ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
Before: SCIRICA, NYGAARD and McKEE, Circuit Judges.
CHEMICAL LEAMAN TANK LINES, INC.
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 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.; OKIO 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"),
AETNA CASUALTY AND SURETY COMPANY ("AETNA"),
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
Before: SCIRICA, NYGAARD and McKEE, Circuit Judges.
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. 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 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
Argued: September 26, 1994
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" 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.
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 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 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.
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. *fn1 During this same period of time, the London Market Insurers ("LMI") sold Chemical Leaman excess CGL coverage. *fn2 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: . . . (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." *fn3
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 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. Section(s) 58:10-5 (1937) (prohibiting pollution of freshwater without Department of Health permit) (repealed 1977); N.J. Rev. Stat. Section(s) 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. Section(s) 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 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 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. *fn4 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.
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 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. *fn5 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.
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 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. *fn6
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 that the continuous trigger doctrine determined whether property damage also occurred under the remaining policies. *fn7 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.
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 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. *fn8
Although LMI raises numerous issues, our inquiry focuses upon whether there has been an "accident" or "occurrence" as defined by the CGL policies. *fn9 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). *fn10 We are guided by Morton and Voorhees, supra. Our review of the district court's interpretation and prediction of New Jersey law is plenary. *fn11 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 [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. *fn12
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:
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 ...