Opinion ID: 722377
Heading Depth: 1
Heading Rank: 3

Heading: Occurrence-Based Insurance Policies and Expected or Intended

Text: 22 Chemical Leaman purchased occurrence-based comprehensive general liability insurance from the LMI that provided coverage for [a]n accident or a happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in ... property damage. The LMI contend that because Chemical Leaman expected or intended to cause property damage at the Bridgeport site, the policies do not provide coverage. 6 23 New Jersey courts have been called upon repeatedly to interpret the expected/intended clause in occurrence-based insurance policies. They have sought to balance the need to compensate victims against the public policy of deterring intentional wrongdoing by denying coverage for its consequences. In companion cases, Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 607 A.2d 1255 (1992), and SL Industries, Inc. v. American Motorists Ins. Co., 128 N.J. 188, 607 A.2d 1266 (1992), the New Jersey Supreme Court addressed how the expected/intended clause should be interpreted in order to strike the correct balance. 24 In Voorhees, the New Jersey Supreme Court held the accidental nature of an occurrence is determined by analyzing whether the insured subjectively intended or expected to cause an injury. Voorhees v. Preferred Mut. Ins. Co., 607 A.2d at 1264. The court explained: 25 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 with an insured's objectively-reasonable expectation of coverage for unintentionally-caused harm. 26 Id. at 1264. The court emphasized, [e]ven 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. 27 The court also recognized an exceptional circumstances exception to the subjective intent inquiry. 28 When 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. 29 Id. at 1265. The court cited to sexual assault against children as an example of an act that is so inherently injurious that an intent to injure can be presumed. Id. 30 In SL Industries, the court confronted the question whether any intent to injure will render the resulting injury intentional [and preclude coverage], whether the wrongdoer must intend the specific injury that results, or whether there is some middle ground between the two approaches. SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d at 1277 (emphasis in original). After evaluating alternative theories, the court adopted the middle ground, which it summarized as follows: 31 Assuming the wrongdoer subjectively intends or expects 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 was accidental and coverage will be provided. 32 Id. at 1278. SL Industries involved an allegation of intentional fraud that presupposes a general subjective intent to injure. Accordingly the New Jersey Supreme Court remanded the cases for a determination of whether the injury suffered by the victim was improbable, and if so, whether the insured intended or expected the victim's actual injuries. Id. at 1279. The court noted this approach conforms to an insured's objectively-reasonable expectations and provides the victim the greatest possibility of additional compensation consistent with the goal of deterring intentional wrongdoing. Id. 33 The New Jersey Supreme Court addressed the expected/intended clause of comprehensive general liability policies in the environmental pollution context in Morton Intern., Inc. v. General Acc. Ins. Co., 134 N.J. 1, 629 A.2d 831 (1993), cert. denied, 512 U.S. 1245, 114 S.Ct. 2764, 129 L.Ed.2d 878 (1994). It attempted to apply the principles established in Voorhees and SL Industries, but was forced to acknowledge the impracticality of adherence to the general rule that 'we will look to the insured's subjective intent to determine intent to injure.'  Id., 629 A.2d at 879. The court then elaborated upon Voorhees' exceptional circumstances exception, which allows an intent to injure to be presumed without inquiry into the actor's subjective intent. 34 [W]e hold that in environmental-coverage litigation a case-by-case analysis is required to determine whether, in the context of all the available evidence, exceptional circumstances exist that objectively establish the insured's intent to injure. Voorhees, 607 A.2d at 1265. Those circumstances include the duration of the discharges, whether the discharges occurred intentionally, negligently, or innocently, the quality of the insured's knowledge concerning the harmful propensities of the pollutants, whether regulatory authorities attempted to discourage or prevent the insured's conduct, and the existence of subjective knowledge concerning the possibility or likelihood of harm. 35 Id., 629 A.2d at 879-80. The court cautioned, insureds held responsible for remediation of environmental pollution vary significantly in their degree of culpability for the harm caused by pollutant discharges. Therefore, [a] general rule in environmental-pollution coverage litigation that would permit intent to injure to be presumed simply on the basis of a knowing discharge of pollutants would be unjustified. Id. at 879. 36 The New Jersey Supreme Court applied the factors it had outlined to determine whether exceptional circumstances supported the presumption of an intent to cause property damage. It noted Morton and predecessors had polluted Berry's Creek to such an extent that [f]or a stretch of several thousand feet, the concentration of mercury ... [was] the highest found in fresh water sediments in the world. Id. at 834. This damage was caused by the discharge of pollutants from a mercury-processing plant over a period of at least eighteen, and perhaps as many as forty-five, years. Id. at 882. Moreover, for at least eighteen years the discharges had been intentional, even though the company knew they would cause environmental harm. Despite repeated complaints by regulatory agencies, Morton engaged in a pattern of 'stonewalling' ... characterized by promises of compliance that consistently were unfulfilled. Id. On the basis of these facts, the court held, it would have ignored reality to conclude that [Morton's] predecessors did not know that the mercury and its effluents was [sic] harmful to the land over which it coursed and the waters into which it fell. Id. at 884. Therefore, it held as a matter of law that the property damage was not caused by an occurrence within the meaning of the applicable insurance policies. 37 Morton's presumption of an insured's subjective intent to cause property damage from egregious circumstances does not hinge on whether the insured should have expected or intended to cause injury. This would be akin to a negligence standard. If negligent acts did not fall within the definition of a covered occurrence, then there would be no point in purchasing comprehensive general liability insurance. Pittston Co. v. Allianz Ins. Co., 905 F.Supp. 1279, 1301 (D.N.J.1995). While Morton pragmatically acknowledges courts should not ignore reality when exceptional circumstances establish the insured's subjective intent to injure, the insured's subjective intent to cause injury remains the relevant inquiry under the occurrence language. 38 In Morton, the New Jersey Supreme Court also addressed the applicability of SL Industries' improbability rule in environmental pollution coverage litigation. It explained: 39 Turning to the question of whether environmental injury was intended or expected, we first observe that although the magnitude of damage to Berry's Creek and the surrounding areas may exceed any intention or expectation attributable to Morton's predecessors, we do not consider differences in harm relating to severity of environmental damage give rise to a finding of improbability of harm that invokes the need for evidence of subjective intent. SL Industries, supra. ... The holding of SL Industries was based on the Appellate Division's ruling ... that in a coverage action arising from a fight between two young teenagers in which one sustained a broken hip, a factual issue was presented because of the inherent improbability that the skirmish would result in a hip fracture. No such inherent improbability can be ascribed to the environmental damage attributable to Morton's predecessors. 40 Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at 882 (citations omitted). Therefore the court concluded it did not have to inquire into Morton's subjective intent to cause the specific environmental damage at issue. 41 In this case, the district court interpreted New Jersey law on the expected/intended clause before the New Jersey Supreme Court's decision in Morton. Nevertheless, it instructed the jury to determine whether Chemical Leaman subjectively expected or intended to cause property damage at the Bridgeport site. At the end of trial, on the LMI's Rule 50(a) motion for judgement as a matter of law, the district court found that the harm to the environment caused by the Bridgeport water treatment system was improbable as a matter of law. The district court also held Chemical Leaman's actions were not so reprehensible as to justify the presumption of an intent to cause property damage under the exceptional circumstances exception. It concluded Chemical Leaman was not throwing toxic waste out into the meadow-lands as Morton and its predecessors had done; rather, it had designed and built the facility to prevent [harm to the environment]. Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817 F.Supp. at 1146. 42 On appeal, the LMI argue the district court's jury instructions on the expected/intended issue were erroneous and inconsistent with New Jersey law. They also assert the harm at the Bridgeport site was not improbable as a matter of law. Finally, they contend exceptional circumstances objectively establish Chemical Leaman's intent to cause property damage. Our review of jury instructions is plenary. See Hook v. Ernst & Young, 28 F.3d 366, 370 (3d Cir.1994). A jury charge, taken as a whole, must fairly and adequately submit the issues in the case to the jury. Id.
43 The district court instructed the jury that it should find for Chemical Leaman if Chemical Leaman did not subjectively expect or intend damage to the soil, groundwater, or wetlands at the Bridgeport site. Midway through the trial, the court instructed the jury: 44 There are three kinds of damage at issue in this case--soil contamination, groundwater contamination, and swamp contamination ... You must evaluate Chemical Leaman by what you believe were its actual, subjective expectations or intentions with regard to causing soil, groundwater and swamp damage ... 45 At the end of the trial, the district court again instructed the jury: 46 EXPECTED OR INTENDED--FOCUS ON DAMAGE 47 In determining Chemical Leaman's expectations and intentions in the context of basic coverage, you are instructed to focus on whether the specific property damage was expected or intended. You are not to consider whether the acts which caused that property damage were intentional acts. I give you this instruction because it is New Jersey law the unintended results of intentional acts may be covered by defendants' insurance policies. Thus, even though Chemical Leaman may have knowingly and intentionally committed the acts that ultimately led to the environmental damage at the Bridgeport site, there still may be insurance coverage as long as you find that Chemical Leaman did not expect or intend the specific property damage that is the subject matter of this litigation, namely the contamination of the soil, groundwater, or wetlands. 48 EXPECTED OR INTENDED--SPECIFIC DAMAGE STANDARD 49 I further instruct you that, in deciding whether Chemical Leaman subjectively expected or intended to cause property damage, you must consider whether Chemical Leaman subjectively expected or intended the very damage that is the subject matter of this case. Thus, it is not sufficient for you to find that Chemical Leaman expected or intended any injury--such as injury to the environment generally. Rather, you must determine whether Chemical Leaman expected or intended the actual property damage that it is now required to clean-up. 50 In addition, special interrogatories were submitted to the jury on Chemical Leaman's expectation and intention to cause damage to the soil, groundwater, and wetlands. 51 The LMI contend the district court's final jury instruction was erroneous because it instructed the jury to focus on whether the specific property damage--namely contamination to the soil, groundwater, or wetlands--was expected or intended. They argue the district should have instructed the jury that if Chemical Leaman expected or intended to cause some injury to the environment generally, then coverage was precluded unless the extent of the injury was improbable. The LMI rely on SL Industries, in which the New Jersey Supreme Court stated: 52 Assuming the wrongdoer subjectively intends or expects 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 was accidental and coverage will be provided. 53 SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d at 1278. The LMI contend Chemical Leaman intended to cause some injury because Chemical Leaman knew the rinsewater contained contaminants, and knew the contaminants would seep into the soil when deposited in the containment ponds. They assert Chemical Leaman also knew discharges from the overflow pipe would drain into the swamp. Therefore, they argue, Chemical Leaman intended some sort of injury as a matter of law, and coverage was precluded unless the extent of injury was improbable. 54 Although the LMI's argument possesses a certain appeal, we believe the New Jersey Supreme Court would reject it. An insured who intentionally discharges a known pollutant generally intends some sort of harm, however de minimis, and the harm that actually results is usually a probable result of the discharge. Accordingly, the LMI's reading of SL Industries would result in a general rule precluding coverage based on the knowing discharge of a pollutant. But in Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at 879-80, the New Jersey Supreme Court held a general rule ... [precluding coverage] simply on the basis of a knowing discharge of pollutants would be unjustified. The LMI's reading of SL Industries' some sort of injury language conflicts with Morton. 55 Moreover, in SL Industries, the New Jersey Supreme Court confronted the problem of insurance coverage for injury caused by intentional, tortious conduct, namely intentional fraud. But intentional tort cases are an imperfect analogy in the context of environmental pollution. The insured who commits an intentional tort like fraud possesses some knowledge of the nature of the harm likely to result and intends to cause such harm. Also, most intentional torts are committed in a single, discrete, and temporally limited incident. In the context of environmental pollution, the insured's knowledge concerning the harmful propensities of pollutants and the likelihood of harm to the environment may be less complete and may vary significantly over time. For example, it is a matter of historical fact that many insureds, acting in accordance with standard industry practices, intentionally discharged pollutants into unlined containment ponds or other inadequate waste treatment systems, but were unaware that groundwater damage would eventually result. 56 In Morton, the New Jersey Supreme Court acknowledged the unsuitability of prior case law on the expected/intended provision in environmental pollution coverage litigation. Morton, 629 A.2d at 879 (In applying our holding in Voorhees to claims seeking coverage for property-damage caused by environmental pollution under occurrencebased CGL policies, we acknowledge the impracticality of adherence to the general rule that 'we will look to the insured's subjective intent to determine intent to injure.' ). We believe the New Jersey Supreme Court would similarly reject a wooden application of SL Industries' some sort of injury language, and would instead look to the general principles underlying the interpretation of insurance-policy provisions involving intentional conduct. As stated by the New Jersey Supreme Court: 57 Our goal is to interpret the insurance provisions in light of the insured's objectively reasonable expectations.... [W]e must attempt to reconcile two goals: that of deterring intentional wrongdoing by precluding insurance indemnification, and that of providing victims with compensation to the extent that compensation will not interfere with deterring injurious behavior. 58 SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d at 1278. We will apply these principles in this case. 59 In the environmental pollution context, the insured's appreciation of the magnitude and nature of harm likely to be caused by a discharge of pollutants is relevant in determining whether insurance coverage should be precluded. 60 When the injury caused significantly exceeds the injury intended or expected ... then it is hard to characterize the injury as truly intentional. ... 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. 61 SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d at 1278. If an insured does not understand the causal connection between the discharge of a pollutant and the property damage that results, deterrence is not served by precluding insurance coverage. Moreover, where an insured does not intend or expect property damage of a particular nature to result from its discharge of pollutants, the insured has an objectively reasonable expectation of coverage should such property damage later manifest itself. For these reasons, we cannot agree with the LMI's contention that some intent to cause any sort of environmental harm will preclude insurance coverage for all environmental harm under New Jersey law. Rather we believe the New Jersey Supreme Court would inquire into the insured's intent or expectation to cause environmental harm of a particular sort, for example, whether the insured intended damage to the soil, groundwater, or wetlands. Where the insured intends or expects such harm, coverage is precluded, unless, of course, the injury was improbable. On the other hand, an insured's intent to cause environmental harm of one sort will not preclude coverage for other kinds of unintended and unexpected environmental harm. For example, an insured's intent to cause soil damage will not preclude coverage for unintended and unexpected damage to the groundwater or wetlands. 62 The district court's jury instruction fairly and adequately asked the jury to consider whether Chemical Leaman expected or intended injury to the soil, groundwater, or wetlands. The instruction also allowed the jury to consider the nature and extent of Chemical Leaman's knowledge regarding the likelihood of harm as that knowledge evolved over time. There was ample evidence supporting the jury's conclusion that Chemical Leaman did not expect or intend to cause property damage. Chemical Leaman presented evidence that it believed the system of unlined ponds would cleanse contaminated rinsewater. Although Chemical Leaman intentionally discharged known pollutants, a reasonable jury could find, and the jury here did find, Chemical Leaman did not expect or intend damage to the soil, groundwater or wetlands. In light of the jury's findings, Chemical Leaman is entitled to insurance coverage for the costs of clean-up of environmental damage. Because Chemical Leaman did not expect or intend damage to the soil, groundwater, or wetlands, we need not inquire whether the property damage at the Bridgeport site was an improbable result of Chemical Leaman's actions. 63
64 The LMI contend that under Voorhees' exceptional circumstances exception, Chemical Leaman's intent to cause property damage should be presumed as a matter of law. As we have noted, in Morton the New Jersey Supreme Court set forth several factors to be considered in evaluating whether exceptional circumstances exist. These include: 65 the duration of the discharges, whether the discharges occurred intentionally, negligently, or innocently, the quality of the insured's knowledge concerning the harmful propensities of the pollutants, whether regulatory authorities attempted to discourage or prevent the insured's conduct, and the existence of subjective knowledge concerning the possibility or likelihood of harm. 66 Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at 879-80. We believe the New Jersey Supreme Court designed the exceptional circumstances exception to apply only to egregious conduct. This much is apparent from the court's use of child sexual abuse as an illustration of conduct that is so inherently injurious as to warrant a presumption of intent to injure. Id. at 879. Because insureds held responsible for remediation of environmental pollution vary significantly in their degree of culpability for the harm caused by pollutant discharges, we believe [a] general rule in environmental-pollution coverage litigation that would permit intent to injure to be presumed simply on the basis of a knowing discharge of pollutants would be unjustified. Id. at 879-880. 7 67 Instead Morton mandates a case-by-case analysis ... in order to determine whether, in the context of all the available evidence, exceptional circumstances exist. Id. Morton is instructive in considering the level of culpability required to allow intent to injure to be presumed in the environmental context. In Morton, the insured intentionally discharged mercury-laden compounds directly into streams over a lengthy period of time. The Department of Health and state engineers made repeated demands for compliance and the insured consistently disregarded its own promises to remediate the discharge. Morton, 629 A.2d at 882. [T]he record fairly reflect[ed] a pattern of 'stonewalling' on the part of [the insured], characterized by promises of compliance that consistently were unfulfilled. Id. 68 We believe a reasonable jury could find Chemical Leaman did not engage in a pattern of stonewalling. On the contrary, a jury could conclude that Chemical Leaman's behavior suggests a good faith effort at compliance with agency demands. Chemical Leaman initially designed the Bridgeport wastewater treatment system to purify contaminated rinseate in 1960. The designers of the system believed that the sandy bottom of the unlined ponds would purify the contaminated rinsewater by acting as a natural filter, and the overflow pipe was intended as a safety valve to prevent a rupture in the berms of the containment ponds in the event of heavy rain. When an inspector from the Pollution Unit of the New Jersey Division of Fish, Game & Wildlife advised Chemical Leaman of an unsatisfactory discharge into a neighboring swamp in September 1961, Chemical Leaman responded by constructing a second set of lagoons and the final settling lagoon. Seven years later, water pollution inspectors from the New Jersey Department of Health concluded discharges from the lagoon were pollutional and, in February 1969, ordered Chemical Leaman to submit plans for a system to properly treat the effluent. In May 1969, Chemical Leaman submitted a plan for a new rinsewater treatment system. The New Jersey Department of Health rejected this plan and over the next four years the parties attempted to resolve their dispute until January 1974, when they entered into a consent judgment. This history can hardly be described as a pattern of 'stonewalling' ... characterized by promises of compliance that consistently were unfulfilled. Morton, 629 A.2d at 882. Accordingly, exceptional circumstances do not exist here that would permit a presumption of Chemical Leaman's subjective intent to cause property damage.