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Supreme Court Re-Shifts Burdens of American Home Products, Then Refuses to Defer to First-Filed Action in a State Whose Insurance Law is Less Favorable In Awarding Coverage to Polluters

The Supreme Court delivered a one-two punch in last week’s decision in Sensient Colors, Inc. v. Allstate Ins. Co., et al., __ N.J. __ (2008), Docket No. A-99/100/101-06 (Jan. 29, 2008). First, it revamped the rules for determining the comity stay. Then, applying those rules, it held that a second-filed action should proceed in New Jersey, in part because the polluting policyholder might be less able to obtain insurance reimbursement for the cost of cleanup of its contaminated property in South Jersey if the action were adjudicated in New York under New York law.

Revising The American Home Products Test

In the battle of the forums (or fora if you remember your Latin), the long-standing general rule has been that courts defer to the first-filed action, unless a party can overcome the first-filed presumption and demonstrate the action should be adjudicated in the second-filed forum based on the particular circumstances of the case. For more than 10 years, American Home Products Corp. v. Adriatic Ins. Co., 286 N.J. Super. 24 (App. Div. 1995), has provided the guiding framework on the first-filed doctrine. In its first opportunity to review the American Home Products analysis, the New Jersey Supreme Court modified the Appellate Division’s paradigm.

American Home Products established a three-prong test to determine whether a court should defer to a first-filed action or retain jurisdiction over a subsequently filed suit. Under this test, a party moving for a comity stay or dismissal of a second-filed action in New Jersey has to establish that: (1) there is a first-filed action in other state; (2) both cases involve substantially the same parties, claims and legal issues; and (3) the plaintiff in the second-filed action will have the opportunity for adequate relief in the first-filed jurisdiction. American Home Products, 286 N.J. Super. at 37. Once these are established, the burden shifts to the other party who must demonstrate special equities for allowing the second-filed action to proceed. Id.

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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.
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