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By David A. O’Neill, J.D.

The Indiana Supreme Court reached its decision in National Union Fire Insurance Company of Pittsburgh, PA et al. v. Standard Fusee Corp. on December 29, 2010.  In its soon to be published opinion, the Court announced its decision to overturn the Court of Appeals ruling that Indiana law governed the interpretation of general liability insurance policies in environmental remediation proceedings involving Standard Fusee sites in multiple states.

Given that Indiana insurance law concerning an insurer’s duty to defend is notoriously more policyholder friendly than that of most states, the “intimate contacts” rule outlined in the Supreme Court’s decision can be expected to discourage corporations with environmental contamination sites in Indiana and in additional states from bringing declaratory judgment actions in Indiana courts.  This is because the location of the contaminated property will no longer be the predominant factor in determining which state’s law the court will use to interpret the policies under which defense or indemnity for the characterization and remediation of the pollution is sought.

Standard Fusee is a manufacturer of emergency signaling flares that was incorporated in Delaware and headquartered in Maryland.  At relevant times, it had facilities in Maryland, Indiana, California and three other states.  When Standard Fusee tested its Indiana facility in 2004, the results showed potential perchlorate contamination.  It then turned to its insurers for defense and indemnity for its expenditures for environmental engineering activities required by the Indiana Department of Environmental Management.  When its insurers denied that they had a duty to defend or did not respond to its notice of claims, Standard Fusee filed an action seeking declaratory judgment.  In 2006, it sought partial summary judgment that Indiana law governed interpretation of the policies and therefore that the insurers had a duty to defend.  The trial court granted partial summary judgment on those grounds.

Whereas the trial court had reached its judgment by considering a number of factors listed in the Restatement (Second) of Conflict of Laws (1971), the Supreme Court determined that “in analyzing the respective contacts with Indiana and Maryland, the trial court in this case found that four of the five factors were inconclusive but that one factor, the place of performance, clearly pointed to Indiana.”

The Court of Appeals reversed the trial court’s decision that Indiana law governed and opted instead for a “site-specific” approach whereby Indiana law governed the interpretation of the policies with respect to the Indiana site and California law governed with respect to the California sites.  The Supreme Court found that the Court of Appeals had favored the “site-specific” approach in order to avoid considering the factors listed in the Restatement (Second). 

Preliminary to deciding whether Standard Fusee Corp.’s insurers had a duty to defend it in environmental remediation proceedings, the Supreme Court considered the threshold choice-of-law issue.  In doing so, the Court considered the “site-specific” approach that the Court of Appeals had taken in reaching its decision. It found that the Court of Appeals had “insufficient justification” for rejecting Indiana’s long-standing adherence to the “uniform contract interpretation” approach in deciding choice-of-law issues.

The Supreme Court’s opinion states that its concern in contracts cases had long been to determine which state was “in most intimate contact with the facts.”  Recalling the rule in W.H. Barber Co. v. Hughes, 223 Ind. 570, 63 N.E.2d 417, 423 (1945), it quoted the opinion in that case as stating “The court will consider all acts of the parties touching the transaction in relation to the law governing the several states involved and will apply as the law governing the transaction, the law of that state with which the facts are in most intimate contact.”  This rule, it found was consistent with the approach that was later taken by the Restatement (Second) of Conflict of Laws.

The five contacts to be used in determining which state’s law applied are listed in the Restatement (Second) as “(1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties. 

Considering that both Maryland and Indiana had but one site each in the mix, the Court determined that neither state had the largest number of insured sites.  The Court found however that the fact that the insured had a headquarters in Maryland made Maryland that company’s principal location and since that headquarters was the location of one of the sites, Maryland was the principal location of the insured risk.  While none of the insurers were headquartered in Indiana or Maryland, the brokers handling the transaction were headquartered in Maryland and the policies were written and the premiums paid in Maryland.  Lastly, the Court determined that the place of performance (“where the funds would be used”) was not exclusive to Indiana because they would also be spent to remediate California sites. 

The Court recalled its decision in Coachman Industries, 838 N.E.2d at 1181 for the rule that while none of the factors were by themselves determinative, the “overall number and quality of contacts” favored Maryland over Indiana.  The Court stated its holding:  “As the state in most intimate contact, we hold that the substantive law of Maryland applies to the entire dispute.”  It concluded that because Maryland was the state in most “intimate contact,” it reversed the trial court and remanded the case back to the trial court for the application of Maryland law to the entire dispute.

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