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OLIN CORP. v. INS. CO. OF NORTH AM.

August 2, 1990

OLIN CORPORATION, PLAINTIFF,
v.
INSURANCE COMPANY OF NORTH AMERICA, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Sand, District Judge.

OPINION

Plaintiff Olin Corporation ("Olin") seeks in this action, inter alia, a declaratory judgment that various defendant insurance companies have a duty to defend and indemnify Olin in connection with certain events involving mercury contamination allegedly caused by Olin's former chlor-alkali plant in Saltville, Virginia. See First Amended Complaint, ¶¶ 60-65, 82-85 (Counts IV and VII). We consider now the motions for partial summary judgment brought by Olin's primary and excess insurance carriers on the grounds that Olin breached the notice provisions of the various insurance policies by providing late notice as a matter of law. We grant those motions.

Background*fn1

From 1954 to 1972, Olin and its predecessors operated a chlor-alkali plant in Saltville, Virginia that produced chlorine from salt using a mercury cell process. As part of that process, mercury-contaminated wastes were deposited into muck ponds and later seeped into the immediately adjoining North Fork of the Holston River.

In 1970, the Virginia State Water Control Board ("VSWCB") and the Virginia State Health Department conducted fish and sediment sampling in the Holston River and discovered mercury contaminations in excess of the FDA-approved limit. As a result, Virginia placed a ban on fishing in the North Fork. Olin also received correspondence from environmental groups in 1970 expressing concern over mercury discharges.

In 1972, Olin closed its Saltville plant and donated most of the land, other than the settling ponds, to the State of Virginia and the Town of Saltville. As part of its deed of gift, Olin agreed to demolish the chlorine plant, to deed the settling ponds to the Town of Saltville at a later date, to "remove the soil along the river bank between the river and the building and [to] cover the area completely with fresh soil," and to give the Town of Saltville $600,000 over the next four years for a "Planning, Salvage, Reclamation and Development Project" and the "Town Operating Budget." Olin continued to monitor the mercury contamination in the river on a monthly basis and in 1975 recorded an unexplained increase in mercury levels. In June 1975, the VSWCB required Olin to obtain a permit imposing limitations and requirements on the continuing mercury "discharges" from the muck ponds.

At Olin's request, Hunton & Williams, a Virginia law firm, prepared a 86-page memorandum dated October 6, 1976 analyzing Olin's "potential liability" for "past and continuing `discharges' of mercury." The memorandum concluded that notwithstanding Olin's conveyance of the plant site to the Town of Saltville, "Olin could probably be held liable under common law nuisance theory, the Refuse Act, and the Virginia SWCL [State Water Control Law] for the mercury pollution in the North Fork of the Holston River and the `discharges' from the chlor-alkali plant site."

In March 1978, Hunton & Williams provided Olin with a supplemental memorandum "to enable Olin to assess its potential exposure and liability in the threatened proceedings by the State Water Control Board and in any other proceedings arising out of the [Saltville] situation." (emphasis supplied). That analysis concluded:

    Olin may be liable under several theories for
  the mercury and TDS discharges from the muck
  ponds. If the muck ponds are significantly
  contributing to the mercury or TDS pollution in
  the river, Olin is probably liable for a public
  and private nuisance under federal common law
  (depending on whether the pollutant discharges
  affect Tennessee waters).

  The fact that the FDA mercury standard for fish
  and the TDS water quality standard are being
  violated is probably sufficient interference with
  the use and enjoyment of the river to constitute
  a nuisance. And a court may apply a per se nuisance
  theory in which case the violations of the
  standards, without regard to actual effects on
  public uses, would be sufficient evidence to prove
  a nuisance (assuming that the muck ponds
  contributed to the violations). . . .
    Olin appears to be liable under the Federal
  Water Pollution Control Act (FWPCA), the Refuse
  Act and the State Water Control Law (SWCL) for
  discharging from a point source (i.e., the
  outfalls) without a permit.
    Olin's potential liability for mercury
  discharges into the Holston River under the
  nuisance theory may have increased since 1976 as
  a result of (a) increased quantities of mercury
  which have entered the river and (b) more
  stringent regulatory standards which could make
  Olin's discharges a nuisance per se.

The supplemental memorandum noted that "[t]here are several recent statutory developments which, while not yet effective, will increase Olin's potential liability in the future," pointing to the amendments to the FWPCA which "provide for the recovery of costs up to $50 million for cleanup and mitigation of discharges of hazardous substances." The memorandum also stated: "Olin will likely be subject to requirements under the Resource Conservation and Recovery Act (RCRA) once EPA promulgates regulations implementing the Act. The muck ponds probably constitute hazardous waste facilities which, under EPA's draft regulations for ponds and lagoons, must meet stringent standards." As to the size of Olin's potential liability, the memorandum stated that the EPA draft standards require that "liners be used for hazardous waste ponds which prevent seepage of wastes from the facility" and that under a nuisance theory, "a court may be willing to impose such drastic measures as ordering Olin to seal the muck ponds to prevent seepage or, alternatively, allowing the state to carry out such measures and requiring Olin to reimburse the costs."

Starting in 1978, an interagency task force, comprised of the VSWCB, the Virginia State Attorney General's Office, the Virginia and Tennessee Departments of Public Health, the Tennessee Valley Authority, and the United States Environmental Protection Agency ("EPA"), conducted several detailed studies to assess the existence and extent of mercury contamination of the North Fork. Initially, Olin was not cooperative, and "the State threatened legal action for damages and cleanup of the site." See Affidavit of Paul R. Koepff dated January 9, 1990 ("Koepff Aff."), Ex. 5 at 31. Then, starting in 1979, Olin, with the concurrence of the Task Force, instituted a multi-phase mercury abatement and monitoring program. In October 1979, Olin rip-rapped the bank at the old plant site to stop the continuing erosion; that project cost $400,000. See id. at 32. During the summer of 1982, Olin rip-rapped a portion of the river bank downstream, adjacent to muck pond 5; that project cost $240,000.

The undisputed facts indicate that Olin was aware of the potential high costs of remediation. In late 1980, Olin estimated that it would cost $25 to $30 million to remove the mercury from pond 5 and dispose of it in a secure landfill. See Koepff Aff., Ex. 5 at 15. In an October 1982 memorandum, the Task Force discussed several abatement alternatives, including "the total removal of all contaminated soils and muck with proper burial at an approved disposal site" at a cost of over $210 million. See Koepff Aff., Ex. 5 at 34. Although that alternative was rejected, partly because of its high cost, Olin was informed of the potential magnitude of the clean-up problem.

During 1982, Olin and the Task Force drafted and negotiated a consent decree setting forth Olin's cleanup and remediation obligations. See Affidavit of E. McIntosh Cover dated March 15, 1990 ("Cover Aff."), Ex. 38. Olin agreed to (1) construct a diversion ditch to reduce the surface water runoff from the muck pond, (2) dredge portions of the river bed to reduce mercury sediments, and (3) monitor the mercury levels in fish and waterways for five years. Id. That order recited that Olin had already spent approximately $1.8 million and had budgeted an additional $3.2 million to complete the prescribed work. The order, moreover, explicitly did not release Olin from future liability:

  [T]he Board reserves the right to initiate
  appropriate judicial action to abate any
  substantial and imminent endangerment to the
  public health or the environment that exists,
  arises, or may come to its attention because of
  the presence of mercury related to Olin's former
  operations at Saltville.

The EPA had been involved with the Task Force negotiations that began in 1978 and had concurred with the 1982 Consent Decree. However, in 1982, the EPA began to take independent action against Olin. In the Spring of 1982, Olin "learned informally" that Saltville would be included on the CERCLA list of most hazardous sites and in October 1982, "learned more definitely that Saltville would be listed." See Koepff Aff., Ex. 12. By letter dated January 17, 1984, the EPA notified Olin that "[t]he old Olin site in Saltville, Virginia has been included by the EPA on the National Priorities List of Superfund sites" and enclosed a draft Remedial Action Master Plan (RAMP) for Olin's comments. See id., Ex. 13. The EPA issued the final RAMP in July 1984, which identified a range of possible long-term remedial measures from no action to any combination of the following remedial alternatives: surface capping, groundwater barriers, chemical stabilization, groundwater collection and treatment and/or surface water diversion and collection. See id., Ex. 2. On June 30, 1987, the EPA issued its Record of Decision which recommended "upgradient storm water control by construction of ditches, berms and swales and detoxification of contaminated material in art onsite pond." See Koepff Aff., Ex. 15 at 100.

Olin also annually informed its outside auditors of the Saltville mercury problem. In a December 1980 memorandum to its auditors, Olin classified the Saltville problem as "threatened litigation or administrative proceedings involving $1,000,000 or more." See Reply Affidavit of Paul R. Koepff dated April 30, 1990 ("Koepff Reply Aff."), Ex. 37. Olin again told its outside auditors in December 1981 that the Saltville claims constituted "threatened litigation." See Koepff Reply Aff., Ex. 38. In its January 1982 report, Olin told its auditors: "At one time, [the Saltville] matter was close to litigation. Current expectations are that the matter will ultimately be settled through administrative negotiations [with the Task Force]." See Koepff Reply Aff., Ex. 39.

Notice to Olin's Insurers

On March 31, 1983, Olin wrote to its insurance broker, Johnson & Higgins, "to advise that Olin is hereby making a claim to its primary and excess insurers for indemnification in respect of property damage arising out of the escape of mercury from its mercury cell chlor-alkali plant . . . in Saltville, Virginia." See Koepff Aff., Ex. 9. That letter explained that "[f]or a substantial period of time, Olin has been negotiating with various federal and state agencies on how to address the problem." Olin stated that in response to threatened litigation by the Task Force, it undertook a variety of remedial projects that cost $4,580,000. Olin's letter was forwarded by the insurance broker to Olin's primary and excess insurers by cover letter dated April 12, 1983. See id. Olin filed this action for declaratory judgment on July 1, 1983.

Choice of Law

Federal courts sitting in diversity jurisdiction must apply the choice of law rules of the forum state. Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). New York law requires courts to apply the law of the jurisdiction "which has the most significant contacts with the matter in dispute." Auten v. Auten, 308 N.Y. 155, 160, 124 N.E.2d 99 (1954); Fleet Messenger Service, Inc. v. Life Ins. Co. of N. America, 315 F.2d 593, 596 (2d Cir. 1963) (applying Auten to an insurance contract). In cases involving insurance contracts, New York courts have looked principally to the following factors: the location of the insured risk; the insured's principal place of business; where the policy was issued and delivered; the location of the broker or agent placing the policy; where the premiums were paid; and the insurer's place of business. See Golotrade Shipping & Chartering, Inc. v. Travelers Indem. Co., 706 F. Supp. 214, 218 S.D.N.Y. 1989) (principal place of business of insured; location of insurance broker; where policy delivered; where premiums paid); Ethicon, Inc. v. Aetna Casualty and Surety Co., 688 F. Supp. 119, 123-24 (S.D.N.Y. 1988) ("state which the parties understood would be the principal location of risk"; where policies issued; principal place of business and state of incorporation of the insured); McGinniss v. Employers Reinsurance Corp., 648 F. Supp. 1263, 1267 (S.D.N.Y. 1986) (residence of insured; place where policy issued); American Re-Insurance Co. v. SGB Universal Builders Supply, Inc., 141 Misc.2d 375, 532 N.Y.S.2d 712, 715 (N.Y. Sup. Ct. 1988) (where policy issued, delivered and paid for; location of agent).

Here, the risks covered by the insurance policies were not confined to any one principal location. Over the entire period from 1955 to 1974, the negotiations, underwriting, issuance, execution and delivery of the various policies took place in New York. See Koepff Aff., ¶ 36 & Ex. 16; Affidavit of Bernard A. Buge, Jr. dated April 27, 1990 ("Buge Aff."), ¶ 10; Hanover's Reply Memorandum in Support of its Motion for Partial Summary Judgment at 5-6. Prior to 1970, Olin was headquartered in New York City; after 1970, Olin maintained offices in New York City. Olin's insurance broker, Johnson & Higgins, is located in New York. Olin only argues that since it moved its principal place of business to Connecticut, in 1970, Connecticut has more significant contacts since any recovery will flow to Olin in Connecticut. However, other courts have applied New York law to disputes involving insurance contracts even though the insured's principal place of business was located outside of New York. See International School Services, Inc. v. Northwestern Nat'l Ins. Co., 710 F. Supp. 86, 88-89 (S.D.N.Y. 1989) (insured's principal place of business was New Jersey; contract negotiated and entered into in New York); Schering Corp. v. Home Ins. Co., 544 F. Supp. 613, 618 (E.D.N Y 1982), rev'd on other grounds, 712 F.2d 4 (2d Cir. 1983) (policies issued and signed in New York; insurer's principal place of business is New York); Parlato v. Interport Trucking Co., 540 F. Supp. 1051, 1053 (E.D.N.Y. 1982) (insured was New Jersey corporation; broker resided in New York; insured maintained office in New York). We find that for each of the insurance policies involved in this dispute, the significant aspects of contract formation and performance occurred in New York. New York has the most significant contacts with the dispute, and we will apply New York law.

Moreover, we note that Olin did not raise this choice of law issue in connection with the prior motion practice in this case. Olin previously relied on New York law in its papers submitted to this Court, and this Court's prior decision was based on New York law. See Olin Corp. ...


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