(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 November 3, 1997 -- Decided June 15, 1998
O'HERN , J., writing for a unanimous Court.
The issue in this appeal is whether insurance coverage exists under the employers liability section of
a workers' compensation policy for claims of workplace sexual harassment when the harassment results in
bodily injury.
Lisa M. Schmidt filed a complaint in September 1991, against her employer, Personalized Audio
Visual, Inc. (PAV) and Dennis Smith (Smith), the President of PAV. PAV ran the business center at the
Somerset Hilton Hotel. In her initial complaint, Lisa alleged that Smith committed hostile work environment
sexual harassment in violation of New Jersey's Law Against Discrimination (LAD), assault, battery, invasion
of privacy and intentional infliction of emotional distress. Two years later, in July 1993, Lisa filed an
amended complaint that alleged that PAV and Smith were liable to her under negligence theories, namely,
that Smith had negligently inflicted emotional distress and that PAV had negligently failed to train her
supervisors.
PAV and Smith demanded defense and indemnification in the lawsuit from United States Fidelity
and Guarantee Company (USF&G) initially under a comprehensive general liability (CGL) policy and later
under the employers liability portion of a workers' compensation and Employer's Liability Policy (Workers'
Compensation policy). USF&G denied coverage under both policies. PAV and Smith therefore instituted a
declaratory judgment action against USF&G on the coverage issue. Although the trial court allowed Lisa's
case to be tried before the coverage action, it urged USF&G to participate in that trial. USF&G declined to
do so.
After trial, the jury found Smith liable to Lisa for hostile work environment sexual harassment,
assault, assault and battery, and intentional infliction of emotional distress. PAV was held liable for the
hostile work environment sexual harassment alone. The jury was not asked whether PAV's liability was
direct or vicarious and it was not asked whether PAV could be vicariously liable for the intentional tort
Smith had committed. The jury awarded compensatory damages to Lisa but did not allocate those damages
to the different causes of action.
Thereafter, on cross-motions for summary judgment, the trial court found that USF&G had a duty
to defend Smith and PAV as well as a duty to indemnify PAV.
On appeal, the Appellate Division affirmed that part of the judgment that required USF&G to
indemnify PAV for the full amount of Lisa's judgment and to reimburse Smith and PAV for all defense
costs incurred by them. The Appellate Division held that, while there was no duty to defend or indemnify
PAV under the terms of the CGL policy, USF&G was obliged to defend and indemnify PAV under the
employer's liability coverage of the workers' compensation policy. The court reasoned that the exclusion in
that coverage for harassment was not applicable to the sexual harassment claims when liability for those
claims was imposed vicariously and not directly. The Appellate Division declined to apportion the defense
costs as between Smith and PAV.
The Supreme Court granted USF&G's petition for certification.
HELD: The provision contained in the employers liability section of PAV's workers' compensation policy,
excluding from coverage bodily injuries caused by acts of sexual harassment in the workplace,
violates the public policy and is therefore void.
1 . Under the New Jersey workers' compensation laws, an employee surrenders his rights to sue an
employer or fellow employees at common law except in cases where the injury stems from intentional wrongs
committed by the employer or the fellow employees. (pp. 5-6)
2. Employers liability coverage is traditionally written in conjunction with workers' compensation and is
intended to serve as a “gap-filler,” providing protection to the employer in those situations where the
employee has a right to bring a tort action despite provisions of the workers' compensation statute. (p. 6)
3. Because workers' compensation is not the exclusive remedy for victims of sexual harassment, the
employers liability section of the workers' compensation policy was a proper place for PAV to look for
coverage. (p. 8)
4. The Legislature, by way of N.J.S.A. 34:15-72, required PAV to obtain sufficient coverage for the payment
of any obligation it might incur on account of bodily injuries to an employee, and the provision in the
employers liability section that would exclude from coverage damages arising out of harassment, etc., is valid
as long as the liability arising from such discomfort is not related to bodily injury. To the extent that the
exclusion would operate to deny coverage for emotional injuries accompanied by physical manifestations, the
exclusion violates the public policy underlying the workers' compensation scheme and is therefore void.
(pp. 9-10)
5. To the extent that workers' compensation coverage may overlap with other insurance products that are
specifically designed to indemnify employers against occupational claims arising from sexual harassment, the
Commissioner of Banking and Insurance and the Commissioner of Labor (who has supervisory authority
concerning the workers' compensation laws) may wish to work with the insurance industry to resolve or
address this overlap. (p. 11)
6. The portion of the cost of defending Smith that was not included within the costs of PAV's defense
would have been negligible and the Court therefore declines to remand for an apportionment of defense
costs. (pp. 11-12)
The judgment of the Appellate Division is AFFIRMED.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN, and
COLEMAN join in JUSTICE O'HERN's opinion.
SUPREME COURT OF NEW JERSEY
A-
24 September Term 1997
LISA M. SCHMIDT,
Plaintiff-Respondent,
v.
DENNIS SMITH and PERSONALIZED AUDIO
VISUAL, INC.,
Defendants and Third-Party
Plaintiffs-Respondents,
and
UNITED STATES FIDELITY and GUARANTY
COMPANY,
Third-Party Defendant-
Appellant.
Argued November 3, 1997 -- Decided June 15,
1998
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
294 N.J. Super. 569 (1996).
Kevin E. Wolff argued the cause for appellant
(McElroy, Deutsch & Mulvaney, attorneys; Mr.
Wolff and Mary Rose Migliazza, on the
briefs).
Elizabeth Zuckerman argued the cause for
respondent Lisa M. Schmidt (Zuckerman &
Fisher, attorneys).
John J. Bublewicz argued the cause for
respondent Dennis Smith.
Francis X. Garrity argued the cause for
respondent Personalized Audio Visual, Inc.
(Garrity, Graham & Favetta, attorneys).
Jerome J. Graham, Jr., submitted a brief on
behalf of amicus curiae New Jersey
Manufacturers Insurance Company (Graham,
Curtin & Sheridan, attorneys).
Susan Stryker submitted a brief on behalf of
amicus curiae American Insurance Association
(Sterns & Weinroth, attorneys).
The opinion of the Court was delivered by
O'HERN, J.
The primary question in this appeal is whether insurance
coverage exists under the employers liability section of a
workers' compensation policy for claims of workplace sexual
harassment when the harassment results in bodily injury. The
specific question is whether the policy's exclusion of coverage
for damages arising out of harassment (among other things) is
effective to deny such coverage. We find that to the extent the
exclusion would deny coverage for bodily injury caused by acts of
sexual harassment in the workplace, the exclusion would prevent
an employer from complying with N.J.S.A. 34:15-71, which requires
employers to "make sufficient provision for the complete payment
of any obligation [the employer] may incur to an injured
employee." Accordingly, we affirm the judgment of the Appellate
Division, which is reported at
294 N.J. Super. 569 (1996). In
American Motorists Insurance Co. v. L-C-A Sales Co., ___ N.J. ___
(1998), also decided today, we examine whether the "employee
exclusion" of an employer's comprehensive general liability
policy bars coverage of an employee's claim of age
discrimination.
Lisa M. Schmidt filed a complaint in September 1991 against
her employer, Personalized Audio Visual, Inc. (PAV) and Dennis
Smith (Smith), the president of PAV. (Because of the similarity
of the names (Schmidt and Smith), we shall refer to plaintiff as
"Lisa.") PAV ran the business center at the Somerset Hilton
Hotel. In her initial complaint, Lisa alleged that Smith
committed hostile work environment sexual harassment in violation
of New Jersey's Law Against Discrimination (LAD), N.J.S.A. 10:5-1
to -42, assault, battery, invasion of privacy and intentional
infliction of emotional distress. She alleged that Smith
demanded that she have sex with him, that he attempted to force
"his tongue down her throat," and that he fondled Lisa's buttocks
and breasts. Lisa alleged that these acts took place between
January 2, 1991 and February 19, 1991, during and immediately
prior to her employment by PAV. Two years later, in July 1993,
Lisa filed an amended complaint that alleged for the first time
that PAV and Smith were liable to Lisa under negligence theories,
namely, that Smith had negligently inflicted emotional distress
and that PAV had negligently failed to train or supervise her
superior.
PAV and Smith (as an employee of PAV) demanded defense and
indemnification in the lawsuit from United States Fidelity &
Guaranty Company (USF&G), initially under a comprehensive general
liability (CGL) policy and later under the employer's liability
portion of a Workers' Compensation and Employers' Liability
policy (Workers' Compensation policy). USF&G denied coverage
under both policies. PAV and Smith instituted a third-party
declaratory judgment action against USF&G on the coverage issue.
The trial court accepted USF&G's argument that Lisa's case should
be tried before the coverage action. The trial court urged USF&G
to participate in that trial, but USF&G declined to do so.
In the trial of Lisa's claims against PAV and Smith, the
jury found Smith liable to Lisa for hostile work environment
sexual harassment, assault, assault and battery, and intentional
infliction of emotional distress. PAV was held liable for the
hostile work environment sexual harassment alone. The jury was
not asked whether PAV's liability was direct or vicarious, and it
was not asked whether PAV could be vicariously liable for the
intentional torts Smith had committed. The jury awarded
compensatory damages of $80,000 to Lisa but did not allocate
those damages to the different causes of action. The trial court
entered judgment against PAV and Smith in the amount of
$181,730.36, which included the compensatory damage award,
$82,313.50 in counsel fees under LAD, and prejudgment interest
and disbursements.
On cross-motions for summary judgment in the coverage
actions, the trial court found that USF&G had a duty to defend
Smith and PAV as well as a duty to indemnify PAV.
On appeal, the Appellate Division affirmed that part of the
judgment that required USF&G to indemnify PAV for the full amount
of Lisa's judgment and to reimburse PAV and Smith for all defense
costs incurred by them. The Appellate Division agreed with USF&G
that there was no duty to defend or indemnify PAV under the terms
of the CGL policy. It held, however, that USF&G was obliged to
defend and indemnify PAV under the employer's liability coverage
of the Workers' Compensation policy. The court reasoned that the
exclusion in that coverage for harassment was not applicable to
sexual harassment claims when liability for those claims was
imposed vicariously and not directly. It declined to apportion
the defense costs as between Smith and PAV. We granted USF&G's
petition for certification.
148 N.J. 461 (1997).
Before considering the terms of the policy, we digress to review the nature of the insurance involved here. Under New Jersey law, injuries that arise in and out of the course of employment are compensable through the system of Workers' Compensation laws. N.J.S.A. 34:15-1 to -142. Absent a specific election not to be covered, every employee is deemed to have elected the Workers' Compensation remedy for occupational injuries. N.J.S.A. 34:15-9. In exchange for this statutory remedy, the employee surrenders rights to sue the employer or fellow employees at common law except in cases where the injury stems from intentional wrongs committed by the employer or the fellow employees. N.J.S.A. 34:15-8. In order to assure that this statutory remedy given in lieu of a common law remedy is not
illusory, the Legislature has required that every employer carry
Workers' Compensation insurance. Those policies must cover not
only claims for compensation prosecuted in the Workers'
Compensation court, but also claims for work-related injuries
asserted in a common law court. N.J.S.A. 134:15-72. Thus, in
Variety Farms, Inc. v. New Jersey Mfrs. Ins. Co.,
172 N.J. Super. 10 (1980), the Appellate Division held that when a minor elected
to seek a common law tort claim to recover compensation for
injuries (workers under 18 years of age are exempt from the
exclusivity provisions of the Workers' Compensation Act, N.J.S.A.
34:15-10), the employer's Workers' Compensation policy was
required to provide coverage even though the policy contained a
specific exclusion for employment that violated the law. (The
plaintiff in that case was hurt while operating power-driven
machinery. N.J.S.A. 34:2-21.17, a section of the Child Labor
Law, prohibits the employment of minors under 16 to work with
such machines.) In short, the terms of a policy issued pursuant
to N.J.S.A. 34:15-78 cannot conflict with the statutory mandate
that there be coverage provided for all occupational injuries.
Employers liability coverage, as the Appellate Division
noted, "is traditionally written in conjunction with workers'
compensation and is intended to serve as a `gap-filler' providing
protection to the employer in those situations where the employee
has a right to bring a tort action despite provisions of the
workers' compensation statute." Producers Dairy Delivery Co. v.
Sentry Ins. Co.,
718 P.2d 920, 927 (Cal. 1986).
The Appellate Division summarized the policy provisions and the exclusions relevant to this appeal.
The employers liability insurance here "applies to bodily injury by accident or bodily injury by disease," which arises "out of and in the course of the injured employee's employment" by the insured. Under the policy USF[&]G agreed to pay "all sums [PAV] legally must pay as damages because of bodily injury to [PAV's] employees, provided the bodily injury is covered by this Employers Liability Insurance." The pertinent exclusions to the policy are as follows:
C. Exclusions.
This insurance does not cover:
4. Any obligation imposed by a workers
compensation, occupational disease,
unemployment compensation, or disability
benefits law, or any similar law;
5. Bodily injury intentionally caused
or aggravated by you;
7. Damages arising out of the
discharge of, coercion of, or
discrimination against any employee in
violation of law.
Exclusion C7 was amended and replaced with
the following exclusion:
This insurance does not cover:
7. Damages arising out of coercion,
demotion, evaluation, reassignment,
discipline, defamation, harassment,
humiliation, discrimination against or
termination of any employee, or any
personnel practices, policies, acts or
omissions.
[294 N.J. Super. at 581 (footnote omitted).]
The Appellate Division concluded that although the language
of Exclusion C7 applied to sexual harassment claims under LAD,
the exclusion did not specifically exclude coverage for vicarious
liability resulting from hostile workplace sexual harassment.
The court resolved the ambiguity in favor of PAV and in line with
PAV's reasonable expectations. Id. at 582. Given that PAV was
legally obligated--under Variety Farms, supra, 172 N.J. Super. at
18--to provide for the complete payment of any obligation arising
from an employee's injury, and given that the purpose of the
employers liability section of the USF&G policy was to bridge the
gap between the typical workers' compensation obligations and the
obligations arising from injuries not covered by the workers'
compensation regime, the court held it was reasonable for PAV to
expect coverage of its vicarious liability for Smith's conduct.
Id. at 583.
We agree with the Appellate Division that Exclusion C5 does
not apply because there is no evidence that PAV intended to
harass Lisa. Id. at 584. We also agree with the Appellate
Division that workers' compensation is not the exclusive remedy
for victims of sexual harassment. Id. at 586. The employers
liability section of the Workers' Compensation policy was
therefore a proper place for PAV to look for coverage.
We are less able to agree with the Appellate Division's
conclusion that Exclusion C7 is ambiguous than with its
determination that an employer would reasonably expect the
employer's liability section to provide coverage for the types of
injuries Lisa suffered. The damages for which PAV is liable are
damages "arising out of" harassment, in the language of that
exclusion, and the phrasing of the exclusion is not "so confusing
that the average policyholder cannot make out the boundaries of
coverage." Weedo v. Stone-E-Brick, Inc.,
81 N.J. 233, 247
(1979). Were there no other ground requiring USF&G to indemnify
PAV for its obligation to Lisa, Exclusion C7 might well have the
effect USF&G urges.
USF&G must indemnify PAV, however, for the same reason that
New Jersey Manufacturers Insurance Company had to indemnify
Variety Farms for its obligations to the underage employee
injured in that case. Variety Farms, supra, 172 N.J. Super. at
22. The Legislature, by way of N.J.S.A. 34:15-72, required PAV
to obtain sufficient coverage for the payment of any obligation
it might incur on account of bodily injuries to an employee. PAV
thus contracted with USF&G for the coverage of bodily injuries
falling both inside and outside of the workers' compensation
structure. The employers liability section of the contract was
to provide compensation for bodily injuries to workers falling
outside the workers' compensation system--injuries intentionally
caused by fellow employees, for example, or injuries befalling a
worker under the age of eighteen "by reason of the negligence of
his or her master." N.J.S.A. 34:15-8 and -10. Exclusion C7 in
the employers liability section disclaims coverage for a class of
discomforts that one typically would not associate with bodily
injury--criticism, demotion, evaluation, and defamation, for
example--and that one typically would not expect to be covered by
a scheme designed to insure that employees' bodily injuries be
compensated. The exclusion is valid as long as the liability
arising from those discomforts is not related to bodily injury.
In this case, however, PAV's liability was primarily related to
the personal injuries that Lisa suffered as a result of Smith's
conduct. We have held that the type of injuries Lisa sustained--"emotional injuries accompanied by physical manifestations"--qualify as "bodily" for these purposes. Voorhees v. Preferred
Mut. Ins. Co.,
128 N.J. 165, 179 (1992).See footnote 1 To the extent
Exclusion C7 would otherwise operate to deny coverage for such
injuries, the exclusion violates the public policy underlying the
workers' compensation scheme and is therefore void. Variety
Farms, supra, 172 N.J. Super. at 22.
We recognize that there are other insurance products that
are specifically designed to indemnify employers against
occupational claims arising from sexual harassment. See Nancy
Ritter, Employer Liability: The Rush Is On for Insurance, N.J.
Lawyer, Feb. 2, 1998, at 1 (discussing employment practices
liability insurance). It is possible that the two forms of
coverage may overlap in the instance when sexual harassment for
which an employer is responsible results in bodily injury to a
worker. The Commissioner of Banking and Insurance and the
Commissioner of Labor (who has supervisory authority concerning
the workers' compensation laws) may wish to work with the
insurance industry to resolve or address this overlap.
We affirm the conclusions of the Appellate Division relating
to USF&G's liability for the defense costs incurred by Smith and
PAV. Although USF&G's duty to defend Smith did not arise until
Lisa filed her amended complaint, USF&G was obligated to defend
PAV from the beginning of the litigation. Her complaint stated a
claim constituting a risk against which PAV had insured. Danek
v. Hommer,
28 N.J. Super. 68, 77 (App. Div. 1953), aff'd o.b.,
15 N.J. 573 (1954). We acknowledge that there is no default rule
requiring insurers to bear all defense costs when covered and
non-covered costs cannot be apportioned with "scientific
certainty." SL Indus., Inc. v. American Motorists Ins. Co.,
128 N.J. 188, 216 (1992). But in this case PAV's defense strategy
was identical to Smith's. Both parties denied the harassment
ever occurred. PAV and Smith hired one lawyer to present their
denials. The portion of the cost of defending Smith that was not
included within the cost of PAV's defense would have been
negligible. We therefore decline to remand for an apportionment
of defense costs.
The judgment of the Appellate Division is affirmed.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN, and COLEMAN join in JUSTICE O'HERN's opinion.
NO. A-24 SEPTEMBER TERM 1997
ON APPEAL FROM Appellate Division, Superior Court
ON CERTIFICATION TO
LISA M. SCHMIDT,
Plaintff-Respondent,
v.
DENNIS SMITH and PERSONALIZED AUDIO VISUAL, INC.,
Defendants and Third-Party Plaintiffs-Respondents,
and
UNITED STATES FIDELITY and GUARANTY COMPANY,
Third-Party Defendant and Appellant.
DECIDED June 15, 1998
Chief Justice Poritz PRESIDING
OPINION BY Justice O'Hern
CONCURRING OPINION BY
DISSENTING OPINION BY
Footnote: 1There is nothing in this record to suggest that any part of PAV's liability stemmed from non-bodily injuries. In its instruction to the jury, the trial court simply explained that in assessing damages, the jury should consider "1) disability and impairment, and 2) pain and suffering." The jury verdict form asked the jury for its assessment of "[d]amages, if any, awarded to Lisa Schmidt," without classifying her injuries in any way. It is highly unlikely that any portion of Lisa's $80,000 award was unrelated to her bodily injuries and would therefore not qualify as the kind of injury for which PAV was statutorily obligated to provide coverage. Because USF&G declined the trial court's invitation to participate in the liability trial, it may not now complain of any prejudice resulting from the jury's failure to distinguish between bodily and non-bodily injuries. See Michaels v. Mutual Marine Office, Inc., 472 F. Supp. 26, 30-31 (S.D.N.Y. 1978) (holding insurer liable for plaintiffs' counsel fees, despite plaintiffs' failure to obtain insurer's written consent before incurring those fees, when insurer had completely disavowed liability and refused to participate in the underlying arbitration proceeding).