Third, Fourth, Sixth, Eighth,

Ninth, Tenth, and D.C. Circuits.

16 On rehearing, the petitioners submitted affidavits from former

state insurance regulators :ontradicting these “findings.” See Pet.

24-29; Ptr. App. 5la, 232a-248a. Because the regulatory estoppel

theory was raised sua sponte, late in the litigation, the Morton

court could not consider these affidavits.

17 Ptr. App. 35a (“[Wle are persuaded that a remand would be

redundant, and that this record together with the reported cases

that address the regulatory history and the abundant independent

9

is worse, New Jersey courts are now extending the scope

of this ruling, by applying it to non-New Jersey cases.

See Continental Ins. Co. v. Beecham, Inc., 836 F. Supp.

1027, 1040 (D.N.J. 1993) (applying Morton where the

dispute had only a tenuous connection to New Jersey,

based on a choice-of-law analysis elevating New Jersey's

policy interest of favoring policyholders over another

State’s interest in “[iJnterpreting insurance contracts to

mean what they say.”).

At a minimum, such extraordinary procedures fail to

inspire confidence in the fairness of American courts.”

This Court’s review is needed to restore the faith of in-

surers, foreign and domestic, that the United States will

not tolerate potentially expropriatory state actions with-

out assurance by this Court of compliance with due proc-

ess requirements.

B. The Value Of Insurance Contracts Nationwide Is

At Risk If Insurers May Be Deprived Without Due

Process Of The Benefit Of Regulatory Approved

Exclusions.

Spurred on by Morton, policyholders are now seeking

to extend the “regulatory estoppel” theory to other states

commentary on the subject affords an accurate and comprehensive

basis for our, determination.” ).

To illustrate, among the articles the Morton court relied on were

Robert D. Chesler et al., Patterns of Judicial Interpretations of

Insurance Coverage for Hazardous Waste Site Liability, 18 Rutgers

L.J. 9 (1986), and George Pendygraft et al., Who Pays For Envi-

ronmental Damage: Recent Developments in CERCLA Liability

and Insurance Coverage Litigation, 21 Ind. L. Rev. 117 (1988).

Each of these articles, like others the court cited, states clearly

that its author “regularly represents policyholders in coverage dis-

putes.” Cf. Ptr. App. 36a-52a.

18 The Court has recognized that adhering to the requirements of

due process is especially important when dealing with foreign

entities. See, e.g., Asahi Metals Industry Co. v. Superior Court, 480

U.S. 102, 115-16 (1987).

10

and even other policy provisions.” Although their success

has thus far been limited, some courts are sorely tempted

to grasp at any theory or truncated procedure that might

finance pollution remediation in their proverbial backyard.

The Louisiana Supreme Court’s recent decision in

South Central Bell Telephone Co. v. Ka-'on Food Stores,

No. 93-CC-2926, 1994 WL 201749 (La. May 24, 1994),

illustrates the potentially far-reaching effects of the Morton

“estoppel” rationale.” That case addressed a pollution

exclusion providing that

this policy does not apply .. . to any . . . property

damage arising out of the actual, alleged or threat-

ened discharge, dispersal, spill, release or escape of

smoke, vapors, soot, fumes, acids, alkalis, toxic

chemicals, liquids or gases, waste materials . . . or

other irritants, contaminants or pollutants . . . at or

from premises owned, rented or occupied by the

named insured.

Id. at *1, *3. This provision was drafted in 1985 to

make absolutely certain that all damages arising from

pollution were excluded from coverage. /d. at *7 (“The

‘absolute’ exclusions eliminated the ‘sudden and acci-

dental’ exception to the exclusion, and clearly stated that

environmental cleanup expenses were not covered dam-

ages.” ). Louisiana’s state insurance regulators, like those

of almost every other state, approved the new exclusion.

Acknowledging that the absolute’ exclusion is “clear

and explicit,” id. at *7, the Louisiana court refused to

enforce it literally based on “equitable considerations.”

19 See Pet. 18 & n.17; see, e.g., St. Paul Fire & Marine Ins. Co.

v. Warwick Dyeing Corp., No. 93-1721 (1st Cir.); Downtown Air-

park, Ine. v. Continental Ins. Co., No. 93-6144 (10th Cir.).

20The Supreme Court of Pennsylvania recently agreed to hear

a case presenting the issue whether insurers should be allowed to

“enforc[e] a policy exclusion in a manner different than was repre-

sented to gain approval for the exclusion’s use.” Central Dauphin

Sch. Dist. v. Pennsylvania Mfrs’. Ass’n Ins. Co., No. 552 M.D. Alloc.

Dkt. 1993, 1994 Pa. LEXIS 155 (Pa. May 16, 1994) (per curiam).

11

Id. at *9. Citing Morton, and similarly injecting on ap-

peal sua sponte an estoppel issue, the Louisiana court held

that the insurer’s right to enforce the exclusion would de-

pend on its historic disclosure and premium adjustment

practices, regardless of compliance with Louisiana regula-

tory requirements. /d. at *10.

Thus, under Morton and its misguided progeny, the

insurer always loses. If policy language does not unequiv-

ocally preclude coverage, coverage is premised on “am-

biguity.” If the policy plainly does preclude coverage—

as in Morton and in Ka-Jon—then insurers are “estopped”

from achieving this disfavored result. The finality of the

regulatory process is swept aside; judgment lies against

insurers simply because they are labelled “bad actors.”

Review by this Court of Morton is needed to ensure that

courts do not proceed without due process, many years

after the fact, to deprive insurers of the benefit of their

clearly drafted exclusions.”

Il. THE WAY THE MORTON COURT ARRIVED AT

ITS “REGULATORY ESTOPPEL” RULE VIOLATED

FUNDAMENTAL PRINCIPLES OF DUE PROCESS.

J t Reasoned adjudication requires, at a minimum, that

/ “courts afford litigants an opportunity to present evidence

to the adjudicator, who bases the ultimate factual deci-

sion on that evidence alone. In addition, due process in

contract cases compels courts to determine disputes under

the agreement between the parties, and not to undertake

a broad reordering of private resources.

Even beyond its massive financial consequences, review

of this case is warranted. First, the New Jersey Supreme

*1 The insurer-always-pays rationale embodied by Morton also

directly conflicts with Congress’s judgment, embodied in section

107(e) of CERCLA, 42 U.S.C. § 9607(e), to preserve the agree-

ments of private parties to insure, to hold harmless, or to indemnify

one another in connection with environmental liabilities arising out

of CERCLA. See generally Mardan Corp. v. CGC Music, Inc., 804

F.2d 1454, 1458-59 (Sth Cir. 1986).

12

Court disregarded due process, denying the petitioners

notice and an opportunity to be heard. Second, Morton

did not simply adjudicate the contract dispute before it.

Instead, Morton redistributes immense sums from insurers

that did not accept (and did not collect premiums for)

certain risks to entities saddled with the huge costs of

remediating soil and water contamination. Morton’s result

—confiscation, without due process, of valuable vested

property rights—is not a legitimate exercise of state judi-

cial power.

A. Morton’s Disregard Of The Petitioners’ Due Process

Rights And Its Purported Application Of A Rule

To The Eniire “Insurance Industry” Reveal That

It Was Not Acting In A Manner Appropriate To A

Court.

Insurance policies, “being contracts, are property and

create vested rights.” Lynch v. United States, 292 US.

571, 577 (1934) (Brandeis, J.). Insurers may not be

divested of these rights without due process of law. Here,

without notice, hearing, or evidentiary record, the New

Jersey Supreme Court estopped the entire “insurance in-

dustry” from enforcing what the court acknowledged was

the plain meaning of a very valuable, State-approved,

policy exclusion. Moreover, treating the entire “industry”

as a monolithic entity, and refusing to consider the vary-

ing facts and circumstances of individual insurers and

their relationships with their policyholders, highlight the

illegitimacy of the Morton court’s actions.

1. In Arriving at its Regulatory Estoppel Theory,

the Morton Court Wrongly Denied the Petition-

ers Notice and an Opportunity to be Heard.

This Court has long held that “‘[t]he fundamental

requisite of due process of law is the opportunity to be

heard.’” Mullane v. Central Hanover Bank & Trust

Co., 339 U.S. 306, 314 (1950) (quoting Grannis v. Or-

dean, 234 U.S. 385, 394 (1914)). “While ‘many con-

troversies have raged about . . . the Due Process Clause,’

13

. . it is fundamental that . . . due process requircs that

when a State seeks to terminate an interest such as that

involved here, it must afford ‘notice and opportunity for

hearing appropriate to the nature of the case’ before the

termination becomes effective.” Bell v. Burson, 402 U.S.

535, 542 (1971) (quoting Mullane, 339 U.S. at 313).

Where a case “has been decided against [a litigant] with-

out his even having had the proper opportunity to present

his evidence,” he is “deprived of due process of law con-

trary to the Fourteenth Amendment.” Saunders v. Shaw,

244 U.S. 317, 319 (1917) (Holmes, J.).

As demonstrated at greater length in the petition for

certiorari, Morton ignores or contravenes these funda-

mental rights in numerous ways:

* It invoked sua sponte a legal theory (i.e., equitable

estoppel) neither alleged nor pursued by the respond-

ent at any stage. Pet. at 1, 5.

It based its estoppel holding on a New Jersey deci-

sion neither cited nor argued by Morton nor any of

its amici. Pet. at 8; see Ptr. App. 88a-89a (relying

on Harr v. Allstate Ins. Co., 255 A.2d 208 (N.J.

1969) ).

It imposed an estoppel even though there. was no

opportunity to develop an evidentiary record om any

of the factual elements of estoppel under New Jersey

law. ‘Pet. at 23-29. There was no discovery as to

those elements; neither the trial court nor the in-

termediate appellate court made any findings or

reached conclusions on those elements. Pet. at 5,

24-29.

The court made de novo factual determinations

based on case reports, partisan articles in journals,

and other non-evidentiary material, in the absence

of any evidentiary record on issues of estoppel. Pet.

at 2, 8.

It also perused case reports instead of creating an

adequate evidentiary record. None of these deci-

sions relied upon by the court was: (1) decided

14

in terms of equitable estoppel or the New Jersey

regulatory process; (2) based upon an evidentiary

hearing on the so-called “regulatory history” of the

pollution exclusion; or (3) entitled to treatment as

res judicata. Pet. at 18.

Relying on non-evidentiary materials, it asserted that

a remand to develop an evidentary record on issues

of fact that were, in actuality, highly disputed would

be “redundant.” Pet. at 1-2, 9 & n.10, 14.”

The Court should grant the petition to signal disapproval

of the constitutionally flawed Morton procedures.”

2. The Morton Court’s Refusal to Consider the

Individual Circumstances of Various Insurers

Confirms that the Court Was Acting Illegiti-

mately.

While the evidence, if fairly examined, would show that

no insurer should be estopped on the basis of the chal-

lenged communications to the state regulators, Morton did

not even adhere to its own faulty “rationale”’—that in-

surers that allegedly misled state regulators about the

meaning of the pollution exclusion in 1970 should be

punished by being deprived of the exclusion’s protection.

Morton should logically not affect insurers who had noth-

ing to do with the 1970 presentation. Yet, it simply dis-

regarded that some insurers entered the New Jersey mar-

22 Also, the Morton court impermissibly “probe[d] the mental

process of” state insurance regulators, many years after the fact,

in contraventior of this Court’s rule in United States v. Morgan,

313 U.S. 409, 422 (1941); see New Jersey Turnpike v. Sisselman,

255 A.2d 810, 815 (N.J. Super. Ct. App. Div.), certif. denied, 258

A.2d 16 (N.J. 1969) (adopting Morgan rule).

23 The Attorney General of New Jersey recently contended that

only this Court could ameliorate any constitutional deficiencies that

may invalidate the Morton decision. See Brief of Amicus Curiae

State of New Jersey, Dep’t of Environmental Protection and Energy

at 12-13, Chemical Leaman Tank Lines, Inc. v. Aetna Casualty &

Sur. Co., Nos. 93-5777, 93-5794 (dated June 2, 1994). Copies of this

Brief have been lodged with the Court for its convenience.

15

ket after the pollution exclusion had been approved by

New Jersey regulators. Other insurers never joined the

Insurance Rating Board (“IRB”), which made the com-

munications at issue. Morton’s failure to consider, the

circumstances of individual litigants demonstrates its ‘ de-

parture from the requisites of due process.

The so-called “London Market Insurers” (Certain

Underwriters at Lloyd’s, London, and Certain London

Market Insurance Companies), which had nothing to do

with the submission of the 1970 pollution exclusion to

;

state regulators, asked the Morton court to clarify, on

reconsideration, that its opinion did not apply to them.”

The Morton court refused. Ptr. App. 198a-201a; see

Brief of Respondents in Support of Petition for a Writ

of Certiorari 1-2 (“At an elementary level, . . . in order

for a claim of estoppel to be made against a party, that

party must have had some communication with the regu-

lators on the matter for which estoppel is sought.”).

Accordingly, review of the case is necessary to reaffirm

the principle that the individual circumstances affecting

each party are to be fairly considered in reasoned adju-

. dication.

{ 24 Motion for Partial Reconsideration and Clarification at 12-13,

i 14-15 (Aug. 30, 1993). Specifically, the London Market Insurers

argued that it would be “fundamentally unfair” to apply any estop-

pel against them given that (a) they had never been members of

the IRB (which had made the allegedly “deceptive” representations

in the early 1970s) ; (b) they had never been members of any of the

IRB’s successors; (c) their policies rarely contained the “sudden

and accidental” language; and (d) their policies at issue in Morton

did not contain that language. In fact, all of the London Market

policies in issue had expired before 1970—.e., before the pollution

exclusion had even been proposed to the states. Copies of this

Motion have been lodged with the Court for its convenience.

16

B. The Due Process Clause Forbids Procedurally De-

ficient Judicial Actions Whose Effect Is To Rewrite

Contracts Or Expropriate Valuable Property

Rights.

The Constitution establishes procedural protection for

private contract rights by ensuring that they can be com-

promised in only two fundamental ways. A court can

alter such rights equitably, so long as it complies with the

requisites of due process (and, where appropriate, the

Takings Clause); or, in certain circumstances, the state

legislature may modify such rights, within the limits of

the Due Process, Takings, and Contracts Clauses. As to

legislation, property owners can repair to the democratic

process to protect their property.

Morton is rooted in a legislative-like policy determina-

tion to vitiate vital provisions of all the insurance agree-

ments at issue, unjustifiably shifting insurer assets to

policyholders.” Stripped of their rights to notice and a

hearing, insurers face the uncompensated deprivation of

their property without either due process or the oppor-

tunity to participate in the democratic process. This

plainly unconstitutional result necessitates examination by

this Court.

The Court has repeatedly recognized that “[a]ny sig-

nificant taking of property by the State is within the pur-

view of the Due Process Clause.” Connecticut v. Doehr,

111 S. Ct. 2105, 2115 (1991). See also TXO Prods.

Corp. v. Alliance Resources Corp., 113 S. Ct. 2711, 2718

n.17 (1993) (Constitution forbids “taking of . . . property

without due process”). Because “[vJalid contracts are

property,” Lynch, 292 U.S. at 579 (Brandeis, J.), they

may not be abrogated without due process. Where a con-

tractual relation has arisen, “the right to enforce it, hav-

25 Cf. City of Philadelphia v. New Jersey, 437 U.S. 617, 627

(1978) (overturning New Jersey Supreme Court decision upholding

state legislation banning the importation of solid waste on the

grounds that thie Court “has consistently found parochial legisla-

tion of this kind to be constitutionally invalid.’’).

EEE

—————— ea

17

ing become vested, comes within the protection of . . . the

due process of law clause in the Fourteenth Amendment,

of the Federal Constitution.” Coombes v. Getz, 285 U.S.

434, 448 (1932).

State courts thus cannot “deprive [an entity] of prop-

erty without affording it at any time an opportunity to be

heard in its defense.” Brinkerhoff-Faris Co., 281 U.S. at

678 (Brandeis, J.). A state court cannot deprive an

owner of property rights where it “has denied . . . due

process of law—using that term in its primary sense of

an opportunity to be heard and to defend its substantive

right.” Id. Such a deprivation is grave, because “[c]on-

tracts between individuals or corporations are impaired

within the meaning of the Constitution whenever the right

to enforce them by legal process is taken away or mate-

rially lessened.” Lynch, 292 U.S. at 580.

The petitioners’ rights under the pollution exclusion in

their contracts are valuable (if intangible) assets.** The

pollution exclusion blocks coverage for massive unfunded

liabilities. IELA members have issued thousands of in-

surance policies containing this or similar clauses in New

Jersey and throughout the nation, and are defending more

than one hundred cases nationwide under those clauses.

The pollution exclusion is therefore an asset with enor-

mous real worth, and Morton unquestionably affects its

value in every pending case.

Here, the New Jersey court affirmed that, under the

insurance policies’ plain language, the insurers had the

vested contractual rights that they claimed. Ptr. App.

33a-34a. “When a right has arisen upon a contract...

and has been so far perfected that nothing remains to be

done by the party asserting it, . . . [i]t has become a

vested right which stands independent[ly].” Coombes, 285

26 See Logan v. Zimmerman Brush Co., 455 U.S. 422, 430 (1982)

(property rights are based on “an individual entitlement grounded

in state law” and include “varied and, as often as not, intangible”

interests).

18

U.S. at 445. Yet, through Morton, New Jersey deprived

all insurers of the right to enforce this vital part of their

contracts without affording them basic procedural protec-

tions.

Morton is an unjustifiable deprivation of vested prop-

erty rights by means of lawmaking that is at its core legis-

lative, not judicial. Ettor v. City of Tacoma, 228 U.S.

148, 155 (1913). Had Morton’s seizure of property been

accomplished by the New Jersey legislature,

the transgression of the due process clause of the

Fourteenth Amendment would be obvious. The vio-

lation is none the less clear when that result is ac-

complished by the state judiciary. . . . The federal

guaranty of due process extends to state action

through its judicial as well as through its legislative,

executive or administrative branch of government.

Brinkerhoff-Faris Co., 281 U.S. at 679-80 (Brandeis, J.)

(citations omitted).

Morton’s contention that the pollution exclusion is un-

enforceable, because of alleged misrepresentations when it

was introduced, does not evade the requirement that in-

surers be accorded due process before their property is

taken. Insurers and insureds have relied on the provision

in negotiating premiums ever since its approval by New

Jersey regulators. The Constitution “prohibits (or requires

compensation for) all retroactive laws that destroy vested

rights.” Kaiser Aluminum & Chem. Corp. v. Bonjorno,

494 U.S. 827, 856 (1990) (Scalia, J. concurring). “[A]

State cannot be permitted to defeat the constitutional pro-

hibition against taking property without due process of

law by the simple device of asserting retroactively that

the property it has taken never existed at all.” Hughes

v. Washington, 389 U.S. 290, 296-97 (1967) (Stewart,

J., concurring). Morton’s invalidation, decades after the

fact and without key procedural safeguards, of an in-

surer’s right to enforce the contract’s recognized meaning

calls upon this Court to grant the insurers’ petition. See

Lynch, 292 U.S. at 576.

Pre ee ee a ee ee

on

19

CONCLUSION

For all of the foregoing reasons, the Court should grant

the petition for certiorari.

Respectfully submitted,

BERT W. REIN *

THOMAS W. BRUNNER

LAURA A. FOGGAN

DANIEL E. TROY

DENNIS A. ToSH

WILEY, REIN & FIELDING

1776 K Street, N.W.

Washington, D.C. 20006

(202) 429-7000

Counsel for Amicus Curiae

Insurance Environmental

Litigation Association

June 13, 1994 * Counsel of Record