Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit

10-12-1995

Chemical Leaman v Aetna Precedential or Non-Precedential:

Docket 93-5777

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Recommended Citation "Chemical Leaman v Aetna" (1995). 1995 Decisions. Paper 264. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/264

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No. 93-5777 and 93-5794

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

1 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.; TOKIO 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 in No. 93-5777

Aetna Casualty and Surety Company ("Aetna"),

Appellant in No. 93-5794

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civ. No. 89-1543)

Argued: September 26, 1994 Before: SCIRICA, NYGAARD and McKEE, Circuit Judges.

(Filed October 12, 1995)

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.

2 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

3 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

OPINION OF THE COURT

McKEE, Circuit Judge.

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"

4 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

5 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

6 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.

7 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, 1985.0 During this same period of time, the

London Market Insurers ("LMI") sold Chemical Leaman excess CGL

coverage.0 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: .

0 During trial, Chemical Leaman dismissed its claims against the 1981-1985 policies, and the district court granted summary judgment in favor of Aetna on the 1959-1960 policy because Chemical Leaman had not presented evidence of damage that could have triggered this policy. We need not discuss the specific provisions of the Aetna policies since they have withdrawn as a party to this appeal. See infra at . 0 At oral argument before the district court, Chemical Leaman dismissed any claims it had against LMI on the policy running from April 1, 1985 to April 1, 1986. Apparently, Chemical Leaman dismissed its claims against the 1981-1985 policies as well. The LMI do not state what happened in their brief, as they say they provided excess coverage from 1960-1981 and cite to a stipulation in the appendix, but the stipulation states they provided coverage from 1958-1986.

8 . . (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."0

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

0 Some of the LMI's earlier policies insured against an "accident," which was circularly defined as "an accident or series of accidents arising out of one event or occurrence." On summary judgment, the district court reasoned that New Jersey law defines the term "accident" in the accident-based policies in substantially the same manner as the definition of an "occurrence" in the occurrence-based policies -- an event neither expected nor intended by the insured. See Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Sur. Co.,

(D.N.J. 1993). Thus, the court held that Chemical Leaman would bear the same standard of proof on the accident policies as it would on the occurrence-based policies. This finding is not challenged on appeal.

9 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

(1937)

(prohibiting pollution of freshwater without Department of Health

permit) (repealed 1977);

, 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);

, 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

10 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

11 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.0

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.

0 Ironically, while assessing Chemical Leaman's proposed solution for its pollution problem, Robinson observed one trailer being drained directly onto the parking lot. While such conduct was apparently a violation of company policy and would subject the individual to disciplinary action, this was not the only occasion on which he observed this prohibited conduct.

12 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

13 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.

, 9607.0 As an owner and operator of the site,

Chemical Leaman is strictly liable under CERCLA for the cost of

the environmental cleanup.

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.,

(D.N.J. 1992). The

court held that the "owned property exclusion" contained in the

0

(a)(1).

14 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.0

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.,

(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.,

(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

0 The other issues that the district court decided as a matter of law are not raised on this appeal.

15 that the continuous trigger doctrine determined whether property

damage also occurred under the remaining policies.0 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

0 The time of an "occurrence" is the time when the complaining party is damaged. See Hartford Accident & Indem. Co. v. Aetna Life & Casualty Ins. Co.,

(N.J. 1984).

16 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.0

0 Practically speaking, Aetna's withdrawal from this appeal has no effect on the issues which we must address since LMI and Aetna joined in each other's arguments.

17 Although LMI raises numerous issues, our inquiry focuses

upon whether there has been an "accident" or "occurrence" as

defined by the CGL policies.0 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.,

(N.J. 1993).0 We are guided by Morton and

Our review of the district court's interpretation and prediction

of New Jersey law is plenary.0 See Wiley v. State Farm Fire &

Casualty Co.,

, 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.,

(1941); Air Products & Chemicals, Inc. v. Hartford

Accident & Indem. Co.,

(3d Cir. 1994); National

Sur. Corp. v. Midland Bank,

(3d Cir. 1977). Thus,

"intervening and conflicting state court decisions will

0 Aetna briefed the "occurrence" issue and LMI joined in and incorporated the arguments advanced by Aetna. See LMI brief at 50; LMI Reply brief at 1-2. 0 The insurers also brought a motion for relief from judgment on the grounds of newly discovered evidence pursuant to rule 60(b)(2) and/or on grounds of misconduct pursuant to Rule 60(b)(3). We need not reach this issue as the insurers will have the benefit of the "after discovered" documents at the new trial. 0 The district court's subject matter jurisdiction was based on diversity of citizenship pursuant to

. The jurisdiction of this court is founded upon

. As a Federal Court sitting in diversity we are bound, as was the district court, to apply the substantive law of the state whose laws govern the action. See Erie R.R. Co. v. Tompkins,

(1938); Borse v. Pierce Goods Shop, Inc.,

(3d Cir. 1992).

18 [necessarily] cause the reversal of judgments which were correct

when entered." Baker v. Outboard Marine Corp.,

(3d Cir. 1979) (quoting Vandenbark,

). 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.0

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:

0

(N.J. Super. Ct. App. Div.), cert. denied,

(N.J. 1990).

19 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. 0 B. Prudential Property & Casualty Ins. Co. v. Karlinski

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.

0

(N.J. Super. Ct. App. Div. 1991).

20 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,

. 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.'"

The motion judge also concluded that "a

broken 'leg' [Mark actually suffered a broken hip] was not an

extraordinary consequence of the fight."

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."

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.

. 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

21 the actual intent of the actor to cause that injury is necessary.

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.0

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,

.

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.'"

.

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

0

(N.J. 1992).

22 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."

. 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."

.

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

23 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.

.

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.

at 1265 (citing Atlantic

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.

While the court felt that there was little evidence that the

24 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

Accordingly, the court affirmed

plaintiff's award of summary judgment. 0 D. SL Industries, Inc. v. American Motorists Ins. Co.

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,

.

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

0

(N.J. 1992).

25 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.

. 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. . . .0 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

0 The test derives its name from Lyons v. Hartford Ins. Group,

(N.J. Super. Ct. App. Div. 1973).

26 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

27 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.0

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,

sue_"

0

(N.J. 1993), cert. denied,

(1994).

28