Oral Argument Before NJ Supreme Court in Sensient Colors v. Allstate
On October 7, 2007, the New Jersey Supreme Court heard oral argument in the matter of Sensient Colors, Inc. v. Allstate Ins. Co., et al. on the issue of whether a Complaint filed by an insured in New Jersey for environmental coverage for a New Jersey site, although filed after the insurer filed a similar action in New York, should proceed.
I. Factual and Procedural History
Following the receipt of a PRP letter from the EPA and a suit by a neighboring property owner for cleanup of environmental contamination arising from the insured’s Camden, New Jersey site, the insured (Sensient) put its insurers on notice. Zurich had issued a reservation of rights letter, but it then filed a declaratory judgment action in New York state court. Zurich is a New York company, and the policies were brokered by a New York broker. Sensient is also a New York company, with its principal place of business in Missouri. Zurich subsequently amended the NY complaint to include additional insurers. Less than two months later, Sensient filed its own declaratory judgment action in New Jersey state court, adding a claim against the New Jersey Property-Liability Insurance Guaranty Association (”NJPLIGA”) and alleging that Zurich had breached the implied covenant of good faith and fair dealing. Sensient moved to dismiss the New York action, which the New York court denied, and Zurich moved to dismiss the New Jersey case.
The New Jersey trial court granted Zurich’s motion to dismiss on comity grounds, deferring to the first-filed action in New York. Sensient appealed, and the Appellate Division reversed, finding that the two actions were not substantially similar because NJPLIGA could not be sued in New York and New York does not recognize a cause of action for breach of the implied covenant of good faith and fair dealing. The Appellate Division further reasoned that even assuming that the two actions were substantially similar, the trial court had erred in not considering special equities that justified not deferring to the first-filed action, namely the fact that the site was located in New Jersey and the state had a paramount interest in the health and safety of its citizens and making sure there are funds for remediation of waste sites in furtherance of that public policy.
II. The Supreme Court Hearing
Zurich appealed the ruling of the Appellate Division, contending that the court erred in not finding a substantial similarity between the two actions and by not placing the burden on Sensient - the plaintiff in the second-filed action - to show compelling special equities to overcome the comity interest of deferring to the first-filed action. Liberty Mutual joined Zurich on the appeal and argued that the Court should not mechanically apply special equities factors to conclude that the location of a waste site in NJ automatically leads to the conclusion that the case should proceed in NJ. Sensient argued that the Appellate Division did not commit any errors and correctly reversed the trial court.
During oral argument, the New Jersey Supreme Court focused on the methodology for applying the comity formula that had been established by the Appellate Division in American Home Products Corp. v. Adriatic Ins. Co., 286 N.J. Super. 24 (App. Div. 1995). The Court noted its concern about developing the appropriate burden and the correct placement of that burden when a court performs a comity analysis pursuant to American Home Products. The Court considered this approach as follows:
(1) The first prong under American Home Products is that there is a first-filed action in another state. This burden should be placed on the defendant in the second-filed (New Jersey) action (here, Zurich).
(2) The second prong under American Home Products is that both cases involve substantially similar parties, claims and legal issues. This burden also should lie with the defendant in the second-filed action.
(3) The third prong under American Home Products is that the plaintiff in the second-filed action (here, Sensient) will have an opportunity for adequate relief in the prior jurisdiction. The Court noted that under American Home Products, this burden also lies with the defendant in the second action.
Under American Home Products, if a defendant (in the second-filed action - presumably the defendant in the New Jersey case) establishes these requisites, it has shown clear entitlement to comity-stay relief and a stay of the second action should be granted unless the plaintiff (in the second action) shows special equities.
The Court’s concern, however, was whether the burden of demonstrating the third prong - i.e., that the plaintiff in the second-filed action has an opportunity for adequate relief in the prior jurisdiction - is improperly placed. The Court questioned whether this burden is more appropriately placed on the plaintiff in the second-filed action (here, Sensient). The Court reasoned that by placing the burden on the defendant, as it is for the first two prongs, the defendant is in the awkward position of having to argue that that the plaintiff has an opportunity for relief as a defendant in the first-filed jurisdiction and to lose there.
Sensient disagreed with the Court’s suggestion that it should bear the burden of the third prong, contending that second and third prongs were intertwined and could not be separated. The Court, however, did not seem to accept Sensient’s theory.
In the context of the burden-shifting discussion, the Court hinted that it might clarify the American Home Products requirement for the third prong and state that it does not have to be shown that there is a remedy in the prior jurisdiction but that a remedy, if one is justifiable under the circumstances, is adequate.
The Court briefly inquired as to the difference between the New York and New Jersey cases in that there is no analogous contractual claim in New York for breach of the covenant of good faith and fair dealing and queried if the cases were truly substantially similar. Zurich responded that the bad faith claim was only brought against Zurich, who was still defending Sensient, and that adding a meritless claim to destroy similarity should not be countenanced. The Court did not respond to this argument. Further considering the similarity of the two actions, the Court noted that if the New Jersey case were stayed in favor of the New York action, Sensient could always file an action against NJPLIGA alone after the New York litigation concluded for whatever NJPLIGA’s liability would be for standing in the shoes of insolvent insurers.
Tags: bad faith, comity, declaratory judgment, first-filed action, insurance