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New York Coverage Action Dismissed On the Basis of Pennsylvania's Sovereign Immunity

February 26, 2008

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Kemper issued a General Contractor's Pollution Liability Policy to the Pennsylvania DOT ("PennDOT"), which constructed a major highway in that state. The policy was issued in Pennsylvania and obtained through a Pennsylvania retail broker. During the course of the project, serious enviromental damage occurred in Pennsylvania. Of significance, the policy contained forum selection and choice of law provisions designating New York as the appropriate forum and source of substantive law for any dispute.

During post loss coverage negotiations, Kemper filed a declaratory judgment action in New York. PennDOT responded by filing a parallel action in Pennsylvania and eventually moved to dismiss the New York action. The New York court dismissed the declaratory judgment action, recognizing Pennsylvania's sovereign immunity and the limited conditions under which such immunity could be waived. For example, like many states, Pennsylvania and its state agencies could only be sued in the statutorily created Board of Claims.

In sum, Pennsylania's sovereign immunity trumped clearly drafted forum selection and choice of law policy provisions. No doubt the court was persuaded that the dispute's limited contacts with New York and Pennsylvania's substantial interest in deciding the issues of coverage tipped the scales in favor of Pennsylvania.

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