Chemical Leaman v. Aetna ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
10-12-1995
Chemical Leaman v Aetna
Precedential or Non-Precedential:
Docket 93-5777
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"Chemical Leaman v Aetna" (1995). 1995 Decisions. Paper 264.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 93-5777 and 93-5794
CHEMICAL LEAMAN TANK LINES, INC.
v.
THE AETNA CASUALTY AND SURETY COMPANY;
and CERTAIN UNDERWRITERS AT LLOYDS, LONDON,
subscribing to Insurance Policies Numbers Numbers
WAR 6771, WAR 6772/A, C62P 10-117, L62P 10-117,
64P 3-121, L64P 3-121A, L64P 3-121B, C64P 3-121B,
C65P 5-119, C65P 5-119A, L65P 5-119A, L66P 5-119A,
C67P 4-158, L67P 4-158, C68P 2-116, L68P 2-116,
C68P 2-116A, C68P 2-116B, L68P 2-116A, L68P 2-116B,
C71-03-03-13, L71-03-03-13, C71-03-03-13A,
C71-03-03-13B, L71-03-03-13A, L71-03-03-13B,
C74-03-18-02, 77-01-19-23, 77-01-19-23A, C77-01-19-23B,
79-04-19-10, C80-02-19-09, C80-02-19-09B, L80-02-09A,
L80-02-19-09A, L80-02-19-09B, C83-02-19-09,
L83-02-19-09A, L83-02-19-09B, L83-02-19-09C
ROBIN ANTHONY GILDART JACKSON, an Underwriter at Lloyds,
London, individually and in his capacity as representative
Underwriter at Lloyds, London for certain subscribing
Underwriters at Lloyds, London who subscribed to certain
liability insurance policies issued to plaintiff Chemical
Leaman Tank Lines, Inc.; ACCIDENT AND CASUALTY COMPANY OF
WINTERTHUR; ALBA GENERAL INSURANCE COMPANY LTD.; ALLIANZ
CORNHILL INTERNATIONAL INSURANCE PLC, FORMERLY KNOWN AS
ALLIANZ INTERNATIONAL INSURANCE COMPANY LTD.; ANGLO-FRENCH
INSURANCE COMPANY LTD.; ARGONAUT NORTHWEST INSURANCE COMPANY;
ASSICURAZIONI GENERALI SPA; BALOISE FIRE INSURANCE COMPANY;
BELLEFONTE INSURANCE COMPANY LTD.; BRITISH NATIONAL LIFE
INSURANCE SOCIETY LTD.; CNA INTERNATIONAL REINSURANCE CO.
LTD., FORMERLY KNOWN AS CNA REINSURANCE OF LONDON LTD.;
DELTA LLOYD NON-LIFE INSURANCE COMPANY; DOMINION INSURANCE
COMPANY LTD.; DRAKE INSURANCE COMPANY LTD.; EDINBURGH
INSURANCE COMPANY; EXCESS INSURANCE COMPANY LTD.; FIDELIDADE
INSURANCE COMPANY; FOLKSAM INTERNATIONAL INSURANCE COMPANY
(U.K.) LTD.; HELVETIA ACCIDENT SWISS INSURANCE COMPANY;
INDEMNITY MARINE ASSURANCE COMPANY, LTD.; LEXINGTON INSURANCE
1
COMPANY LTD.; LONDON & OVERSEAS INSURANCE COMPANY, LTD.;
LONDON & EDINBURGH INSURANCE COMPANY, LTD.; LONDON & SCOTTISH
ASSURANCE CORPORATION, LTD.; GAN MINSTER INSURANCE COMPANY,
FORMERLY KNOWN AS MINSTER INSURANCE COMPANY LTD.; NATIONAL
CASUALTY COMPANY; NATIONAL CASUALTY INSURANCE OF AMERICA,
LTD.; NEW LONDON REINSURANCE COMPANY, LTD.; NORTH ATLANTIC
INSURANCE COMPANY LTD., FORMERLY KNOWN AS BRITISH NATIONAL
INSURANCE CO. LTD.; ORION INSURANCE COMPANY LTD.; PINE TOP
INSURANCE COMPANY LTD.; RIVER THAMES INSURANCE COMPANY LTD.;
SCOTTISH LION INSURANCE COMPANY; SOVEREIGN MARINE AND
GENERAL INSURANCE COMPANY, LTD.; SPHERE INSURANCE COMPANY
LTD.; ST. KATHERINE INSURANCE COMPANY LTD.; STRONGHOLD
INSURANCE COMPANY LTS.; SWISS UNION GENERAL INSURANCE COMPANY
LTD.; TAISHO MARINE & FIRE INSURANCE COMPANY (EUROPE) LTD.,
FORMERLY KNOWN AS TAISHO MARINE & FIRE INSURANCE COMPANY
(U.K.) LTD.; TOKIO MARINE & FIRE INSURANCE COMPANY (U.K.)
LTD.; TUREGUM INSURANCE COMPANY LTD.; UNIONAMERICA INSURANCE
COMPANY; UNITED STANDARD INSURANCE COMPANY LTD.; WINTERTHUR
SWISS INSURANCE COMPANY; WORLD AUXILIARY INSURANCE CORPORATION
LTD.; YASUDA INSURANCE COMPANY (U.K.) LTD.
(hereinafter collectively referred to as "Jackson & Companies"),
Appellants in No. 93-5777
Aetna Casualty and Surety Company ("Aetna"),
Appellant in No. 93-5794
ON APPEAL FROM THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 89-1543)
Argued: September 26, 1994
Before: SCIRICA, NYGAARD and McKEE, Circuit Judges.
(Filed October 12, 1995)
BRIAN J. COYLE, ESQ. (Argued)
PETER E. MUELLER, ESQ.
HARWOOD LLOYD, ESQ.
130 Main Street
Hackensack, NJ 07601
EDWARD M. DUNHAM, JR., ESQ.
DANIEL W. CANTU-HERTZLER, ESQ.
2
Miller Dunham Doering & Munson
1515 Market Street, 13th Floor
Philadelphia, PA 19102-1913
WILLIAM H. JEFFRESS, JR., ESQ.
Miller, Cassidy, Larroca & Lewin
2555 M Street, N.W.
Washington, D.C. 20037
Counsel for Appellant
Aetna Casualty & Surety Company
JOHN G. MCANDREWS, ESQ.
HENRY LEE, ESQ. (Argued)
HANNAH M. O'DRISCOLL, ESQ.
GARY P. SCHILZ, ESQ.
Mendes & Mount
750 Seventh Avenue
New York, NY 10019-6829
WILLIAM J. HANLEY, ESQ.
Ronca, McDonald & Hanley
5 South Regent Street
Livingston, NJ 07039
Counsel for Appellant
Robin Anthony Jackson, An
Underwriter at Lloyds, London,
and Certain London Market
Insurance Companies
("London Market Insurers")
KEVIN B. CLARK, ESQ. (Argued)
JOHN P. DEAN, ESQ.
CARLISLE E. PERKINS, ESQ.
CONRAD J. SMUCKER, ESQ.
Willkie Farr & Gallagher
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20036-3384
Counsel for Plaintiff-Appellee
Chemical Leaman Tank Lines, Inc.
THOMAS W. BRUNNER
JOHN E. BARRY
DENNIS A. TOSH
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
3
Counsel for Amicus Curiae
Insurance Environmental
Litigation Association
DEBORAH T. PORITZ
Attorney General of New Jersey
MARY C. JACOBSON
Assistant Attorney General
KAREN L. JORDAN
Deputy Attorney General
R.J. Hughes Justice Complex
CN 093
Trenton, NJ 08625
Counsel for Amicus Curiae
State of New Jersey, Department
of Environmental Protection and
Energy
OPINION OF THE COURT
McKEE, Circuit Judge.
Chemical Leaman Tank Lines, Inc. brought this declaratory
judgment action in an effort to determine if various policies of
insurance issued by defendant insurance companies covered the
cost of environmental cleanup of a waste disposal site it
maintained in Bridgeport, New Jersey. Although numerous issues
are raised on appeal, the primary issue is the appropriate test
to determine if Chemical Leaman "expected or intended"
environmental damage. We hold that, under New Jersey law, the
appropriate inquiry is the insured's objective intent and that
the district court erred when it instructed the jury that it must
determine if Chemical Leaman subjectively "expected or intended"
4
to damage the environment. Since we determine as a matter of law
that Chemical Leaman did expect or intend environmental damage as
of November, 1968, we remand for a new trial to determine
Chemical Leaman's objective intent during the years remaining in
question.
I. Background
A. The Bridgeport Site
Chemical Leaman is a tank truck company specializing in the
transportation of hazardous chemicals including carcinogens. The
Bridgeport terminal at issue here was one of many terminals that
Chemical Leaman maintained across the country. These terminals
included facilities where Chemical Leaman would routinely wash
the trailers that transported the hazardous chemicals after those
chemicals had been delivered. The rinse water contaminated with
residue from the inside of the trailers was disposed of in a
wastewater treatment system that is at the heart of this law
suit.
The Bridgeport wastewater treatment system consisted of a
series of unlined ponds dug into the soil to catch and
purportedly purify the contaminated washwater. Apparently, the
designers of this system believed that the sandy bottom of the
unlined ponds would purify the contaminated rinsewater by acting
as a kind of natural filter that would strain the impurities from
the contaminated water as it percolated into the soil. The
facility operated in this manner from 1960 to 1975. It was
designed and built by Harry Elston, Chemical Leaman's Manager of
Real Estate and Engineering, in consultation with Edwin Wagner, a
5
professional sanitary engineer with experience in the design of
waste treatment facilities. Elston made virtually all of
Chemical Leaman's decisions regarding waste management and
disposal.
From 1960-62, the wastewater treatment system consisted of a
series of three unlined settling and percolation ponds, connected
by "tee pipes." Elston testified that the depth of the ponds was
limited to five feet to allow sunlight to enhance the growth of
aerobic microbes that fed on the trace amounts of chemicals in
the rinsewater. This natural process was enhanced by anaerobic
microbes acting in the ponds and lagoons to biodegrade the
chemical particulates in the rinsewater. Gravity separated
heavier materials from lighter ones in the first pond, and the
floating contaminants were then periodically skimmed from the top
of the ponds, and the settled materials were periodically dredged
from the bottom of the ponds. The natural processes of aerobic
and anaerobic microbial biodegradation would break down the trace
chemical constituents which remained in the rinsewater.
A "tee pipe" connected the first and second ponds so as to
prevent the precipitated and floating materials from passing into
the second pond. Thus, only "cleaner" water could reach the
second pond. When this rinsewater reached the second pond, the
retention, phased gravity separation, percolation and microbial
biodegradation process was repeated. Only the rinsewater in the
middle depth of that pond was allowed to flow into the third
pond. These processes continued in the third pond, which
received the "cleanest" water as a result of the processes
6
occurring in the first two ponds. Elston testified at trial that
the Bridgeport site was specially selected for its suitability
for this kind of percolation system.
In 1962, Chemical Leaman augmented this system by adding two
larger aeration lagoons and a final settling lagoon with a
limestone bed. Each of these lagoons was designed to replicate
and enhance the treatment afforded by the original three ponds.
In addition, the fourth and fifth lagoons were equipped with
spray aeration devices to increase the oxygen level in the
lagoons and, thereby, increase aerobic microbial biodegradation
and evaporation.
From the very beginning of this system, the final
impoundment pond contained an overflow pipe at the top end of the
berms which fed into an adjacent swamp. The pipe was apparently
intended as a safety valve to prevent a rupture in the berms and
a resulting massive loss of rinsewater in the event of a heavy
rain. Between 1960 and 1975, there were repeated discharges of
treated rinsewater through the overflow pipe to the adjacent
swamp. Elston described this discharge as a "trickle," and
another witness testified that the amount coming out of the
overflow pipe was usually about a fraction of an inch.
Nevertheless, a 1970 New Jersey Department of Health sample of
the swamp water that the rinsewater "trickled" into revealed that
this trickle was "highly pollutional." Moreover, by 1974 the
path of the "trickle" from the last impoundment could "be easily
seen by looking for a 75 foot wide lane of dead trees" in the
swamp.
7
B. The Insurance Policies
Chemical Leaman purchased primary comprehensive general
liability insurance ("CGL") from the Aetna Casualty & Surety
Company ("Aetna") covering successive years, from April 1, 1959
through April 1, 1985.0 During this same period of time, the
London Market Insurers ("LMI") sold Chemical Leaman excess CGL
coverage.0 Each of the primary and excess policies provided
coverage (and a duty to defend) only for fortuitous damage, i.e.
damage that was "neither expected nor intended from the
standpoint of the insured." Some of these policies insured
against an "accident," and others insured against an "occurrence"
but it is clear that each of these policies covered only
fortuitous damage, i.e. damage that the insured neither expected
nor intended.
The LMI policies typically stated:
[s]ubject to the limitations, terms and
conditions [of the policy] to indemnify the
Assured for all sums which the Assured shall
be obligated to pay by reason of the
liability . . . imposed upon the Assured by
law, . . . for damages . . . on account of: .
0
During trial, Chemical Leaman dismissed its claims
against the 1981-1985 policies, and the district court granted
summary judgment in favor of Aetna on the 1959-1960 policy
because Chemical Leaman had not presented evidence of damage that
could have triggered this policy. We need not discuss the
specific provisions of the Aetna policies since they have
withdrawn as a party to this appeal. See infra at .
0
At oral argument before the district court, Chemical
Leaman dismissed any claims it had against LMI on the policy
running from April 1, 1985 to April 1, 1986. Apparently,
Chemical Leaman dismissed its claims against the 1981-1985
policies as well. The LMI do not state what happened in their
brief, as they say they provided excess coverage from 1960-1981
and cite to a stipulation in the appendix, but the stipulation
states they provided coverage from 1958-1986.
8
. . (ii) Property Damage . . . caused by or
arising out of each occurrence . . . .
These policies defined "occurrence" as "[a]n accident or a
happening or event or a continuous or repeated exposure to
conditions which unexpectedly and unintentionally results in . .
. property damage . . . during the policy period."0
The policies required that the insured provide written
notice in the event of an occurrence or accident "as soon as
practicable." The policies also provided that the insured shall
cooperate with the insurer in the defense of a potentially
coverable claim, suit or proceeding instituted against the
insured or insurer.
Each LMI policy from April 1, 1971 to April 1, 1985,
contained a pollution exclusion clause. Because we hold that
those policies do not insure against the damage that occurred
after November, 1968, we do not reach any of the issues raised
under the pollution exclusion clauses.
C. Contamination of the Bridgeport Site
At the time the Bridgeport facility was built, New Jersey
prohibited the construction of industrial waste treatment systems
0
Some of the LMI's earlier policies insured against an
"accident," which was circularly defined as "an accident or
series of accidents arising out of one event or occurrence." On
summary judgment, the district court reasoned that New Jersey law
defines the term "accident" in the accident-based policies in
substantially the same manner as the definition of an
"occurrence" in the occurrence-based policies -- an event neither
expected nor intended by the insured. See Chemical Leaman Tank
Lines, Inc. v. Aetna Casualty & Sur. Co., 817 F. Supp. 1136, 1148
(D.N.J. 1993). Thus, the court held that Chemical Leaman would
bear the same standard of proof on the accident policies as it
would on the occurrence-based policies. This finding is not
challenged on appeal.
9
without the approval of the New Jersey Department of Health
("NJDOH"), and this prohibition was especially applicable to
treatment facilities discharging effluent into surface and
underground waters. See N.J. Rev. Stat. § 58:10-5 (1937)
(prohibiting pollution of freshwater without Department of Health
permit) (repealed 1977); N.J. Rev. Stat. §§ 58:11-10, 11-12
(1937) (requiring Department of Health approval for any change in
sewage or industrial waste treatment system; owner of such system
must periodically furnish information required by the department)
(repealed 1977); N.J. Rev. Stat. §§ 58:12-1, 12-2, 12-3 (1937)
(prohibiting operation of a plant for the treatment of polluting
substances from which the effluent is to flow into any waters of
the states unless approved by Department of Health; "waters of
the state" include . . . all springs, streams and bodies of
surface or groundwater) (repealed 1977).
Chemical Leaman never obtained the required permits or
approvals from the State of New Jersey to construct or operate
the waste water disposal facility at Bridgeport. However,
despite Chemical Leaman's failure to get official approval, the
State of New Jersey learned the Bridgeport site was in operation.
In March 1961, the New Jersey Division of Fish, Game & Wildlife
("FGW") received a complaint of a number of dead fish in a pond
that was fed by swamp water flowing from the direction of the
Bridgeport facility. The complaint suggested that Chemical
Leaman's facility may be responsible. On September 12, 1961,
Inspector Walter Robinson of the Pollution Unit of the FGW
inspected the Bridgeport facility and noticed a discharge into
10
the swamp from the overflow pipe in the last pond. Robinson had
observed this discharge on about half of his visits to the
Bridgeport site, and had concluded in a report dated September
12, 1961 that "these conditions are not satisfactory."
Thereafter, Chemical Leaman was asked to stop the discharge.
Chemical Leaman responded by agreeing to attempt to purchase
property to use as a disposal area and to retain a consultant to
correct this situation. In return, FGW informed Chemical Leaman
that FGW expected "all work to be completed and pollution stopped
by September 1, 1962." Chemical Leaman's response was the
construction of the second set of unlined earthen aeration
lagoons and the final settling lagoon discussed earlier.
Inspector Robinson revisited the Bridgeport site on July 31,
1962, to check on the status of the new treatment system. His
progress report noted that while a new spray disposal system had
been installed in an adjacent field, the area still "has to be
diked and a new separator has to be installed in the old settling
ponds." Although his report noted that the work should be
completed in six weeks, there is no indication that this work was
ever completed. Robinson's "Progress Report" did note that
effluent was seeping into the ground as intended and not into the
swamp and that this was "a good indication" that the new
treatment system was working properly. However, at trial,
Robinson testified that he may have thought the pits were lined,
since "that's the way things were done." Moreover, Robinson's
responsibility was limited to preventing discharges to adjacent
waters that could affect the fish or wildlife in the State of New
11
Jersey. Thus, seepage into the ground, whether or not
potentially harmful to the groundwater, or any aspect of the
environment other than fish and wildlife, was not his concern.0
Robinson's initial optimism proved unfounded when, in
November 1968, water pollution inspectors from the New Jersey
Department of Health ("NJDOH") again observed a discharge from
the overflow pipe in the last lagoon. The NJDOH water pollution
inspectors concluded that "the waste emanating from the lagoon is
highly pollutional and [that] immediate measures [sic] be taken
to eliminate this discharge or to sufficiently treat the waste
prior to discharge." The inspectors also concluded that the
Bridgeport site was operating in violation of State statutes
since it was discharging an effluent without appropriate
Departmental approval. As a result, in February 1969 the NJDOH
ordered Chemical Leaman to submit plans "concerning the methods
and operations of a system designed to properly treat the
effluent of their tank truck washing facility." In May 1969,
Chemical Leaman submitted a plan for a new rinse water treatment
system designed by its own engineering department. However,
State regulators rejected this plan as they found the amount of
remaining chemical residue in the treated rinsewater that would
be discharged to a nearby stream to be unacceptable.
0
Ironically, while assessing Chemical Leaman's proposed
solution for its pollution problem, Robinson observed one trailer
being drained directly onto the parking lot. While such conduct
was apparently a violation of company policy and would subject
the individual to disciplinary action, this was not the only
occasion on which he observed this prohibited conduct.
12
In February 1970, the NJDOH sampled the waste water in the
lagoons and found the discharge to be "objectionable."
Thereafter, State officials again met with Chemical Leaman in an
unsuccessful attempt to resolve the polluting discharges at the
Bridgeport site. Chemical Leaman eventually entered into a
consent judgment with the New Jersey Department of Environmental
Protection ("NJDEP") on January 28, 1974, which mandated
construction of an approved facility by April 1974. Subsequently,
in 1975, Chemical Leaman fully alleviated its waste water
disposal problems when Du Pont agreed to take and treat the waste
water.
From November 1968, when water pollution inspectors from
the NJDOH observed the discharge from the overflow pipe, until
the summer of 1975, when the contract with Du Pont was entered
into, some 40 to 50 million gallons of contaminated waste water
was processed using the same treatment system as modified in
1962. Throughout the time the Bridgeport site was in operation
Chemical Leaman discharged approximately 100 million gallons of
contaminated waste water into the unlined ponds and lagoons, the
bottoms of which were only two and a half feet above the
groundwater.
In late 1980, a routine NJDEP survey revealed the existence
of contaminated groundwater at and around the Bridgeport site. A
subsequent investigation disclosed that groundwater beneath the
terminal was contaminated and that Chemical Leaman's unlined
ponds and lagoons were the primary source of contamination.
Thereafter, Chemical Leaman entered into an Administrative
13
Consent Order with the NJDEP to study the scope of the
groundwater contamination at Bridgeport, and in 1984, the United
States Environmental Protection Agency ("EPA") placed the
Bridgeport Site on the Superfund National Priorities List. 42
U.S.C. §§ 9605, 9607.0 As an owner and operator of the site,
Chemical Leaman is strictly liable under CERCLA for the cost of
the environmental cleanup. Id.
In July 1985 Chemical Leaman entered into a consent decree
with the EPA based upon a finding that four neighboring wells
were contaminated, and that three more were threatened. In that
decree Chemical Leaman acknowledged liability and agreed to
undertake a Remedial Investigation and Feasibility Study
("RI/FS") of environmental contamination at the site. It is this
CERCLA liability for which Chemical Leaman seeks coverage under
the policies purchased from the insurers.
II. Procedural History
Chemical Leaman filed a declaratory judgment action in
district court to determine its right to insurance coverage after
Aetna and LMI refused to indemnify it for any of the costs of the
environmental cleanup at the Bridgeport facility.
On March 31, 1992, after extensive discovery, the district
court filed an opinion granting partial summary judgment in favor
of Chemical Leaman. See Chemical Leaman Tank Lines, Inc. v.
Aetna Casualty & Sur. Co., 788 F. Supp. 846 (D.N.J. 1992). The
court held that the "owned property exclusion" contained in the
0
42 U.S.C. §9607(a)(1).
14
policies does not bar coverage for the costs of remedial measures
designed to benefit the ground or surface waters in the vicinity
of the Bridgeport site.0
Subsequently, the district court ruled that genuine issues
of material fact remained as to whether Chemical Leaman expected
or intended to cause soil and groundwater damage. See Chemical
Leaman Tank Lines, Inc. v. Aetna Casualty & Sur. Co., 817 F.
Supp. 1136 (D.N.J. 1993). The district court rejected the
insurers' argument that Chemical Leaman's objective intent to
injure the soil and groundwater controlled whether there had been
an "occurrence" under the insurance policies. The court also
relied on Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255
(N.J. 1992), to conclude that Chemical Leaman's actions at the
Bridgeport site were not so "reprehensible" as to require a
presumption that Chemical Leaman expected or intended to cause
the groundwater and soil damage. Instead, the court concluded
that Chemical Leaman had the burden of proving that it did not
subjectively intend to cause soil and groundwater damage, and
that it was not substantially certain that it was causing such
damage.
In ruling upon motions for partial summary judgment, the
court found that soil and groundwater damage occurred sometime
during 1960, thus triggering the 1960-61 policies. The court
also ruled as a matter of law that soil and groundwater damage
occurred in the policy year April 1, 1960 to April 1, 1961, but
0
The other issues that the district court decided as a
matter of law are not raised on this appeal.
15
that the continuous trigger doctrine determined whether property
damage also occurred under the remaining policies.0 Since there
were disputed issues of fact the court held that the jury would
have to determine whether injuries occurred during each policy
period, whether Chemical Leaman subjectively expected or intended
the injuries, and whether the injuries caused by the use of the
Bridgeport rinsewater treatment system were of a continuous,
indivisible nature. Finally, the court held that Chemical
Leaman's failure to promptly notify its insurers of its liability
under CERCLA did not bar recovery under the notice provisions of
the various insurance policies because the insurers had not been
prejudiced by the delay.
Prior to trial, Chemical Leaman filed a motion in limine to
bar evidence of environmental problems it had encountered at
sites other than Bridgeport. The court granted that motion
holding that the probative value of the other-site evidence was
substantially outweighed by the danger of unfair prejudice, jury
confusion, and undue waste of time. That ruling is also
challenged on this appeal.
III. The Jury's Findings
After a three week trial, the jury found that Chemical
Leaman was entitled to coverage under the Aetna and LMI policies
as follows: the policies in effect from April 1, 1960 to April 1,
1971 - for costs associated with the remediation of the soil; the
0
The time of an "occurrence" is the time when the
complaining party is damaged. See Hartford Accident & Indem. Co.
v. Aetna Life & Casualty Ins. Co., 483 A.2d 402, 409 (N.J. 1984).
16
policies in effect from April 1, 1961 to April 1, 1971 - for the
remediation of the wetlands; and the policies in effect from
April 1, 1960 to April 1, 1981 - for groundwater remediation. The
jury also found that Chemical Leaman was entitled to defense
costs that were incurred after April 18, 1988. The insurers
challenge both the court's and jury's findings on appeal. The
court instructed the jury that it had to find for Chemical Leaman
unless it concluded that Chemical Leaman subjectively expected or
intended to cause the pollution at the Bridgeport site. This
charge is at the center of this appeal as the insurers argue that
the appropriate inquiry is Chemical Leaman's objective
expectation and intent. The insurers argue that, viewed
objectively, the evidence established that the damage at
Bridgeport was expected and/or intended by Chemical Leaman, and
that there was therefore no accident or occurrence under the
various policies.
Subsequent to oral argument but prior to our disposition of
this appeal, Chemical Leaman and Aetna settled all of Chemical
Leaman's environmental claims against Aetna, including the claims
involved in this appeal. In accordance with the settlement
agreement filed with this court, Aetna withdrew as a party to
this appeal. LMI, however, was not a party to that settlement
agreement. Therefore, we must still address the issues raised as
they pertain to LMI.0
0
Practically speaking, Aetna's withdrawal from this appeal
has no effect on the issues which we must address since LMI and
Aetna joined in each other's arguments.
17
Although LMI raises numerous issues, our inquiry focuses
upon whether there has been an "accident" or "occurrence" as
defined by the CGL policies.0 Following the court's rulings on
the post-trial motions, the New Jersey Supreme Court decided
Morton Int'l, Inc. v. General Accident Ins. Co. of Am., 629 A.2d
831 (N.J. 1993).0 We are guided by Morton and Voorhees, supra.
Our review of the district court's interpretation and prediction
of New Jersey law is plenary.0 See Wiley v. State Farm Fire &
Casualty Co., 995 F.2d 457, 459 (3d Cir. 1993).
The parties agree that New Jersey law governs this dispute.
It is also clear that we must apply state law as it exists today,
even if the law may have changed since the judgment of the
district court. See Vandenbark v. Owens-Illinois Glass Co., 311
U.S. 538, 543 (1941); Air Products & Chemicals, Inc. v. Hartford
Accident & Indem. Co., 25 F.3d 177, 181 (3d Cir. 1994); National
Sur. Corp. v. Midland Bank, 551 F.2d 21, 28 (3d Cir. 1977). Thus,
"intervening and conflicting state court decisions will
0
Aetna briefed the "occurrence" issue and LMI joined in and
incorporated the arguments advanced by Aetna. See LMI brief at
50; LMI Reply brief at 1-2.
0
The insurers also brought a motion for relief from
judgment on the grounds of newly discovered evidence pursuant to
rule 60(b)(2) and/or on grounds of misconduct pursuant to Rule
60(b)(3). We need not reach this issue as the insurers will have
the benefit of the "after discovered" documents at the new trial.
0
The district court's subject matter jurisdiction was
based on diversity of citizenship pursuant to 28 U.S.C. § 1332.
The jurisdiction of this court is founded upon 28 U.S.C. § 1291.
As a Federal Court sitting in diversity we are bound, as was the
district court, to apply the substantive law of the state whose
laws govern the action. See Erie R.R. Co. v. Tompkins, 304 U.S.
64, 78 (1938); Borse v. Pierce Goods Shop, Inc., 963 F.2d 611,
613 (3d Cir. 1992).
18
[necessarily] cause the reversal of judgments which were correct
when entered." Baker v. Outboard Marine Corp., 595 F.2d 176, 182
(3d Cir. 1979) (quoting Vandenbark, 311 U.S. at 543). However, a
brief discussion of the evolution of the law in this area will
focus our analysis.
IV. New Jersey Law Before Morton.
A. Atlantic Employers Ins. Co. v. Tots & Toddlers Pre-
School Day Care Center, Inc.0
In Atlantic Employers, parents of children who had allegedly
been sexually abused sued the owners and operators of a day care
center where the abuse purportedly took place. The company that
insured the center then brought a declaratory judgment action to
determine its obligation to defend or indemnify the owners for
any recovery the plaintiffs might win in their personal injury
suits based upon negligence and intentional tort.
The day care center's insurance policy insured against
damage resulting from an "occurrence." An "occurrence" included
injuries or damage that was "neither expected nor intended by the
insured." Atlantic Employers, 571 A.2d at 303. The policy also
contained an exclusion for violations of penal statutes or
ordinances. The Appellate Division first noted the general rule
that "coverage does exist . . . 'for the unintended results of an
intentional act, but not for damages assessed because of an
injury intended to be inflicted.'" Id. (citation omitted). The
court stated:
0
571 A.2d 300 (N.J. Super. Ct. App. Div.), cert. denied,
584 A.2d 218 (N.J. 1990).
19
There seems to be no dispute that if, . . .
Robert Knighton sexually molested the
children, then he had the requisite level of
intent to be found guilty of sexual
molestation, based upon the criminal statutes
of this State. But appellants insist that
this does not necessarily mean that he
intended the damages or injuries incurred by
the children as a result of such actions. . .
. Further, they insist that the existence of
such intent cannot automatically be imputed
to the other insureds under the policy so as
to exclude coverage. . . . We reject this
position.
Id. The court then examined cases from other jurisdictions in
order to analyze the insureds' argument in context with
developing law. The court noted that some jurisdictions employed
a subjective test in determining insurance coverage under these
circumstances, and some rely upon an objective test. The court
concluded that public policy mandated an objective approach.
As a matter of public policy and logic we
conclude that the better rule warrants
application of the objective approach. A
subjective test suggests that it is possible
to molest a child and not cause some kind of
injury, an unacceptable conclusion. . . . It
is simply against public policy to indemnify
a person for a loss incurred as a result of
his[/her] own willful wrongdoing.
Id. at 304.
0
B. Prudential Property & Casualty Ins. Co. v. Karlinski
Within a year and a half of Atlantic Employers, the
Appellate Division decided Karlinski. There, insured's 13 year
old son (James) had engaged in a prearranged fight with a 14 year
old (Mark) in which Mark had fallen and suffered a broken hip.
0
598 A.2d 918 (N.J. Super. Ct. App. Div. 1991).
20
The court was asked to determine if a homeowner's policy
obligated the plaintiff insurer to defend and indemnify the
defendant. The policy excluded coverage for "'bodily injury . .
. which is expected or intended by the insured.'" Karlinski, 598
A.2d at 919. The motion court granted the insurer's motion for
summary judgment noting, that the son of the insured "'instigated
the fight and threw the first blow and started the fight. As far
as I am concerned, it is intentional conduct and the coverage
doesn't apply.'" Id. The motion judge also concluded that "a
broken 'leg' [Mark actually suffered a broken hip] was not an
extraordinary consequence of the fight." Id.
On appeal the court aptly noted, "[t]his appeal requires
that we again explore the frequently visited but still unclearly
charted area of liability coverage for intentional torts which
produce unintended results." Id. The court went on to observe:
Our review of New Jersey authorities
satisfies us that, . . . it is difficult to
ascertain a clear weight of authority on the
subject of liability insurance coverage for
unintended results of intentional acts.
Differing combinations of variables, such as
the language of the exclusion clause, the
nature of the harm and its relationship to
the intentional act, and the availability of
relief to the injured party, appear to
influence the extent to which our decisions
have inquired into the nature of the intent.
Id. at 921. The court then stated:
we hold that, when a coverage exclusion is
expressed in terms of bodily injury expected
or intended by the insured, and where the
intentional act does not have an inherent
probability of causing the degree of injury
actually inflicted, a factual inquiry into
21
the actual intent of the actor to cause that
injury is necessary.
Id.
Thus, after Karlinski, a fact finder did not have to inquire
into the actual (i.e. subjective) intent of the insured unless
the damage that resulted from the insured's actions was not
inherently probable. Accordingly, absent this improbability of
harm, the appropriate inquiry was the insured's objective intent.
C. Voorhees v. Preferred Mutual Ins. Co.0
In Voorhees, a parent was sued for statements she had made
at a public meeting questioning the competency of her child's
teacher. The teacher claimed she had suffered emotional distress
and mental anguish as a result of the parent's conduct. The
teacher alleged that the parent had acted "willfully,
deliberately, recklessly and negligently," in making false
accusations that had damaged the teacher professionally, and
subjected her to public ridicule. Voorhees, 607 A.2d at 1257.
Medical evidence established that the emotional distress the
teacher complained of had resulted in "'an undue amount of
physical complaints,' including 'headaches, stomach pains,
nausea, . . . [and] body pains.'" Id. at 1258.
The parent had a homeowner's policy that provided coverage
for liability arising from "bodily injury" caused by an
"occurrence." The policy defined an "occurrence" as an
"accident," and excluded coverage for bodily injury intentionally
caused by the insured. The insurer relied upon this language and
0
607 A.2d 1255 (N.J. 1992).
22
refused to defend the insured against the teacher's suit,
asserting that the claims were based on the insured's intentional
act and that the complaint sought damages for a "personal" rather
than a "bodily" injury. The parent eventually sued her carrier
for damages resulting from its refusal to provide a defense and
indemnify her. Both parties moved for summary judgment.
The trial court granted the insurer's motion ruling that the
complaint did not allege the kind of "bodily injury" that would
be covered under the policy. A divided panel of the Appellate
division reversed.
The New Jersey Supreme Court noted that the duty to defend
under the policy was not triggered "absent a potentially-
coverable occurrence." Id. at 1262. In assessing whether the
insured's statements constituted a potentially coverable
occurrence, the court first held that "the accidental nature of
an occurrence is determined by analyzing whether the alleged
wrongdoer intended or expected to cause an injury." Id. at 1264.
As to what constitutes an "intent to injure," the court noted
that the general trend in the law appeared to require an inquiry
into the actor's subjective intent to cause injury.
We adhere to the prevalent New Jersey rule
and hold that the accidental nature of an
occurrence is determined by analyzing whether
the alleged wrongdoer intended or expected to
cause an injury. If not, then the resulting
injury is "accidental," even if the act that
caused the injury was intentional. That
interpretation prevents those who
intentionally cause harm from unjustly
benefitting from insurance coverage while
providing injured victims with the greatest
chance of compensation consistent with the
need to deter wrong-doing. It also accords
23
with an insured's objectively-reasonable
expectation of coverage for
unintentionally-caused harm.
Even if the operative question is the
intent to injure rather than to act, the
question of what constitutes an "intent to
injure" remains. The key issue is whether
the court must find a subjective intent to
injure, or whether it can presume an intent
to injure from the objective circumstances.
In that regard, our inquiry parallels that
taken in interpreting policy exclusions for
intentional acts. Those exclusions preclude
coverage for injuries expected or intended by
the insured. Case law interpreting those
policy exclusions, in addition to that
interpreting the definition of "occurrence,"
is thus relevant.
The general trend appears to require an
inquiry into the actor's subjective intent to
cause injury. Even when the actions in
question seem foolhardy and reckless, the
courts have mandated an inquiry into the
actor's subjective intent to cause injury.
Id. at 1264.
However, the court recognized that:
[w]hen the actions are particularly
reprehensible, the intent to injure can be
presumed from the act without an inquiry into
the actor's subjective intent to injure. That
objective approach focuses on the likelihood
that an injury will result from an actor's
behavior rather than on the wrongdoer's
subjective state of mind.
Id. at 1265 (citing Atlantic Employers, supra). The Voorhees
court reasoned that the insured's actions were a far cry from the
type of egregious behavior that justified an objective approach
in Atlantic Employers. The court held that "[a]bsent exceptional
circumstances that objectively establish the insured's intent to
injure," the insured's subjective intent to injure must govern.
Id. While the court felt that there was little evidence that the
24
insured subjectively intended or expected to injure the teacher,
the court never had to address this question because the
plaintiff had also alleged that the insured had acted
negligently. The allegation of negligence presupposed the
absence of a subjective intent to injure and stated a claim for a
potentially coverable occurrence thus triggering the insurer's
duty to defend. See id. Accordingly, the court affirmed
plaintiff's award of summary judgment.
0
D. SL Industries, Inc. v. American Motorists Ins. Co.
In SL Industries, an employee had filed suit against his
employer alleging age discrimination and common law fraud as a
result of the employer eliminating his position. The employee
sought recovery for the alleged bodily injury that resulted. The
employer was insured under a policy in which the insurer agreed
to defend and indemnify the employer for all sums resulting from
a bodily injury caused by an "occurrence." "Occurrence" was
defined as an "accident . . . which results in bodily injury . .
. neither expected nor intended from the standpoint of the
insured." SL Industries, 607 A.2d at 1269-70.
The employer settled the suit and then brought a declaratory
judgment action against its insurer to establish its right to
indemnification. The Law Division granted the insurer summary
judgment, but the Appellate Division reversed, holding that
although intended harm was not covered under the policy, the
policy did provide coverage for the unforeseen results of
0
607 A.2d 1266 (N.J. 1992).
25
intentional conduct. The court then remanded the case to the Law
Division to determine whether the employee's emotional distress
had been intended or whether it was foreseeable.
On appeal, the New Jersey Supreme Court had to determine if
the general intent to injure that is inherent in a claim of fraud
necessarily incorporates the intent to cause the specific injury
(emotional distress), or whether proof of a subjective intent to
cause the specific injury is required. Id. at 1277-1279. The
court began its analysis of the required intent by examining the
differing approaches taken by earlier cases.
Our courts have taken different approaches
to the question of how specifically the
insured must have intended the resulting
injury. Employing the "Lyons" test some
courts have held that a subjective intent to
injure ends the inquiry and precludes
coverage. Under that approach, if there is a
subjective intent to injure then any injury
that results from the action will be deemed
"intentional," even if the injury is
different from or greater than that intended.
. . .0
On the other hand, some courts have
indicated that to preclude coverage if the
injury that actually occurred was not a
probable outcome of the wrongful act is
unfair. [citing Prudential Property &
Casualty Ins. Co. v. Karlinski] . . . .
However, in those circumstances in which the
facts indicate that the acts in which the
insured engaged were unlikely to result in
the degree or type of injury that in fact
occurred, an inquiry into the subjective
intent to cause the resulting injury is in
order.
A third approach is even more likely to
lead to coverage. In Hanover Ins. Group v.
Cameron, the court rejected the insurance
0
The test derives its name from Lyons v. Hartford Ins.
Group, 310 A.2d 485, 488-89 (N.J. Super. Ct. App. Div. 1973).
26
company's argument that to preclude coverage
only the intent to harm need be demonstrated.
The court indicated that "intent" would only
be found when the actual consequences that
resulted from the act were intended, or when
the actor was substantially certain they
would result.
To determine which approach to adopt, we
refer to the general principles underlying
the interpretation of insurance-policy
provisions involving intentional conduct.
The Lyons test . . . precludes coverage in
some cases in which an insured could
reasonably expect coverage. When the injury
caused significantly exceeds the injury
intended or expected and is an improbable
consequence of the wrongful act that caused
it, then it is hard to characterize the
injury as truly "intentional." The injury,
from the standpoint of the insured, is
"accidental," and could thus be deemed an
occurrence. Moreover, if the tortfeasor did
not intend or expect to cause the resulting
harm, denying coverage will not deter the
harmful conduct. In that case, there is no
policy justification for denying the victim
the possibility of additional compensation.
As the Karlinski court noted, precluding
coverage "even if the actual harm far
exceed[s] the consequences which might
reasonably be expected by the insured . . .
diminishes the injured party's realistic
possibility of recovery more than it impacts
upon the insured tortfeasor."
On the other hand, an approach allowing
coverage whenever the adverse consequences
intended by the tortfeasor did not precisely
match the actual consequences of their
wrongful actions undermines the basic policy
against indemnifying wrongdoers.
We believe the Karlinski test presents the
most reasonable approach. . . . Assuming the
wrongdoer subjectively intends or expects to
cause some sort of injury, that intent will
generally preclude coverage. If there is
evidence that the extent of the injuries was
improbable, however, then the court must
inquire as to whether the insured
subjectively intended or expected to cause
that injury. Lacking that intent, the injury
27
was "accidental" and coverage will be
provided.
Id. at 1277-78 (citations omitted).
Accordingly, the court affirmed the Appellate Division's
judgment remanding the case to the Law Division to determine
whether the employee's emotional distress had been a probable
outcome of the insured's general intent to injure, and if not,
whether the insured subjectively had intended to cause the
employee's actual injuries. See id. at 1279.
V. Morton Int'l, Inc. v. General Accident Ins. Co.0
In Morton, the New Jersey Supreme Court had to apply the
evolving law of occurrence based insurance policies to injuries
to the environment. There, the insured, Morton International,
sue_"
0
629 A.2d 831 (N.J. 1993), cert. denied, 114 S. Ct. 2764
(1994).
28