Petition for Writ of Certiorari — Liberty Mutual Insurance v. Caldwell Trucking PRP Group

No. 03-

IN THE

Supreme Court of the Gnited States

LIBERTY MUTUAL INSURANCE CO.,

Petitioner,

Vv.

CALDWELL TRUCKING PRP GROUP,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of New Jersey

PETITION FOR A WRIT OF CERTIORARI

JONATHAN D. HACKER JOHN C. SULLIVAN

O’MELVENY & MYERSLLP (Counsel of Record)

1625 Eye Street, N.W Post & SCHELL PC

Washington, D.C. 20006 Four Penn Center

(202) 383-5300 1600 John F. Kennedy Boulevard

} Philadelphia, Pennsylvania 19103

; (215) 587-1000

Attorneys for Petitioner

(6 pv

QUESTION PRESENTED

Whether it is a violation of the Due Process Clause or the

Takings Clause for a state supreme court to impose millions

of dollars in retroactive liability on an insurer by nullifying

an unambiguous insurance contract provision solely for the

purpose of promoting a judicially created policy of increas-

ing the money available to pay for environmental clean up.

il

LIST OF PARTIES AND CORPORATE DISCLOSURE

The petitioner is Liberty Mutual Insurance Company.

Liberty Mutual Group Inc. owns 100 percent of the stock of

Liberty Mutual Insurance Company. LMHC Massachusetts

Holdings Inc. owns 100 percent of the stock of Liberty Mu-

tual Group Inc. Liberty Mutual Holding Company Inc. owns

100 percent of the stock of LMHC Massachusetts Holdings

Inc. No publicly traded entity owns any stock of any of the

above-named entities.

Respondent is the Caldwell Trucking PRP Group. Cald-

well Trucking PRP Group is an unincorporated association

of parties alleged by the United States Environmental Protec-

tion Agency to be responsible for the remediation of hazard-

ous substance contamination at the Caldwell Trucking

Superfund Site. The Caldwell Trucking PRP Group consists

of: Scherng-Plough Corporation, E.I. du Pont de Nemours

and Company, Kearfott Guidance & Navigation Corporation,

Saltire Industrial Inc., Curtiss-Wnght Corporation, BP p.l.c.,

Cooper Industries, Inc., and Englehard Industries, Inc.

The other parties who participated in the proceedings be-

fore the Supreme Court of New Jersey were American Home

Assurance Company, Industnal Underwriters Insurance

Company, Lexington Insurance Company, and National Un-

ion Fire Insurance Company of Pittsburgh, PA.

lil

TABLE OF CONTENTS

Page

QUESTION PRESENTED o.oo. ceccsccecsssssscssssesecscsscecseseeeeee. i

LIST OF PARTIES AND CORPORATE

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TABLE OF AUTHORITIES ...0..........ccccscescsccscssccsssscosssseseees Vv

PETITION FOR A WRIT OF CERTIORARI ...cecccscccsssseesee. |

em PEN Ee MII oo. snsssesnseccsuscesnsecsvevecessseesesereeseseserees |

I I caassnsnixicenscessncsvscoavssesenesouesorevoxerjenevsesece ]

CONSTITUTIONAL PROVISIONS INVOLVED.............. |

STATEMENT OF THE CASE..00..cccccscssscssessscsssecsscessesseeoses 2

A. Liberty’s Non-Cumulation Clauses.........ccccccccceseseoees 2

B. The Owens-Illinois Decision ..........cccececesessesecceseseeeee. 4

C. The Carter-Wallace Decision .........ccceccccscsesesssseseoees 7

D. The Proceedings and Decision Below..........eccccesces-0. 9

REASONS FOR GRANTING THE WRIT .....cceccccccccseseeee. 15

I. THE DECISION BELOW VIOLATES THE

oo 8. ae | 0 cn 17

A. The Decision Below Violates Liberty’s

Fundamental Rights To Contract, Which

Are Protected From Arbitrary Judicial

Impairment By The Due Process Clause .......... 17

B. The Decision Below Violates Due Process

Because It Imposes An Unpredictable,

Severe And Unfair Retroactive Insurance

ETERS ae 21

Il. THE DECISION BELOW VIOLATES THE

BI EIB ois cssvnsevesersersansvccsosseenoaryeressces 24

iV

II. THE DECISION BELOW CONFLICTS

WITH OTHER DECISIONS ENFORCING

INSURANCE CONTRACTS CONSISTENT

WEE EE Fea ee BPRS sctctsnsserersscssssinnesesvincnne 25

IV. THIS CASE IS EXTREMELY IMPOR-

TANT TO INSURERS AND {INSUREDS IN

NEW JERSEY AND ELSEWHERE..............:00-.000 28

RAI serene nimisnriinometdone 30

Vv

TABLE OF AUTHORITIES

Page(s)

Cases

Aerojet-General Corp. v. Transport Indemnity Co.,

Ue Fe PO Ch NF epsieiccthcsntacisteleisnieerni 27

Allied Structural Steel Co. v. Spannaus, 438 U.S.

Be Ce cscs aaa 18,19,20

Alpine Haven Property Owners Ass'n, Inc. v.

Deptula, 830 A.2d 78 (Vt. 2003) ........eeeeeeeseeeseeeeeeee 26

Armstrong v. United States, 364 U.S. 40 (1960)................ y

BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996)............ 22

Bouie v. City of Columbia, 378 U.S. 347 (1964)... 17

Caldwell Trucking PRP Group v. Spaulding

Composites Co., 890 F. Supp. 1247 (D.N.J.

EPO O D siksicsaicesrnisesnnmnarntnitemapeiaataaaiagdslmndaaanaae 10

Carmell v. £6008, S29 U.S. S13 (2OQD) ..ceccrseneveesincsonrsvsonsons 18

Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d

SEG Ld. ee inncnincainae 7,8,9,11,14,23

City of Los Angeles v. Manhart, 435 U.S. 702

(RFR F ED secronisrsisasnsieictatiininsidunahabeanamaeepamanaiaanaeaigtemmatiilaaie 28

Cohen v. Cohen, 126 N.J.L. 605 (N.J. 1941)... eeeeeeeeeeeee 20

Columbia Propane, L.P. v. Wisconsin Gas Co., 661

BO, We ae Fe COP BO csisinncricesncniiaininnaimoniaian 26

Eastern Enterprises v. Apfel, 524 U.S. 498

Cr sacscvchvonbeniatuccmaciacnlaendsencmkanaiaede 15,21,22,23,24,25

Elliott v. Darwin Neibur Farms, 69 P.3d 1035

CD BIER sincnccsnrsiintmencabaomtonennieneuimnigncntinciaitial ossceecesenees 26

Vl

Flynn v. Hartford Fire Ins. Co., 370 A.2d 61 (N.J.

Super., App. Div.), certif: denied, 379 A.2d 236

Re BF Ti isxencrvcsiseennenuncisanibbmsaniniaasbaininanemaapanata 13

Hardee v. Hardee, 585 S.E.2d 501 (S.C. 2003)... 26

Hertz v. Clovis, 578 $.E.2d 391 (W. Va. 2003)..............006 26

Home Building & Loan Ass'n v. Blaisdell, 290 U.S.

Ee sisncssisnnibsndandintidenneastaedaaatenaebeiel 18,19

Insurance Co. of North America v. Continental

Casualty Co., 575 F.2d 1070 (3d Cir. 1978).............02. 11

Joint Anti-Fascist Refugee Committee v. McGrath,

UE Is EA Ee oii canninversenns 16

Kampf v. Franklin Life Ins. Co., 161 A.2d 717 (N.J.

SPI <acwsinv kes sieahssNlercsasusnaonscughoes a aaianiamekaaetnaesimeeannhaainaats 14

Keystone Bituminous Coal Ass'n v. DeBenedictis,

RO 5 Toi 5) nC Ee ae” mene 18,20

Landgraf v. USI Film Prods., 511 U.S. 244 (1994)....... 18,21

Linden Motor Freight Co., Inc. v. Travelers Ins.

Cae, 395 A.2E Ze rds Fe Rirsiininviinemmans 13

Medlar v. Aetna Ins. Co., 248 A.2d 740 (Vt. 1968)............ 27

Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d

PPE IGE. CF iiinsvniionensacceanabeaamimaniaiin passim

Phillips Petroleum Co. v. Shutts, 472 U.S. 197

EPID s vxwshennvdenansianienemnellietniiieniueieanan da teiaaiamialaaeanacaae

Quill Corp. v. North Dakota, 504 U.S. 298 (1992)............. 22

Rogers v. Tennessee, 532 U.S. 451 (2001) ......e eee eeseeeeeees 22

Rosen v. State Farm Gen. Ins. Co., 70 P.3d 351

TA SIPPY <snvvesxssxssntanassnuanianitaes ee kapanenaabaamaeea aaa 27

Standard Banner Coal Corp. v. Rapoca Energy Co.,

FP Ba SS CV, BOI ii snrsnscnrssnncrinsesiasnicvinseenceainnins 26

Vii

Tidal Oil Co. v. Flanagan, 263 U.S. 444 (1924) w..ceeeeeee. 17

United States Trust Co. v. New Jersey, 431 U.S. 1

SINT 7S theese nsdsansllipilsinhapisaeasaiadsitanliadaddanentaeshdaetaneakaiad 18

Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776

a INE inishsdsscascasadansicraticraccussaineiituaaieascccacnaes 26,27

World-Wide Volkswagen Corp. v. Woodson, 444

ae Gere retin inccenscetntncacieendacteeahaalaaseaiblecadiaiiaice 22

Yarcheski v. Reiner, 669 N.W.2d 487 (S.D. 2003) .........0-+. 26

; Constitutional Provisions

U.S. Const, Art. I, § 10, cl. 1......c..cccccccscsocccsccssccecseeess 1,17,27

Rica Sem MUNIN. © tas aniscecosspearedterioresennastbneesnclaecemeidvance 1,24

Sha SpA. MUNIN: TOIT sensccticadatnandmvntecaderactiartasanacemmaaRenens l

Statutes

OO Re TASTER CIID enincsniscccsesssronseasanivonssmsananssibscensomaans l

Books, Treatises and Journals

Developments in the Law - Toxic Waste Litigation,

99 Harv. L. Rev. 1458 (1986) vo. eceesesceseeseesceseeeceees 5

The Federalist, No. 44 (James Madison) (Clinton

IE Wiig POPE E sicesschsisiaiatachtedaiiatdasececssacabdenlcucnmcitacs 18

The Federalist, No. 84 (Alexander Hamilton)

(Clinton Rossiter ed., 1961) ......cccecssesccsescscssesscescsecesees 18

Holmes, The Path of the Law, 10 Harv. L. Rev. 457

PENT T icsundiiaticsenunbininiinuastameienatiaiaatiin eee 15,16

Jones & Hurwitz, An Introduction to Insurance

Allocation Issues In Multiple-Trigger Cases, 10

ViOGRs BURVEL, LF, ZS (1GGD) .cccccensercecosncsersscnvsvececcasancenseses 6

PETITION FOR A WRIT OF CERTIORARI

Petitioner respectfully prays that a wmit of certiorari issue

to review the judgment of the Supreme Court of New Jersey

in this case.

DECISIONS BELOW

The opinion of the New Jersey Supreme Court is re-

ported at 819 A.2d 410 and is reprinted in the Appendix

(“App.”) hereto at la. The opinion of the New Jersey Supe-

nor Court, Appellate Division, is reported at 787 A.2d 238

and is reprinted at App. 25a. The judgment of the mal court

is unreported and is reprinted at App. 38a.

JURISDICTION

The opinion of the New Jersey Supreme Court was is-

sued on April 10, 2003. A timely motion for reconsideration

was denied on June 23, 2003. Justice Souter extended the

time in which to file this petition to October 22, 2003. This

Court has jurisdiction pursuant to 28 U.S.C. § 1257(a)

(1993).

CONSTITUTIONAL PROVISIONS INVOLVED

The Due Process Clause, U.S. Const. amend. XIV, pro-

vides:

... nor shall any State deprive any person of life, lib-

erty, or property without due process of law....

The Takings Clause, U.S. Const. amend. V, provides:

... nor shall private property be taken for public use

without just compensation ....

The Contracts Clause, U.S. Const., art. I, § 10, cl. 1, pro-

vides:

No State shall . . . pass any . .. Law impairing the Ob-

ligation of Contracts ....

5

STATEMENT OF THE CASE

The case raises a novel but profoundly important ques-

tion: whether there are any federal constitutional limits on

the power of a state supreme court to nullify, retroactively,

the unambiguous contractual nghts of a private party. It is

beyond dispute that the opinion below, were it a law enacted

word-for-word by the New Jersey Legislature, would be a

blatant and egregious violation of the Contracts Clause of the

U.S. Constitution and the even more fundamental constitu-

tional security against retroactive laws that the Clause em-

bodies. The question for this Court is whether a state su-

preme court has a broader constitutional authority to overnde

the settled and unambiguous obligations of pnvate contract,

and even if so, whether such authority is functionally unlim-

ited, as it would have to be for the decision below to stand.

A. Liberty’s Non-Cumulation Clauses

This case involves nine insurance contracts entered into

by petitioner Liberty and Spaulding Composites Company,

between 1976 and 1984. The contracts provided “compre-

hensive general liability’ (CGL) insurance. Each of the

policies included two provisions which explicitly limit the

amount of nsk accepted by Liberty under its policies. First

is a Declarations sciiedule which identifies the dollar limits

for the different types of coverage provided. The 1976 con-

tract had a $500,000 liability limit for each occurrence; the

subsequent eight contracts each limited coverage to $1 mil-

lion in liability for each occurrence. Second, each of the

policies included a Limits of Liability section which speci-

fied how the dollar figures applied to different types of

claims covered by the policy. The Limits of Liability section

stated that the dollar limitation applicable to “each occur-

rence” was “the total limit of the company’s liability for all

damages because of bodily injury, personal injury or prop-

erty damage as the result of any one occurrence.” App. 66a

(emphasis added).

+

4

As part of the Limits of Liability section, each contract

included an identical clause — the “non-cumulation clause” —

addressing and prohibiting the cumulation of liability over

successive contracts. The clause accomplished this result in

two steps. First, the clause provided that

For the purpose of determining the company’s total li-

ability, all bodily injury, personal injury and property

damage arising out of continuous or repeated exposure

to substantially the same general conditions shall be

construed as arising out of one occurrence.

App. 66a. In other words, the parties agreed by contract that

they would treat an injury that occurs or reoccurs over time —

1.€., environmental contamination from chemical exposure —

as but a single occurrence for purposes of establishing Lib-

erty’s total liability for the costs of such an injury.

Second, the “non-cumulation” clause provided that the

amount of liability incurred under any one contract for “one

occurrence” (contractually defined, as noted, to include con-

tinuous exposures) “shall be reduced by the amount of each

payment made by the company with respect to such occur-

rence under a previous policy of which this policy is a re-

placement.” Thus, if Spaulding incurred, say, $10 million in

liability for environmental contamination that began during

the first of its contracts with Liberty and continued for each

of the nine years in which Spaulding had a Liberty policy,

Liberty would never be liable for more than $1 million. In

year one, Liberty would owe the policy maximum of

$500,000. In year two, Liberty would owe that year’s policy

maximum of $1 million reduced by the $500,000 already

paid out under the first year’s contract, meaning $500,000 in

the second year and a total of $1 million over the first two

years. In year three, Liberty again would owe that year’s

policy maximum of $1 million, this time reduced by the full

$1 million already paid out under the prior policies, for a to-

tal of zero additional liability. Year four, and all subsequent

years would be the same: Liberty’s liability for costs associ-

4

ated with this single occurrence would be the maximum $1

million for that year, reduced by the full $1 million already

paid out. In this way, the clause operated to prevent Lib-

erty’s liability from cumulating under each successive con-

tract for each successive year with respect to a single occur-

rence.

The insurance contracts between Liberty and Spaulding

were primary policies, 1.e., policies that provided first-level

coverage. Throughout the period that Liberty provided in-

surance to Spaulding, Spaulding also purchased excess poli-

cies, 1.e., policies that provided second-level coverage which

would be implicated if Liberty had paid its limit of liability

for a particular occurrence. Each of these excess policies

contained a non-cumulation provision which was substan-

tively similar to the Liberty provision. See PRP N.J. S.Ct.

Br., App., at a92-103.

Thus, when the parties entered into the contracts, they

necessarily understood from the contracts’ plain terms that

Liberty’s total potential liability for any one occurrence of

environmental contamination, regardless how long the con-

tamination occurred, was fixed: Liberty would be liable for

a total of $1 million and not one penny more. The price

Spaulding paid for its.insurance for each year was necessar-

ily premised on the parties’ explicit understanding that Lib-

erty would be assuming exactly that amount of nsk for an

event of contamination and no more — for the price of insur-

ance, of course, reflects nothing more or less than the value

of the risk being transferred.’

B. The Owens-Illinois Decision

In 1994, almost ten years after the expiration of the last

of Spaulding’s contracts with Liberty, the New Jersey Su-

preme Court decided Owens-Illinois, Inc. v. United Ins. Co.,

l ’

As anyone who has purchased homeowners’ insurance knows, the

more coverage one has, the higher one’s premiums will be.

5

650 A.2d 974 (N.J. 1994). Owens-Illinois addressed the

then-emerging problem of how to allocate insurance liability

for an injury that occurs over a long period of time (such as

asbestos injury or environmental contamination), during

which the insured has successive insurance policies in effect.

The first question the court addressed was how to decide

when an injury “occurs” within the meaning of contracts that

provide coverage for each “occurrence.” The court observed

that at least three possible alternative conceptions of when

injury has occurred had been adopted by courts in other ju-

risdictions. See Owens-Illinois, 650 A.2d at 980-81 (quoting

Developments in the Law — Toxic Waste Litigation, 99 Harv.

L. Rev. 1458, 1579-81 (1986)). Under the “exposure” the-

ory, the injury occurs when the injury-causing agent first

contacts the body or property. /d. at 980. Under the “mani-

festation” theory, the injury occurs when the injury physi-

cally manifests itself in the body or on the property. Under

the “continuous trigger” theory, the injury occurs continu-

ously, as long as the injury-causing agent is affecting the

body or property. .

As Owens-Illinois reflects, the choice among these alter-

natives has significant consequences for insurance coverage.

Depending on the theory chosen, the injury could “occur”

only at one fixed moment for the purpose of triggering pol-

icy coverage, meaning that an insured would be covered only

by the policy in effect at that moment. Under the “continu-

ous tigger’ theory, by contrast, the injury would “occur” in

each of the years of successive policies, thereby potentially

requiring the insurer to provide coverage up to the maximum

of each year’s policies. In this way, unless the contract

specified otherwise, the insurer’s liability could be cumu-

lated over each of its successive policies.

The Owens-Illinois court adopted the “continuous trig-

ger” theory and thus held that, where an insurance contract

does not bar cumulation, “courts may reasonably treat the

progressive injury or damage as an occurrence within each of

ee

0

the vears” of successive CGL policies. /d. at 995. Notably,

Owens-Illinois’s resolution of this question did not address

non-cumulation clauses, which were not involved in the case

in any way. Rather, the adoption of the “continuous trigger”

theory only paved the way tor the court to answer the real

question in the case: how to allocate among many insurers

the insured’s lability for injuries caused over a long period

of time, when the insured had different policies and different

insurers. See id. (“Because multiple policies of insurance are

triggered under the continuous-trigger theory, 1t becomes

necessary to determine the extent to which each tnggered

policy shall provide indemnity.”’).

The court adopted a pro rata theory of allocation: the in-

sured’s total coverage during the period of liability 1s estab-

lished; each insurer’s total potential lability dunng that pe-

riod is assessed and compared to the insured’s total cover-

age, producing each insurer's proportionate or pro rata share

of total coverage; and then the insured’s actual costs for the

period are allocated to each tnsurer in accordance with the

Insurer's proportionate share of total coverage for the pe-

riod.”

* As the decision below explained it

The basis of an individual insurer's lability is the aggregate cov-

erage it underwrote during the period in which the loss occurred.

Basically, a given insurer's liability is determined by comparing

its particular exposure to the total amount of exposure assumed

by all carners of the tnggered policies. This comparison vields a

percentage that is then applied to the amount of loss the policy-

holder sustained.

App. 12a (quoting Jones & Hurwitz, 4n /ntroduction to Insurance Allo-

cation Issues In Multiple-Trigger Cases, 10 Vill. Envtl. L.J. 25, 44-45

(1999)). In addition to this basic allocation rule, the Owens-/Ilinois court

held that. for any vears in which the insured was not covered, neither

proportionate liability nor actual costs would be allocated to any insurer:

instead the insured, who accepted the nsk for that period, was required to

7

As noted, the insurance contracts at issue in Owens

Mlinois did not include non-cumulation of ability limita-

tions, and the court gave not the least intimation that such

clauses would henceforth be void — much less retroactively

void ~ as a result of its allocation ruling. To the contrary, the

Owens-Illinois court specifically cautioned that its decision

did not speak to the cumulation (or stacking”) of coverages

under successive policies: “[T]o say that coverage 1s af-

forded under more than one policy seems different from Say-

ing that a policyholder may stack the limits of all the policies

in effect during a period of repeated or continuous expo-

sure.” Ld. at 990. The Owens-Illinois court also did not de-

clare any policy language unenforceable. Again to the con-

trary, the court specifically acknowledged that “the contract

of insurance” provides the source of any duty of an insurer

“to pay any judgments.” /d. at 978. The court found only

that the particular policy language under consideration in

-that case was inapplicable.

C. The Carter-Wallace Decision

The New Jersey Supreme Court applied the Owens-

Iilinois rule four years later in Carter-Wallace, Inc. vy. Admi-

ral Ins. Co., 712 A.2d 1116 (N.J. 1998), another case that

had nothing to do with non-cumulation clauses. Whereas

Owens-Illinois involved the allocation of liability among dif-

ferent insurers with successive polices, Carter-Wallace in-

volved the allocation of liability among different insurers

with concurrent policies providing coverage at different lev-

els — specifically, “primary” and “excess” insurers — in con-

tinuous trigger liability situations. ‘“Primary” insurance pro-

vides initial coverage up the limits of the contract. “Excess”

or “secondary” insurance provides additional coverage, typi-

cally only after the primary coverage has been exhausted.

bear the pro rata share of costs incurred during that period. Owens-

Illinois, 650 A.2d at 994.

S

Allocation of hability between primary and excess insurers

can be difficult in progressive injury cases, because during a

multi-year period of injury, the insured 1s likely to have dif-

ferent primary and excess insurance contracts with different

insurers With different amounts of coverage.

The excess insurer in Carter-Wallace argued that excess

liability did not attach under any of the insured’s excess 1n-

surance policies until the insured had exhausted a// of its pri-

mary coverage for every year in effect dunng the period of

injury. As a result, the excess insurer argued, if all of the

primary coverage sufficed to cover the total costs of the in-

jury, then no excess insurer would be liable. The New Jersey

Supreme Court opted for a different rule: in progressive in-

jury cases, the insured’s total lability would be allocated pro

rata tor each year, and then each year’s pro rata amount of

liability would be assigned to primary and excess insurers in

accordance with the policies in effect that year. Thus if the

pro rata amount of lability in the first year exhausted the in-

sured’s primary coverage in that year, any excess insurer

with a contract that year would be liable for any remaining

amount for the year, up to the limits of its coverage in that

vear, and so on. The court reasoned that “this approach

makes efficient use of available resources because it neither

minimizes nor maximizes the liability of either pnmary or

excess insurance, thereby promoting cost efficiency by

spreading costs.” /d. at 1124. The court also found that this

approach “promotes simple justice, by respecting the differ-

* Suppose, for example, an insured incurred $10 million in liability

for a ten-year progressive injury. The court would allocate $1 million of

that injury to each of the ten vears. Then the court would look to the

policies in effect for each year. So, in year one, if an insured had

$500,000 in pmmary coverage with insurer A and $500,000 in excess

coverage with insurer B, each insurer would owe the limits of the policy.

If un year two the insured had increased its coverage with insurer A to $1

mullion while keeping the same excess coverage with insurer B, then in-

surer B would owe nothing in year two.

9

ence between primary and excess insurance while not per-

mitting excess insurers unfairly to avoid coverage in long-

term, continuous trigger cases.” /d. at 1121.

Although thus driven by concerns for efficiency and

simple justice, neither the Carte.-Wallace reasoning nor its

result undermined — much less contradicted — any explicit

contractual language in the applicable policies. Even more

to the present point, nothing in the reasoning or result of

Carter-Wallace addresses or even relates to the validity of

non-cumulation clauses in primary CGL policies.

D. The Proceedings and Decision Below

Thus, until this case, New Jersey’s leading insurance al-

location precedents had hewed closely to the relevant con-

tract language, applying broader policy concems only to re-

solve matters unaddressed in the terms of the applicable in-

surance contracts. Breaking sharply from its own prior case

law — and from its constitutional obligations to respect Lib-

erty’s firmly fixed, contractually based expectations — the

New Jersey Supreme Court in this case held flatly void a di-

rectly applicable, unambiguous provision limiting Liberty’s

liability for costs incurred by its insured in cases of progres-

sive injury. The court cited both Owens-Illinois and Carter-

Wallace as supporting this result, but the citations are both

wrong and irrelevant to the constitutional issue this petition

raises. They are wrong because neither opinion suggests in

any way that non-cumulation clauses are void under New

Jersey law. They are irrelevant because even if the opinions

did support such a result, the first of them was issued almost

ten years after the last of the contracts at issue here expired,

and thus in no way could have affected the parties’ expecta-

tions when Liberty and Spaulding agreed to the liahility limi-

tation and priced the contracts on that basis.

1. Liberty’s basic coverage responsibilities arose when

Spaulding was identified in 1990 as a potentially responsible

party for the disposal of hazardous lead-containing wastes at

10

the Caldwell Trucking Superfund Site in Fairfield, New Jer-

sey. App. 4a. Spaulding declared bankruptcy in 1993. App.

4a. Caldwell Trucking Group PRP (“PRP”) and the EPA

filed a federal action against Spaulding in 1994 seeking to

hold Spaulding responsible for cleanup costs. App. 4a.* In

1996, the district court granted PRP partial summary judg-

ment, holding Spaulding liable for an undetermined amount

of the cleanup costs incurred by PRP. App. 4a. Judgments

of liability were ultimately entered against Spaulding totaling

over $13 million. App. Sa.

In 1995, Spaulding began a state-court action seeking a

declaratory judgment as to the liability of its insurers, includ-

ing Liberty, for its potential cleanup responsibilities at the

Caldwell Trucking site. Spaulding argued that it was entitled

to $8.5 million in total coverage from Liberty across all nine

of its contracts; Liberty argued that, under the plain language

of the non-cumulation clause, its liability was limited to $1

million. The tnal court granted Spaulding summary judg-

ment, holding Liberty’s non-cumulation clause to be “inap-

plicable” because it was “intended to govern cases involving

a single occurrence causing damage over multiple years,”

App. 5a (emphasis added), whereas it read Owens-Illinois as

holding that continuous environmental injury was to be

treated as a “separate occurrence ‘within each of the years of

a CGL policy.’” App. 5a (emphasis added).

2. The Appellate Division reversed. The court’s conclu-

sion was simple and unassailable: “[T]|he contract language

* PRP initially joined Spaulding’s insurers, including Liberty, as di-

rect defendants, seeking contribution for Spaulding’s cleanup responsi-

bilities. Caldwell Trucking PRP Group v. Spaulding Composites Co.,

890 F. Supp. 1247 (D.N.J. 1995). The claims against Spaulding’s insur-

ers were dismissed on the ground that PRP itself had no claim against the

insurers. /d. at 1256.

: 1]

of the non-cumulation clause is clear and should be en-

forced.”” App. 27a. The court specifically addressed Owens-

Illinois and Carter-Wallace, but “perceive[d] no inconsis-

tency” between those decisions and “applying the clear lan-

guage of Liberty’s non-cumulation clause.” App. 35a. The

court noted that in both cases the New Jersey Supreme Court

had been “unable to find the answer to the allocation issue in

the language of the policy” and also had “found ‘the tradi-

tional rules of interpretation to be unhelpful.’” App. 35a

(quoting Owens-Illinois, 650 A.2d at 990). Accordingly,

while it was proper for the prior decisions to follow ‘a

method that was fair in light of the complexities of environ-

mental litigation” where there was no contract language on

point, in this case the Appellate Division could “find the an-

swer in the clear language of the policy” and thus was “‘com-

pelled” to apply that language. App. 35a. The court also

rejected PRP’s argument that the non-cumulation clause was

an impermissible “other insurance” clause. The court held

that other insurance clauses, including “escape” clauses, ap-

ply only when there are concurrent policies (typically wnit-

ten by different insurers) in effect. App. 36a. The non-

cumulation clause, the court explained, was implicated by

the successive policies of a single insurer, and thus was not

an “other insurance” escape clause.” App. 36a. In fact, the

“other insurance” provisions of Liberty’s policies were con-

tained in separate endorsements from the non-cumulation

clause.

3. The New Jersey Supreme Court granted leave to ap-

peal and reversed, reinstating summary judgment in favor of

> In so ruling, the court also rejected the argument that the non-

cumulation provision was an “escape” clause, a sub-category of other

insurance provision. “Escape” clauses are looked on with disfavor by

courts because they allow an insurer to escape liability altogether when

other insurance applies. See /nsurance Co. of North America v. Conti-

nental Casualty Co., 575 F.2d 1070, 1072 (3d Cir. 1978).

oe ee — . se J

ee

12

PRP. PRP’s main argument on appeal” was that the non-

cumulation clause was not applicable because it was an

“other insurance” clause. Like the Appellate Division, the

New Jersey Supreme Court rejected this argument. All

“other insurance” clauses, the court recognized, apply only

when there are concurrent policies. Their point 1s to allocate

among insurers with potentially overlapping coverage re-

sponsibilities. App. 20a. A non-cumulation clause, by con-

trast, applies when one insurer provides successive policies,

as the court acknowledged. App. 20a. The point of a non-

cumulation clause 1s not to allocate lability among different

insurers, but to fix a limit on the total potential lability of the

single insurer providing successive vears of coverage. App.

20a (‘a non-cumulation clause governs successive policies

and prevents the accretion of limits when the policies have

been tnggered by a single occurrence’).

The Court recognized that the non-cumulation language

was directly relevant to the allocation issue:

| A] non-cumulation clause generally, and Liberty's in

particular, operates to limit an insurer’s lability under

multiple sequential CGL policies where losses related

to a “single occurrence” tngger successive poll-

cies.... What the non-cumulation clause seeks to

avoid is the “cumulation” of insurance policy limits

when only one insured act or ‘occurrence’ 1s involved.

App. 2la. Nonetheless, this Court made an explicit determi-

nation to “look[] beyond contract language and traditional

rules of insurance policy interpretation,” App. 17a, rather

than give effect to the contract language, stating:

In a word, Owens-/ilinois eliminated reliance on par-

ticular contract language (other than limits and exclu-

° While the appeal was pending, Spaulding assigned all of its rights

to coverage to PRP.

13

sions) and on traditional rules of interpretation, and set

forth a uniform standard for resolving allocation issues

in long-tail environmental exposure cases.

App. 19a.

The court held the clause to be void as a matter of law

“because it would thwart the Owens-Illinois pro rata alloca-

tion modality.” App. 22a. That “modality,” the court ex-

plained, “has, at its core, a public policy that favors maxi-

mizing, in a fair and just manner, insurance coverage for

cleanup of environmental disasters.” App. 23a. The court

further explained that if a non-cumulation clause were actu-

ally enforced in accordance with the contract’s terms — in

accordance, that is, with the parties’ specific agreement, nec-

essarily reflected in the cost of the coverage purchased — “‘in-

surers who were actually ‘on the risk’ would be insulated

from their fair share of liability in direct contravention of

Owens-Illinois.” App. 23a. Finally, the court distinguished

the many cases from other jurisdictions enforcing non-

cumulation clauses on the ground that “none of the cases

... Involves the application of the continuous trigger and

pro-rata allocation methodology of Owens-Illinois.” App.

23a-24a.

The court’s conclusion that Owens-Illinois necessarily

rendered the parties’ non-cumulation clause void — and ret-

roactively void at that — could not have been more of a sur-

prise to Liberty. When Liberty issued its first policy to

Spaulding in 1976, it had already “long been the law of

[New Jersey] that the court is bound to enforce the policy as

it is written.” Flynn v. Hartford Fire Ins. Co., 370 A.2d 61.

63-64 (N.J. Super., App. Div.), certif’ denied, 379 A.2d 236

(N.J. 1977). New Jersey courts had been “insistent that clear

basic terms and particular provisions of an insurance contract

may not be disregarded at will and a new contract judicially

made for the parties.” Linden Motor Freight Co., Inc. v.

Travelers Ins. Co., 193 A.2d 217, 225 (N.J. 1963). Accord-

ingly, New Jersey law recognized that “{a]bsent statutory

eerie Ie

fe |

14

prohibitions, an insurance company has the nght to impose

whatever conditions it desires prior to assuming its obliga-

tions and such provisions should be construed in accordance

with the language used.” Kampf v. Franklin Life Ins. Co.,

161 A.2d 717, 721 (N.J. 1960). Owens-Illinois itself cer-

tainly did not deviate from this settled tradition. To the con-

trary, the Owens-Illinois Court acknowledged unequivocally

that “[t]he source of any duty on the part of the Insurance

Companies to defend actions or to pay any judgments is ob-

viously in the contract of insurance.” Owens-Illinois, 650

A.2d at 978 (emphasis added). Indeed, the pnmary “public

policy” the court below identified as at the “core” of Owens-

Illinois — maximization of insurance coverage — was 1n fact

explicitly reyected by the Owens-Illinois court as a sufficient

basis for imposing coverage liability: “A rule of law prem-

ised on nothing more than the result-oriented goal of maxi-

mizing coverage has been described as judicial legislation.

A more consistent principle is required.” Jd. at 981 (internal

quotation marks omitted).

In short, in no pnor case — not Ovens-illinois, nor

Carter-Wallace, nor any other — had the New Jersey Su-

preme Court ever held that a “public policy” of maximiza-

tion of coverage could operate to render an unambiguous li-

ability limitation in an insurance contract null and void. And

certainly no decision had ever done so in a case decided

twenty years after the policies had expired, undoing expecta-

tions settled literally for decades.

Second, leaving the errors of state-law precedent to one

side, the suggestion of the court below that insurers “on the

risk” would be relieved of liability by enforcement of the

non-cumulation clause is wrong — indeed, it is nonsensical.

An insurer can be “on” no more risk than the insurer agrees

by contract to assume. If the insurer and insured agree that

liability will not cumulate over successive policies, the in-

surer’s “fair share of liability” is fixed by that agreement.

There is nothing “fair and just” about “maximizing” Lib-

15

erty’s coverage far beyond the specific maximum set forth in

the parties’ own contract of insurance.

4. Liberty moved for reconsideration. Liberty’s motion

not only explained how the court had badly misread its

precedents, but also specifically raised federal constitutional

issues under the Due Process, Takings, and Contract Clauses

in respect to the court’s ruling declaring the non-cumulation

clause retroactively void. App. 58a-65a. More than two

months later, the court denied the motion for reconsideration.

App. 43a. This petition followed.

REASONS FOR GRANTING THE WRIT

It is common ground on this Court that “an unfair retro-

active assessment of liability upsets settled expectations, and

it thereby undermines a basic objective of law itseif.” East-

ern Enterprises v. Apfel, 524 U.S. 498, 557 (1998) (Breyer,

J., dissenting); see id. at 533 (plurality); id. at 549 (Kennedy,

J., concurring). The retroactive and wholly unforeseeable

nullification of the non-cumulation clause here literally de-

prived-Liberty of due process of law: the court’s decision is

a brazen act of judicial legislation, suspending Liberty’s li-

ability limitation for the openly avowed purpose of increas-

ing the amount of insurance money available for environ-

mental cleanup in the State of New Jersey. If the New Jersey

Legislature had tried to enact as statute the result in this case,

it would have plainly violated fundamental constitutional

constraints intended to protect settled expectations and to

ensure that the lawmaking process does not entirely lose

sight of its “law” component. If courts are bound by fewer

explicit constitutional constraints than are legislatures, it is

only because the Framers quite reasonably presumed that

courts, by their very nature, are always bound by the law — a

system of reasoning and judgment that, while capable of

evolving, does so only by incorporating prior judgments and

building slowly upon itself, with the ultimate goal of protect-

ing and enforcing a system of ordered and reasonable expec-

tations in private affairs. See generally Holmes, The Path of

7 rs

16

the Law, 10 Harv. L. Rev. 457 (1897). If “due process of

law” means anything, it must be this: the traditional process

of reasonably predictable decisionmaking through which

private entitlements are protected and private obligations en-

forced. See Joint Anti-Fascist Refugee Committee v.

McGrath, 341 U.S. 123, 162-63 (1951) (Frankfurter, J., con-

curring) (describing “due process of law” as “a delicate

process of adjustment” that is “compounded of history, rea-

son, the past course of decisions, and stout confidence in the

strength of the democratic faith which we profess”).

The New Jersey Supreme Court departed radically from

that tradition, and thus deprived Liberty of its nght to “due

process of law” in a most literal sense. Not only did the

court wander far into the realm of legislative conduct, it went

farther than even the legislature could ever go, explicitly im-

pairing the obligation of Liberty’s contracts and taking its

property without just compensation. In order to increase in-

surance resources for environmental cleanup in the state, the

New Jersey Supreme Court simply nullified an unambiguous

limitation on the amount of liability Liberty had long ago

agreed to assume for injuries caused by Spaulding. It did so

even though Spaulding had never paid Liberty for the addi-

tional coverage it would now be receiving ($8.5 million in

coverage obviously costs a lot more in premiums than $1

million in coverage), and it did so without providing Liberty

any measure of compensation from the State for the new

public burden of environmental cleanup the court had de-

cided to impose on Liberty and other insurance companies.

In substance, it is exactly as if Spaulding had paid for only

$1,000,000 in coverage for environmental cleanup liabilities,

but the Court nevertheless decided that Liberty should pro-

vide $8,500,000 in coverage, simply because the State would

be better off if Liberty were forced to pay more for the inju-

ries Spaulding had caused.

That is not due process. It is not even law. Certiorari

should be granted.

9

’

2

|

17

I. THE DECISION BELOW VIOLATES THE DUE

PROCESS CLAUSE

The decision of the New Jersey Supreme Court in this

case violates due process in two distinct but related respects.

First, the decision violates the basic constitutional protection

of contractual rights afforded by such provisions as the Con-

tracts Clause, as the principles of that Clause are incorpo-

rated against judicial decisionmaking through the Due Proc-

ess Clause. Second, the decision violates the Due Process

Clause’s more general proscription against the imposition of

unpredictable, severely retroactive civil liability.

A. The Decision Below Violates Liberty’s Fundamen-

tal Rights To Contract, Which Are Protected

From Arbitrary Judicial Impairment By The Due

Process Clause

The decision blatantly impairs the obligation of

Spaulding’s insurance contract with Liberty. That much is

not even in dispute. The square holding and explicit point of

the decision below is to nullify Liberty’s contractually guar-

anteed limitation on the liability it was assuming, so that

more money would be available for environmental cleanup.

The Contracts Clause of the U.S. Constitution states that

“No State shall... pass any ... Law impairing the Obliga-

tion of Contracts.” Although the Clause by its own terms

applies only to legislative enactments, see Tidal Oil Co. v.

Flanagan, 263 U.S. 444, 451 (1924), its basic protection of

existing contractual obligations necessarily applies to judi-

cial decisions under the Due Process Clause; otherwise, the

protection afforded by the Clause would be a virtual dead

letter. Cf Bouie v. City of Columbia, 378 US. 347, 353-54

(1964) (“If a state legislature is barred by the Ex Post Facto

Clause from passing such a law, it must follow that a State

Supreme Court is barred by the Due Process Clause from

achieving precisely the same result by judicial construc-

tion.”).

18

This Court has recognized that contractual rights are

“matters in which predictability and stability are of prime

importance.” Landgraf v. USI Film Prods., 511 U.S. 244,

271 (1994); see id. at 265-66 (“In a free, dynamic society,

creativity in both commercial and artistic endeavors is fos-

tered by a rule of law that gives people confidence about the

legal consequence of their actions.”); Allied Structural Steel

Co. v. Spannaus, 438 U.S. 234, 245 (1978) (“Contracts en-

able individuals to order their personal and business affairs

according to their particular needs and interests. Once ar-

ranged, those nghts and obligations are binding under the

law, and the parties are entitled to rely on them.”). The

Framers shared that view in spades: they considered the

rights explicitly protected by the Contracts Clause “to be

‘perhaps greater securities to liberty and republicanism than

any [the Constitution] contains,” and violations of such

rights to be “contrary to the first principles of the social

compact and to every principle of sound legislation.”” Car-

mell v. Texas, 529 U.S. 513, 521 (2000) (quoting The Feder-

alist, No. 44, at 282 (James Madison), No. 84, at 511 (Alex-

ander Hamilton) (Clinton Rossiter ed., 1961)). They be-

lieved the Clause necessary for at least two reasons: to bar

states from retroactively “changing the relative situation of

debtor and creditor,” Home Building & Loan Ass'n v. Blais-

dell, 290 U.S. 398, 427-28 (1934); see Keystone Bituminous

Coal Ass’n v. DeBenedictis, 480 U.S. 470, 503 (1987) (Con-

tract Clause’s “primary focus was upon legislation that was

designed to repudiate or adjust pre-existing debtor-creditor

relationships that obligors were unable to satisfy.”), and “to

encourage trade and credit by promoting confidence in the

stability of contractual obligations,” United States Trust Co.

v. New Jersey, 431 U.S. 1, 15 (1977). Those basic purposes

would be frustrated just as easily by judicial suspension cf

contractual obligations as by legislative. It follows that

courts must be bound to the essential principles, at least, of

the Contracts Clause through every court’s obligation to pro-

ce ee en eee

thoes

19

vide due process of law, even if courts are not bound to the

letter of the Contracts Clause or to every detail of judicially-

developed doctrine applying the Clause.

There is no doubt that the decision below, were it simply

re-captioned “A Law Passed By The New J ersey Assembly,”

would violate the very essence of the rights protected by the

Contracts Clause — and thus the rights also protected by the

Due Process Clause. The Contracts Clause does not bar the

enforcement of all laws that affect contractual obligations —

inasmuch as virtually all economic legislation may have

some effect on existing contracts — but the Clause does “im-

pose some limits upon the power of a State.to abridge exist-

ing contractual relationships, even in the exercise of its oth-

erwise legitimate police power.” Spannaus, 438 U.S. at 242.

If “the state law has, in fact, operated as a substantial im-

pairment of a contractual relationship,” as opposed to a mere

“[mJinimal alteration,” it is invalid. Jd. at 244-45. Under

this Court’s precedents, an impairment is “substantial”. if the

contracting party “had no reason to anticipate” the impair-

ment, and instead- “relied heavily, and reasonably, on this

legitimate contractual expectation in calculating” its obliga-

tions under the contract. Jd. at 245-46. While a “temporary”

impairment of contractual relationships might not be sub-

stantial, a law that works a “severe, permanent, and immedi-

ate change in those relationships—irrevocably and retroac-

tively,” id. at 250, obviously works a substantial impairment.

The archetypal substantial impairment is one that “nullifies

express terms of the company’s contractual obligations and

imposes a completely unexpected liability” when those obli-

gations are “in an area where the element of reliance [is] vi-

tal.” Jd. at 246-47.

That is exactly what the decision below does. Directly in

the face of the Clause’s most central purpose of barring

States from “changing the relative situation of debtor and

creditor,” Blaisdell, 290 U.S. at 427-28; the decision “nulli-

fies express terms” of the debtor-creditor insurance contract,

20

see Cohen vy. Cohen, 126 N.J.L. 605, 609 (N.J. 1941) (in-

sured-insurer relationship is “clearly that of debtor and credi-

tor’), imposing “completely unexpected liability” and a “‘se-

vere,” “permanent,” “immediate,” and “retroactive” change

in the parties’ contractual relationship. This is all particu-

larly harmful in an industry (insurance) where reliance on

express contract terms is so critical, because the very nature

of the industry depends upon being able to painstakingly

analyze and calculate precise degrees of risk and transform

that analysis into contractual terms. Just as the employer in

Spannaus “made contributions to [its pension] fund based on

actuarial predictions of eventual payout needs,” Spannaus,

438 U.S. at 237, which were obviously based on its contrac-

tual obligations, so too did Liberty rely on actuarial predic-

tions in forming its insurance contracts and determining the

premiums it would charge.’

If the nghts protected by the Contracts Clause mean any-

thing, they must be secure against judicial infringement as

well as legislative. This is not a question of interpretation

committed to the courts, nor a question on the margins of

contract enforcement — a question, say, of unconscionability

or violation of public policy — where the exercise of reason-

able judicial judgment is to be expected. This is a simple

case of a state court refusing to enforce an unambiguous con-

tractual nght, for one reason — to make one party pay much

’ Even a “substantial” impairment may be upheld if it is “necessary”

to serve a “significant and legitimate public purpose.” Keystone Bitumi-

nous Coal, 480 U.S. at 505. Environmental cleanup may be an important

public interest, but the decision below does not even purport to explain

why it is “necessary” to serve that interest by forcing insurers to pay

many times more for cleanup than they ever promised to pay. If those

actually responsible for environmental damage cannot or will not pay for

clean-up, leaving the public with the bill, then the public must pay it —

confiscating resources from individual private parties to pay for per-

ceived public needs is precisely what the Contracts Clause, among other

constitutional provisions, is supposed to bar the State from doing.

21

more than it owes because the public would benefit from the

confiscation. That will not justify state action of any kind,

much less action by a court bound to provide due process of

law. The rights underlying the Contracts Clause are im-

paired not once but twice in this case — first, by failing to en-

force the contract as indisputably written, and second, by

giving force to a substituted contract that the parties never

made, one in which the potential lability for a continuing

occurrence is $8,500,000 rather than $1,000,000.

B. The Decision Below Violates Due Process Because

It Imposes An Unpredictable, Severe And Unfair

Retroactive Insurance Liability

The decision below deprives Liberty of due process be-

Cause it imposes a severe and deeply unfair retroactive civil

liability on Liberty. Even if the Due Process Clause were

not understood as incorporating Contracts Clause principles

per se, the Due Process Clause itself exists more broadly to

protect the same settled expectations the Contracts Clause

protects specifically in the contract setting. As this Court has

recognized, “[e]lementary considerations of fairness dictate

that individuals should have an opportunity to know what the

law is and to conform their conduct accordingly; settled ex-

pectations should not be lightly disregarded.” Landgraf, 511

U.S. at 265. Accordingly, “due process protection for prop-

erty must be understood to incorporate our settled tradition

against retroactive laws of great severity.” Eastern Enter-

prises, 524 U.S. at 549 (Kennedy, J., concurring). “If retro-

active laws change the legal consequences of transactions

long closed, the change can destroy the reasonable certainty

and security which are the very objects of property owner-

ship.” Jd.; see id. at 558 (“To find that the Due Process

Clause .. . protects against an unfair allocation of public

burdens through this kind of specially arbitrary retroactive

means — is to read the Clause in light of a basic purpose: the

fair application of law, which purpose harkens back to the

Magna Carta.”) (Breyer, J., dissenting). And if “an unfair

tb,

retroactive assessment of liability upsets settled expectations,

and ... thereby undermines a basic objective of law itself,”

id. at 558 (Breyer, J., dissenting), it follows that any judicial

decision that upsets settled expectations by imposing an un-

fair retroactive liability on a party necessarily deprives the

party of due process of law itself.

The Due Process Clause’s protection of settled expecta-

tions is manifested in the “core due process concepts” of

“notice” and “foreseeability.” Rogers v. Tennessee, 532 U.S.

451, 459 (2001); see Quill Corp. v. North Dakota, 504 U.S.

298, 312 (1992) (“notice” or “fair warning” is the “analytic

touchstone” of due process analysis); World-Wide Volks-

wagen Corp. v. Woodson, 444 U.S. 286, 297 (1980) (“fore-

seeability” is “critical to due process analysis”). These re-

quirements of course ensure that a State’s actions do not vio-

late the settled, reasonable expectations of its citizens. These

requirements apply to courts no less than to legislatures.

Thus, this Court has held it to be a violation of due process

for a court to assert jurisdiction over a person in the absence

of state contacts sufficient to give the person notice of the

state’s power over him, see Quill Corp., 504 U.S. at 313

(minimum contacts are a “proxy for notice’), to apply a

state’s law to a party’s conduct in violation of the party’s

reasonable expectations, see Phillips Petroleum Co. v.

Shutts, 472 U.S. 797, 822 (1985), and to impose a punitive

damage award beyond what a party might reasonably expect

given other indicators of the wrongfulness of the conduct,

see BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 574 (1996).

It has also held that “limitations on ex post facto decision-

making are inherent in the notion of due process.” Rogers,

532 US. at 456.

The retroactive liability imposed here was imposed with-

Out notice, fair warning, or foreseeability of any kind. From

1976 to 1984, and for the two decades preceding the decision

below, when Liberty assessed its potential liabilities, calcu-

lated premiums, and entered into contracts of insurance, the

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23

law of New Jersey — and every jurisdiction in this country —

was that courts were bound to enforce an insurance contract

as it is written. As a result, when Liberty and Spaulding

agreed to their nine contracts from 1976 to 1984, they had

not the least reason to expect that the non-cumulation clause

clearly fixing Liberty’s total potential liability for continuous

injunies would be nullified by a court twenty years later.

Even if Owens-Illinois or Carter-Wallace had given such

notice — and they assuredly did not — they were not decided

until more than ten years after the last of the contracts ex-

pired.

Where ex post facto laws are by their nature fundamen-

tally unfair when enacted by a legislature, they are likewise

“fundamentally unfair” as the result of judicial rulings.

Whether the governmental actor responsible for the in-

fringement is a legislature or a court is irrelevant: the essen-

tial stability is no less undermined by seven justices in a

courtroom than by a legislature in session. The judicial deci-

sion imposing retroactive liability here is little different in

substance than the federal statute imposing retroactive liabil-

ity in Eastern Enterprises — except that the decision here was

worse from a due process perspective, because it was en-

tirely unforeseeable when the nullified contractual provi-

sions were agreed to by the parties. In Eastern Enterprises,

this Court invalidated a federal law imposing several mil-

lions of dollars of mineworkers’ benefits liability on a coal

company for events that took place 35 years earlier. The

plurality reasoned: “The distance in the past that the Act

reaches back to impose liability on Eastern and the magni-

tude of that liability raise substantial questions of fairness.”

Eastern Enterprises, 524 U.S. at 534. Although the plurality

addressed the problem under the Takings Clause, see id. at

533, Justice Kennedy’s concurrence — which reflected his

decisive fifth vote — explained the same problem in terms of

the Due Process Clause, finding a violation of the Clause be-

cause “in creating liability for events which occurred 35

24

years earlier the Coal Act has a retroactive effect of unprece-

dented scope.” Jd. at 549. And both Justice Kennedy and

the four-Justice plurality recognized that while Congress

might well have a legitimate interest in resolving “the prob-

lem of funding miners’ benefits,” “the Constitution does not

permit a solution to [that] problem .. . that imposes such a

disproportionate and severely retroactive burden upon East-

er.” /d. at 536 (plurality).

So it is here. The decision in this case would fundamen-

tally rework transactions closed between 19 and 27 years

ago. In doing so it would impose millions of dollars in un-

expected liability on one party to those transactions. While a

state may have a legitimate interest in ensuring adequate

funds for environmental cleanup, its supreme court cannot

accomplish this goal by imposing disproportionate and se-

verely retroactive burdens on insurers who took care to nego-

tiate with their highly sophisticated insureds very specific

and unambiguous limits on their liabilities for such cleanup.

The decision below is an affront to the most fundamental

premise of the Due Process Clause — that whatever process a

party may receive, it will in all events be due process of law.

The decision below is not law — it is straight confiscatory

policymaking. If the New Jersey Legislature had attempted

such an act, no court would have allowed it. The fact that a

court itself has attempted it does not mitigate, but exacer-

bates, the constitutional harm. It certainly cannot immunize

the act from constitutional review. Certiorari should be

granted.

Il. THE DECISION BELOW VIOLATES THE TAK-

INGS CLAUSE

The New Jersey Supreme Court’s retroactive imposition

of liability on Liberty also violates the Takings Clause, U.S.

Const. amend V, for essentially the same reasons it violates

due process. “The aim of the [Takings] Clause is to prevent

the government ‘from forcing some people alone to bear

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25

public burdens which, in all fairness and justice, should be

borne by the public as a whole.’” Eastern Enterprises, 524

U.S. at 522 (plurality opinion) (quoting Armstrong v. United

States, 364 U.S. 40, 49 (1960)). That is exactly what the de-

cision below does. As the Eastern Enterprises plurality ex-

plained, governmental action constitutes an impermissible

Taking “if it imposes severe retroactive liability on a limited

class of parties that could not have anticipated the liability,

and the extent of that liability is substantially disproportion-

ate to the parties’ experience.” Eastern Enterprises, 524

U.S. at 528-29. That test is easily met here: as discussed

above, the liability imposed is “severe,” it is “retroactive,” it

is imposed on a “limited class of parties,” it “could not have

[been] anticipated,” and it is “substantially disproportionate

to the parties’ experience” — which experience, after all, was

to negotiate the very liability limitation the decision nullifies.

Certiorari should be granted to rectify the grossly unfair

taking of Liberty’s property effected by the retroactive impo-

sition of millions of dollars of unforeseeable liability on Lib-

erty.

IiIl.THE DECISION BELOW CONFLICTS WITH

OTHER DECISIONS ENFORCING INSURANCE

CONTRACTS CONSISTENT WITH THEIR LAN-

GUAGE

It should come as no surprise that the decision below

conflicts with decisions of other state courts of last resort

holding that contracts, including insurance contracts, must be

enforced according to their terms, unless those terms are un-

conscionable or unlawful. Indeed, decisions from every ju-

risdiction in the United States have made clear that it is not

even within the judicial power, as that power is understood

in our system of law, to rewrite the unambiguous terms of

private contracts, barring fraud, unconscionability, or some

other form of illegality in the agreement. “The judicial func-

tion of a court of law is to enforce a contract as made by the

parties, and not to rewrite or distort, under the guise of con-

26

struction, contracts, the terms of which are plain and unam-

biguous.” Hardee v. Hardee, 585 S.E.2d 501, 503 (S.C.

2003).°

This principle of course applies fully to insurance con-

tracts. As the Michigan Supreme Court recently observed in

refusing to deviate from the terms of an insurance policy, it

is a “bedrock principle of American contract law that parties

are free to contract as they see fit, and the courts are to en-

force the agreement as wnitten absent some highly unusual

circumstance, such as a contract in violation of law or public

policy.” Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776,

782 (Mich. 2003). A “highly unusual circumstance” is not a

court’s professed interest in promoting pollution cleanup in

disregard of the terms of private contracts. In direct contrast

with the New Jersey Supreme Court in this case, the Michi-

gan court recognized the constitutional dimension of the re-

quirement that insurance contracts must be enforced accord-

ing to their terms:

The notion, that free men and women may reach

agreements regarding their affairs without government

interference and that courts will enforce those agree-

ments, is ancient and irrefutable. It draws strength

from our common-law roots and can be seen in our

fundamental charter, the United States Constitution,

* The principle that courts lack authority under our system of law to

disregard the lawful, unambiguous terms of private contracts is so well

settled that a complete list of citations endorsing it would be impossible

to include in any brief. In addition to the cases cited in the text, the fol-

lowing decisions from state courts of last resort on this point were re-

ported in just the last few months: Elliott v. Darwin Neibur Farms, 69

P.3d 1035, 437 (Idaho 2003); Yarcheski v. Reiner, 669 N.W.2d 487, 495

(S.D. 2003); Alpine Haven Property Owners Ass'n, Inc. v. Deptula, 830

A.2d 78, 86 (Vt. 2003); Standard Banner Coal Corp. v. Rapoca Energy

Co., 576 S.E.2d 435, 437 (Va. 2003); Hertz v. Clovis, 578 S.E.2d 391,

395 (W. Va. 2003); Columbia Propane, L.P. v. Wisconsin Gas Co., 661

N.W.2d 776, 783 (Wis. 2003).

———

27

where government is forbidden from impairing the ob-

ligation of contracts of citizens, art. I, § 10, cl. 1.... It

is, in short, an unmistakable and ineradicable part of

the legal fabric of our society.

Id. at 782. Other state supreme court decisions have simi-

larly recognized that, in our constitutional system, courts “do

not rewnte any provision of any contract, including an insur-

ance policy, for any purpose.” Rosen v. State Farm Gen. Ins.

Co., 70 P.3d 351, 353 (Cal. 2003) (alterations omitted); see,

€.g., Aerojet-General Corp. v. Transport Indemnity Co., 948

P.2d 909 (Cal. 1997); Medlar v. Aetna Ins. Co., 248 A.2d

740, 747 (Vt. 1968).

Rosen is especially on point. In that case, the insured

made a claim for the cost of repairing two decks, which liad

been in a state of imminent collapse, despite the fact that

coverage under the policy was expressly restricted to actual

collapse. The California Supreme Court rejected the argu-

ment that notwithstanding the language of the collapse pro-

vision in the insurance contract, public policy mandated that

the insurer afford coverage:

Applying the same logic, with the same lack of re-

straint, courts could convert life insurance into health

insurance. In rewriting the coverage provision to con-

form to their notions of sound public policy, the trial

court and the Court of Appeal exceeded their author-

ity, disregarding the clear language of the policy and

the equally clear holdings of this court.

Rosen 70 P.3d at 355. In so ruling, the court drew an anal-

ogy to earlier rulings addressing coverage for environmental

cleanup in which the court had recognized that “[w]hile we

agree that it is in everyone’s best interests to have hazardous

wastes cleaned up, we do not agree that a California court

may rewrite an insurance policy for that purpose or for any

purpose.” Jd. at 356 (citations omitted).

———— es

28

The decision of the New Jersey Supreme Court in this

case cannot be reconciled with these other decisions, or with

the deeply embedded constitutional principle they endorse.

IV.THIS CASE IS EXTREMELY IMPORTANT TO

INSURERS AND INSUREDS IN NEW JERSEY

AND ELSEWHERE

This case is not a minor or commonplace contractual dis-

pute between insurer and insured. The decision below alone

means the difference between $1 million and $8.5 million in

potential liability for Liberty. But there is much more to it

than that. Non-cumulation clauses are a commonplace fea-

ture of Liberty’s policies. Because no court had ever sug-

gested that such clauses are simply void, for literally decades

Liberty sold policies to insureds in New Jersev that included

this important cap on Liberty’s potential liability. The deci-

sion below nullifies the coverage limitation — the essence of

the bargain — in every one of those contracts as it applies in

continuous injury situations. Potentially scores of millions

of dollars are at stake.

This Court has previously acknowledged the enormous

costs and virtually inherent unfairness of retroactive insur-

ance liability:

[I]nsurance depend{s] on the accumulation of large

sums to cover contingencies. The amounts set aside

are determined by a painstaking assessment of the in-

surer’s likely liability. Risks that the insurer foresees

will be included in the calculation of liability, and the

rates or contnbutions charged will reflect that calcula-

tion. The occurrence of major unforeseen contingen-

cies, however, jeopardizes the insurer’s solvency and,

ultimately, the insureds’ benefits. Drastic changes in

the legal rules governing pension and insurance funds,

like other unforeseen events, can have this effect.

City of Los Angeles v. Manhart, 435 U.S. 702, 721 (1978).

Manhart involved the retroactive application of a federal re-

Bannan ss Me

re

ya

regulatory statute affecting insurance funds, not a statute or

court decision retroactively nullifying a fundamental liability

limitation in an insurance contract. But its recognition of the

inequities and hidden costs of imposing retroactive insurance

liability of any kind is directly applicable here.

The costs and unfairness do not affect Liberty alone.

Non-cumulation clauses are ot provisions secretly or

uniquely devised by Liberty. They are a commonplace fea-

ture of policies sold by many other insurers as well. The

court below well understood that it was not imposing a spe-

cial burden on Liberty alone — it was tapping the resources of

every insurer with a policy in New Jersey limiting its liabil-

ity over successive contracts. The more coverage, the better,

the court explicitly held.

In short, the Due Process Clause and Takings violation

that occurred here will not affect just this one insurer in this

one case. It will affect many other insurers in many other

cases. The retroactive effect of the law across the industry

will be enormous.

This case is thus an appropriate vehicle through which to

remind state courts that, while the common law may be ca-

pable of evolving, at bottom courts must always remain

courts of law. Review and reversal here need not draw this

Court into endless battles over claimed error in state-law

contractual disputes. As we have explained, the error here is

of a qualitatively different kind: whether or not the court

below was correct in its reading of prior precedents, what

cannot be disputed is that the decision (1) nullifies an unam-

biguous contractual provision, (2) does so retroactively, and

(3) in a manner that was wholly unforeseeable at the time,

now more than twenty years ago, that the contracts were en-

tered into. The asserted error, in other words, is not one of

State law; indeed it is just the opposite. Liberty does not dis-

pute that the New Jersey Supreme Court, as the final arbiter

of New Jersey state law, is entitled to interpret contracts in

accordance with its well-settled principles of contract inter-

30

pretation. But an approach in which judges divine a public

policy and then rewrite contracts made years earlier is an-

tagonistic to due process of law. If New Jersey law allows a

court to refuse to enforce an unambiguous insurance liability

limitation simply to increase the insurance dollars available

for environmental cleanup, then application of that New Jer-

sey law to Liberty deprives Liberty of due process and takes

its property without just compensation.

Because it is the rare court that departs so fundamentally

from the basic precepts of law that govern all courts, it is the

rare petition for certiorari in a contract dispute, otherwise

governed by state law, that presents — or ever would present

— a meritorious federal constitutional claim. Recognition of

that claim here thus would ultimately have the salutary effect

of minimizing the number of petitions claiming such error,

for reversal of the decision below would serve as a potent

reminder to all state courts that they must continue, as they

largely have for centuries, to respect the boundaries of their

critically important role as arbiters of law in our constitu-

tional order.

CONCLUSION

For the foregoing reasons, the petition should be granted.

Respectfully submitted,

JONATHAN D. HACKER JOHN C. SULLIVAN

O’MELVENY & MYERSLLP (Counsel of Record)

1625 Eye Street, N.W Post & SCHELL PC

Washington, D.C. 20006 Four Penn Center

(202) 383-5300 . 1600 John F. Kennedy Boulevard

Philadelphia, Pennsylvania 19103

(215) 587-1000