(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued April 27, 1998 -- Decided July 8, 1998
STEIN, J., writing for a unanimous Court.
This appeal requires a determination of the responsibility of an excess insurer in the context of
environmental damage occurring over many years. Also presented is the issue whether an insurer bears the
burden of proving that environmental contamination was "expected" or "intended" by a policyholder, and the
jury instructions required on whether the contamination was expected or intended.
Carter-Wallace is a manufacturer of pharmaceutical and consumer products. Between 1966 and
1979, it hired a licensed waste hauler to remove and dispose of waste generated at the company's Cranbury,
New Jersey plant. The waste was transported to the Lone Pine Landfill. Lone Pine was closed by the New
Jersey DEP in 1979. In 1982, the United States EPA served notice on Carter-Wallace and numerous other
parties who had disposed of waste at Lone Pine that they were potentially responsible parties for
contamination at the site. Carter-Wallace and many other parties entered into a consent decree with EPA,
reached agreements among themselves to allocate the costs, and the cleanup project was completed.
Carter-Wallace brought this declaratory judgment action in 1989, seeking defense reimbursement
and indemnity from over twenty insurers for costs it expended for the cleanup of Lone Pine. The insurers
did not contest that the estimated amount of those costs was $9.2 million. Carter-Wallace settled with all but
one of its insurers, Commercial Union, which had issued a second-layer excess policy to Carter-Wallace that
was in effect from April 30, 1969 to April 30, 1972.
Commercial Union's policy provided $1 million in coverage, which was part of a shared $10 million
umbrella coverage in excess of both a $100,000 primary layer of coverage and a $5 million first-level excess
layer. Condition J of the policy states that "[l]iability under this policy with respect to any occurrence shall
not attach unless and until the insured, or the insured's underlying insurer, shall have paid the amount of the
underlying limits on account of such occurrence."
The action was tried in two phases, with Phase I being tried before a jury on the issue of
Commercial Union's liability. The court instructed the jury that Commercial Union bore the burden of
proving that Carter-Wallace "expected" or "intended" the damage at Lone Pine. Additionally, the court
refused to instruct the jury concerning the "exceptional circumstances" criteria outlined by this Court in
Morton International, Inc. v. General Accident Insurance Co. of America,
134 N.J. 1, 86-87 (1993), cert.
denied,
512 U.S. 1245,
114 S. Ct. 2764 (1994) for determining whether Carter-Wallace expected or intended
the damage (duration of discharges, insured's knowledge concerning the harmful propensities of the
pollutants, and the involvement of regulatory authorities).
Phase II of the action was a bench trial on damages. The court found that no part of Carter-Wallace's damages was allocable to Commercial Union, reasoning that Carter-Wallace had not yet exhausted
all of the primary and first-layer excess coverage during the seventeen-year trigger period. Interpreting
Owens-Illinois, Inc. v. United Insurance Co.,
138 N.J. 437 (1994), the court determined that coverage
provided by all triggered primary and first-layer excess policies must be exhausted ("horizontal exhaustion")
before allocating any share to Commercial Union's second-layer excess policy.
Both parties appealed. The Appellate Division held that the trial court erred in finding that Owens-Illinois required horizontal exhaustion before Commercial Union's policy could be pierced. It did not, however, offer an alternative allocation scheme, leaving to the trial court the responsibility of hearing more evidence on the issue on remand. On the remaining issues, the Appellate Division affirmed the trial court's
determination that Commercial Union had the burden of proving that contamination was "expected" or
"intended," and that the trial court properly declined to instruct the jury on the "exceptional circumstances"
criteria. The Supreme Court granted certification to consider those issues.
HELD: Allocating coverage to excess carriers requires a calculation of the share of responsibility borne in
each year of the trigger period, and then the application of the coverage limits of the policies in effect in
each year. An insurer must bear the burden of proving that an insured intended or expected environmental
damage. A jury should be informed of the exceptional circumstances criteria, although the instruction in this
case adequately conveyed the appropriate legal standard.
1. In Owens-Illinois, the Supreme Court found insurance contract language and the traditional rules of
interpretation to be unhelpful in allocating responsibility among triggered insurance policies for damage
occurring over an extended period. Instead, the Court was guided by a concern for the efficient use of
resources and the demands of simple justice. The methodology adopted requires allocation of the losses
among the carriers on the basis of the extent of the risk assumed (proration on the basis of policy limits)
multiplied by years of coverage. (Pp. 9-12)
2. Commercial Union argues that the plain language of condition J of the policy requires that all primary
and first-layer excess policies in effect throughout the seventeen-year trigger period be exhausted before its
policy may be pierced. Carter-Wallace's proposed solution collapses the damages incurred over the entire
seventeen-year trigger period into the policy period covered by Commercial Union's excess policy. The
Supreme Court rejects both proposals. (Pp. 12-15)
3. The Supreme Court agrees with the method for allocating coverage between various levels of excess
insurance adopted by Judge Brotman in Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co.,
978 F. Supp. 589 (D.N.J. 1997). In Chemical Leaman, the court extended the calculation provided by the
illustration in Owens-Illinois for determining an insurer's share of the loss, and determined the responsibility
borne by each year of the trigger period. Having reached a figure for each year, the court then vertically
allocated each policy in effect for that year, beginning with the primary policy and proceeding upward
through each succeeding layer. The Supreme Court adopts this method as the presumptive rule unless
exceptional circumstances dictate application of a different standard. (Pp. 15-19)
4. The Supreme Court concludes that an insurer must bear the burden of proving that an insured intended
or expected environmental damage. Otherwise, the insured would be required to prove a negative fact (no
intention or expectation of damage). The "unexpectedly and unintentionally" language of the occurrence
definition should be treated as an exclusion for purposes of assigning the burden of proof, since it has the
effect of denying coverage for damages expected or intended. (Pp. 19-26)
5. Assuming there was sufficient evidence in the record to permit a jury to conclude that Carter-Wallace
intended or expected environmental damage to occur, the jury should have been informed of the exceptional
circumstances outlined in Morton. Although the court's charge omitted reference to some of the factors, it
properly focused the jury's attention on what Carter-Wallace knew or expected during the time Commercial
Union's policy was in effect. More importantly, the charge emphasized that the jury could consider any
circumstantial evidence presented. Additionally, any deficiencies in the instructions must be viewed within
the context of the record, in contrast with the egregious behavior detailed in Morton. Any shortcomings in
the charge were harmless in view of the instructions provided combined with the minimal evidence suggesting
knowledge or expectation of environmental harm. (Pp. 26-31)
The judgment of the Appellate Division is AFFIRMED as MODIFIED.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, O'HERN, GARIBALDI, and COLEMAN
join in JUSTICE STEIN's opinion. JUSTICE POLLOCK did not participate.
SUPREME COURT OF NEW JERSEY
A-
129 September Term 1997
CARTER-WALLACE, INC., a corporation
of the State of Delaware,
Plaintiff-Respondent,
v.
ADMIRAL INSURANCE COMPANY, a corporation of the State of Delaware, ALLSTATE INSURANCE COMPANY (as Successor to NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, formerly NORTHBROOK INSURANCE COMPANY and NORTHBROOK INDEMNITY COMPANY), a corporation of the State of Illinois, AMERICAN HOME ASSURANCE COMPANY, a corporation of the State of New York, AMERICAN RE-INSURANCE COMPANY, a corporation of the State of Delaware, ASSOCIATED INTERNATIONAL INSURANCE, a corporation of the State of California, CALIFORNIA UNION INSURANCE COMPANY, a corporation of the State of California, COLUMBIA CASUALTY COMPANY, a corporation of the State of Illinois, EMPLOYERS INSURANCE OF WAUSAU, a corporation of the State of Wisconsin, FIRST STATE INSURANCE COMPANY, a corporation of the State of Delaware, HOME INSURANCE COMPANY, a corporation of the State of New Hampshire, INTERNATIONAL SURPLUS LINES INSURANCE COMPANY, a corporation of the State of Illinois, UNDERWRITERS AT LLOYD'S LONDON, Nos. 1 to 200, being fictitious names, LONDON MARKET INSURANCE COMPANIES, Nos. 1 to 200, being fictitious names, THE MUTUAL FIRE, MARINE & INLAND INSURANCE, a corporation of the State of Pennsylvania, NEW JERSEY PROPERTY-LIABILITY INSURANCE GUARANTY
ASSOCIATION, NEW JERSEY SURPLUS
LINES INSURANCE GUARANTY FUND, THE
AETNA CASUALTY AND SURETY COMPANY,
a corporation of the State of
Connecticut, THE CONTINENTAL
INSURANCE COMPANY, a corporation of
the State of New Hampshire, THE
NORTH RIVER INSURANCE COMPANY, a
corporation of the State of New
Jersey, UNITED STATES FIRE
INSURANCE COMPANY, a corporation of
the State of New York and ZURICH
INSURANCE COMPANY, a foreign
corporation,
Defendants,
and
COMMERCIAL UNION INSURANCE COMPANY,
(as Successor to Employers
Commercial Union Insurance
Company), a corporation of the
State of Massachusetts,
Defendant-Appellant.
Argued April 27, 1998 -- Decided July 8, 1998
On certification to the Superior Court,
Appellate Division.
James W. Christie, III, argued the cause for
appellant (Christie, Pabarue, Mortensen and
Young, attorneys; Mr. Christie and Peter J.
Lynch, of counsel and on the briefs).
C. MacNeil Mitchell, a member of the New York
bar, argued the cause for respondent (Porzio,
Bromberg & Newman, attorneys; Mr. Mitchell,
Donald Jeffrey Campbell and Charles Stoia, of
counsel and on the briefs).
Brian R. Ade argued the cause for amici
curiae Fireman's Fund Insurance Company and
Hartford Accident & Indemnity Company
(Gilberg & Kiernan, attorneys; Robert F.
Walsh, of counsel; Mr. Ade, Mr. Walsh and
Anthony J. LaPorta, on the brief).
Kevin J. Bruno submitted a joint brief on
behalf of amici curiae Alco Industries, Inc.,
The Boc Group, Combustion Engineering, Inc.,
Eastman Kodak Company, The Flintkote Company,
Genstar Corporation, Illinois Tool Works
Inc., Millenium Holdings Corp., Pfizer Inc.,
PPG Industries, Inc., Princeton Gamma Tech
Inc., The Stearns & Foster Bedding Company,
Schlumberger Ltd., Unisys Corporation,
Warner-Lambert Company and Wheeling
Pittsburgh Steel Corporation (Hannoch
Weisman, attorneys for Alco Industries, Inc.,
Combustion Engineering, Inc., Illinois Tool
Works Inc., PPG Industries, Inc., Princeton
Gamma Tech Inc., The Stearns & Foster Bedding
Company, Schlumberger Ltd. and Unisys
Corporation; Gregory J. Schwartz and Laurie
J. Sands, of counsel; McCarter & English,
attorneys for The Flintkote Company and
Genstar Corporation; Gita Rothschild, of
counsel; Dughi and Hewitt, attorneys for
Warner Lambert Company; Russell L. Hewit and
Daniel R. Lindemann, of counsel; Anderson
Kill & Olick, attorneys for The Boc Group,
Millenium Holdings Corp., Pfizer Inc., and
Wheeling Pittsburgh Steel Corporation; Paul
E. Breene, of counsel, and Sills Cummis
Zuckerman Radin Tischman Epstein & Gross,
attorneys for Eastman Kodak Company; Phillip
R. Sellinger and Jeffrey M. Pollock, of
counsel).
Laurie B. Epstein and William G. Passannante
submitted a brief on behalf of amicus curiae
United Policyholders Inc. (Anderson, Kill &
Olick, attorneys).
Susan Stryker submitted a brief on behalf of
amicus curiae National Association of
Independent Insurers (Sterns & Weinroth,
attorneys).
Wilson M. Brown, III, and John F. Schultz
submitted a brief on behalf of amici curiae
Lumbermens Mutual Casualty Company, American
Motorists Insurance Company and American
Manufacturers Mutual Insurance Company
(Drinker, Biddle & Reath, attorneys).
Robert D. Chesler submitted a brief on behalf of amicus curiae Marisol, Incorporated
(Lowenstein, Sandler, Kohl, Fisher & Boylan,
attorneys).
Wendy L. Mager submitted a brief on behalf of
amicus curiae Insurance Environmental
Litigation Association (Smith, Stratton,
Wise, Heher & Brennan, attorneys).
Steven Jakubowski submitted a letter brief on
behalf of amicus curiae Federal Insurance
Company.
Charles W. Miller, III, submitted a brief on
behalf of amicus curiae The Travelers
Indemnity Company (Norris, McLaughlin &
Marcus, attorneys).
The opinion of the Court was delivered by
STEIN, J.
This appeal involves the availability and allocation of
insurance coverage for costs incurred at an environmental cleanup
site in Monmouth County. Specifically, it requires us to
determine how the responsibility of an excess insurer is measured
in the context of environmental damage with a continuous trigger
of liability over many years. Also presented are the issues
whether an insurer bears the burden of proving that environmental
contamination was "expected" or "intended" by a policyholder, and
whether a trial court must instruct a jury concerning the
"exceptional circumstances" outlined in Morton International,
Inc. v. General Accident Insurance. Co. of America,
134 N.J. 1,
86-87 (1993), cert. denied,
512 U.S. 1245,
114 S. Ct. 2764,
129 L. Ed.2d 878 (1994), before allowing the jury to consider
whether a policyholder "expected" or "intended" such
contamination.
Carter-Wallace brought this declaratory judgment action in 1989, seeking defense reimbursement and indemnity from over twenty insurers for costs it expended for the cleanup of Lone Pine. The parties did not contest that the estimated amount of those costs was $9.2 million. Carter-Wallace eventually settled with all but one of its insurers, Commercial Union Insurance Company (Commercial Union), which had issued a second-layer excess policy to Carter-Wallace that was in effect from April 30,
1969, to April 30, 1972. That comprehensive general liability
(CGL) policy provided $1 million in coverage, which was part of a
shared $10 million umbrella coverage in excess of both a primary
layer of coverage and a first-level excess layer of coverage.
Under Commercial Union's policy, the "proportion of risk insured"
is
$1,000,000.00 part of $10,000,000.00 each
occurrence and in the aggregate excess of
$5,000,000.00 each occurrence and in the
aggregate which in turn is in excess of
primary insurance.
Thus, Commercial Union's annual $1 million in coverage was in
excess of a total of $5.1 million in underlying primary and
first-layer excess coverage. In addition, condition J of the
policy provides in pertinent part that "[l]iability under this
policy with respect to any occurrence shall not attach unless and
until the insured, or the insured's underlying insurer, shall
have paid the amount of the underlying limits on account of such
occurrence."
The suit against Commercial Union was tried in two phases.
Phase I was a jury trial held over several days in April and May,
1994. The court instructed the jury that to avoid liability
Commercial Union bore the burden of proving that Carter-Wallace
"expected" or "intended" the damage at Lone Pine. Additionally,
the court refused to instruct the jury concerning the
"exceptional circumstances" criteria outlined in Morton, supra,
134 N.J. at 86-87. Phase I of the trial culminated in a
favorable result for Carter-Wallace. Specifically, the jury
found that property damage at Lone Pine occurred during
Commercial Union's policy period; that the contamination at Lone
Pine was part of a continuous and indivisible process; and that
Carter-Wallace neither expected nor intended the environmental
damage at Lone Pine. Pursuant to the jury's findings, the court
entered an order declaring that the Commercial Union policy
provided coverage to Carter-Wallace for costs incurred at Lone
Pine.
Phase II of the litigation was a bench trial on the damages
issue. Both parties stipulated that the relevant period for
assessing the damages issue was the seventeen years from 1966
through 1982. After determining that Carter-Wallace's settlement
to clean up Lone Pine was reasonable, the court found that no
part of Carter-Wallace's damages was allocable to Commercial
Union, reasoning that Carter-Wallace had not yet exhausted all of
the primary and first-layer excess coverage in effect during the
seventeen-year "trigger period." Interpreting
Owens-Illinois, Inc. v. United Insurance Co.,
138 N.J. 437
(1994), the court determined that the coverage provided by all
triggered primary and first-layer excess policies must be
exhausted before allocating any share to Commercial Union's
second-layer excess policy. Because Carter-Wallace did not
fulfill that requirement of "horizontal exhaustion," the court
concluded that Carter-Wallace was not entitled to payment under
the Commercial Union policy. The court also determined that
although Carter-Wallace was not a "successful claimant" in Phase
II of the trial, see Rule 4:42-9(a)(6), equitable principles
entitled it to fees and costs incurred through December 22, 1994,
the date on which this Court decided Owens-Illinois.
Both parties appealed to the Appellate Division. In an
unreported opinion, the Appellate Division held that the trial
court erred in finding that Owens-Illinois required exhaustion of
the primary and first-layer excess policies in effect during the
seventeen-year trigger period before Commercial Union's policy
could be pierced. The appellate panel concluded that horizontal
exhaustion of all primary and first-layer excess policies was not
only not required, but was prohibited under its reading of Owens-Illinois. The Appellate Division did not offer an alternative
allocation scheme, leaving to the trial court the responsibility
of hearing more evidence on the issue on remand. On the
remaining issues, the Appellate Division affirmed the trial
court's determination that Commercial Union had the burden of
proving that the contamination was "expected" or "intended" by
Carter-Wallace. It also determined that the trial court properly
declined to instruct the jury on the "exceptional circumstances"
criteria set forth in Morton, supra, 134 N.J. at 86-87, when
resolving the "expected" or "intended" issue.
We granted certification to consider those issues.
152 N.J. 9 (1997).
A
when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy. That is the continuous-trigger theory for activating the insurer's obligation to respond under the policies.
Realizing that the adoption of the continuous trigger theory necessarily meant that multiple insurance policies would bear the
responsibility of providing coverage, the question in Owens-Illinois then centered on the proper methodology to be used in
allocating the appropriate share of that responsibility among
each of the triggered policies. We rejected joint-and-several
allocation, 138 N.J. at 468, a theory under which the problem of
indivisible injury is resolved simply by collapsing the
continuous injury into one year. Joint-and-several allocation
effectively allows a policyholder to simply select one triggered
year and exhaust the coverage provided during that period in
satisfaction of its claim, id. at 459-62, requiring the insurers
to sue each other for contribution. We determined that such an
approach rested on an assumption not in accordance with the
development of the law: “that at every point in the progression
the provable damages due to injury in any one of the years from
exposure to manifestation will be substantially the same . . . .”
Id. at 468. We also considered the effect on the allocation
issue of "other insurance" clauses, which are provisions
typically designed to preclude a double recovery when multiple,
concurrent policies provide coverage for a loss. We determined
that such clauses were not generally applicable in the
continuous-trigger context where successive rather than
concurrent policies were at issue. Id. at 470. In sum, we found
the contract language and the traditional rules of interpretation
to be unhelpful in settling on the proper method of allocating
responsibility. Id. at 468-71.
Rather, our resolution of the issue was guided by our
concern for the efficient use of resources to address the problem
of environmental disease and by the demands of simple justice.
Id. at 472-73. We also observed that "[b]ecause insurance
companies can spread costs throughout an industry and thus
achieve cost efficiency, the law should, at a minimum, not
provide disincentives to parties to acquire insurance when
available to cover the risks." Ibid. We determined that "any
allocation should be in proportion to the degree of the risks
transferred or retained during the years of exposure," and
concluded that the "better formula" was to "allocate[] the losses
among the carriers on the basis of the extent of the risk
assumed, i.e., proration on the basis of policy limits,
multiplied by years of coverage." Id. at 475 (citing Armstrong
World Indus., Inc. v. Aetna Cas. & Sur. Co.,
26 Cal. Rptr.2d 35,
57 (1993)).
We provided an illustration to explain what we meant by an
allocation scheme that was related both to the years of coverage
and the degree of risk assumed. During a nine-year period, our
model assumed that in years one through three coverage for the
owners of an office building was provided in the amount of two
million dollars per year; in years four through six the
applicable coverage had a limit of three million dollars per
year; and in years seven through nine, during which time no
insurance was purchased, the self-insured risk was four million
dollars per year. Id. at 475-76. Thus, under an allocation
methodology that is proportionate to the degree of the risks
transferred or retained during the years of exposure, insurers in
years one through three would bear 6/27ths of the responsibility,
insurers in years four through six would shoulder 9/27ths, and
the building owners in years seven through nine would be
responsible for 12/27ths. Id. at 476.
Nevertheless, we expressly declined to address how the
solution we crafted would affect excess insurers:
We realize that many complexities
encumber the solution that we suggest
involving, as it does, proration by time and
degree of risk assumed -- for example,
determining how primary and excess coverage
is to be taken into account or the order in
which policies are triggered. The parties
did not focus on those issues.
B
account of such occurrence.” According to Commercial Union, the
Owens-Illinois discussion of "other insurance" clauses occurred
only in the context of rejecting the joint-and-several allocation
methodology, and does not encompass exhaustion provisions such as
condition J. Because exhaustion provisions are designed not to
allocate loss among concurrent policies but are part "of the
insurer's definition of the amount of risk it is willing to
accept," Commercial Union asserts that condition J differs in
purpose from "other insurance" clauses.
Commercial Union also proposes an allocation method that it
contends is consistent with Owens-Illinois and with the plain
meaning of condition J:
The Commercial Union method begins by adding
together the per occurrence limits of the
primary policies in the coverage block.
Then, the sum of each primary insurer's
limits are divided by the sum of the total
triggered primary limits, to determine the
percentage of loss assigned to that insurer
for that level. That percentage is
multiplied by the total limits per level to
determine the amount the insurer must pay.
If additional loss remains to be allocated
after each primary insurer has paid its
policy limits, this process is repeated on
each excess layer until the loss is fully
allocated.
Essentially, Commercial Union's method of horizontal exhaustion
by layer subordinates its coverage responsibility to all primary
and first-level excess policies in effect during the entire
seventeen-year trigger period. Under the circumstances of this
case, that methodology results in Commercial Union indemnifying
no portion of Carter-Wallace's costs.
Carter-Wallace submits a different proposal that rejects the
horizontal exhaustion of primary policies. Under its allocation
method, Carter-Wallace is entitled to indemnification in the
amount of $72,350 from Commercial Union. It describes the
appropriate allocation method thusly:
The limits of the Commercial Union Policy are
10" of $10 million, excess of $5.1 million
underlying cover[age] for each year of its 3-year policy period. In other words,
Commercial Union is responsible for 10" of
the cost above $5.1 million, up to a maximum
liability of $1 million, for 3 of the 17
triggered years. Carter-Wallace's total
covered costs at the time of the Phase II
trial were $9.2 million. The Commercial
Union Policy covers 10" of $4.1 million ($9.2
million coverage - $5.1 million in underlying
coverage) or $410,000. As the Commercial
Union Policy covers 3 of the 17 policy years
in this $410,000 triggered layer, its share
of the loss is $72,350 [$410,000 divided by
17, multiplied by 3] . . . .
We view the allocation methods proposed by both parties as
untenable and inconsistent with the principles we set forth in
Owens-Illinois. Were we to adopt Commercial Union's allocation
method, its coverage obligation would be subordinated not just to
the primary and first-level excess policies in effect during the
time of its coverage, but to all primary and first-level policies
in effect throughout the entire seventeen-year trigger period.
In support of that position, Commercial Union relies on its
policy language that requires the underlying limits of coverage
to be exhausted before liability attaches under its second-level
excess policy. Fairly read, that provision requires the vertical
depletion of the relevant policies in effect during the time of
the excess policy's coverage; we are unpersuaded that the clause
somehow applies to future policies that had not been written or
signed at the time this second-layer excess policy was issued.
Moreover, we note the similarity between this exhaustion
provision and the "other insurance" clauses we found to be
inapplicable in the context of a continuous trigger. Owens-Illinois, supra, 138 N.J. at 470, 479. Therefore, as in Owens-Illinois, id. at 468, "[w]e are unable to find the answer to
allocation in the language of the polic[y]."
Carter-Wallace's approach is similarly inadequate. Its
proposed solution is premised on the assumption that an excess
layer policy can be allocated if the entire loss sustained during
a continuous-trigger period is treated as if it occurred in only
one year. In other words, by using the figure $4.1 million (the
amount of damages above the underlying $5.1 million in coverage)
to calculate Commercial Union's share of responsibility, Carter-Wallace's allocation method simply collapses the damages incurred
over the entire seventeen-year trigger into Commercial Union's
policy period. That technique most closely resembles the joint-and-several allocation method that we specifically rejected in
favor of a pro rata method that accounted for the time on the
risk and the degree of risk assumed. Id. at 479.
We therefore reject each alternative advanced by the parties
to this appeal. Instead, we are confident that another
allocation method more faithful to the principles articulated in
Owens-Illinois is available to resolve this issue. In Chemical
Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co.,
978 F.
Supp. 589 (D.N.J. 1997), Judge Brotman relied on Owens-Illinois
in allocating coverage between various levels of excess
insurance. Not unlike this appeal, Chemical Leaman involved a
plaintiff that sought coverage for costs incurred as a result of
environmental contamination. Id. at 592-93. The insurers argued
that each layer of insurance must be exhausted across all of the
triggered policy years before the next layer would be allocated,
id. at 604, a contention that Commercial Union echoes here.
Using the example we provided in Owens-Illinois, the court
observed that "[t]he Owens-Illinois method intentionally assigns
a greater portion of indemnity costs to years in which greater
amounts of insurance were purchased, based on the view that this
measure of allocation is more consistent with the economic
realities of risk retention and risk transfer." Id. at 605. The
court therefore rejected the theory of horizontal exhaustion by
layer, and "direct[ed] apportionment of damages among policy
years without reference to the layering of policies in the
triggered years." Ibid. However, the court did note that within
any given year, each layer of excess coverage must be depleted
before the next level is pierced. Id. at 606.
In order to allocate fairly the losses among carriers to the
extent of the risk assumed by each, we provided an illustration
in Owens-Illinois, supra, that assumed a nine-year continuous
trigger and broke down the corresponding obligations of the
insurers and the owners into three three-year periods. 138 N.J.
at 475-76. Based on the amount of coverage provided in each
three-year block, we determined that carriers in the first three
years would bear 6/27ths of the burden, carriers in the second
three years 9/27ths, and the building owners in the last three
years would bear 12/27ths of the loss (a time in which no
insurance had been purchased). In Chemical Leaman, the court
simply extended that calculation to make the further assessment
of the responsibility borne by each year of the continuous
trigger. 978 F. Supp. at 605. Returning to our example,
carriers in the first year would therefore be responsible for
2/27ths of the loss, carriers in the second year for 2/27ths, and
carriers in the third year for 2/27ths. Then, having reached a
figure for each year, the Chemical Leaman court adopted a method
that vertically allocated each policy in effect for that year,
beginning with the primary policy and proceeding upward through
each succeeding excess layer. Id. at 606. Assume that primary
coverage for one year was $100,000, first-level excess insurance
totaled $200,000, and second-level excess coverage was $450,000.
If the loss allocated to that specific year was $325,000, the
primary insurer would pay $100,000, the first-level excess policy
would be responsible for $200,000, and the second-level excess
policy would pay $25,000.
We believe Judge Brotman's well-reasoned opinion in Chemical
Leaman represents a natural extension of Owens-Illinois, one that
is entirely consistent with our belief that "any allocation
should be in proportion to the degree of the risks transferred or
retained during the years of exposure." Owens-Illinois, supra,
138 N.J. at 475. In Owens-Illinois we identified several public
interest factors relevant to the appropriate method of allocating
insurance coverage, including the efficient use of available
resources, the interests of simple justice, and the need for an
"efficient response" to the logistical challenge posed by
environmental insurance litigation. Id. at 472-74.
We are confident that the Chemical Leaman solution best
serves those interests. Firstly, this approach makes efficient
use of available resources because it neither minimizes nor
maximizes the liability of either primary or excess insurance,
thereby promoting cost efficiency by spreading costs. See Owens-Illinois, supra, 138 N.J. at 472-73. That method also promotes
"simple justice," id. at 473, by respecting the distinction
between primary and excess insurance while not permitting excess
insurers unfairly to avoid coverage in long-term, continuous
trigger cases. Additionally, adoption of that allocation method
will introduce a degree of certainty and predictability into the
complex world of environmental insurance litigation in
continuous-trigger cases. Moreover, we perceive that that
solution is consistent with the contract language, as Commercial
Union's second-level excess policy will not be pierced unless and
until the primary and first-level excess policies in effect for a
given year have been expended.
Our jurisprudence in this area has not been marked by rigid
mathematical formulas, and we do not advocate any such
inflexibility now. Rather, our focus remains on "[a] fair method
of allocation . . . that is related to both the time on the risk
and the degree of risk assumed." Id. at 479. Nevertheless, we
anticipate that the principles of Owens-Illinois, as clarified by
our decision today, represent the presumptive rule for resolving
the allocation issue among primary and excess insurers in
continuous trigger liability cases unless exceptional
circumstances dictate application of a different standard. See
Comment, Allocating Progressive Injury Liability Among Successive
Insurance Policies,
64 U. Chi. L. Rev. 257, 259 (1997)(noting
that “[t]he magnitude of the losses in [progressive injury] cases
further illustrates the need for courts to choose one method, and
apply it consistently, when allocating liability for progressive
injuries”).
The remaining issues raised by this appeal relate to the trial court's instructions to the Phase I jury. Commercial Union asserts that the trial court improperly assigned it the burden of proving that Carter-Wallace expected or intended the environmental damage at Lone Pine. Additionally, Commercial Union contends that it was error for the trial court not to charge the jury on the "exceptional circumstances" set forth in Morton, supra, 134 N.J. at 86-87.
[T]he defendant contends that there were exclusions from coverage, that the damage was either expected or intended. In that respect, the defendant has the burden of proving that the plaintiff expected or intended the damages. And by the same standard, by a fair preponderance of the credible evidence. . . .
. . . .
If Commercial Union proves that Carter-Wallace actually expected or intended that
its waste would cause groundwater
contamination at Lone Pine, then the
Commercial Union policy would not provide
coverage to Carter-Wallace for its cleanup
liability.
Commercial Union does not dispute the general rule that an insurer bears the burden of proving that a policy exclusion precludes coverage. See Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997)(noting that "the burden is on the insurer to bring the case within the exclusion")(citing Burd v. Sussex Mut.
Ins. Co.,
56 N.J. 383, 399 (1970)). Rather, it asserts that the
"unexpectedly and unintentionally" language does not constitute
an exclusion but merely is a component of the definition of an
"occurrence." Therefore, as part and parcel of the basic grant
of coverage, Carter-Wallace would have the burden of showing that
it neither expected nor intended the contamination at Lone Pine
in order to secure indemnity from Commercial Union. See, e.g.,
Adron, Inc. v. Home Ins. Co.,
292 N.J. Super. 463, 473 (App. Div.
1996)(finding that "[t]he burden was initially on plaintiff to
bring the claim within the basic terms of the policy"); 21 John
A. Appleman & Jean Appleman, Insurance Law and Practice § 12094,
at 24 (rev. ed. 1980)(noting that "[o]ne suing on a liability
policy must establish that the loss fell within its
terms")(footnote omitted).
The proper assessment of Commercial Union's claim of error
must be made in the context of our holding in Morton, supra,
134 N.J. 1. In that case, we determined that the standard pollution-exclusion clause contained in CGL policies would be enforced only
to the extent that it precluded coverage for an insured's
intentional discharge of a known pollutant, regardless of whether
the resulting property damage was intended or expected. Id. at
78. However, we also addressed whether the events culminating in
property damage constituted an "occurrence" under policies that
did not contain pollution-exclusion clauses. Id. at 80.
Resolution of that issue necessarily required an assessment of
whether the insured intended or expected the ultimate injury. We
recognized the unique nature of environmental-pollution cases,
and the difficulty of uncovering "the insured's subjective intent
to determine intent to injure." Id. at 85 (quoting Voorhees v.
Preferred Mut. Ins. Co.,
128 N.J. 165, 185 (1992)). Despite that
difficulty, we also rejected as unjustified a rule that would
presume an intent to injure based simply on a knowing discharge
of pollutants. Id. at 86. Rather, we concluded that a case-by-case analysis would be necessary to determine whether
"exceptional circumstances [exist] that objectively establish the
insured's intent to injure." Ibid. (quoting Voorhees, supra, 128
N.J. at 185).
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.
Our experience in Morton leads us to conclude that an insurer must bear the burden of proving that an insured intended or expected environmental damage. As we noted in Morton, "[a]bsent 'smoking gun' testimony from a disgruntled employee, proof of subjective intent to cause environmental harm will
rarely be available in coverage litigation." Id. at 85-86.
Accordingly, requiring an insured to prove a negative fact -
that it did not intend or expect environmental damage -- in this
context would in our view be highly impractical; the insured's
incentive consists of little more than a motivation to present
general testimony that it had no expectation that its activities
would result in property damage. In another context, we have
emphasized our inherent reluctance to place the burden of proving
a negative fact on a litigant. See Barbato v. Alsan Masonry &
Concrete, Inc.,
64 N.J. 514, 532 (1974)(observing in workers'
compensation case that "[i]f the claimant had the burden of proof
to establish that her employment in a position commensurate with
her now lessened abilities was implausible, she would have the
burden of proving a negative fact . . ."); see also U.S. v.
Rosero,
42 F.3d 166, 171 (3d Cir. 1994)(noting "the difficulties
often associated with proving a negative"); Williams v. Topps
Appliance City,
239 N.J. Super. 528, 532-33 (App. Div.
1989)(noting in workers' compensation case that burden of
establishing negative is "something the law rarely, if ever,
imposes"). Rather, it is the insurer who has an interest in, and
is better positioned for, eliciting facts on the basis of which a
trier of fact can conclude that the insured expected or intended
environmental contamination. We therefore conclude that the
"unexpectedly and unintentionally" language of the occurrence
definition should be treated as an exclusion for purposes of
assigning the burden of proof in environmental coverage cases.
Moreover, we emphasize that whether inserted in the form of
a specific exclusion or packaged within the definition of an
"occurrence," the effect of this language is ultimately the same:
it denies coverage for damage expected or intended from the
standpoint of the insured. See Clemco Indus. v. Commercial Union
Ins. Co.,
665 F. Supp. 816, 820 (N.D. Cal. 1987)(concluding that
placement of "neither expected nor intended" language in
definition of coverage "in no way changed the effect or character
of the phrase . . . [it] remained an exclusion of the coverage
grant by the very operation of its terms"), aff'd
848 F.2d 1242
(9th Cir. 1988); see also Andover Newton Theological School, Inc.
v. Continental Cas. Co.,
964 F.2d 1237 (1st Cir. 1992)(noting
"[i]f an insurer were able to distribute provisions limiting
liability throughout a policy, with the expectation that its
shouldering of the burden of proof would be limited to the single
section entitled, 'Exclusions,' this would create considerable
incentive to obfuscation and subterfuge"). We agree that
exclusions do not shed their essential character when they are
moved from one section of a policy and are crafted as part of
that policy's grant of coverage. We therefore decline to adopt a
rule of law governing burden of proof the application of which
would depend merely on the location of a provision in an
insurance contract.
Our recognition that the "unexpectedly and unintentionally"
language constitutes a policy exclusion for purposes of assigning
the burden of proof is consistent with case law. See Nestle
Foods Corp. v. Aetna Cas. & Sur. Co., 842 F. Supp. 125, 129 (D.N.J. 1993)(citing Morton and rejecting insurer's motion for summary judgment on basis of "neither expected nor intended" language of "occurrence" definition, noting that the insurer "must demonstrate with support from the record that [the insured] 'expected/intended' to cause the environmental damage"); Continental Ins. Co. v. Beecham, Inc., 836 F. Supp. 1027, 1042 (D.N.J. 1993)(noting that because insurer alleged no occurrence took place, it "will bear the burden of proving that the ultimate damage was expected or intended"); Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 750 F. Supp. 1340, 1350 (E.D. Mich. 1990)(assigning burden of proof regarding "neither expected nor intended" clause in definition of occurrence to insurer, noting that "[t]his interpretation is supported by case law and the general rule . . . that an insurer must prove the applicability of an exclusion to coverage"); Summit Assocs., Inc. v. Liberty Mut. Fire Ins. Co., 229 N.J. Super. 56, 62-63 (App. Div. 1988)(observing that "[i]n order to succeed with its claim that this was not an occurrence, [the insurer] needed to establish that [the insured] knew or should have known of the likelihood that construction on its premises would result in the release of contaminants"); see also Voorhees, supra, 128 N.J. at 183-84 (finding that in context of homeowner's policy, accidental nature of occurrence is determined by whether injury was intended or expected, and that relevant inquiry is the same as that for intentional-acts exclusions). But see, e.g., Pittston Co. v.
Allianz Ins. Co.,
905 F. Supp. 1279, 1300-01 (D.N.J.
1995)(placing expected/intended burden of proof on insured
because occurrence is element of coverage), rev'd in part,
124 F.3d 508 (3d Cir. 1997); Chemical Leaman Tank Lines, Inc. v.
Aetna Cas. & Sur. Co.,
817 F. Supp. 1136, 1143-45 (D.N.J.
1993)(same), aff'd in part,
89 F.3d 976 (3d Cir.), cert. denied,
__ U.S. __,
117 S. Ct. 485,
136 L. Ed.2d 379 (1996).
Moreover, we perceive that in most complex environmental
contamination cases, the burden-of-proof issue will be of limited
importance. Most likely, facts supporting or negating an
"expected/intended" finding will be elicited during discovery and
will illuminate the issue for a trier of fact. We anticipate
that the rare case will be one in which the ultimate resolution
of this issue depends on which party bears the burden of proof.
B
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.
The trial court in this case declined to instruct the jury to consider those five Morton factors. The Appellate Division upheld this determination, noting that "the evidence here simply does not reach the level in Morton." The trial court did, however, provide the jury with an extensive instruction regarding the issue whether Carter-Wallace expected or intended to cause environmental contamination:
Now if you find that the groundwater [damage] at Lone Pine landfill occurred during the policy period, then you must go into the expected or intended exclusion. Property damage is accidental and, therefore, covered by the Commercial Union policy if that damage was not expected, it was not intended from the standpoint of Carter-Wallace. Thus, it doesn't matter whether Carter-Wallace expected or intended to have its waste exposed [sic] at the Lone Pine landfill, only if Carter-Wallace actually expected or actually intended to cause groundwater contamination at Lone Pine of the kind and quality that in fact occurred, will the insurance coverage be denied.
If Commercial Union proves that Carter-Wallace actually expected or intended that its waste would cause groundwater contamination at Lone Pine, then the
Commercial Union policy would not provide
coverage to Carter-Wallace for its cleanup
liability.
As to the intended exclusion, you must
consider whether or not Carter-Wallace
actually wanted to cause that contamination
of that site. As to the expected exclusion,
you must determine whether Carter-Wallace
knew with some substantial certainty that its
actions would cause or were causing that
damage. And the proof must be that Carter-Wallace subjectively expected or intended to
cause the groundwater contamination of the
kind and quality that occurred.
In determining whether Carter-Wallace
subjectively expected or intended the
property damage in question [it] is not
enough for you to find that Carter-Wallace
should have expected that damage would occur,
nor is it for you to find that other people
of other companies in similar circumstances
might have expected the damage to occur.
Rather, you're instructed to determine
whether or not Carter-Wallace actually
expected or actually intended to cause the
contamination.
Even if you believe that Carter-Wallace['s] actions were negligent or
reckless, Carter-Wallace is still entitled to
coverage unless you find that it expected it
or intended to cause the damage at the Lone
Pine landfill.
In making this determination, you must
judge Carter-Wallace by what you find it
actually knew and understood during the
periods of '69 to -- 1969 to 1972; you should
not judge Carter-Wallace['s] expectations or
intentions by today's standards, some 25
years later. You should judge Carter-Wallace's expectations or intentions
according to what was known at the -- by them
at the time.
Now you heard me tell you about circumstantial evidence a few moments ago, what it is. The defendant, in attempting to prove whether Carter-Wallace expected or intended the damage, is entitled to have you
consider not only the direct testimony but
any circumstantial evidence as to whether or
not it was able to prove that Carter-Wallace
expected or intended the damage in question.
Now since Carter-Wallace is a
corporation, the expectation or intent of the
corporation can only be measured by the
knowledge and expectation of its employees.
Therefore, in determining whether Carter-Wallace expected or intended to cause
groundwater contamination at the Lone Pine
landfill, you must determine whether its
corporate management, that is those persons
responsible for formulating . . . its waste
disposal policies or its employees with
functional responsibility for waste disposal
procedures, expected or intended that damage.
Assuming that there was sufficient evidence in the record to permit a jury to conclude that Carter-Wallace intended or expected environmental damage to occur, the jury should have been informed of the Morton factors in order to assist it in assessing Carter-Wallace's state of mind. Although omitting any reference to some of those factors, we find that the court's instruction in this case adequately conveyed to the jury the appropriate legal standard for resolving the issue. The court's charge properly focused the jury's attention on what Carter-Wallace knew or expected during the time Commercial Union's policy was in effect, a time when the waste was being generated and disposed of. More important, the charge emphasized to the jury that it could
consider any circumstantial evidence presented, an instruction
that effectively would have led the jury to consider, among other
factors, “the existence of subjective knowledge concerning the
possibility or likelihood of harm.” Id. at 86-87. Further, the
instruction directed the jury to assess the knowledge and
expectations of Carter-Wallace's employees, thereby appropriately
focusing the inquiry on “the quality of the insured's knowledge.”
Id. at 86. Additionally, we note that Commercial Union's counsel
argued during summation the presence of exceptional circumstances
-- including Carter-Wallace's appreciation of the hazards
associated with some of its waste and knowledge that the waste
was causing harm at Lone Pine -- thus presenting the relevant
inquiry squarely before the jury.
Moreover, any deficiencies in the trial court's instructions
must be viewed within the context of the record before this jury,
in contrast with the egregious behavior we detailed in Morton.
In Morton, the owners of a mercury-processing plant failed to
honor promises to remediate the quality of its emissions into
nearby creeks, continued to intentionally discharge pollutants
for years after the unacceptable quality of those contaminants
was brought to their attention, ignored demands for compliance
from government officials and state engineers, and ignored
reports from their own consultants regarding the unacceptability
of their discharges into a nearby creek. Id. at 88-93.
In contrast, the record here reveals that rather than
indiscriminately dumping contaminants onto nearby land as
occurred in Morton, Carter-Wallace procured a duly-licensed waste
hauler to dispose of its waste. Moreover, the record suggests
that the waste generated by Carter-Wallace consisted primarily of
common trash; although some hazardous materials were also
disposed of, including residual chemical components of
manufactured products as well as cleaning solvents, such
materials were not present in substantial concentrations. Expert
testimony was also presented suggesting that Carter-Wallace
observed accepted methods of waste disposal in place at the time.
Additionally, no evidence adduced at trial suggested that Carter-Wallace received or ignored governmental warnings concerning its
waste-disposal practices. See Chemical Leaman Tank Lines, Inc.
v. Aetna Cas. & Sur. Co.,
89 F.3d 976, 989-90 (3d Cir.)
(suggesting importance of party's “stonewalling” in assessment
whether Morton's exceptional circumstances exist), cert. denied,
__ U.S. __,
117 S. Ct. 485,
136 L. Ed.2d 379 (1996).
In sum, we consider any shortcoming in the court's charge to
be harmless in view of the instructions provided by the trial
court, combined with the minimal evidence presented by this
record suggesting knowledge or expectation of environmental harm.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, O'HERN, GARIBALDI, and COLEMAN join in JUSTICE STEIN's opinion. JUSTICE POLLOCK did not participate.
NO. A-129 SEPTEMBER TERM 1997
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
CARTER-WALLACE, INC., a corporation
of the State of Delaware,
Plaintiff-Respondent,
v.
ADMIRAL INSURANCE COMPANY, etc., et al.,
Defendants,
and
COMMERCIAL UNION INSURANCE COMPANY,
etc.,
Defendant-Appellant.
DECIDED July 8, 1998
Chief Justice Poritz PRESIDING
OPINION BY Justice Stein
CONCURRING OPINION BY
DISSENTING OPINION BY