Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.

[W] Chemical Leaman Tank Lines, Inc. v. Aetna Cas. and Sur. Co.

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


October 12, 1995

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 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"),

APPELLANTS

AETNA CASUALTY AND SURETY COMPANY ("AETNA"),

APPELLANT

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civ. No. 89-1543)

Before: SCIRICA, NYGAARD and McKEE, Circuit Judges.

McKEE, Circuit Judge.

OPINION WITHDRAWN

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 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"),

APPELLANTS

AETNA CASUALTY AND SURETY COMPANY ("AETNA"),

APPELLANT

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civ. No. 89-1543)

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

McKEE, Circuit Judge.

Argued: September 26, 1994

Filed October 12, 1995)

OPINION OF THE COURT

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.

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 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.

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 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.

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 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 for a loss incurred as a result of his[/her] own willful wrongdoing. Id. at 304.

B. Prudential Property & Casualty Ins. Co. v. Karlinski *fn13

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. 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 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. *fn14

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 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 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 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.

D. SL Industries, Inc. v. American Motorists Ins. Co. *fn15

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 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. . . . *fn16

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 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 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. *fn17

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, sued primary and excess CGL insurers seeking reimbursement for costs incurred in defending a suit filed by the Department of Environmental Protection (DEP), as well as indemnity for cleanup and remediation expenses resulting from the DEP proceeding. Morton, 629 A.2d at 834-835. Morton's predecessors, including Ventron Corporation, had polluted a body of water known as Berry's Creek to such an extent that "[f]or a stretch of several thousand feet, the concentration of mercury in Berry's Creek [was] the highest found in fresh water sediments in the world." Id. at 834. Morton's claims were derived from Ventron as well as other prior owners of the land. See id.. The DEP sued Ventron and other prior owners to compel them to pay for remediating the pollution of Berry's Creek and the surrounding area. The environmental damage had been caused by discharges from a mercury-processing plant operated for forty years by the various defendants. See New Jersey v. Ventron Corp., 468 A.2d 150 (N.J. 1983).

In the underlying suit to establish liability, the New Jersey Supreme court affirmed the Appellate Division's judgment holding the defendants jointly and severally liable. The court reasoned that the discharge of mercury constituted an abnormally dangerous activity, and imposed strict liability against all defendants. See id. at 160.

Morton then commenced a declaratory judgment action to determine its right to indemnification from the various insurers that had provided primary and excess coverage while the mercury-processing plant was in operation. The primary issue that the court had to determine was whether the pollution resulted from an "occurrence" under the applicable policies. To qualify as an "occurrence" the environmental damage must not have been "expected nor intended from the standpoint of the insured." Morton, 629 A.2d at 836. The trial court granted the insurer's motion for summary judgment. The Appellate Division reversed holding that the trial court had "focused improperly upon the manner in which the injury had been caused and had erroneously concluded that the policy did not provide coverage for the unexpected result of a deliberate act." Id. at 877 (citation omitted).

The Appellate Division also relied upon Atlantic Employers to conclude that "[t]he intentional character of the act is the basis for the inference that the insured either intended or was manifestly indifferent to the prospect of injury." Id. (citation omitted). In reaching this conclusion, the Appellate Division (without the benefit of either Voorhees or SL Industries) noted that the "substantial environmental pollution over a long period" together with the knowledge by Morton's predecessors that "the substance being discharged . . . was toxic and harmful" rendered unacceptable a conclusion that no harm had been expected." Id. (citation omitted).

On appeal to the New Jersey Supreme Court, Morton argued that the Appellate Division's reliance on Atlantic Employers improperly equated the discharge of pollutants with child molestation as acts that could be deemed intentionally injurious as a matter of law. Morton further argued that "the Appellate division improperly invoked an objective standard for determining whether harm had been intended or expected under the `occurrence' based policies, ignoring the long-standing principle that coverage exists for the unintended results of intentional acts." Id.

The court began its analysis by acknowledging the unique circumstances that surround issues of insurance coverage for environmental damage.

In applying our holding in Voorhees to claims seeking coverage for property-damage caused by environmental pollution under occurrence-based 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." Although insureds may concede that pollutants -- even known pollutants -- had been intentionally discharged, those insureds are virtually certain to insist that the resultant harm was unintended and unexpected. Absent "smoking gun" testimony from a disgruntled employee, proof of subjective intent to cause environmental harm will rarely be available in environmental insurance coverage litigation.

We noted in Voorhees that an alternative to proof of subjective intent to injure existed in those cases in which the insured's "actions are particularly reprehensible, [so that] the intent to injure can be presumed from the act without an inquiry into the actor's subjective intent to injure." We cited Atlantic Employers, . . . as illustrative of conduct that was so inherently injurious as to warrant the conclusion that intent to injure could be presumed. . . . We are unpersuaded that environmental-pollution litigation should generally be included in that category of cases, typified by Atlantic Employers, in which reprehensible conduct justifies a presumption that injury was intended. Id. at 879 (citations omitted) (emphasis added).

Instead of establishing a general rule, the court called for an individualized inquiry based upon the facts of each case.

[I]nsureds held responsible for remediation of environmental pollution vary significantly in their degree of culpability for the harm caused by pollutant discharges. 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.

Instead, we hold that in environmental-coverage litigation a case-by-case analysis is required in order to determine whether, in the context of all the available evidence, "exceptional circumstances [exist] that objectively establish the insured's intent to injure." Voorhees, supra, Id. at 879-80 (emphasis added).

The term "exceptional circumstances" had been used in Voorhees. As noted above, there, the court stated that, absent exceptional circumstances, the subjective intent of the insured controlled whether there was an "occurrence" under an occurrence based insurance policy.

In Morton, the court defined those exceptional circumstances.

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. Id. at 880.

It is important to note that even though these circumstances include "the existence of subjective knowledge concerning the possibility or likelihood of harm," that subjective knowledge is not used to definitively determine if the insured expected or intended environmental damage. Rather, the insured's subjective knowledge is but one of those "exceptional circumstances" that determine if an "occurrence" has taken place.

In a further effort to adopt prior law (particularly the holding in Karlinski) to environmental insurance coverage, the court noted that subjective evidence of the polluter's intent did not become relevant merely because the extent of pollution was greater than anticipated.

Turning to the question whether environmental injury was intended or expected, we first observe that although the magnitude of the damage to Berry's Creek and the surrounding areas may exceed any intention or expectation attributable to Morton's predecessors, we do not consider that differences in harm relating to the 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. Whether Morton's predecessors anticipated that discharges of untreated effluent on the plant site and into Berry's Creek for more than forty years would cause environmental harm of the severity described . . . hardly demonstrates that the extent of the injury was "improbable." The holding in SL Industries was based on the Appellate Division's ruling in Karlinski, that in a coverage action arising from a fight between two young teenagers in which one sustained a broken hip, a factual issue of subjective intent 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. Id. at 882 (citations omitted).

The court then reviewed the record to determine the extent to which it established the presence of "exceptional circumstances". The court noted, "[i]n determining whether in the context of this record the trial court properly concluded, as a matter of law, that Morton's predecessors had intended or expected environmental injury, we focus on those factors that we previously have identified to be significant." Id. The court concluded that exceptional circumstances established as a matter of law that there had been no occurrence as Morton's predecessors had to have expected the pollution they caused. The objective nature of this conclusion is further evidenced by the court's clearly stating that it was not deciding whether Morton's predecessors "intended" the damage.

We are thoroughly persuaded that summary judgment was properly granted, there being no material disputed facts concerning whether Morton's predecessors had expected to cause environmental damage to Berry's Creek and the surrounding area. Without determining that such damage was intended, we find inescapable the conclusion that damage qualitatively comparable to that found to exist in the Ventron litigation must have been anticipated by Morton's predecessors on the basis of their prolonged knowledge of and avoidance of compliance with complaints by regulatory officials that the company was discharging unacceptable emissions, including mercury compounds, into Berry's Creek. Based on that conclusion, we concur with both the trial court's and Appellate Division's determination that as a matter of law the property damage to Berry's Creek and the surrounding area was not caused by an "occurrence" within the meaning of the term in the various CGL policies. Id. at 884.

VI. Chemical Leaman's Intent to Pollute.

Chemical Leaman asks us to hold that even under Morton its subjective intent to damage the environment must control. See Appellee's brief at 22. Chemical Leaman argues that "in order to constitute an 'exceptional circumstance' mandating a judicial finding of intent (rather than a trial on the subjective intent of the insured), the insured's conduct must be so 'reprehensible' and egregious' and 'so inherently injurious that [the resulting damage] can never be an accident.'" Appellee's brief at 21. This argument confuses "exceptional circumstances" with "reprehensible conduct", and can not withstand even a cursory examination of Morton. The court in Morton specifically ruled that environmental pollution does not constitute the kind of "reprehensible conduct" that justifies finding an intent to harm as matter of law under Atlantic Employers, yet the court held that "exceptional circumstances" justified the finder of fact in concluding that Morton's predecessors intended or expected to harm the environment.

Moreover, the court explained that its approach was mandated by the reality that a polluter may well admit the acts that cause pollution but will almost never concede an intent to pollute. Accordingly, the court inquired into the presence of "exceptional circumstances" that would objectively establish the insured's intent to injure the environment in the absence of "smoking gun" proof of actual (subjective) intent.

However, Karlinski remains even under Morton, and therefore, Chemical Leaman's subjective intent is still relevant if the extent of the environmental harm that it caused is found to be "improbable" or unforeseeable. Morton, 629 A.2d at 882 (citing SL Industries, 607 A.2d at 1278). If that is the case, there is still a covered "accident" or "occurrence" unless Chemical Leaman subjectively intended to cause that specific harm. Id. However, a subjective inquiry into Chemical Leaman's intent is not triggered merely because the "magnitude of the damage to [the Bridgeport area] may exceed [Chemical Leaman's] intention or expectation." Id. at 882 A case by case analysis based on all the available evidence is required to determine whether "exceptional circumstances" objectively establish intent to injure. Although the insured's "objective intent" to injure can be decided as a matter of law if there are no disputed material issues of fact, we reject Chemical Leaman's argument that this "objective intent" to injure is a threshold issue that must be decided by a court as a matter of law. See Brief of Appellee at 21-22. If there are disputed issues of fact then the trier of fact must examine all the evidence and determine whether "exceptional circumstances" exist that objectively establish the insured's intent to injure.

The Morton factors should have been considered by the district court when ruling on the insurers' Rule 50(b) motion. Our review of the record establishes that exceptional circumstances establish as a matter of law that Chemical Leaman expected or intended environmental damage as of November 1968. *fn18

A. The Duration of the Discharge.

The first factor that we consider under Morton is the duration of the discharge. In Morton the discharge into Berry's Creek continued over a period of at least eighteen years, and perhaps as long as forty-five years. Morton, 629 A.2d at 882. Here, Chemical Leaman daily discharged its pollutants for 15 years before finally contracting with Du Pont. Throughout the time the pond and lagoon system was in use there were repeated discharges of waste through the overflow pipe to the adjacent swamp. In fact, the very purpose of the overflow pipe was to allow for discharges from the last pond to the swamp.

Inspector Robinson observed this discharge from the last pond during his September 12, 1961, visit and thereafter observed similar discharges on about half of his visits to the Bridgeport site. In November 1968 water pollution inspectors from the New Jersey Department of Health again observed the discharge from the overflow pipe in the last lagoon. Although it was characterized as a sporadic "trickle", Elston and Holman admitted that the overflow pipe did discharge into the swamp throughout the time the pond and lagoon system was in use.

B. Was the Discharge Innocent or deliberate?

In Morton, the court concluded that the discharge of pollutants was intentional once the polluters knew it was unacceptable. Morton, 629 A.2d at 882. There, the repeated demands of the Department of Health that the owner halt the discharges or install adequate treatment facilities were regularly ignored. Id.

Here, the intentional nature of the discharge is also evident. Chemical Leaman intentionally designed its waste treatment system so that the overflow pipe would discharge into the swamp. Moreover, even under the subjective framework that the jury was given to review the evidence, the jury concluded that Chemical Leaman's "overflow pipe" releases were intentional. That conclusion is supported by the record and Chemical Leaman cannot now successfully argue that the discharge was anything but intentional. Indeed, Chemical Leaman's protestations illustrate the concerns in Morton wherein the court stated that a polluter may admit to the discharge, but would never admit to intentionally polluting the environment.

Here, as in Morton, the intentional nature of the discharge is confirmed by Chemical Leaman's continued evasion of the State's demands to stop the discharge. The unacceptable condition of the discharge from the overflow pipe into the swamp was brought to Chemical Leaman's attention by Inspector Robinson in September 1961. Although Chemical Leaman installed three more lagoons in an attempt to alleviate this situation, the overflow pipe remained a staple of the Bridgeport site and in 1968 Chemical Leaman was discharging wastes into the lagoon in the same manner seven years later. Chemical Leaman intentionally discharged wastes into the swamp both before and after it knew that this practice was unacceptable.

C. Knowledge of the harmful propensities of the pollutants.

State officials regularly informed Chemical Leaman that the effluent flowing from the overflow pipe constituted an unacceptable discharge into the swamp. In 1961, FGW told Chemical Leaman that the discharge was an unacceptable condition and that the resulting pollution should be stopped within a year. Subsequently, in 1968 the NJDOH told Chemical Leaman that "the waste emanating from the lagoon is highly pollutional and [that] immediate measures [should] be taken to eliminate this discharge or to sufficiently treat the waste prior to discharge" and in 1969 Chemical Leaman was ordered to find an alternative method of waste treatment.

Chemical Leaman argues that it was not aware of the harmful propensities of its pollutants because it was not discharging pure chemicals, but rather "trace amounts" of these chemicals in highly diluted rinsewater. However, the uncontroverted evidence clearly showed that at least by 1968 Chemical Leaman was alerted that the discharge into the swamp was "highly pollutional" even in its diluted form.

D. Efforts of Regulatory Authorities.

Chemical Leaman is more sympathetic than the polluters in Morton who engaged in a deliberate pattern of "stonewalling" characterized by promises of compliance that went unfulfilled. Morton, 629 A.2d at 882. Chemical Leaman apparently thought that its natural filtration system would reduce the danger of pollution. In fact, it was designed to do just that. Nevertheless, the record here also evidences a pattern of unfulfilled promises of compliance to state agency requests to abate the polluting discharge.

After Inspector Robinson's visit in 1961, Chemical Leaman promised to comply with his request to stop discharging waste from the overflow pipe into the swamp. Although Chemical Leaman attempted to alleviate this unacceptable situation by installing three more lagoons, and Inspector Robinson noted while on a return visit in 1962 that the seepage into the ground was a good sign, the overflow pipe remained an integral part of the waste treatment system.

Even after officials caught Chemical Leaman discharging into the swamp in 1968 and ordered it to find a better way to treat wastes in 1969, Chemical Leaman never improved the waste treatment system until the summer of 1975, when the contract with Du Pont was entered into. In the interim, 40 to 50 million gallons of contaminated waste water had been processed using the same treatment system.

Thus, from 1961, when the State first notified Chemical Leaman that the discharge to the swamp was unacceptable, until 1975, when Chemical Leaman began off-site disposal at the Du Pont plant, Chemical Leaman responded to regulatory agencies with promises of compliance that went unfulfilled.

Because of Morton's command that we consider "all the available evidence" to determine whether exceptional circumstances exist that establish an objective intent to injure, we believe it both appropriate and necessary for us to also consider that the operation at Bridgeport was illegal from the very beginning. Chemical Leaman never obtained the required permits or other necessary approvals for the Bridgeport site. Indeed, this may well be the reason that it took the officials until September 1961 to discover the discharge to the swamp. If it were not for a local resident's complaint of dead fish in March 1961, it may have been years before the state stumbled upon the unacceptable discharges to the swamp.

Chemical Leaman argues it did not know it needed a permit and the absence of a permit is therefore irrelevant. However, compliance with regulatory agencies can not be so lightly dismissed. Moreover, Chemical Leaman's response to regulatory agencies once its treatment system became known is relevant, and that response is less than exemplary.

E. The Insured's Subjective Knowledge.

The final Morton factor which we must consider is the insured's subjective knowledge of the likelihood of harm. In Morton, the court held that the likelihood of harm could be inferred from the fact that the former plant owners were told that the effluent was unacceptable for discharge into Berry's Creek, yet repeatedly ignored demands for compliance. Morton, 629 A.2d at 882.

Similarly, Chemical Leaman was informed that the discharge to the swamp was unacceptable. Although the state did not articulate why the discharge was improper, it is difficult to imagine what other reason Chemical Leaman could have attributed to the state's concern if not the impact of the discharge upon the environment. Moreover, it is clear from Chemical Leaman's own argument in this regard that it never attempted to ascertain the reason for the State's concern.

Nevertheless, assuming arguendo that in 1961 Chemical Leaman could not ascertain that its system was damaging the environment, there is no dispute that Chemical Leaman learned that the discharges to the swamp were likely to cause harm as of November of 1968 when it was expressly told that "the waste emanating from the lagoon is highly pollutional and [that] immediate measures [should] be taken to eliminate this discharge or to sufficiently treat the waste prior to discharge." Even more telling is Harry Elston's concession at trial that both at the time of FGW's inspections in 1961 and 1962, and at the point when NJDOH issued its order in 1969, he knew that Chemical Leaman's discharge into the swamp was causing some damage to the swamp.

Chemical Leaman repeatedly asserts that it did not know of the possibility or likelihood of environmental harm because it designed, built and operated its waste treatment system to prevent environmental harm. However, Chemical Leaman discharged approximately 100 million gallons of contaminated waste water into its unlined ponds and lagoons for the 15 years that the Bridgeport site was in operation. The bottom of those lagoons was only two and a half feet above the groundwater, and the insurers' expert testified that the soil, groundwater and swamp contamination was the probable result of this discharge. That testimony was not refuted by Chemical Leaman's expert even though Chemical Leaman argues on appeal that their unlined treatment system was the state of the art. *fn19 Moreover, even assuming that Chemical Leaman's mistaken belief that the soil was acting as a natural cleanser was held in good faith, that belief is only one factor that the fact finder must examine to determine Chemical Leaman's objective intent and expectation under Morton. At trial, Chemical Leaman's in-house expert, Harry Elston, conceded that he knew that the soil would not eliminate one hundred percent of the contaminants.

Although Chemical Leaman may have believed that the discharge was relatively clean because it emanated from the last pond, Elston's admission must be weighed along with the other Morton factors to determine the objective knowledge of Chemical leaman insofar as the overflow pipe is concerned.

VII. Improbability of the Environmental Harm

Having found that Chemical Leaman intended to damage a portion of the environment as of November, 1968, we must determine what effect, if any, this has upon Chemical Leaman's right to coverage for damage to other parts of the environment before and after that date. Just as the severity of harm was not improbable though it may have exceeded any intention or expectation of Morton's predecessors, the severity of the damage here was not improbable. "[W]e do not consider that differences in harm relating to the severity of environmental damage give rise to a finding of 'improbability' of harm that invokes the need for evidence of subjective intent." Morton, 629 A.2d 882.

The "severity of harm" that the Morton court was referring to was the enormous quantity of mercury that saturated Berry's Creek and the surrounding areas. However, while the Morton court did not elaborate on this point we believe that the "severity of the harm" can mean at least two very different things in the environmental pollution context. As Morton expressly held, the "severity of the harm" is the quantity of mercury or other pollutants in the land and water. However, the "severity of the harm" can also refer to the different components of the environment that are ultimately injured by the polluting process. "Determination of the magnitude of the damage includes recognition that the disposal of toxic waste may cause a variety of harms, including ground water contamination via leachate, surface water contamination via runoff or overflow, and poison via the food chain." Ventron, 468 A.3d at 159-160 (citing, Special Report to Congress, Injuries and Damages from Hazardous Wastes -- Analysis and Improvement of Legal Remedies in Compliance with section 301(e) of the Comprehensive Environmental Response Compensation and Liability Act of 1980 By the Superfund Section 301(c) Study Group (reprinted as Comm. Print for the Senate Comm. on Envtl. & Pub. Works, Serial No. 97-12, 97th cong., 2d Sess. 1982)). Furthermore, the Ventron court noted that "the waste dumped may react synergistically with elements in the environment, or other waste elements, to form an even more toxic compound." Id. at 160 (citing, W. Stopford & L.J. Goldwater, "Methylmercury in the Environment, A Review of Current Understanding," 12 Envtl. Health Persp. 115-18 (1975)).

In Morton, the insured was held to have objectively intended the damage to Berry's Creek and the surrounding areas and thus was not entitled to coverage for any of this damage under the CGL policies. Damage to the entire area was the probable result of dumping mercury into the creek. Chemical Leaman would have us parse out various components of the environment and individually determine its intent with regard to each even though each is an integral part of the whole. The court in Morton did not do this, and we see no reason for us to engage in such an unrealistic analysis. See New Hampshire Ball Bearings v. Aetna Casualty & Sur. Co., 43 F.3d 749, 753 (1st Cir. 1995) ("We have serious doubts that the intended injuries to the top soil and wetlands are divisible from the unintended injury to the groundwater.").

VIII. Summary of the Required Intent

The district court correctly concluded that the insured has the burden of proof on establishing coverage. Accordingly, Chemical Leaman must establish by a preponderance of the evidence that the environmental damage for which it seeks recovery is an "occurrence" or "accident" within the meaning of the applicable policies. To summarize, we hold that Morton requires that an objective standard be used in determining whether environmental damage was either "expected or intended from the viewpoint of the insured." The district court, acting without the benefit of the New Jersey Supreme Court's pronouncement on this issue erred in charging the jury that Chemical Leaman's subjective intent controlled, and a new trial is therefore required. If, after hearing the evidence, the factfinder concludes that exceptional circumstances exist that objectively establish that Chemical Leaman expected or intended to cause environmental damage there is no occurrence and no coverage under the applicable policy unless the extent of the damage was unforeseeable. If it is determined that the extent of the damage was unforeseeable there will still be coverage unless the factfinder concludes that Chemical Leaman subjectively intended or expected that the damage was likely to result from its activities.

Applying these principles to the record before us we find, as a matter law, Chemical Leaman expected or intended the damage it was causing to the environment as of November, 1968, and the damage was not improbable in view of Chemical Leaman's waste treatment system. Accordingly, beginning in November, 1968 there was no "occurrence" and Chemical Leaman is not entitled to coverage for damage after that period. However, we do not feel that the record sufficiently establishes the state of Chemical Leaman's knowledge or expectations before November, 1968, and we must therefore remand to the district court for a factual determination of Chemical Leaman's objective expectations or intentions before November, 1968. Upon remand, if the factfinder conducts the appropriate inquiry and concludes that Chemical Leaman did not objectively expect or intend to cause the environmental damage that resulted from its waste treatment system during any portion of that period, Chemical Leaman is covered under the insurance policy applicable to such period. However, if the factfinder concludes that exceptional circumstances do establish that Chemical Leaman intended or expected environmental damage, there was no occurrence and no coverage for the applicable period unless the extent of that damage was unforeseeable.

If the fact finder determines that the damage was unforeseeable it must then determine if Chemical Leaman subjectively intended the specific damage that resulted from its practices.

IX. The Pollution Exclusion Clauses

LMI has also appealed the trial court's ruling as to the applicability of the Pollution Exclusion Clauses contained in Chemical Leaman's policies. However, the policies did not contain this exclusion until 1971. Since we hold that Chemical Leaman may not recover for any period after November, 1968, we need not reach this issue. However, several other issues must still be addressed.

X. Other-Site Evidence

Before trial, Chemical Leaman made a motion in limine to exclude all evidence of any environmental problems at any Chemical Leaman site other than Bridgeport. The district court granted this motion under Federal Rule of Evidence 403 because the court found that the probative value of the evidence was substantially outweighed by the danger of unfair prejudice, jury confusion, and undue waste of time.

LMI argues that the district court abused its discretion by barring evidence of the environmental problems at other Chemical Leaman wastewater disposal sites. LMI argues that this evidence is relevant to show Chemical Leaman's knowledge of injury at Bridgeport, and that it should have also been introduced to impeach Elston's testimony. *fn20 In denying the motion, the court stated:

the jury would have to evaluate the various explanations offered by Chemical Leaman on why its knowledge of alleged problems at other sites did not translate into an expectation or intention that the rinsewater treatment system in Bridgeport would cause damage. These explanations include, among others, whether damage actually occurred at the other sites; and whether the geological and other conditions at the other sites were significantly different or substantially the same as at Bridgeport. Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Sur. Co., No. 89-1543, slip op. at 4-5 (D.N.J. March 17, 1993).

The court feared that a series of mini-trials would be necessary, and that this would spawn collateral inquiries that "would cause undue delay and mislead and confuse the jury as to its ultimate factual issue, namely the subjective expectations and intent of Chemical Leaman in respect to the Bridgeport site." Id. at 5. This was a reasonable concern. However, the district court further noted that "evidence that Chemical Leaman was on notice that its design concept of unlined ponds and lagoons could cause soil, groundwater or swamp damage can be used by a jury to find that Chemical Leaman should have known that the rinsewater treatment system in Bridgeport would cause damage." Id. The court held that the danger that a jury may apply this objective standard constituted a danger of undue prejudice which further warranted exclusion of the other-site evidence. This objective standard is precisely the inquiry that is required.

At oral argument before this court, the parties disputed the number of sites that were at issue and the number of witnesses needed to introduce this testimony. The district court must determine if the specific evidence that the insurers seek to introduce is so probative of Chemical Leaman's objective knowledge that it outweighs the court's other concerns. Under our reading of Morton the other-site evidence is more probative than it was under the subjective inquiry employed by the district court. Upon remand, the district court should again balance the competing considerations for admitting and excluding this evidence keeping in mind that it is relevant to Chemical Leaman's objective knowledge.

Since the district court is in a better position than this court to know the number of potential witnesses and exhibits, the complexity of the testimony, and the amount of trial time involved, it is in a better position than this court to conduct the Rule 403 balancing.

XI. Owned Property Exclusion

Aetna's policies contain an "owned property exclusion" that excludes coverage for damage to property owned or occupied or used by the insured. While LMI's policies do not contain this exclusion, several pre-1968 LMI policies provide that they are subject to the same warranties, terms, and conditions as are contained in the policies of the primary insurers. Thus, Aetna's "owned property exclusion" is arguably applicable to these LMI policies. Therefore, we will address whether the "owned property exclusion" is a bar to coverage.

In granting Chemical Leaman's motion for partial summary judgment, the district court held that the "owned property exclusion does not bar coverage for remedial measures on Chemical Leaman's own property so long as those efforts are directed at correcting injury to the ground and surface water and neighboring private wells. See Chemical Leaman, 788 F. Supp. at 853. The court based its ruling on the fact that "the EPA has already determined that the Site was the primary source of the groundwater contamination in the vicinity of the Bridgeport Terminal facility and that other private wells are threatened with contamination." Id.

On appeal LMI argues that the district court failed to recognize that the groundwater is the property of the surface landowner, not the state of New Jersey. Accordingly, it claims that the owned property exclusion bars coverage for the remediation of groundwater contamination at the Bridgeport site, even though directed at preventing further damage of third-party property.

The New Jersey Supreme Court has never addressed whether the state or the surface landowner owns the groundwater beneath the landowner's property. In Reliance Ins. Co. v. Armstrong World Indus., 625 A.2d 601, 608 (N.J. Super. Ct. Law Div. 1993), the Law Division held that "[t]he `property interest' in groundwater is clearly an interest held by the owner of the recorded title of the surface land." There, unlike here, there was no evidence that the groundwater pollution had migrated and caused damage to groundwater outside the boundaries of the insured's property. Regardless of who owns the groundwater beneath the Bridgeport site, it is clear that the owned property exclusion does not apply to clean-up activities performed at the Bridgeport site to remedy or prevent damage to property owned by others. See New Jersey v. Singo Trading Int'l, Inc., 612 A.2d 932, 938 (N.J. 1992). In Singo, the New Jersey Supreme Court held that the owned property exclusion applies when there is no present damage to third-party property. However, the court went on to note that once there is some damage to third-party property coverage is available for clean-up activities performed on the insured's property to prevent further injury to the third-party property, as well as to remedy the existing damage to third-party property. See id. at 938-39.

The owned property exclusion barred coverage in Singo because "no present or past injury to property of a third party [had been] proven." Id. at 938-39. Here, LMI acknowledged that neighboring ground water wells have been contaminated. Moreover, numerous site investigation reports and the testimony of expert hydrogeologists for both sides have confirmed that four neighboring water wells have been contaminated and at least three more are threatened by the groundwater contamination. Accordingly, coverage is available for clean-up that is necessary to remedy the existing damage to the neighboring groundwater wells, and to prevent further injury to other groundwater wells. Thus, we affirm the district court's grant of summary judgment.

XII. Continuous Trigger

The time of an "occurrence" under a CGL policy is the time when the complaining party is damaged. Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 982 (N.J. 1994). LMI challenges the district court's conclusion that the "continuous trigger" theory was the law of New Jersey. That theory basically provides that "where an injury process is not a definite discrete event, the date of the occurrence should be the continuous period from exposure to manifestation of damage." Gottlieb v. Newark Ins. Co., 570 A.2d 443, 445 (N.J. Super. Ct. App. Div. 1990). "[T]he term 'trigger' is merely a label for the event or events that under the terms of the insurance policy determines whether a policy must respond to a claim in a given set of circumstances." Owens-Illinois, 650 A.2d at 979. In the environmental pollution context, "[t]he conceptual underpinning of the continuous-trigger theory is that injury occurs during each phase of environmental contamination -- exposure, exposure in residence (defined as further progression of injury even after initial exposure has ceased), and manifestation of disease." Id. at 981.

In its summary judgment motion before the district court, Chemical Leaman asserted that New Jersey endorses the continuous trigger theory, and that under this theory all of the insurers' polices are triggered from 1960 through 1985.

The district court held that under the continuous trigger theory, all insurance policies activated by an ongoing occurrence are jointly and severally liable to policy limits for all damages resulting from that occurrence, including damage occurring before or after the policy period. However, the court held that:

New Jersey law requires the insured to make two factual showings before imposing joint and several liability under the continuous trigger theory. First, the insured must establish that some kind of property damage occurred during each policy period for which the insured seeks coverage. Second, the insured must establish that the property damage was part of a continuous and indivisible process of injury. Chemical Leaman, 817 F. Supp. at 1153-54.

Since each of these issues was disputed, the district court denied Chemical Leaman's motion for summary judgment. However, the court noted that if Chemical Leaman could establish these factual predicates at trial, all policies triggered by a continuous occurrence would be jointly and severally liable and the court charged the jury accordingly.

A.

On appeal, LMI contends that New Jersey does not recognize the continuous trigger theory and thus, the court improperly charged the jury. Our review of jury instructions is plenary. See Hook v. Ernst & Young, 28 F.3d 366, 370 (3d Cir. 1994). Our inquiry must focus upon "whether the charge taken as a whole fairly and adequately submits the issues in the case to the jury." Id.

After the oral argument in this case the New Jersey Supreme Court rendered its decision in Owens-Illinois, Inc. v. United Ins. Co., supra. Owens-Illinois clearly establishes that the continuous trigger theory involving progressive indivisible injury or property damage is the law of New Jersey. However, New Jersey has rejected strict imposition of joint and several liability of insurers in favor of an alternative allocation of liability related to the degree of risk transferred or retained by the insured during the years of exposure. See Owens-Illinois, 650 A.2d at 993.

In Owens-Illinois, Owens-Illinois ("O-I"), a company that had manufactured insulation containing asbestos between 1948 and 1958, brought a declaratory judgment action against its two lead insurers seeking a declaration that they must provide coverage for numerous asbestos-related personal-injury and property-damage claims brought against O-I. "Between 1948 and 1963, O-I was self-insured; it maintained no insurance to cover its product liability losses but bore that risk itself." Id. at 976. From 1963 to 1977 O-I was insured under excess indemnity policies by Aetna. These policies contained a deductible, or "self-insured retention," for each occurrence resulting in personal injury or property damage. From 1977 to 1985, O-I had primary coverage with United Insurance Company and excess coverage from a captive insurance company that reinsured with various insurance companies. See id. at 976-77.

The New Jersey Supreme Court granted certification on two issues pertaining the insurance policies issued from 1977 to 1985: (1) the application of the continuous trigger theory, and (2) any consequent apportionment of liability. After an extensive survey of the applicable law, the court applied the continuous trigger theory to the claims of asbestos-related injury and property damage. The court held that "courts may reasonably treat the progressive injury or damage as an occurrence within each years of a CGL policy" when faced with a progressive, and indivisible injury. Id. at 995. Thus, the asbestos related bodily injury and property damage claims triggered all applicable policies from initial exposure to the asbestos product through manifestation of asbestos-related disease or property damage. Although the court was concerned with personal injury, not environmentally related property damage, the court clearly stated that its analysis was analogous to the latter situation as the environment doesn't immediately manifest the effects of exposure. "Thus, while property damage is not, of course, an insidious disease, many of the same considerations apply." Id. at 983.

The court then relied in part upon Keene Corp. v. Ins. Co. of North Am., 667 F.2d 1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007 (1982), to hold that the "triggered policies must respond to a claim on a prorated basis and that a policyholder is responsible for a portion of indemnification and defense obligations as a result of periods of time when it was uninsured or self-insured." Id. at 987.

Here, Chemical Leaman was insured by Aetna and LMI from the time the environment was first exposed to the hazardous substances until the damage became evident. It therefore retained no risks. Consequently, any liability resulting from a continuous "occurrence" or "accident" during this period should be borne solely by LMI subject only to policy limits and exclusions. See id. at 994. Thus, if after the new trial LMI is held liable under any of the triggered policies, the district court must conduct the alternative allocation of liability established in Owens-Illinois, and allocate the losses among the carriers on the basis of the extent of the risk assumed.

We hold that the district court correctly held that New Jersey recognizes the continuous trigger theory. However, when charging the jury the court should omit mention of joint and several liability. Instead, the policy limits of any triggered policies must be allocated in accordance with the formula established by Owens-Illinois.

B.

LMI argues that Chemical Leaman failed to prove property damage for each policy year from 1960-70, and that the district court therefore erred in: (1) granting summary judgment in favor of Chemical Leaman for the 1960-61 policy year, and (2) denying its motion for judgment as a matter of law with respect to the 1961-70 policy years. LMI also argues that the court erroneously instructed the jury on the meaning of "property damage" which, in turn, allowed the jury to find the existence of property damage without proof of actual environmental damage.

Each of these arguments presumes that New Jersey does not recognize the continuous trigger theory. In light of Owens-Illinois, these arguments are clearly without merit.

1. 1960-1961 policies

The district court found as a matter of law that groundwater and soil damage occurred in 1960, thus triggering the 1960-61 policies. The court based its conclusion on the fact that "contaminated rinsewater from the three settling ponds started migrating through the soil to underlying groundwater almost immediately after beginning pond operation in 1960." Chemical Leaman, 817 F. Supp. at 1148. Injury occurs during each phase of environmental contamination under the continuous trigger theory. Thus, an injury occurred as soon as the soil and groundwater were exposed to the contaminants in the rinsewater. The record reflects that the point of initial exposure was "immediately after beginning pond operation in 1960." Thus, we hold that the district court did not err in granting Chemical Leaman summary judgment with respect to the 1960-61 policies.

2. 1961-1970 policies

Likewise, we hold that the district court did not error in denying the insurers' motion for judgment as a matter of law. The insurers argued that Chemical Leaman had not demonstrated that property damage occurred during each of the policy years between 1961-1970. On appeal, LMI contends that the lack of any pre-1970 evidence of soil or groundwater contamination demonstrates that the district court did not require Chemical Leaman to show damage-in-fact for each policy year. LMI maintains that this error resulted in the improper denial of their motion for judgment as a matter of law.

As discussed above, under the continuous trigger theory the actual injury need not manifest itself in each and every policy year so long as there is a continuous, indivisible process resulting in damage. Thus, we affirm the district court's denial of the insurers' motion.

3. Jury instruction on "property damage"

Over the insurers' objections, the district court instructed the jury on the meaning of "property damage" and the applicability of the continuous trigger as follows:

"PROPERTY DAMAGE" -- DEFINED

In order for Chemical Leaman to obtain basic coverage under defendants' insurance policies, you, the jury, must determine whether or not property damage occurred at the Bridgeport site during the relevant periods. Property damage in the context of this case means physical injury to the soil, the groundwater and/or the wetlands at or about the Bridgeport site.

You are instructed that as to the policy year April 1, 1960, to April 1, 1961, the Court has already ruled as a matter of law, that property damage to soil and groundwater took place.

"CONTINUOUS TRIGGER DOCTRINE"

Under New Jersey law, Chemical Leaman may be entitled to coverage under the defendants' insurance policies for property damage that occurs during a policy period, but that originally began during an earlier policy period . . . .

On appeal, LMI argues that:

[this] jury charge, in light of the evidence, could not fairly apprise the jury of what constitutes "property damage" consistent with New Jersey's requirement of damage-in-fact, unless the charge defined "property damage" to mean "actual injury" and required the jury to find "new property damage" to each environmental medium during each policy period for which coverage was sought. LMI's Brief at 40.

Under the continuous trigger theory the jury could find that property damage occurred during a policy period if there was proof that an indivisible injurious process took place during the policy period, regardless of when the actual environmental injury became manifest. Thus, the district court's jury charge was not erroneous.

XIII. Late Notice

Chemical Leaman concedes that it did not comply with the notice requirement in the policies, and LMI argues that this omission relieves them from any obligation to provide coverage.

The district court relied upon Morales v. National Grange Mut. Ins. Co., 423 A.2d 325 (N.J. Super. Ct. Law Div. 1980), to hold that Chemical Leaman was entitled to coverage despite the absence of notice.

It is . . . beyond dispute that notice should have been given to defendants, at the earliest, by 1984, when the EPA placed the Bridgeport site on the Superfund national priorities list. The court finds that the evidence in the record fails to establish that defendants suffered a likelihood of appreciable prejudice in their ability to contest coverage . . . . The insurers have not submitted proof that they would have been in any better position to make this case beginning in 1984 upon timely notice . . . . Chemical Leaman, 817 F. Supp. at 1158-59.

The court also examined whether the delayed notice had impacted upon "the likelihood of success of the insurer in defending against the underlying claim." The court noted that:

Chemical Leaman, as an owner and operator of the Bridgeport facility, is strictly liable under CERCLA for damages for injury to, destruction of, or loss of natural resources, as well as for the reasonable costs of assessing such damage to natural resources, and all costs of removal, remediation, or other necessary response costs. Chemical Leaman's liability for these damages is retroactive, joint, and several, and imposed regardless of fault. Defendants do not contend that a meritorious challenge exists to the findings, made in the 1985 consent order . . . . Nor do defendants assert that there is a meritorious defense to the EPA's allegation that the presence of hazardous substances at the Bridgeport facility and their migration to surrounding soils and groundwater constitute a release within the meaning of section 101(2) of CERCLA, 42 U.S.C. Section(s) 9601(22). Accordingly, the court finds that defendants have not shown a likelihood of success in defending Chemical Leaman against claims under CERCLA. Id. at 1159 (citation omitted).

Since prejudice was not demonstrated, the district court ruled that the late notice did not bar recovery.

LMI does not now dispute that it must prove that it suffered a likelihood of appreciable prejudice. However, it suggests that the New Jersey Supreme Court would not adopt the two prong Morales test for appreciable prejudice employed by the district court.

LMI does not cite to any New Jersey case in which this test has been rejected, or in which a different standard has been applied. We have previously recognized that the Morales test is consistent with the purpose of the prejudice requirement, that is, "to allow an insurer to refuse payment only if its procedural handicap has led to disadvantageous, substantive results -- in other words, if the insured's violation of its contract has proximately caused its insurer damages." Trustees of the University of Pennsylvania v. Lexington Ins. Co., 815 F.2d 890, 898-99 (3d Cir. 1987). Several courts applying New Jersey law have adopted the Morales test of appreciable prejudice in environmental coverage cases. See Continental Ins. Co. v. Beecham, Inc., 836 F. Supp. 1027, 1047-48 (D.N.J. 1993); Hatco v. W.R. Grace & Co., 801 F. Supp. 1334, 1371-72 (D.N.J. 1992); Witco Corp. v. Travelers Indem. Co., Civ. 86-2997, 1987 WL 65060 (D.N.J. May 1, 1987).

"Although lower state court decisions are not controlling on an issue on which the highest court of the state has not spoken, federal courts must attribute significant weight to these decisions in the absence of any indication that the highest state court would rule otherwise." Wisniewski v. Johns-Manville Corp., 759 F.2d 271, 273-74 (3d Cir. 1985). We do not think the Supreme Court of New Jersey would reject this 15 year old test. Accordingly, we find that the district court correctly relied upon Morales in ruling that the absence of timely notice does not bar recovery.

XIV.

For the foregoing reasons, we will reverse and remand for proceedings consistent with this opinion.

SCIRICA, Circuit Judge, dissenting.

Despite having rendered its opinion before the New Jersey Supreme Court's opinion in Morton Int'l, Inc. v. General Accident Ins. Co., 629 A.2d 831 (N.J. 1993), cert. denied, 114 S. Ct. 2764 (1994), the district court correctly required the insurers to prove that Chemical Leaman subjectively expected or intended to cause the environmental harm for which it sought coverage. The New Jersey Supreme Court has recognized only a limited exception to the requirement that an insurer must prove its insured subjectively expected or intended to cause harm in order to deny coverage under an occurrence based insurance policy. Because I believe the majority has broadened that exception beyond what was contemplated by the New Jersey Supreme Court and has misapplied it to hold, as a matter of law, that Chemical Leaman intended or expected to cause the resultant environmental injury, I respectfully dissent.

In Morton, the New Jersey Supreme Court cautioned that courts may, as a matter of law, find objective intent to cause environmental harm only in "exceptional circumstances". The court defined those circumstances to include:

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. Morton, 629 A.2d at 880.

As the majority acknowledges, "a general rule in environmental coverage litigation that would permit intent to injure to be presumed simply on the basis of a knowing discharge of pollutants would be unjustified." Opinion at 32 (citing Morton, 629 A.2d at 879-80). Rather, a court may presume intent to injure only where insureds have engaged in "particularly reprehensible" conduct. Morton, 629 A.2d at 879.

The New Jersey Supreme Court recognized that "insureds held responsible for remediation of environmental pollution vary significantly in their degree of culpability." Id. Therefore, the court designed the "exceptional circumstances" test to apply to only the most egregious conduct and the worst polluters. 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.

Morton is instructive in considering the level of culpability required to allow intent to injure to be presumed in the environmental context. As the majority recognizes, "the specific circumstances in Morton help to define the parameters of the exceptional circumstances test." Opinion at note 18. 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.There is no "pattern of stonewalling" under the facts in this case. On the contrary, a fact finder 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. "Apparently, the designers of the system believed that the sandy bottom of the unlined ponds would purify the contaminated rinsewater by acting as a kind of natural filter . . . ." Opinion at 5. The overflow pipe "was apparently intended as a safety valve to prevent a rupture in the berms" which would have resulted in a massive loss of rinsewater in the event of a heavy rain. Id. at 7.

In September 1961, 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. Chemical Leaman responded by constructing a second set of lagoons and the final settling lagoon. Id. at 12. The majority refers to no further agency demands until seven years later, when water pollution inspectors from the New Jersey Department of Health concluded that discharges from the lagoon were "highly pollutional" and, in February 1969, ordered Chemical Leaman to submit plans for a system to properly treat the effluent. Id. 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. Id. at 13.

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. Despite its acknowledgment that Morton rejected a rule permitting "intent to injure to be presumed simply on the basis of a knowing discharge of pollutants," Opinion at 32 (citing Morton, 629 A.2d at 879-80), the majority has concluded that "a sporadic trickle," amounting to a "fraction of an inch" of discharge from the overflow pipe, id. at 7, warrants presumption of an intent to cause environmental damage. The exceptional circumstances that warranted such a presumption in Morton do not apply here, and I fear today's holding has broadened the parameters of the "exceptional circumstances" test beyond what the New Jersey Supreme Court intended. I would affirm.


Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.