American Motorists Insurance v. ARTRA Group, Inc.
338 Md. 560, 1995 Md. LEXIS 81, 659 A.2d 1295 (1995)
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Rule of Law:
Under the doctrine of renvoi, a Maryland court will apply Maryland substantive law to a contract, despite the rule of lex loci contractus, if the state where the contract was made would apply Maryland law under its own choice-of-law principles and Maryland has a substantial relationship to the contract issue.
Facts:
- ARTRA Group, Inc. ('ARTRA') and its predecessors owned and operated a paint manufacturing factory in Baltimore City, Maryland (the 'Hollins Ferry Site').
- American Motorists Insurance Company ('American Motorists'), headquartered in Illinois, issued a series of general liability insurance policies to ARTRA, which was also headquartered in Illinois.
- All insurance policies were countersigned on behalf of American Motorists in Illinois, making it the place of contracting.
- The policies contained a pollution exclusion clause, which denied coverage for property damage from pollutants unless the 'discharge, dispersal, release or escape is sudden and accidental.'
- In 1980, ARTRA sold the Hollins Ferry Site to Sherwin-Williams Company ('Sherwin-Williams').
- The Maryland Department of the Environment later required Sherwin-Williams to remediate hazardous waste contamination at the site.
- In 1991, Sherwin-Williams sued ARTRA, alleging that numerous spills and releases of hazardous substances occurred regularly and continuously during ARTRA's ownership as part of normal plant operations.
- ARTRA sought defense and indemnification from American Motorists under its insurance policies for the Sherwin-Williams lawsuit.
Procedural Posture:
- American Motorists filed a complaint for declaratory judgment against ARTRA in the Circuit Court for Baltimore City, a state trial court.
- The trial court granted summary judgment in favor of American Motorists, ruling that Maryland law applied via the doctrine of renvoi and that the pollution exclusion barred coverage.
- ARTRA, as appellant, appealed the decision to the Court of Special Appeals of Maryland, an intermediate appellate court.
- The Court of Special Appeals reversed, holding that strict lex loci contractus applied, meaning Illinois law governed, and that a potentiality of coverage existed under either state's law.
- American Motorists, as petitioner, successfully petitioned for a writ of certiorari from the Court of Appeals of Maryland, the state's highest court.
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Issue:
Does Maryland's choice-of-law doctrine of lex loci contractus require application of a foreign state's substantive law when that foreign state's own choice-of-law rules would apply Maryland substantive law to the dispute?
Opinions:
Majority - Chasanow, J.
No. Maryland's lex loci contractus rule does not require application of a foreign state's substantive law when that state's own choice-of-law rules would refer back to Maryland law. The court adopts a limited form of renvoi, holding that where the place of contracting (Illinois) would apply Maryland law under its own 'most significant relationship' test, a Maryland court will apply Maryland substantive law. The court assumes Illinois would apply Maryland law because the insured risk (the polluted site) is located in Maryland. Applying Maryland law, the court interprets the term 'sudden' in the pollution exclusion clause to have a temporal meaning, signifying an event that is abrupt and quick. The underlying complaint alleges pollution occurred gradually and continuously over many years as part of regular business operations, which does not constitute a 'sudden' event. Therefore, the pollution exclusion applies, there is no potentiality of coverage, and American Motorists has no duty to defend or indemnify ARTRA.
Dissenting - Raker, J.
Yes. The court should adhere to the established, predictable rule of lex loci contractus and apply the substantive law of Illinois, where the contract was made. The majority's adoption of the renvoi doctrine is an unwarranted departure from precedent that will introduce uncertainty and confusion into Maryland's choice-of-law jurisprudence. The doctrine of renvoi has been widely criticized and rejected. Furthermore, the dissent questions the majority's foundational assumption that an Illinois court would actually apply Maryland law, suggesting Illinois law would likely govern.
Analysis:
This decision marks a significant evolution in Maryland's conflict of laws jurisprudence, moving away from the rigid, traditional rule of lex loci contractus. By adopting a limited renvoi exception, the court embraces a more flexible approach that seeks to resolve 'false conflicts' and achieve uniform outcomes regardless of the forum. This holding signals a willingness to consider modern choice-of-law theories, like the 'most significant relationship' test, at least indirectly. The case establishes a new precedent for contract disputes in Maryland, requiring courts to look not only at where a contract was made but also at the choice-of-law rules of that jurisdiction before applying foreign substantive law.
