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CPC Int'l, Inc. v. Aerojet-General Corp.

ELR Citation: 24 ELR 20424
Nos. Nos. 1:89-CV-503, -961, 825 F. Supp. 795/(W.D. Mich., 05/21/1993) Ins. coverage

Applying Michigan law to an insurance dispute, the court adopts the doctrines of known-risk and loss-in-progress, and denies coverage because the insured's environmental director knew or reasonably should have known of a substantial probability of a loss caused by groundwater contamination at the site before the policy periods began.

The court first holds that Michigan law governs the dispute. The court notes that the insurance contracts at issue did not include choice-of-law provisions and holds that, in a diversity case, it must apply the choice-of-law rules of the state in which it sits. In Michigan, the nature and effect of a contract are determined by the law of the place of occurrence of the last act necessary to make the contract a binding agreement, as set forth inthe Restatement (First) of Conflict of Laws. Because the parties were bound by the insurance contracts at issue before they were countersigned, the court distinguishes cases that hold countersigning to be the last act necessary to make an insurance contract. Further, the court holds that the Michigan Supreme Court would not mechanically apply the place-of-contracting rule if faced today with deciding choice-of-law in a case of such factual complexity, but instead would adopt the most-significant-relationship test of the Restatement (Second) of Conflict of Laws and would consider the location of the insured's contaminated site to be the most important factor in applying the test. The contaminated site is located in Michigan; accordingly, Michigan law governs interpretation of the insurance contracts at issue.

Next, the court adopts the known-risk and loss-in-progress doctrines, under which, respectively, a loss is uninsurable when the insurer knew or should have known of a substantial probability of loss before the contract period began, and no part of a loss may be insured when the loss was already in progress before the contract period began. Under Michigan law, knowledge acquired by corporate employees within the scope of their employment is imputed to corporations. In a prior opinion the court has already found the insured parent corporation liable as an operator that actively participated in and exerted significant control over its subsidiary's business. The court finds that the insured's environmental director and other officials knew or reasonably should have known of a substantial probability of a loss caused by groundwater contamination before the effective dates of the insurance policies at issue. The court also finds that the loss was in progress before the contract periods began. The court grants all defendant insurers summary judgment under the known-risk doctrine and, in the alternative, under the loss-in-progress doctrine. Also, in the alternative, the court holds that several insurance companies are entitled to summary judgment because the insured violated its policies by providing late notice of governmental enforcement. Insurance provisions that call for notice "immediately" or "as soon as practicable" are interpreted to require notice within a reasonable time under the circumstances of the case. Unless the insurer meets its burden of proving prejudice, late notice does not eliminate the insurer's obligations under the policy. The court holds, however, that a delay of three to four years in providing notice was so unreasonably late that prejudice must be presumed.

Finally, the court grants summary judgment to an insurer that it has no duty to defend the insured.

[Related decisions are published at 20 ELR 20712, 22 ELR 20022, 22 ELR 20029, and 22 ELR 20457.]

Counsel for Plaintiff
J. Michael Smith
Miller, Johnson, Snell & Cummiskey
800 Calder Plaza, Grand Rapids MI 49503
(616) 459-8311

Counsel for Defendants
Irene A. Sullivan, Timothy G. Reynolds
Skadden, Arps, Slate, Meagher & Flom
919 Third Ave., New York NY 10022
(212) 735-3000