Appendix — Jackson v. Chemical Leaman Tank Lines, Inc.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 93-5777 & 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 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
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COMPANY LTD.; BRITISH NATIONAL LIFE
INSURANCE SOCIETY LTD.; CNA INTERNATIONAL
REINSURANCE CO. LTD., FORMERLY KNOWN AS
CNA REINSURANCE OF LONDON LTD.; DELTA
LLOYD NON-LIFE INSURANCE COMPANY;
DOMINION INSURANCE COMPANY LTD.; DRAKE
INSURANCE COMPANY LTD.; EDINBURGH
INSURANCE COMPANY; EXCESS INSURANCE
COMPANY LTD.; FIDELIDADE INSURANCE
COMPANY; FOLKSAM INTERNATIONAL INSURANCE
COMPANY (U.K.) LTD.; HELVETIA ACCIDENT SWISS
INSURANCE COMPANY; INDEMNITY MARINE
ASSURANCE COMPANY, LTD.; LEXINGTON
INSURANCE COMPANY, LTD.; LONDON & OVERSEAS
INSURANCE COMPANY, LTD.; LONDON &
EDINBURGH INSURANCE COMPANY, LTD.; LONDON
& SCOTTISH ASSURANCE CORPORATION, LTD.; GAN
MINSTER INSURANCE COMPANY, FORMERLY
KNOWN AS MINSTER INSURANCE COMPANY LTD.;
NATIONAL CASUALTY COMPANY; NATIONAL
CASUALTY INSURANCE OF AMERICA, LTD.; NEW
LONDON REINSURANCE COMPANY, LTD.; NORTH
ATLANTIC INSURANCE COMPANY LTD., FORMERLY
KNOWN AS BRITISH NATIONAL INSURANCE CO.
LTD.; ORION INSURANCE COMPANY LTD.; PINE TOP
INSURANCE CGMPANY 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
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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 at No. 93-5777
AETNA CASUALTY AND SURETY COMPANY
(“AETNA”)
Appellant at No. 93-5794
(D.C. Civ. No. 89-cv-1543)
SUR PETITION FOR REHEARING
Present: BECKER, STAPLETON, MANSMANN, SCIRICA,
COWEN, NYGAARD, ALITO, ROTH, LEWIS, McKEE and
SAROKIN, Circuit Judges.
The petition for rehearing filed by appellants Robin An-
thony Gildart Jackson, an Underwriter at Lloyds, London, et
al. in the above-entitled case having been submitted to the
judges who participated in the decision of this Court and to all
the other available circuit judges of the circuit in regular ac-
tive service, and no judge who concurred in the decision
having asked for rehearing, and a majority of the circuit
judges of the circuit in regular service not having voted for
rehearing, the petition for rehearing by the panel and the
Court in banc, is denied. Judge McKee would grant rehearing.
BY THE COURT,
/s/ Scirica
CIRCUIT JUDGE
Dated: July 22, 1996
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CHEMICAL LEAMAN TANK LINES, INC.
Vv.
The AETNA CASUALTY AND SURETY COMPANY;
and Certain Underwriters At Lloyds, London, subscrib-
ing to Insurance Policies 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 rep-
resentative Underwriter at Lloyds, London for certain
subscribing Underwriters at Lloyds, London who sub-
scribed 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 Interna-
tional Insurance PLC, Formerly Known as Allianz In-
ternational Insurance Company Ltd.; Anglo-French
Insurance Company Ltd.; Argonaut Northwest Insur-
ance Company; Assicurazioni Generali Spa; Baloise
Fire Insurance Company; Bellefonte Insurance Com-
pany 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 Insur-
ance Company Ltd.; Drake Insurance Company Ltd.;
Edinburgh Insurance Company; Excess Insurance
Company Ltd.; Fidelidade Insurance Company; Folk-
sam International Insurance Company (U.K.) Ltd.;
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Helvetia Accident Swiss Insurance Company; Indem-
nity Marine Assurance Company, Ltd.; Lexington In-
surance Company Ltd.; London & Overseas Insurance
Company, Ltd.; London & Edinburgh Insurance Com-
pany, 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., For-
merly Known as British National Insurance Co. Ltd.;
Orioa Insurance Company Ltd.; Pine Tup 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 Ltd.;
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 Stan-
dard Insurance Company Ltd.; Winterthur Swiss In-
surance Company; World Auxiliary Insurance
Corporation Ltd.; Yasuda Insurance Company (U.K.)
Ltd. (hereinafter collectively referred to as “Jackson &
Companies”), Appellants at No. 93-5777,
Aetna Casualty and Surety Company (“AETNA”),
Appellant at No. 93-5794.
No. 93-5777, 93-5794.
United States Court of Appeals,
Third Circuit.
Argued Sept. 26, 1994.
Decided Oct. 12, 1995.
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Petition for Panel Rehearing Granted
and Opinion and Judgment Vacated
Dec. 15, 1995.
Submitted on Petition for
Panel Rehearing Dec. 15, 1995.
Decided June 20, 1996.
Order Denying Rehearing and
Rehearing In Banc July 22, 1996.
insured sought declaration that its primary and excess
comprehensive general liability (CGL) policies provided cov-
erage for costs of cleaning up environmental contamination at
and around its tank-truck cleaning facility. In separate opin-
ions, the United States District Court for the District of New
Jersey, Stanley S. Brotman, J., 788 F.Supp. 846 and 817
F.Supp. 1136, granted some motions for summary judgment
and denied others, and after jury trial resulted in verdict of
partial coverage, insurers appealed. On panel rehearing, the
Court of Appeals, Scirica, Circuit Judge, held that: (1) in-
struction on “occurrence” issue properly directed jury to focus
on whether specific property damage at issue was expected or
intended by insured; (2) Voorhees “exceptional circum-
stances” rule allowing insured’s intent to injure to be pre-
sumed did not apply; (3) Morton regulatory estoppel rule
applied to nonstandard pollution exclusion in insured’s excess
policies; (4) insurers did not preserve error as to jury instruc-
tion on pollution exclusion, and instruction was not plain er-
ror; (5) evidence of environmental problems at other facilities
operated by insured was inadmissible; (6) under continuous
trigger, allocation cf liability among the policies had to be
risk-based, rather than joint and several; (7) property damage
occurred as matter of law during ten successive policy periods
following insured’s initial discharge of contaminants; and (8)
insured’s four-year delay in providing notice of claim did not
relieve insurers of their coverage obligations.
Affirmed in part and remanded.
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McKee, Circuit Judge, concurred in part, dissented in part,
and filed opinion.
Opinion superseded, 68 F.3d 658.
1. Insurance k437.1(1)
Under New Jersey law, insured had burden of proving that
it did not expect or intend to cause property damage in order
to establish coverage under its occurrence-based comprehen-
sive general liability (CGL) policies for costs of cleaning up
environmental contamination at and around its tank-truck
cleaning facility.
2. Federal Courts k754.1
Court of Appeals’ review of jury instructions is plenary.
3. Federal Civil Procedure k2182.1
Jury charge, taken as whole, must fairly and adequately
submit issues in case to jury.
4. Insurance k669.6(3)
Under New Jersey law, instruction properly directed jury to
focus on whether specific property damage at issue —
namely, contamination to soil, groundwater, and wetlands at
and around insured’s tank-truck cleaning facility — was ex-
pected or intended by insured, with respect to issue of
whether there had been “occurrence” as required for coverage
for costs of cleaning up the contamination under insured’s
comprehensive general liability (CGL) policies; focus on
whether insured intended some sort of injury would have been
improper.
5. Insurance k433.2
Under New Jersey law, “occurrence” requirement for li-
ability insurance coverage for costs of cleaning up environ-
mental contamination is not satisfied when insured intended
Or expected its actions to cause environmental harm of
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particular sort, unless the harm that actually resulted was im-
probable.
6. Insurance k433.2
Under New Jersey law, “occurrence” requirement does not
operate to preclude liability insurance coverage for costs of
cleaning up environmental contamination where insured had
intent to cause environmental harm of one sort but other kinds
of unintended and unexpected environmental harm resulted.
7. Insurance k433.2
Under New Jersey law, Voorhees “exceptional circum-
stances” rule for determining whether “occurrence” require-
ment for coverage under liability insurance policy is satisfied,
which allows insured’s intent to injure to be presumed with-
out inquiry into insured’s subjective intent in cases of egre-
gious conduct, did not apply to insured’s conduct leading to
contamination of soil, groundwater, and wetlands at and
around its tank-truck cleaning facility, where insured did not
engage in pattern of stonewalling characterized by promises
of compliance that consistently were unfulfilled.
8. Insurance k138(4)
Under New Jersey law, Morton regulatory estoppel rule,
which bars liability insurers from enforcing standard-form
pollution exclusion containing exception for “sudden and ac-
cidental” discharges on grounds that insurance industry mis-
led state regulators in securing approval of exclusion, applied
to nonstandard pollution exclusion in insured’s excess com-
prehensive general liability (CGL) policies, where it used
word “sudden,” it closely tracked language of standard ex-
clusion, and it came into use at about same time as standard
exclusion, regardless of whether insurers who issued the
policies containing the nonstandard exclusion directly made
misrepresentations to regulators.
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9. Federal Civil Procedure k2602
Defendant liability insurers’ objection to jury charge on
scope of pollution exclusion could not serve as predicate for
renewed motion for judgment after trial, or motion for j.n.o.v.,
where district court did not explicitly treat the objection as
motion for judgment as matter of law, or directed verdict mo-
tion. Fed.Rules Civ.Proc.Rule 50(a), (a)(2), (b), 28 U.S.C.A.
10. Federal Courts k637
Defendant liability insurers’ objection to jury charge on
scope of pollution exclusion was insufficient to preserve ar-
gument for appeal, in insured’s action seeking coverage for
costs of cleaning up environmental contamination, where ob-
jection was difficult to understand due to convoluted grammar
and did not specify authority upon which it was based.
Fed.Rules Civ.Proc.Rule 51, 28 U.S.C.A.
11. Federal Courts k621
In absence of party’s preservation of assigned error for ap-
peal, Court of Appeals reviews for plain error, and its power
to reverse is discretionary.
12. Federal Courts k621
Particularly in civil context, Court of Appeals exercises its
power to reverse for plain error sparingly.
13. Federal Courts k630.1
Plain error warranting exercise of Court of Appeals’ dis-
cretionary power to reverse was not presented by instruction
requiring proof that insured intended discharge of known
pollutants into groundwater, as opposed to into environment
generally, in order for pollution exclusion in its comprehen-
sive general liability (CGL) policies to preclude coverage for
costs of cleaning up groundwater damage.
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14. Evidence k146
Evidence of environmental problems at other tank-truck
cleaning facilities operated by insured was inadmissible, due
to its probative value being substantially outweighed by dan-
ger of prejudice and jury confusion and delay, in insured’s
action seeking liability coverage for costs of cleaning up envi-
ronmental contamination at and around one particular facility,
where series of minitrials relating to each facility would have
been required for jury to properly evaluate the evidence.
Fed.Rules Evid.Rule 403, 28 U.S.C.A.
15. Insurance k178.6
Under New Jersey law, continuous trigger theory for identi-
fying time of “occurrence” for purposes of liability insurance
coverage extends to property damage claims resulting from
long-term environmental contamination.
16. Insurance k178.6
Under New Jersey law, continuous trigger theory for identi-
fying time of “occurrence” for purposes of liability insurance
coverage did not make all of insured’s successive, applicable
liability policies jointly and severally liable for long-term en-
vironmental contamination at and around its tank-truck
cleaning facility, but rather required risk-based allocation of
liability among the policies in accordance with Owens-
Illinois.
17. Insurance k178.6
Under New Jersey’s continuous trigger theory for identify-
ing time of “occurrence” for purposes of liability insurance
coverage, exposure to harm-causing agent is sufficient to trig-
ger potential coverage, and actual manifestation of injury is
not required, so long as there is continuous, indivisible proc-
ess resulting in damage.
1%. Insurance k178.6
Under New Jersey’s continuous trigger theory for identify-
ing time of “occurrence” for purposes of liability insurance
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coverage, property damage occurred as matter of law during
each of ten successive comprehensive general liability (CGL)
policy period, in connection with environmental contamina-
tion at and around insured’s tank-truck cleaning facility,
where insured discharged contaminated rinsewater into un-
lined ponds and lagoons in every year at issue, and contami-
nated rinsewater from three settling ponds started migrating
through soil to underlying groundwater almost immediately
after pond operation began.
19. Insurance k669.2
Jury instruction stating that insured could be entitled to
coverage under comprehensive general liability (CGL) poli-
cies for environmental property damage that occurred during
policy period but that originally began during earlier policy
period was proper under New Jersey’s continuous trigger the-
ory for identifying time of “occurrence” for purposes of li-
ability insurance coverage.
20. Insurance k539.8
Under New Jersey law, insured’s four-year delay in provid-
ing notice to its comprehensive general liability (CGL) insur-
ers of claim for costs of cleaning up environmental
contamination at and around insured’s tank-truck cleaning
facility did not relieve insurers of their coverage obligations,
where the untimely notice did not leave insurers with inade-
quate evidentiary record or otherwise cause them to irre-
trievably lose any substantial right, and insurers’ ability to
defend against underlying claim was not adversely affected.
21. Insurance k539.1
Under New Jersey law, insured’s contractual obligation to
notify its comprehensive general liability (CGL) insurers of
environmental contamination at and around insured’s tank-
truck cleaning facility did not arise until Environmental Pro-
tection Agency (EPA) placed site on Superfund National Pri-
orities List, which ultimately led to the clean-up cost liability
for which insured was seeking coverage, and did not arise
some 20 years earlier when insured first received complaints
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from various regulatory bodies, especially since prior New
Jersey state actions had sought only nonmonetary injunctive
relief.
Henry Lee (Argued), Gary P. Schulz, John G. McAndrews,
Hannah M. O'Driscoll, Mendes & Mount, New York City,
William J. Hanley, Ronca, McDonald & Hanley, Livingston,
New Jersey, for Appellants at No. 93-5777.
Brian J. Coyle (Argued), Peter E. Mueller, Harwood Lloyd,
Hackensack, New Jersey, William H. Jeffress, Jr., Miller,
Cassidy, Larroca & Lewin, Washington, DC, Edward M.
Dunham, Jr., Miller, Dunham & Doering, Philadelphia, Penn-
sylvania, for Appellant, Aetna Casualty and Surety Company.
Kevin B. Clark (Argued), John P. Dean, Conrad J.
Smucker, Willkie, Farr & Gallagher, Washington, DC, for
Appellee, Chemical Leaman Tank Lines, Inc.
Thomas W. Brunner, Wiley, Rein & F ielding, Washington,
DC, for Amicus Curiae Appellant, Insurance Environmental
Litigation Association.
Karen L. Jordan, Office of Attorney General of New Jer-
sey, Department of Law & Public Safety, Trenton, New Jer-
sey, for Amicus Curiae Appellee, State of New Jersey, New
Jersey Department of Environmental Protection & Energy.
Before SCIRICA, NYGAARD and McKEE, Circuit
Judges.
OPINION OF THE COURT
SCIRICA, Circuit Judge.
Chemical Leaman Tank Lines, Inc. brought this declaratory
judgment action against Aetna Casualty and Surety Company
and the London Market Insurers, seeking a declaration that
defendants’ insurance policies covered the cost of environ-
mental clean-up at Chemical Leaman’s Bridgeport, New Jer-
sey facility. After a three week trial, a jury found Chemical
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Leaman was entitled to partial coverage under several poli-
cies. Thereafter the New Jersey Supreme Court decided Mor-
ton Intern., Inc. v. General Acc. Ins. Co., 134.N.J. 1,629 A.2d
831 (1993), cert. denied, U.S. , 114 S.Ct. 2764, 129
L.Ed.2d 878 (1994), which interprets several key provisions
of comprehensive general liability insurance policies in the
context of environmental pollution. Defendant insurers now
appeal, contending the district court incorrectly instructed the
jury on whether Chemical Leaman “expected or intended” to
cause environmental damage under Morton. We believe
Morton requires an inquiry into the insured’s subjective intent
to cause environmental harm, unless “exceptional circum-
stances” support a presumption of the insured’s subjective
intent. Therefore we conclude the district court’s jury instruc-
tions were proper.
Defendant insurers raise several other issues on appeal.
They argue the district court mistakenly limited the applica-
bility of the policies’ pollution exclusion clause, incorrectly
adopted the “continuous trigger” theory as New Jersey law,
and ignored the prejudicial effect of Chemical Leaman’s fail-
ure to file its claims for coverage in a timely manner. They
also dispute the district court’s exclusion of evidence relating
to environmental contamination at other Chemical Leaman
facilities. We will affirm the district court’s holdings on the
pollution exclusion clause, the “continuous trigger” theory,
and timely notice. We also conclude that the exclusion of
certain evidence was within the sound discretion of the dis-
trict court.
' The district court’s opinions granting partial summary judgment are re-
ported at Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
788 F.Supp. 846 (D.N.J.1992), and Chemical Leaman Tank Lines, Inc. v.
Aetna Cas. and Sur. Co., 817 F.Supp. 1136 (D.N.J.1993).
Our initial opinion in this case was vacated on a petition for rehearing
in banc. See Chemical Leaman Tank Lines, Inc. v. Aetna Cas. and Sur
Co., 68 F.3d 658 (3d Cir.1995), vacated 68 F.3d 685 (3d Cir.1995).
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I. Background
A. Contamination at the Bridgeport Facility
Chemical Leaman Tank Lines, Inc., a tank truck company
that specializes in the transport of chemicals and other liquids,
operates a number of tank truck cleaning facilities around the
country, including one in Bridgeport, New Jersey. At the
Bridgeport facility, Chemical Leaman disposed of rinsewater
contaminated with chemical residue during the cleaning proc-
ess into a water treatment system designed by Harry Elston,
Chemical Leaman’s Manager of Real Estate and Engineering,
and Harry Wagner, a professional Sanitary engineer. At its
inception in 1960, the Bridgeport water treatment system
consisted of three unlined ponds connected by “tee pipes.”
The ponds were intended to purify rinsewater by filtering out
contaminants as the water seeped into the soil. The designers
of the system believed that the forces of gravity would sepa-
rate contaminates from the rinsewater, and that natural proc-
esses of aerobic and anaerobic microbial degradation would
break down trace contaminants. An overflow pipe drained
from the final pond of the water treatment system into an ad-
jacent swamp in order to allow water to escape in the case of
heavy rains.
In September 1961, an Inspector with the New Jersey Di-
vision of Fish Game & Wildlife informed Chemical Leaman
that its water treatment system was “not satisfactory.” In re-
sponse, Chemical Leaman constructed two additional aeration
lagoons and a settling lagoon with a limestone bed. The la-
goons were designed to function in the same manner as the
first three ponds. But the overflow pipe still drained from the
last lagoon into the ne: ghboring swamp.
Water pollution inspectors with the New Jersey Department
of Health observed discharge from the overflow pipe into the
swamp in November 1968. They found the discharge to be
“highly pollutional” and ordered Chemical Leaman to submit
a plan to improve its water treatment system. In May 1969,
Chemical Leaman submitted a plan, but state regulators found
it to be unsatisfactory. Thereafter state regulators and
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Chemical Leaman unsuccessfully attempted to reach agree-
ment. Finally, on January 28, 1974, Chemical Leaman and the
New Jersey Department of Environmental Protection entered
into a consent decree in which Chemical Leaman agreed to
construct an approved water treatment facility. In 1975,
Chemical Leaman arranged for its wastewater to be treated by
Du Pont and ceased to use the system of ponds and lagoons.
Subsequently, Chemical Leaman drained the ponds and la-
goons, dredged them, and filled them with brickbat, sand and
concrete.
In 1980, a routine survey by the New Jersey Department of
Environmental Protection discovered groundwater contami-
nation at and around the Bridgeport site. Subsequent investi-
gations established that the ponds and lagoons were the
primary source of groundwater contamination on the site, and
that several private wells near the facility were either con-
taminated or threatened with contamination. The federal Envi-
ronmental Protection Agency placed the Bridgeport site on
the Superfund National Priorities List in 1984, and, in 1985,
Chemical Leaman entered into a consent order with the EPA.
Chemical Leaman admitted liability under the Comprehensive
Environmental Response, Compensation and Liabilities Act
(“CERCLA”) and agreed to remediate the Bridgeport site or
to pay for its remediation.
Chemical Leaman gave notice of claims to Aetna in April
1988, and to the London Market insurers (“LMI”) in March
1989. Aetna and the LMI refused to defend or indemnify
Chemical Leaman for costs incurred in connection with the
clean-up of the Bridgeport site. Chemical Leaman then filed
this suit.
B. The Insurance Policies
Chemical Leaman purchased comprehensive general liabil-
ity insurance from Aetna covering successive years from
April 1, 1959 through April 1, 1985. It purchased excess
comprehensive general liability policies covering the same
period from the LMI. The LMI challenge the district court’s
interpretation of several provisions of the policies purchased
A-16
by Chemical Leaman. Because Aetna has withdrawn from
this appeal, we need not discuss its policies.
The LMI policies were standard form “occurrence-based”
policies, meaning they insured against “occurrences” as de-
fined in the policies. The insuring clause in the LMI policies
typically stated that the LMI agreed:
[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 rea-
son of the liability ... imposed upon the Assured by
law, ... for damages ... on account of: ... (ii) Property
Damage ... caused by or arising out of each occur-
rence.
The LMI 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” (emphasis
added). The combined effect of the insuring clause and the
definition of “occurrence” is to preclude coverage for prop-
erty damage that is expected or intended by the insured. On
appeal, the LMI contend the district court incorrectly in-
structed the jury on the legal standard by which to evaluate
Chemical Leaman’s expectation or intention to cause property
damage.
Each LMI policy in effect from 1971 to 1985 also con-
tained a pollution exclusion clause. The LMI policies in effect
from April 1, 1971 to April 1, 1974, and from April 1, 1977 to
April 1, 1985 contained the standard form exclusion known as
NMA 1685. NMA 1685 does not cover personal injury or
* The LMI’s earlier policies insured against “accidents” as opposed to
“occurrences.” New Jersey law defines an “accident” in the same manner
as an “occurrence;” namely, as an event neither expected nor intended by
the insured. The district court therefore held that Chemical Leaman bore
the same burden of proof under both types of policies. See Chemical Lea-
man Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817 F.Supp. 1136, 1148
(D.N.J.1993). The LMI do not challenge this holding on appeal.
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A-17
property damage caused by seepage, pollution, or contamina-
tion unless “such seepage, pollution or contamination is
caused by a sudden, unintended and unexpected happening
during the period of [the] insurance.” The LMI policies in ef-
fect from April 1, 1974 to April 1, 1977 contained the stan-
dard industry pollution exclusion clause, the so-called “ISO”
pollution exclusion, which precludes coverage for pollution
and contamination, unless the “discharge, dispersal, release or
escape is sudden and accidental.” Both the ISO pollution ex-
clusion clause and the NMA 1685 pollution exclusion clause
focus on the insured’s intention and expectation to discharge
pollutants, not on the insured’s intention or expectation to
cause property damage. On appeal, the LMI argue the pollu-
tion exclusion clauses bar coverage under the 1971 to 1985
policies because Chemical Leaman’s discharges of pollutants
were not sudden, unintended, or unexpected.
Finally, the LMI policies require the insured to provide
written notice “as soon as practicable” following an occur-
rence. The LMI argue that Chemical Leaman’s failure to
comply with this provision bars coverage.
II. Procedural History
Chemical Leaman filed this declaratory judgment action in
1989 after the insurers’ refusal to indemnify it for the costs of
environmental clean-up at the Bridgeport facility. Following
extensive discovery, the parties filed cross-motions for sum-
mary judginent on various grounds. The district court granted
partial summary judgment in favor of Chemical Leaman,
holding that New Jersey law applied, and that the “owned
property exclusion” did not bar coverage for the costs of
remediation of onsite soil contamination designed to correct
injury to surrounding properties. See Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. & Sur. Co., 788 F.Supp. 846
(D.N.J.1992).
After subsequent cross-motions for summary judgment, the
district court held Chemical Leaman bore the burden of
proving it did not subjectively expect or intend the damage to
the soil and groundwater for which it sought coverage. See
A-18
Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
817 F.Supp. 1136, 1146 (D.N.J.1993). It also found Chemical
Leaman’s actions were not so “reprehensible” as to objec-
tively establish that it expected or intended to cause damage.
Id. The court then denied the cross-motions for summary
judgment because there remained genuine issues of fact about
Chemical Leaman’s subjective intent. /d. at 1152.
The district court also held as a matter of law that damage
to the soil and groundwater occurred during the April 1, 1960
to April 1, 1961 policy year because Chemical Leaman began
depositing rinsewater in the ponds during that time period.’
The district court noted that from 1960 to 1975, Chemical
Leaman disposed of 10,000 to 20,000 gallons of rinsewater
into the ponds each day, but did not find that property damage
occurred during that period as a matter of law. Jd. Rather, it
ruled that New Jersey follows the “continuous trigger” theory
and that factual issues remained as to whether Chemical Lea-
man suffered continuous, indivisible property damage from
1961 to 1985.
The district court interpreted the pollution exclusion
clauses in the LMI’s post-1971 policies as precluding cover-
age “when the insured has caused the discharge of contami-
nants or pollutants, unless the discharge was neither expected
nor intended from the standpoint of the insured.” /d at 1157.
On the basis of the pollution exclusion clauses, the district
court granted partial summary judgment in favor of defen-
dants as to soil damage on the post-1971 policies. It denied
summary judgment with respect to groundwater contamina-
tion, and did not address contamination to the surrounding
wetlands. /d. Finally, the district court held Chemical
* The date on which the insured suffers property damage is important be-
cause it determines whether an “occurrence” has taken place under the
applicable insurance policies. See Hartford Acc. & Indem. Co. v. Aetna
Life & Cas. Ins. Co., 98 N.J. 18, 483 A.2d 402, 409 (1984). The district
court granted the insurers summary judgment on the April 1, 1959 to
April 1, 1960 policy, because Chemical Leaman produced no evidence
that damage occurred during that time period.
SOA
A-19
Leaman’s failure to give timely notice of its claims did not
preclude insurance coverage because the delay had not preju-
diced the defendant insurers. /d. at 1157-58.
Before trial, Chemical Leaman filed a motion in limine to
exclude evidence relating to waste disposal sites other than
Bridgeport. The district court granted the motion, holding the
other-site evidence more prejudicial than probative and un-
duly time consuming.
After a three week trial, the jury found that Chemical Lea-
man was entitled to coverage for damage to the soil and wet-
lands under the April 1, 1960 to April 1, 1971 policies, and to
coverage for damage to the groundwater under the April 1,
1960 to April 1, 1981 policies.’ In reaching its verdict, the
jury answered detailed interrogatories on Chemical Leaman’s
intent and expectation to cause property damage and to dis-
charge pollutants during each policy year. After oral argument
before this Court, Chemical Leaman and Aetna settled all
claims arising from this dispute.” The LMI now appeals the
district court’s legal determinations and the jury’s verdict.
We have jurisdiction to review the final judgment of the
district court under 28 U.S.C. § 1291. The district court held
New Jersey law governs, which the parties do not dispute.
Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
788 F.Supp. at 851. As a federal court sitting in diversity, we
must apply the substantive law of New Jersey. Borse v. Piece
Goods Shop, Inc., 963 F.2d 611, 613 (3d Cir.1992). Our re-
view of the district court’s interpretation of New Jersey law is
plenary. Wiley v. State Farm Fire & Cas. Co., 995 F.2d 457,
459 (3d Cir.1993).
* The parties appear to agree that Chemical Leaman has dismissed its
claims against the LMI on the 1981-85 policies, although it is unclear
from the record when or why this occurred.
* Aetna and the LMI each incorporated the arguments advanced by the
other, and so, accordingly, we must still address the issues raised by Aetna
as they relate to the LMI.
A-20
III. Occurrence-Based Insurance Policies and
“Expected or Intended”
[1] Chemical Leaman purchased “occurrence-based” com-
prehensive general liability insurance from the LMI that pro-
vided coverage for “[a]n accident or a happening or event or a
continuous or repeated exposure to conditions which unex-
pectedly and unintentionally results in ... property damage.”
The LMI contend that because Chemical Leaman “expected”
or “intended” to cause property damage at the Bridgeport site,
the policies do not provide coverage.”
New Jersey courts have been called upon repeatedly to in-
terpret the “expected/intended” clause in occurrence-based
insurance policies. They have sought to balance the need to
compensate victims against the public policy of deterring in-
tentional wrongdoing by denying coverage for its conse-
quences. In companion cases, Voorhees v. Preferred Mut. Ins.
Co., 128 N.J. 165, 607 A.2d 1255 (1992), and SL Industries,
Inc. v. American Motorists Ins. Co., 128 N.J. 188, 607 A.2d
1266 (1992), the New Jersey Supreme Court addressed how
the “expected/intended” clause should be interpreted in order
to strike the correct balance.
In Voorhees, the New Jersey Supreme Court held the acci-
dental nature of an occurrence is determined by analyzing
whether the insured subjectively intended or expected to
cause an injury. Voorhees v. Preferred Mut. Ins. Co., 607
A.2d at 1264. The court explained:
That interpretation prevents those who intentionally
cause harm from unjustly benefitting from
* Under New Jersey law, an insured must prove that a coverable loss has
occurred. Diamond Shamrock Chem. Co. v. Aetna Cas. & Sur. Co., 258
N.J.Super. 167, 609 A.2d 440, 464 (App.Div.1992), certif. denied, 134
N.J. 481, 634 A.2d 528 (1993). Accordingly, the district court correctly
required Chemical Leaman to prove it did not expect or intend to cause
property damage in order to establish coverage under the applicable insur-
ance policies. Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur.
Co., 817 F.Supp. at 1144.
P|
2
}
}
3
A-21
insurance coverage while providing injured victims
with the greatest chance of compensation consistent
with the need to deter wrong-doing. It also accords
with an insured’s objectively-reasonable expecta-
tion of coverage for unintentionally-caused harm.
Id. at 1264. The court emphasized, “[e]ven when the actions
in question seem foolhardy and reckless, the courts have
mandated an inquiry into the actor’s subjective intent to cause
injury.” Jd.
The court also recognized an “exceptional circumstances”
exception to the subjective intent inquiry.
When the actions are particularly reprehensible, the
intent to injure can be presumed from the act with-
out an inquiry into the actor’s subjective intent to
injure. That objective approach focuses on the like-
lihood that an injury will result from an actor’s be-
havior rather than on the wrongdoer’s subjective
state of mind.
Id. at 1265. The court cited to sexual assault against children
as an example of an act that is “so inherently injurious” that
an intent to injure can be presumed. /d. :
In SL Industries, the court confronted the question
“whether any intent to injure will render the resulting injury
intentional [and preclude coverage], whether the wrongdoer
must intend the specific injury that results, or whether there is
some middle ground between the two approaches.” SL Indus-
tries, Inc. v. American Motorists Ins. Co., 607 A.2d at 1277
(emphasis in original). After evaluating alternative theories,
the court adopted the “middle ground,” which it summarized
as follows:
Assuming the wrongdoer subjeciively intends or
expects some sort of injury, that intent will gener-
ally 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
A-22
injury. Lacking that intent, the injury was
“accidental” and coverage will be provided.
Id. at 1278. SL Industries involved an allegation of intentional
fraud that “presupposes a general subjective intent to injure.”
Accordingly the New Jersey Supreme Court remanded the
cases for a determination of whether the injury suffered by the
victim was improbable, and if so, whether the insured in-
tended or expected the victim’s actual injuries. /d. at 1279.
The court noted this approach “conforms to an insured’s ob-
jectively-reasonable expectations and provides the victim the -
greatest possibility of additional compensation consistent with
the goal of deterring intentional wrongdoing.” /d.
The New Jersey Supreme Court addressed the ex-
pected/intended clause of comprehensive general liability
policies in the environmental pollution context in Morton In-
tern., Inc. v. General Acc. Ins. Co., 134 N.J. 1, 629 A.2d 831
(1993), cert. denied, —— U.S. ——, 114 S.Ct. 2764, 129
L.Ed.2d 878 (1994). It attempted to apply the principles es-
tablished in Voorhees and SL Industries, but was forced to
“acknowledge the impracticality of adherence to the general
rule that ‘we will lock to the insured’s subjective intent to
determine intent to injure.’” Jd, 629 A.2d at 879. The court
then elaborated upon Voorhees’ “exceptional circumstances”
exception, which allows an intent to injure to be presumed
without inquiry into the actor’s subjective intent.
[W]e hold that in environmental-coverage litiga-
tion a case-by-case analysis is required to determine
whether, in the context of all the available evidence,
“exceptional circumstances exist that objectively
establish the insured’s intent to injure.” Voorhees,
607 A.2d at 1265. 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
A-23
subjective knowledge concerning the possibility or
likelihood of harm.
Id., 629 A.2d at 879-80. The court cautioned, “insureds held
responsible for remediation of environmental pollution vary
significantly in their degree of culpability for the harm caused
by pollutant discharges.” Therefore, “[a] general rule in envi-
ronmental-pollution coverage litigation that would permit in-
tent to injure to be presumed simply on the basis of a knowing
discharge of pollutants would be unjustified.” /d. at 879.
The New Jersey Supreme Court applied the factors it had
outlined to determine whether “exceptional circumstances”
supported the presumption of an intent to cause property
damage. It noted Morton and predecessors had polluted
Berry’s Creek to such an extent that “[flor a stretch of several
thousand feet, the concentration of mercury ... [was] the high-
est found in fresh water sediments in the world.” /d. at 834.
This damage was caused by the discharge of pollutants from a
mercury-processing plant over a period of at least eighteen,
and perhaps as many as forty-five, years. Jd. at 882. Moreo-
ver, for at least eighteen years the discharges had been inten-
tional, even though the company knew they would cause
environmental harm. Despite repeated complaints by regula-
tory agencies, Morton engaged in “a pattern of ‘stonewalling’
... Characterized by promises of compliance that consistently
were unfulfilled.” Jd. On the basis of these facts, the court
held, it “would have ignored reality to conclude that
[Morton’s] predecessors did not know that the mercury and its
effluents was [sic] harmful to the land over which it coursed
and the waters into which it fell.” Jd. at 884. Therefore, it held
as a matter of law that the property damage was not caused by
an “occurrence” within the meaning of the applicable insur-
ance policies.
Morton's presumption of an insured’s subjective intent to
cause property damage from egregious circumstances does
not hinge on whether the insured should have expected or in-
tended to cause injury. This would be akin to a negligence
standard. If negligent acts did not fall within the definition of
A-24
a covered occurrence, then there would be no point in pur-
chasing comprehensive general liability insurance. Pittston
Co. v. Allianz Ins. Co., 905 F.Supp. 1279, 1301 (D.N.J.1995).
While Morton pragmatically acknowledges courts should not
“ignore reality” when exceptional circumstances establish the
insured’s subjective intent to injure, the insured’s subjective
intent to cause injury remains the relevant inquiry under the
occurrence language.
In Morton, the New Jersey Supreme Court also addressed
the applicability of SL Industries’ improbability rule in envi-
ronmental pollution coverage litigation. It explained:
Turning to the question of whether environmental
injury was intended or expected, we first observe
that although the magnitude of damage to Berry’s
Creek and the surrounding areas may exceed any
intention or expectation attributable to Morton’s
predecessors, we do not consider differences in
harm relating to severity of environmental damage
give rise to a finding of “improbability” of harm
that invokes the need for evidence of subjective in-
tent. SL Industries, supra. ... The holding of SL Jn-
dustries was based on the Appellate Division’s
ruling ... that in a coverage action arising from a
fight between two young teenagers in which one
sustained a broken hip, a factual issue was presented
because of the inherent improbability that the skir-
mish would result in a hip fracture. No such inher-
ent “improbability” can be ascribed to the
environmental damage attributable to Morton’s
predecessors.
Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at 882
(citations omitted). Therefore the court concluded it did not
have to inquire into Morton’s subjective intent to cause the
specific environmental damage at issue.
In this case, the district court interpreted New Jersey law on
the “expected/intended” clause before the New Jersey Su-
preme Court’s decision in Morton. Nevertheless, it instructed
A-25
the jury to determine whether Chemical Leaman subjectively
expected or intended to cause property damage at the Bridge-
port site. At the end of trial, on the LMI’s Rule 50(a) motion
for judgement as a matter of law, the district court found that
the harm to the environment caused by the Bridgeport water
treatment system was improbable as a matter of law. The dis-
trict court also held Chemical Leaman’s actions were not so
reprehensible as to justify the presumption of an intent to
cause property damage under the “exceptional circumstances”
exception. It concluded Chemical Leaman was not “throwing
toxic waste out into the meadow-lands” as Morton and its
predecessors had done; rather, it had “designed and built the
facility to prevent [harm to the environment].” Chemical
Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817
F.Supp. at 1146.
[2, 3] On appeal, the LMI argue the district court’s jury in-
structions on the expected/intended issue were erroneous and
inconsistent with New Jersey law. They also assert the harm
at the Bridgeport site was not improbable as a matter of law.
Finally, they contend “exceptional circumstances” objectively
establish Chemical Leaman’s intent to cause property dam-
age. Our review of jury instructions is plenary. See Hook v.
Ernst & Young, 28 F.3d 366, 370 (3d Cir.1994). A jury
charge, taken as a whole, must “fairly and adequately” submit
the issues in the case to the jury. /d.
A. Jury Instruction on Expected/Intended
The district court instructed the jury that it should find for
Chemical Leaman if Chemical Leaman did not subjectively
expect or intend damage to the soil, groundwater, or wetlands
at the Bridgeport site. Midway through the trial, the court in-
structed the jury:
There are three kinds of damage at issue in this case
— soil contamination, groundwater contamination,
and swamp contamination ... You must evaluate
Chemical Leaman by what you believe were its ac-
tual, subjective expectations or intentions with
A-26
regard to causing soil, groundwater and swamp
damage ...
At the end of the trial, the district court again instructed the
jury:
“EXPECTED OR INTENDED” — FOCUS ON
DAMAGE
In determining Chemical Leaman’s expectations and inten-
tions in the context of basic coverage, you are instructed to
focus on whether the specific property damage was expected
or intended. You are not to consider whether the acts which
caused that property damage were intentional acts. I give you
this instruction because it is New Jersey law the unintended
results of intentional acts may be covered by defendants’ in-
surance policies. Thus, even though Chemical Leaman may
have knowingly and intentionally committed the acts that ul-
timately led to the environmental damage at the Bridgeport
site, there still may be insurance coverage as long as you find
that Chemical Leaman did not expect or intend the specific
property damage that is the subject matter of this litigation,
namely the contamination of the soil, groundwater, cr wet-
lands.
“EXPECTED OR INTENDED” — SPECIFIC
DAMAGE STANDARD
I further instruct you that, in deciding whether Chemical
Leaman subjectively expected or intended to cause property
damage, you must consider whether Chemical Leaman sub-
_ jectively expected or intended the very damage that is the
subject matter of this case. Thus, it is not sufficient for you to
find that Chemical Leaman expected or intended any injury
— such as injury to the environment generally. Rather, you
must determine whether Chemical Leaman expected or in-
tended the actual property damage that it is now required to
clean-up.
In addition, special interrogatories were submitted to the
jury on Chemical Leaman’s expectation and intention to cause
damage to the soil, groundwater, and wetlands.
A-27
[4] The LMI contend the district court’s final jury instruc-
tion was erroneous because it instructed the jury “to focus on
whether the specific property damage” — namely contamina-
tion to the soil, groundwater, or wetlands — “was expected or
intended.” They argue the district should have instructed the
jury that if Chemical Leaman “expected or intended” to cause
some injury to the environment generally, then coverage was
precluded unless the extent of the injury was improbable. The
LMI rely on SL Industries, in which the New Jersey Supreme
Court stated:
Assuming the wrongdoer subjectively intends or
expects some sort of injury, that intent will gener-
ally 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 in-
jury. Lacking that intent, the injury was “accidental”
and coverage will be provided.
SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d
at 1278. The LMI contend Chemical Leaman intended to
cause some injury because Chemical Leaman knew the rinse-
water contained contaminants, and knew the contaminants
would seep into the soil when deposited in the containment
ponds. They assert Chemical Leaman also knew discharges
from the overflow pipe would drain into the swamp. There-
fore, they argue, Chemical Leaman intended “some sort of
injury” as a matter of law, and coverage was precluded unless
the extent of injury was improbable.
Although the LMI’s argument possesses a certain appeal,
we believe the New Jersey Supreme Court would reject it. An
insured who intentionally discharges a known pollutant gen-
erally intends “some sort of harm,” however de minimis, and
the harm that actually results is usually a probable result of
the discharge. Accordingly, the LMI’s reading of SL Indus-
tries would result in a general rule precluding coverage based
on the knowing discharge of a pollutant. But in Morton In-
tern., Inc. v. General Acc. Ins. Co., 629 A.2d at 879-80, the
;
Le
A-28
New Jersey Supreme Court held “a general rule ... [precluding
coverage] simply on the basis of a knowing discharge of pol-
lutants would be unjustified.” The LMI’s reading of SL Indus-
tries’ “some sort of injury” language conflicts with Morton.
Moreover, in SL Industries, the New Jersey Supreme Court
confronted the problem of insurance coverage for injury
caused by intentional, tortious conduct, namely intentional
fraud. But intentional tort cases are an imperfect analogy in
the context of environmental pollution. The insured who
commits an intentional tort like fraud possesses some knowl-
edge of the nature of the harm likely to result and intends to
cause such harm. Also, most intentional torts are committed
in a single, discrete, and temporally limited incident. In the
context of environmental pollution, the insured’s knowledge
concerning the harmful propensities of pollutants and the
likelihood of harm to the environment may be less complete
and may vary significantly over time. For example, it is a
matter of historical fact that many insureds, acting in accor-
dance with standard industry practices, intentionally dis-
charged pollutants into unlined containment ponds or other
inadequate waste treatment systems, but were unaware that
groundwater damage would eventually result.
In Morton, the New Jersey Supreme Court acknowledged
the unsuitability of prior case law on the expected/intended
provision in environmental pollution coverage litigation.
Morton, 629 A.2d at 879 (“In applying our holding in Voor-
hees to claims seeking coverage for property-damage caused
by environmental pollution under occurrence-based CGL
policies, we acknowledge the impracticality of adherence to
the general rule that ‘we will look to the insured’s subjective
intent to determine intent to injure.’”). We believe the New
Jersey Supreme Court would similarly re‘ect a wooden appli-
cation of SL Industries’ “some sort of injury” language, and
would instead look to the general principles underlying the
interpretation of insurance-policy provisions involving inten-
tional conduct. As stated by the New Jersey Supreme Court:
‘
4
aj
4
x
3
2
:
3
1
A-29
Our goal is to interpret the insurance provisions in
light of the insured’s objectively reasonable expec-
tations.... [W]e must attempt to reconcile two goals:
that of deterring intentional wrongdoing by preclud-
ing insurance indemnification, and that of providing
victims with compensation to the extent that com-
pensation will not interfere with deterring injurious
behavior.
SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d
at 1278. We will apply these principles in this case.
[5, 6] In the environmental pollution context, the insured’s
appreciation of the magnitude and nature of harm likely to be
caused by a discharge of pollutants is relevant in determining
whether insurance coverage should be precluded.
When the injury caused significantly exceeds the
injury intended or expected ... then it is hard to
characterize the injury as truly “intentional.” ...
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.
SL Industries, Inc. vy. American Motorists Ins. Co., 607 A.2d
at 1278. If an insured does not understand the causal connec-
tion between the discharge of a pollutant and the property
damage that results, deterrence is not served by precluding
insurance coverage. Moreover, where an insured does not in-
tend or expect property damage of a particular nature to result
from its discharge of pollutants, the insured has an
“objectively reasonable expectation” of coverage should such
property damage later manifest itself. For these reasons, we
cannot agree with the LMI’s contention that some intent to
cause any sort of environmental harm will preclude insurance
coverage for all environmental harm under New Jersey law.
Rather we believe the New Jersey Supreme Court would in-
quire into the insured’s intent or expectation to cause envi-
ronmental harm of a particular sort, for example, whether the
A-30
insured intended damage to the soil, groundwater, or wet-
lands. Where the insured intends or expects such harm, cover-
age is precluded, unless, of course, the injury was improbable.
On the other hand, an insured’s intent to cause environmental
harm of one sort will not preclude coverage for other kinds of
unintended and unexpected environmental harm. For exam-
ple, an insured’s intent to cause soil damage will not preclude
coverage for unintended and unexpected damage to the
groundwater or wetlands.
The district court’s jury instruction fairly and adequately
asked the jury to consider whether Chemical Leaman ex-
pected or intended injury to the soil, groundwater, or wet-
lands. The instruction also allowed the jury to consider the
nature and extent of Chemical Leaman’s knowledge regarding
the likelihood of harm as that knowledge evolved over time.
There was ample evidence supporting the jury’s conclusion
that Chemical Leaman did not expect or intend to cause prop-
erty damage. Chemical Leaman presented evidence that it be-
lieved the system of unlined ponds would cleanse
contaminated rinsewater. Although Chemical Leaman inten-
tionally discharged known pollutants, a reasonable jury could
find, and the jury here did find, Chemical Leaman did not ex-
pect or intend damage to the soil, groundwater or wetlands. In
light of the jury’s findings, Chemical Leaman is entitled to
insurance coverage for the costs of clean-up of environmental
damage. Because Chemical Leaman did not expect or intend
damage to the soil, groundwater, or wetlands, we need not
inquire whether the property damage at the Bridgeport site
was an improbable result of Chemical Leaman’s actions.
B. The “Exceptional Circumstances” Exception
[7] The LMI contend that under Voorhees’ “exceptional
circumstances” exception, Chemical Leaman’s intent to cause
property damage should be presumed as a matter of law. As
we have noted, in Morton the New Jersey Supreme Court set
forth several factors to be considered in evaluating whether
exceptional circumstances exist. These include:
A-31
the duration of the discharges, whether the dis-
charges occurred intentionally, negligently, or inno-
cently, the quality of the insured’s knowledge
concerning the harmful propensities of the pollut-
ants, whether regulatory authorities attempted to
discourage or prevent the insured’s conduct, and the
existence of subjective knowledge concerning the
possibility or likelihood of harm.
Morton Intern., Inc. v. General Acc. Ins. Co., 629 A.2d at
879-80. We believe the New Jersey Supreme Court designed
the “exceptional circumstances” exception to apply only to
egregious conduct. This much is apparent from the court’s use
of child sexual abuse as an illustration of conduct that is “so
inherently injurious” as to warrant a presumption of intent to
injure. Jd. at 879. Because “insureds held responsible for
remediation of environmental pollution vary significantly in
their degree of culpability for the harm caused by pollutant
discharges,” we believe “[a] general rule in environmental-
pollution coverage litigation that would permit intent to injure
to be presumed simply on the basis of a knowing discharge of
pollutants would be unjustified.” /d. at 879-880.
’ The dissent would apply the “exceptional circumstances” test in all envi-
ronmental pollution insurance coverage cases. See Dissent at 1004 (“The
‘exceptional circumstances’ test, however, is not an ‘exception,’ but the
rule that is to be applied in environmental coverage cases.”). It would
have the court, rather than the jury, decide whether an insured “expected”
or “intended” to cause property damage.
We believe Morton did not displace the usual relationship between the
court and the jury. It remains the unique province of the jury to resolve
disputed issues of fact — such as the intentions or expectations of the in-
sured. Only in cases where there is no legally sufficient evidentiary basis
for a reasonable jury to find for a party may the court enter judgment as a
matter of law. Morton refines the test for when a court may enter judg-
ment as a matter of law in environmental pollution coverage cases. Its
“exceptional circumstances” define when no reasonable jury could find
the insured did not intend or expect to cause property damage because
objective circumstances — evidence of prolonged, intentional, or flagrant
discharges of known pollutants in the face of regulatory disapproval —
(Footnote continued)
A-32
Instead Morton mandates “a case-by-case analysis ... in or-
der to determine whether, in the context of all the available
evidence, exceptional circumstances exist.” Jd. Morton is in-
structive in considering the level of culpability required to
allow intent to injure to be presumed in the environmental
context. In Morton, the insured intentionally discharged mer-
cury-laden compounds directly into streams over a lengthy
period of time. The Department of Health and state engineers
made repeated demands for compliance and the insured con-
sistently disregarded its own promises to remediate the dis-
charge. Morton, 629 A.2d at 882. “[T]he record fairly
reflect[ed] a pattern of ‘stonewalling’ on the part of [the in-
sured], characterized by promises of compliance that consis-
tently were unfulfilled.” /d.
We believe a reasonable jury could find Chemical Leaman
did not engage in a “pattern of stonewalling.” On the contrary,
a jury could conclude that Chemical Leaman’s behavior sug-
gests a good faith effort at compliance with agency demands.
Chemical Leaman initially designed the Bridgeport wastewa-
ter treatment system to purify contaminated rinseate in 1960.
The designers of the system believed that the sandy bottom of
the unlined ponds would purify the contaminated rinsewater
by acting as a natural filter, and the overflow pipe was in-
tended as a safety valve to prevent a rupture in the berms of
the containment ponds in the event of heavy rain. When an
inspector from the Pollution Unit of the New Jersey Division
of Fish, Game & Wildlife advised Chemical Leaman of an
unsatisfactory discharge into a neighboring swamp in Sep-
tember 1961, Chemical Leaman responded by constructing a
second set of lagoons and the final settling lagoon. Seven
years later, water pollution inspectors from the New Jersey
Department of Health concluded discharges from the lagoon
were pollutional and, in February 1969, ordered Chemical
establish that the insured must have intended property damage. The pres-
ence of “exceptional circumstances” requires a court to enter judgment as
a matter of law. Their absence, of course, does not prevent a jury from
finding an insured “expected” or “intended” to cause property damage.
“iis rae ee ae °
SEALE RITE TN DS aR AEDS ABE « AH lt tears Seite aren oitas balan AR eines 5 RLS EAP ER Re
A-33
Leaman to submit plans for a system to properly treat the ef-
fluent. In May 1969, Chemical Leaman submitted a plan for a
new rinsewater treatment system. The New Jersey Depart-
ment of Health rejected this plan and over the next four years
the parties attempted to resolve their dispute until January
1974, when they entered into a consent judgment. This history
can hardly be described as “a pattern of ‘stonewalling’ ...
characterized by promises of compliance that consistently
were unfulfilled.” Morton, 629 A.2d at 882. Accordingly,
“exceptional circumstances” do not exist here that would
permit a presumption of Chemical Leaman’s subjective intent
to cause property damage.
IV. Pollution Exclusion Clauses
The April 1, 1971 to April 1, 1985 LMI policies contained
pollution exclusion clauses barring coverage for discharges of
pollutants, unless such discharges were “sudden and acciden-
tal” or “sudden, unintended, and unexpected.”® The LMI
* The policies sold by the LMI to Chemical Leaman covering the April 1,
1974 to April 1, 1977 period contained the standard ISO pollution exclu-
sion clause, which provides:
This insurance does not apply to ... Property Damage arising
out of the Discharge, Dispersal, Release or Escape of ... Con-
taminants or Pollutants into or upon Land, the Atmosphere or
any Watercourse or Body of Water, but this exclusion does
not apply if such Discharge, Dispersal, Release or Escape is
sudden and accidental.
The April 1, 1971 to April 1, 1974 and the April 1, 1977 to April 1, 1985
policies contained the NMA 1685 pollution exclusion, which provides:
This Insurance does not cover any liability for: (1) Personal
Injury or Bodily Injury or loss of, damage to, or loss of use of
property directly or indirectly caused by seepage, pollution, or
contamination, provided always that this Paragraph (1) shall
not apply to liability for Personal Injury or Bodily Injury or
loss of or physical damage to or destruction of tangible prop-
erty, or loss of use of such property damaged or destroyed
where such seepage, pollution, or contamination is caused by
a sudden, unintended and unexpected happening during the
period of this insurance.
(Footnote continued)
A-34
argued to the district court that coverage was precluded be-
cause the discharge of pollutants at the Bridgeport site was
not “sudden.” The district court rejected the LMI’s argument,
relying on a line of New Jersey cases beginning with Broad-
well Realty Serv., Inc. v. Fidelity & Cas. Co., 218 N.J.Super.
516, 528 A.2d 76 (App.Div.1987). It held the word “sudden”
is ambiguous — sometimes carrying a temporal meaning and
sometimes meaning “unexpected” — and should not be inter-
preted to exclude coverage for environmental harm caused by
gradual discharges over a prolonged period. It concluded,
“[t]he pollution exclusion precludes coverage when the in-
sured has caused the discharge of pollutants, unless the dis-
charge was neither expected nor intended from the standpoint
of the insured.” Chemical Leaman Tank Lines, Inc. v. Aetna
Cas. & Sur. Co., 817 F.Supp. at 1157. The district court then
granted partial summary judgment to the insurers with respect
to soil damage because Chemical Leaman intended to dis-
charge contaminants into the soil. At trial, the jury found
Chemical Leaman expected and intended discharges to the
swamp, but not to the groundwater. On appeal, the LMI con-
test their liability for groundwater damage.
Subsequent to the district court’s decision, the New Jersey
Supreme Court addressed the standard form pollution exclu-
sion clause in Morton Intern., Inc. v. General Acc. Ins. Co.,
629 A.2d at 847-76. The New Jersey Supreme Court ex-
pressly overruled Broadwell, because it believed that the word
“sudden” was not ambiguous. It held “‘sudden’ possesses a
temporal element, generally connoting an event that begins
abruptly or without prior notice or warning,” and concluded
that “the phrase ‘sudden and accidental’ in the standard
The district court held both pollution exclusions were identical in scope. It
interpreted “accidental” to mean unintended and unexpected, and there-
fore concluded that the “sudden, unintended, and unexpected” exception
in the NMA 1685 exclusion should be construed in the same manner as
the “sudden and accidental” exception in the standard ISO pollution ex-
clusion. See Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
817 F.Supp. at 1156 n. 17. In any case, the dispute in this case revolves
around application of the term “sudden,” which appears in both clauses.
A-35
pollution-exclusion clause describes only those discharges,
dispersals, releases, and escapes of pollutants that occur
abruptly or unexpectedly and are unintended.” /d., at 847.
Nevertheless, the court refused to enforce the standard pollu-
tion exclusion as written because it found the insurance indus-
try had misled state regulators in securing its approval.
Instead, the court held the pollution exclusion clause pre-
cludes coverage if the insured intentionally discharges a
known pollutant, regardless of whether the insured expected
or intended to cause property damage:
[W]e perceive that regulators would reasonably
have understood the effect of the clause to have de-
nied coverage for the intentional discharge, disper-
sal, release, or escape of known pollutants, whether
or not the eventual damage was intended or ex-
pected from the standpoint of the insured. The in-
dustry’s presentation of the clause to regulators
described it as a clarification of the “intended and
expected” clause of the basic “occurrence” defini-
tion “so as to avoid any question of intent,” and
could fairly be understood as an attempt to override
the issue whether damage was intended by exclud-
ing coverage for intentional discharges of known
pollutants. Accordingly, we construe and give effect
to the standard pollution-exclusion clause only to
the extent that it shall preclude coverage for pollu-
tion-caused property damage caused by an
“occurrence” if the insured intentionally discharged,
dispersed, released, or caused the escape of a known
pollutant.
Id. at 848 (emphasis in the original).
On appeal, the LMI contend the district court incorrectly
instructed the jury that the pollution exclusion clause pre-
cludes coverage only if Chemical Leaman intentionally dis-
charged known pollutants into the groundwater. First, the
LMI argue Morton established that the word “sudden” has a
temporal connotation — meaning “abrupt” — and precludes
A-36
coverage for gradual discharges, dispersals, releases, or es-
capes. Because Chemical Leaman discharged contaminated
rinsewater over a prolonged period, they argue, coverage
should be precluded. The LMI acknowledge Morton's regula-
tory estoppel holding generally prevents enforcement of the
“sudden” requirement, but assert Morton does not apply to the
LMI because (1) several of their policies contain the non-
standard NMA 1685 pollution exclusion, and (2), they were
not party to the misrepresentations made to regulatory
authorities. Second, the LMI argue that even if Morton's
regulatory estoppel holding applies, the pollution exclusion
clause bars coverage because Chemical Leaman intentionally
discharged known pollutants. They argue the district court
erred in requiring proof that Chemical Leaman intended dis-
charge into the groundwater, as opposed to into the environ-
ment generally.
A. Regulatory Estoppel
1. Non-Standard Pollution Exclusion
[8] In Morton, the New Jersey Supreme Court applied
regulatory estoppel to the ISO standard pollution exclusion
clause and did not address coverage issues relating to non-
standard pollution exclusion clauses. Morton Intern., Inc. v.
General Acc. Ins. Co., 629 A.2d at 881. The LMI argue that
Morton's regulatory estoppel holding should not prevent en-
forcement of the term “sudden” in the non-standard NMA
1685 pollution exclusion clause contained in certain of their
policies. We believe this argument lacks merit. Both the ISO
standard pollution exclusion and the non-standard NMA 1685
pollution exclusion use the term “sudden.” The NMA 1685
exclusion closely tracks the language of the standard pollution
exclusion, and both pollution exclusion clauses came into use
at about the same time. Indeed, the LMI argue the NMA 1685
exclusion and the standard exclusion are identical in scope
because both exclude coverage for non-abrupt, non-sudden
discharges and releases of pollutants. See also Potomac Elec.
Power Co. v. California Union Ins. Co., 777 F.Supp. 968, 978
n. 23 (D.D.C.1991) (defendant insurers admit there is “no
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A-37
material difference” between standard pollution exclusion and
NMA 1685 pollution exclusion). The New Jersey Supreme
Court refused to enforce the term “sudden” in Morton because
the insurance industry mislead state regulators as to its effect
when obtaining approval for the standard pollution exclusion
clause. We do not believe the New Jersey Supreme Court
would enforce the term “sudden” in non-standard pollution
exclusion clauses simply because other language in those
clauses varies slightly from that in the standard pollution ex-
clusion. Therefore we conclude that Morton's regulatory es-
toppel holding applies to the NMA 1685 pollution exclusion
as well as the standard pollution exclusion.
2. Application of Regulatory Estoppel to the LMI
The LMI also argue that Morton's regulatory estoppel
holding should not be applied to them because they did not
affirmatively deceive New Jersey regulators in securing ap-
proval of the standard pollution exclusion. We cannot agree.
The LMI’s policies contained the standard pollution exclusion
precluding coverage for non-sudden discharges or releases of
pollutants. They also contained the NMA 1685 pollution ex-
clusion, which closely parallels the language of the standard
exclusion. Approval of the standard pollution exclusion
clause was secured through misrepresentations to regulatory
authorities. Regardless of whether the LMI themselves di-
rectly misrepresented the effect of the term “sudden” in the
pollution exclusion clauses, they benefitted from the mislead-
ing explanation of the effect of the standard pollution exclu-
sion submitted to state regulators by insurance industry trade
groups. The LMI did not independently submit information to
New Jersey regulators or attempt to explain the full impact of
the term “sudden” in the pollution exclusion clauses they
used.’ Under these circumstances, we believe the New Jersey
” In Morton, the New Jersey Supreme Court noted the failure of the insur-
ance industry to reduce rates on comprehensive general liability insurance
policies containing pollution exclusion clauses, even though such policies
dramatically reduced coverage previously offered for property damage
caused by poilution. See Morton Intern., Inc. v. General Acc. Ins. Co., 629
(Footnote continued)
A-38
Supreme Court would not enforce the term “sudden” in the
policies issued by the LMI.
B. Intentional Discharge
The LMI also argue the district court should not have re-
quired separate findings with regard to intent to discharge into
the soil, wetlands, and groundwater. They contend that if
Chemical Leaman intended any discharge, whether to the soil,
groundwater, or wetlands, then the pollution exclusion clauses
preclude coverage for all property damage arising from that
discharge. Because the district court granted partial summary
judgment to the insurers with respect to discharges into the
soil, the LMI argue, the district court should also have denied
coverage for all resulting property damage, including
groundwater damage. The effect of the LMI’s argument
would be to require judgment in their favor as a matter of law
on all policies containing a pollution exclusion. The LMI
raised this argument before the district court in a Rule 50(b)
motion. The district court refused to consider the argument
because the LMI had not raised it in their prior Rule 50(a)
motion. Chemical Leaman Tank Lines, Inc. v. Aetna Cas. &
Sur. Co., No. 89-1543, slip op. at 4 (D.N.J. November 8,
1993).
[9] Motions for judgment as a matter of law must be made
before submission of the case to the jury and must “specify
the judgment sought and the law and facts on which the
moving party is entitled to judgment” under Fed.R.Civ.P.
50(a)(2).. We have reviewed the portions of the record cited
A.2d at 872. Chemical Leaman contends that the LMI did not reduce the
rates they charged on policies containing pollution exclusion clauses. This
factor would support applying Morton's regulatory estoppel rule to the
LMI, although we do not rely on it in reaching our holding.
'° Fed. R.Civ.P. 50(a) provides:
(a) Judgment as a Matter of Law
(1) If during a trial by a jury a party has been fully heard on an issue
and there is no legally sufficient evidentiary basis for a reasonable jury to
(Footnote continued)
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A-39
to by the LMI in their brief, and conclude that the LMI did
not specify the “law and facts” entitling them to judgment in
their summary judgment motion, their Joint Trial Brief, or
their Rule 50(a) motion before the district court. The LMI as-
sert they adequately raised the argument because they ob-
jected to the district court’s jury instruction on the pollution
exclusion clauses, stating:
There was one other thing with respect to the pollu-
tion exclusion. Just to be perfectly clear. It’s not my
understanding that the law even where it does not
recognize a temporal element for the sudden. It is
not required that there be an intent or an expectation
to discharge a particular medium, rather it’s the dis-
charge itself and where it goes. This should not be
the subject of the deliberation of the jury.
An objection to a jury charge can serve as a predicate for a
later Rule 50(b) motion only if the district court explicitly
treated the objection as a Rule 50(a) motion. Bonjorno v. Kai-
ser Aluminum & Chemical Corp., 752 F.2d 802, 814-15 (3d
Cir.1984) (“A request for jury instructions may suffice to
fulfill the requirement that a motion for a directed verdict be
made before granting a JNOV only if it is clear the district
court treated the request as a motion for a directed verdict and
ruled on it as such.”), cert. denied 477 US. 908, 106 S.Ct.
3284, 91 L.Ed.2d 572 (1986); Lowenstein v. Pepsi-Cola Bot-
tling Co. of Pennsauken, 536 F.2d 9, 11 (3d Cir.) (same), cert.
denied, 429 U.S. 966, 97 S.Ct. 396, 50 L.Ed.2d 334 (1976).
The district court did not treat the LMI’s objection to the jury
find for that party on the issue, the court may determine the issue against
that party and may grant a motion for judgment as a matter of law against
that party with respect to a claim or defense that cannot under the control-
ling law be maintained or defeated without a favorable finding on that
issue.
(2) Motions for judgment as a matter of law may be made at any time
before submission of the case to the jury. Such a motion shall specify the
judgment sought and the law and facts on which the moving party is enti-
tled to judgment.
A-40
charge as a Rule 50(a) motion. Accordingly, we believe the
district court correctly declined to hear the LMI’s argument
on their Rule 50(b) motion.
“It is clear under our jurisprudence that this court cannot
reverse the district court’s decision denying [a] Rule 50(b)
motion for j.n.o.v. on the basis of an argument the [a party]
failed to raise in support of its predicate Rule 50(a) motion for
a directed verdict.” Simmons v. City of Philadelphia, 947 F.2d
1042, 1077 (3d Cir.1991), cert. denied, 503 U.S. 985, 112
S.Ct. 1671, 118 L.Ed.2d 391 (1992); see also Lightning Lube,
Inc. v. Witco. Corp., 4 F.3d 1153, 1172 (3d Cir.1993) (“In or-
der to preserve an issue for judgment pursuant to Rule 50(b),
the moving party must timely move for judgement as a matter
of law at the close of the nonmovant’s case, pursuant to Rule
50(a), and specify the grounds for that motion.”). The LMI
did not raise their argument in their Rule 50(a) motion. There-
fore we will not address it on appeal.
[10] We believe the LMI’s objection to the district court’s
jury instruction was also insufficient to preserve their argu-
ment for appeal under Fed.R.Civ.P. 51. In order to preserve
an objection to a jury instruction, a party must “object[ |
thereto before the jury retires to consider its verdict, stating
distinctly the matter objected to and the grounds of the objec-
tion.” Fed.R.Civ.P. 51. The purpose of Rule 51 is to “afford
the trial judge an opportunity to correct the error in her charge
before the jury retires to consider its verdict and to lessen the
burden on appellate courts by diminishing the number of rul-
ings at the trial which they may be called on to review.” Dunn
vy. HOVIC, 1 F.3d 1371, 1379 (3d Cir.) (in banc), modified, 13
F.3d 58, and cert. denied, 510 U.S. 1031, 114 S.Ct. 650, 126
L.Ed.2d 608 (1993). We believe the LMI’s objection did not
identify the issue they now argue on appeal with sufficient
clarity to give the trial judge notice of a possible error in the
instruction. Not only was the objection difficult to understand
because of its convoluted grammar, but the objection did not
specify the authority upon which it was based. Therefore the
LMI’s objection failed to comply with Rule 51’s requirement
that an objection “stat{e] distinctly ... the grounds of the
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objection” and did not preserve the LMI’s argument for ap-
peal. See United States v. Zannino, 895 F.2d 1, 17 (ist Cir.),
(“Judges are not expected to be mindreaders. Consequently, a
litigant has an obligation to spell out its arguments squarely
and distinctly, or else forever hold its peace.”), cert. denied
494 U.S. 1082, 110 S.Ct. 1814, 108 L.Ed.2d 944 (1990).
[11-13] “In the absence of a party’s preservation of an as-
signed error for appeal, we review for plain error, and our
power to reverse is discretionary.” Fashauer v. New Jersey
Transit Rail Operations, Inc., 57 F.3d 1269, 1289 (3d
Cir.1995). Particularly in the civil context, we exercise our
power to reverse for plain error sparingly. /d.; see also United
States v. Carson, 52 F.3d 1173, 1188 (2d Cir.1995) (“plain
error review is only appropriate in the civil context where the
error is so serious and flagrant that it goes to the very integrity
of the trial.”), cert. denied —— US. , 116 S.Ct. 934,
133 L.Ed.2d 861 (1996). Because we do not believe any mis-
take in the district court’s jury instructions on the pollution
exclusion clause was so fundamental as to amount to plain
error, we decline to exercise our discretion to reverse.
V. Other-Site Evidence
[14] Before trial, Chemical Leaman made a motion in lim-
ine to exclude evidence relating to environmental problems at
other tank truck cleaning facilities it operated. The district
court granted this motion under Federal Rule of Evidence 403
because it found the probative value of the evidence substan-
tially outweighed by the danger of unfair prejudice, jury con-
fusion, and undue waste of time. Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. & Sur. Co., No. 89-1543, slip op. at
4-5 (D.N.J. March 17, 1993).
The LMI argue the district court abused it discretion in ex-
cluding evidence of environmental pollution at other Chemi-
cal Leaman cleaning facilities. They contend the evidence
from other sites tended to establish Chemical Leaman knew
its system of unlined ponds at Bridgeport would cause prop-
erty damage, including harm to the groundwater. They also
insist that such evidence should have been allowed to
A-42
impeach the testimony of Harry Elston, the designer of all
Chemical Leaman’s waste treatment facilities, even if not al-
lowed in their case-in-chief. We review the district court’s
rulings on the admissibility of evidence for an abuse of dis-
cretion. See Tait v. Armor Elevator Co., 958 F.2d 563, 568
(3d Cir.1992).
The district court noted the evidence the LMI sought to in-
troduce had limited probative value because its relevance de-
pended upon an extended chain of reasoning linking it to the
Bridgeport site:
the jury would have to evaluate the various expla-
nations offered by Chemical Leaman on why its
knowledge of alleged problems at other sites did not
translate into an expectation or intention that the
rinsewater treatment system in Bridgeport would
cause damage. These explanations include, among
others, whether damage actually occurred at the
other sites; and whether the geological and other
conditions at the other sites were significantly dif-
ferent or substantially the same as at Bridgeport....
[T]he probative value of the proffered other site
evidence is remote because it necessarily depends
upon these intermediate findings.
Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
No. 89-1543, slip op. at 4-5 (D.N.J. March 17, 1993). The
district court believed that for the jury properly to evaluate
this evidence, a series of mini-trials relating to each site
would have been required. Such mini-trials, the court con-
cluded, would cause undue delay and mislead and confuse the
jury as to the ultimate factual issue, namely Chemical Lea-
man’s subjective intent to cause harm at the Bridgeport site.
Id. Moreover, the district court held that the other site evi-
dence carried with it a significant danger of unfair prejudice.
On the basis of such evidence, the court noted, the jury might
have ignored New Jersey law on the insured’s subjective in-
tent and applied an objective test assessing whether
= ar
A-43
“Chemical Leaman should have known that its rinsewater
treatment system would cause damage.” /d
In light of the district court’s balancing of the probative
value of the proffered evidence against its prejudicial effect
and the potential for jury confusion and delay, we cannot say
the district court abused its discretion in excluding the other
site evidence.
VI. Continuous Trigger
The New Jersey Supreme Court adopted the “continuous
trigger” theory to identify the time of an “occurrence” in
Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650
A.2d 974 (1994). The continuous trigger theory recognizes
that “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.” /d., 650 A.2d at 995,
The conceptual underpinning of the continuous-
trigger theory, then, is that injury occurs during
each phase of environmental! contamination — ex-
posure, exposure in residence (defined as further
progression of environmental injury even after ex-
posure has ceased), and manifestation of disease.
Id. at 981.
In Owens-Illinois, the New Jersey Supreme Court also ad-
dressed the allocation of losses between multiple insurers and
the insured when the continuous trigger theory establishes an
occurrence in several different policy years. It held “{a] fair
method of allocation appears to be one that is related both to
the time on the risk and the risk assumed,” id at 995, “ie,
proration on the basis of policy limits, multiplied by years of
coverage,” id. at 993.
[15] Owens-Illinois involved a suit for personal injuries
resulting from exposure to asbestos, but the New Jersey Su-
preme Court made clear the continuous trigger theory extends
A-44
to property damage claims resulting from long-term environ-
mental contamination. It concluded, “(pjroperty-damage cases
are analogous to the contraction of disease from exposure to
toxic substances like asbestos. Like a person exposed to toxic
elements, the environment does not necessarily display the
harmful effects until long after the initial exposure.” /d. at
983: see also Astro Pak Corp. v. Fireman 's Fund Ins. Co.,
284 N.J.Super. 491, 665 A.2d 1113, 1117 (App.Div.) (same),
certif. denied, 143 N.J. 323, 670 A.2d 1065 (1995).
Although considering the issue before the New Jersey Su-
preme Court’s decision in Owens-Illinois, the district court
applied the continuous trigger theory, ruling all of the LMI’s
policies from 1960 through 1985 had been triggered by the
environmental contamination at the Bridgeport site, unless a
policy exclusion barred coverage. Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. & Sur. Co., 817 F.Supp. at 1153-54.
The district court also held that all insurance policies acti-
vated by a continuing occurrence are jointly and severally li-
able to policy limits for property damage resulting from the
occurrence. Id.
[16] On appeal, the LMI contend the New Jersey Supreme
Court would not recognize the continuous-trigger theory. In
light of the intervening decision in Owens-Illinois, this argu-
ment is meritless. On the other hand, the LMI correctly dis-
pute the district court’s holding that all policies are jointly and
severally liable under the continuous trigger theory. Because
the New Jersey Supreme Court rejected joint and several li-
ability in favor of a risk-based allocation of liability among
applicable insurance policies in Owens-Illinois, we will re-
mand this matter to the district court for a reallocation of li-
ability between the insurers and among the triggered policies
in accordance with Owens-Illinois.
[17, 18] The LMI also contend that Chemical Leaman
failed to prove property damage occurred during each policy
year from 1960-70, and therefore the district court erred in
finding as a matter of law that property damage occurred in
the 1960-61 policy year, and in denying their summary
OOO eee
A-45
judgement motion with respect to the 1961-70 policy years.
Under the continuous trigger theory, exposure to the harm
causing agent is sufficient to trigger potential coverage. Ac-
tual manifestation of the injury is not required, so long as
there is a continuous, indivisible process resulting in damage.
Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d at 981
(“injury occurs during each phase of environmental contami-
nation —- exposure, exposure in residence ... and manifesta-
tion of disease”); Morrone v. Harleysville Mut. Ins., 283
N.J.Super. 411, 662 A.2d 562, 564 (App.Div.1995) (exposure
to gasoline sufficient to trigger occurrence). It is undisputed
that Chemical Leaman discharged contaminated rinsewater
into the unlined ponds and lagoons in every year from 1960-
70. Moreover, the district court found as a factual matter that
“contaminated rinsewater from the three settling ponds started
migrating through the soil to underlying groundwater almost
immediately after beginning pond operation in 1960.” Chemi-
cal Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 817
F.Supp. at 1148. Accordingly, the district court correctly
concluded as a matter of law that property damage occurred
upon initial exposure in 1960, and should have concluded as a
matter of law that property damage occurred in each policy
period from 1961-70. The LMI, of course, were not preju-
diced by the district court’s error.
[19] Finally, the LMI assert the district court incorrectly
instructed the jury on the meaning of “property damage” in
the underlying policies. Specifically, they object to the in-
struction that “Chemical Leaman may be entitled to coverage
under the defendants’ insurance policies for property damage
that occurs during a policy period, but that originally began
during an earlier policy period.” They argue Chemical Lea-
man was required to prove “actual injury” during each policy
period, and the jury incorrectly equated exposure to pollutants
with property damage. Under the continuous trigger theory,
proof of actual injury in the sense of manifestation of injury is
not required. The jury could find property damage occurred
during a policy period so long as there is proof that a continu-
ous, indivisible process of injury occurred during that period.
The district court’s jury charge was not erroneous.
A-46
VII. Late Notice
[20] Chemical Leaman failed notify its insurers of its claim
relating to the Bridgeport facility until 1988, four years after it
entered into a consent decree with the EPA admitting liability
under CERCLA, and even longer after the underlying events
that harmed the environment. The LMI assert this failure vio-
lated the notice provisions of the policies and relieves them
from any obligation to provide insurance coverage.
An insurer that seeks to disclaim coverage based upon un-
timely notice from its insured under an occurrence-based
policy must demonstrate that it has suffered “appreciable
prejudice.” Cooper v. Government Employees Ins. Co., 51
N.J. 86, 237 A.2d 870 (1968); Med. Inter Ins. Exchange v.
Health Care Ins. Exchange, 278 N.J.Super. 513, 651 A.2d
1029, 1033 (App.Div.), certif, denied, 140 N.J. 329, 658 A.2d
728 (1995). Lower courts in New Jersey have identified two
relevant factors in determining whether an insurer has suf-
fered prejudice justifying a denial of coverage: “whether sub-
stantial rights have been irretrievably lost by virtue of the
failure of the insured to notify the carrier in a timely fashion,”
Morales v. National Grange Mut. Ins. Co., 176 N.J.Super.
347, 423 A.2d 325, 329 (Law Div.1980), and whether “the
likelihood of success of the insurer in defending against the
[underlying claim]” has been adversely affected, id., 423 A.2d
at 330. Applying this two part test, the district court found the
LMI had suffered no prejudice because material evidence had
not been irretrievably lost, and no meritorious defense existed
to Chemical Leaman’s underlying liability under CERCLA.
Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
817 F.Supp. 1136, 1158-59 (D.N.J.1993).
[21] The LMI contend the district court erred in holding
Chemical Leaman’s contractual obligation to notify it of
claims arose, at the earliest, in 1984. They argue that obliga-
tion arose as much as twenty years earlier, when Chemical
Leaman received complaints of environmental pollution from
various regulatory bodies. We disagree. Chemical Leaman
could not have known of the liabilities for which it seeks
A-47
coverage until the EPA placed the Bridgeport site on the Su-
perfund National Priorities List in 1984. Prior New Jersey
State actions against Chemical Leaman had sought only non-
monetary injunctive relief. Because 1984 was the earliest
practicable date by which Chemical Leaman could have given
notice to the LMI, the LMI’s assertions that potential valuable
evidence was lost prior to 1984 are irrelevant. While the LMI
also argue that evidence was lost, and witnesses died, between
1984 and 1988, they have not disputed that “a wealth of rele-
vant documentary evidence remains intact.” Jd at 1159.
Moreover, the LMI had extensive opportunities to depose, and
later cross-examine, Harry Elston, the designer of the Bridge-
port site. Accordingly, the district court correctly found that
the LMI had not irretrievably lost any substantial right due to
Chemical Leaman’s untimely notice.
In addition, the LMI assert that Chemical Leaman’s failure
to give timely notice adversely affected their ability to defend
against the underlying claim. But the district court held no
prejudice had resulted:
Chemical Leaman, as owner and operator of the
Bridgeport facility, is strictly liable under CERCLA
for damages for injury to, destruction of, or loss of
natural resources, as well as for the reasonable costs
of assessing such damage to natural resources, and
all costs of removal, remediation, or other necessary
response costs. Chemical Leaman’s liability for
these damages is retroactive, joint, and several, and
imposed regardless of fault. Defendants do not
contend that a meritorious challenge exists to the
findings, made in the 1985 consent order.... Nor do
defendants assert there is a meritorious defense to
the EPA’s allegation that the presence of hazardous
substances at the Bridgeport facility and their mi-
gration to surrounding soils and groundwater consti-
tute a release within the meaning of section 101(22)
of CERCLA, 42 U.S.C. § 9601(22). Accordingly,
the court finds that defendants have not shown a
A-48
likelihood of success in defending Chemical Lea-
man against claims under CERCLA.
Defendants also ask this court to find that timely
notice would have resulted in a likelihood that the
insurance carriers would have reached a more fa-
vorable settlement. However, defendants fail to
demonstrate what better arrangement the insurance
carriers would have been able to obtain if they had
assumed Chemical Leaman’s defense upon timely
notice.
Id. On appeal, the LMI have not advanced any arguments that
cause us to doubt the district court’s conclusion.
Finally, the LMI question whether the New Jersey Supreme
‘ourt would apply the two part Morales test in determining
whether an insurer has suffered appreciable prejudice. But the
LMI have not directed us to any New Jersey precedent that
questions the vitality of Morales. Accordingly, their conten-
tion lacks merit.
VIII. Discovery Misconduct
The LMI assert that Chemical Leaman willfully suppressed
the identity of relevant witnesses and failed to produce certain
documents. After trial, the LMI moved for relief from the
judgment and a new trial under Federal Rule of Civil Proce-
dure 60(b)(3). The district court denied the motion, although
it believed a “close question” had been presented. After re-
viewing the record and the arguments of the parties, we con-
clude the district court did not abuse its discretion in denying
the LMI’s motion.
1X. Conclusion
For the foregoing reasons, we will affirm the district court
except as to the allocation of liability among applicable poli-
cies. We will remand to the district court for a reallocation of
damages among applicable policies in accordance with the
New Jersey Supreme Court’s holding in Owens-Illinois, 650
A.2d at 993-95.
A-49
McKEE, Circuit Judge, concurring in part, and dissenting
in part.
[ must respectfully dissent from part [If of the majority
opinion because | do not agree with the majority’s interpreta-
tion of Morton International, Inc. v. General Accident Ins.
Co. of America 134 N.J. 1, 629 A.2d 831 (1993), cert denied
U.S. » 114 S.Ct. 2764, 129 L.Ed.2d 878 (1994). |
believe Morton mandates an objective inquiry in disputes
such as this. Because the district court’s jury instruction im-
properly focused on Chemical Leaman’s subjective intent, |
would remand this matter to the district court for retrial to
determine if “exceptional circumstances” objectively estab-
lished Chemical Leaman’s intent to cause injury, and if so,
whether the extent of the resulting injury was foreseeable
I. The Evolution of The “Intent” Analysis in
“Occurrence-Based” Policies
Although the majority’s analysis has much to commend it,
I believe that a more thorough discussion of the evolution of
New Jersey’s law in this area is necessary to fully understand
Morton. An appreciation of the development of that law casts
a different light upon the portions of Morton that control our
analysis.
A. Atlantic Employers Ins. Co. v. Tots & Toddlers
Pre School Day Care Center, Inc.’
Our analysis must begin with, and be guided by a discus-
sion of Atlantic Employers, because it used language that the
court would later cite and which I believe has caused my col-
leagues to take an incorrect analytical turn. In Atlantic Em-
ployers, parents of children who had 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
' 239 N.J.Super. 276, 571 A.2d 300 (App.Div.), cert. denied 122 NJ
147, 584 A.2d 218 (1990).
A-50
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” in-
cluded injury or damage that was “neither expected nor in-
tended 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 be-
cause of an injury intended to be inflicted.’” /d. (citation
omitted). The court stated:
There seems to be no dispute that if ... Robert
Knighton sexually molested the children, then he
had the requisite level of intent to be found guilty of
sexual molestation, based on 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 de-
veloping law. The court noted that some jurisdictions em-
ployed a subjective test in determining insurance coverage
under these circumstances, and some relied upon an objective
test. The court concluded that public policy mandated an ob-
jective approach.
As a matter of public policy and logic we con-
clude 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....
A-51
... 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. Thus, the court held that policy, as well as logic,
required an “objective approach” as an exception to the gen-
eral rule.
B. Prudential Property & Casualty Ins. Co. v. Karlinski’
Within a year and a half of Atlantic Employers, the Appel-
late Division decided Karlinski. There, insured’s 13-year old
son (James) had engaged in a prearranged fight with a 14-year
old (Mark) in which Mark had fallen and suffered a broken
hip. The court was asked to determine if a homeowner’s pol-
icy obligated the plaintiff insurer to defend and indemnify the
defendant. The policy excluded coverage for “‘bodily injury
... Which is expected or intended by the insured.’” Karlinski,
598 A.2d at 919. The motion court granted the insurer’s mo-
tion 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.’” Jd. The motion judge also con-
cluded that “a broken ‘leg’ [Mark actually suffered a broken
hip] was not an extraordinary consequence of the fight.” /d.
On appeal the court aptly noted, “{t]he appeal requires that
we again explore the frequently visited but still unclearly
charted area of liability coverage for intentional torts which
produce unintended results.” Jd. The court went on to ob-
serve:
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 cover-
age for unintended results of intentional acts. Differ-
ing combinations of variables, such as the language
of the exclusion clause, the nature of the harm and
* 251 N.J.Super. 457, 598 A.2d 918 (App.Div.1991).
A-52
its relationship to the intentional act, and the avail-
ability of relief to the injured party, appear to influ-
ence the extent to which our decisions have inquired
into the nature of the intent.
Id. at 921. The court then stated:
[W]e hold that, when a coverage exclusion is ex-
pressed in terms of bodily injury expected or in-
tended by the insured, and where the intentional act
does not have an inherent probability of causing the
degree of injury actually inflicted, a factual inquiry
into the actual intent of the actor to cause that injury
is necessary.
Id.
C. Voorhees v. Preferred Mutual Ins. C 0.
In Voorhees, a parent was sued for statements she had
made at a public meeting where she had questioned the com-
petency 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 pro-
fessionally, and subjected her to public ridicule. Voorhees,
607 A.2d at 1257. Medical evidence established that the emo-
tional distress the teacher complained of had resulted in “*an
undue amount of physical complaints,’ including ‘headaches,
stomach pains, nausea, ... [and] body pains.’” /d. at 1258.
The parent had a homeowner's policy that provided cover-
age for liability arising from “bodily injury” caused by an
“occurrence.” The policy defined an “occurrence” as an
“accident,” and excluded coverage for bodily injury inten-
tionally caused by the insured. The insurer relied upon this
language and refused to defend the insured against the
3 198 NJ. 165, 607 A.2d 1255 (1992).
ae ae er
A-53
teacher’s suit, asserting that the claims were based on the in-
sured’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 re-
fusal 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 de-
fend under the policy was not triggered “absent a potentially-
coverable occurrence.” /d. at 1262. In assessing whether the
insured’s statements constituted a potentially coverable occur-
rence, the court first held that “the accidental nature of an oc-
currence is determined by analyzing whether the alleged
wrongdoer intended or expected to cause an injury.” /d. at
1264. As to what constitutes an “intent to injure,” the court
noted that the general trend in the law appeared to require an
inquiry into the actor’s subjective intent to cause injury:
We adhere to the prevalent New Jersey rule and
hold that the accidental nature of an occurrence is
determined by analyzing whether the alleged
wrongdoer intended or expected to cause an injury.
If not, then the resulting injury is “accidental,” even
if the act that caused the injury was intentional. That
interpretation prevents those who intentionally
cause harm from unjustly benefitting from insur-
ance coverage while providing injured victims with
the greatest chance of compensation consistent with
the need to deter wrong-doing. It also accords with
an insured’s objectively-reasonable expectation of
coverage for unintentionally-caused harm.
Even if the operative question is the intent to in-
jure rather than to act, the question of what consti-
tutes an “intent to injure” remains. The key issue is
whether the court must find a subjective intent to
A-54
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
preciude coverage for injuries expected or intended
by the insured. Case law interpreting those policy
exclusions, in addition to that interpreting the
definition of “occurrence,” is thus relevant.
The general trend appears to require an inquiry
into the actor’s subjective intent to cause injury.
Even when the actions in question seem foolhardy
and reckless, the courts have mandated an inquiry
into the actor’s subjective intent to cause injury.
Id. at 1264.
The court, however, recognized that:
When the actions are particularly reprehensible, the
intent to injure can be presumed from the act with-
out an inquiry into the actor’s subjective intent to
injure. That objective approach focuses on the like-
lihood that an injury will result from an actor’s be-
havior rather than on the wrongdoer’s subjective
state of mind.
Id. at 1265. The Voorhees court reasoned that the insured’s
actions there were a far cry from the type of egregious behav-
ior that had justified an objective approach in Atlantic Em-
ployers. The court held that “[a]bsent exceptional
circumstances that objectively establish the insured’s intent to
injure,” the insured’s subjective intent to injure must govern.
Id. The Voorhees court’s reference to “exceptional circum-
stances” was clearly intended to recognize the need for an
objective test in the specific circumstances it confronted in
Atlantic Employers, and it foreshadowed the test it would
proclaim in Morton.
Although the court in Voorhees felt that there was little
evidence of a subjective intent to injure the teacher, the court
never had to address this question because the plaintiff had
A-55
also alleged that the insured had acted negligently. The alle-
gation of negligence presupposed the absence of a subjective
intent to injure and stated a claim for a potentially coverable
occurrence thus triggering the insurer’s duty to defend. See Id.
Accordingly, the court affirmed plaintiff's award of summary
judgment.
D. SL Industries, Inc. v. American
Motorists Ins. Co.‘
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 em-
ployee sought recovery for the alleged bodily injury that re-
sulted. The employer was insured under a policy in which the
insurer agreed to defend and indemnify the employer for all
sums resulting from a bodily injury caused by an
“occurrence.” “Occurrence” was defined as an “‘accident ...
which results in bodily injury ... neither expected nor intended
from the standpoint of the insured.’” SL Industries, 607 A.2d
at 1269-70.
The employer settled the suit and then brought a declara-
tory judgment action against its insurer to establish its right to
indemnification. The Law Division granted the insurer sum-
mary judgment, but the Appellate Division reversed, holding
that although intended harm was not covered under the policy,
the policy did provide coverage for the unforeseen results of
intentional conduct. The court then remanded the case to the
Law Division to determine whether the employee’s emotional
distress had been intended or whether it was foreseeable.
On appeal, the New Jersey Supreme Court had to deter-
mine if the general intent to injure that is inherent in a claim
of fraud necessarily incorporates the intent to cause the
* 128 NJ. 188, 607 A.2d 1266 (1992). SL Industries summarizes and ex-
plains the evolution of the law of coverage under “occurrence-based”
policies in New Jersey, and | will therefore take the liberty of quoting at
length from that opinion.
A-56
specific injury (emotional distress), or whether proof of a
subjective intent to cause the specific injury is required. /d. at
1277-1279. The court began its analysis of the required intent
by examining the differing approaches taken by earlier cases.
Our courts have taken different approaches to the
question of how specifically the insured must have
intended the, resulting injury. Employing the
“Lyons” test,’ some courts have held that a subjec-
tive intent to injure ends the inquiry and precludes
coverage. Under that approach, if there is a subjec-
tive 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 in-
tended...
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 wrong-
ful act is unfair [discussing Karlinski ].... However,
in those circumstances in which the facts indicate
that the acts in which the insured engaged were un-
likely 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 Insurance Group v. Cameron
{122 N.J.Super. 51, 298 A.2d 715 (Ch.Div.1973)],
the court rejected the insurance company’s argu-
ment 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 in-
tended, or when the actor was substantially certain
they would result.
* The test derives its name from Lyons v. Hartford Ins. Group, 125
N.J.Super. 239, 310 A.2d 485, 488-89 (App.Div.1973).
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A-57
To determine which approach to adopt, we refer
to the general principles underlying the interpreta-
tion of insurance-policy provisions involving inten-
tional conduct.
The Lyons test ... precludes coverage in some
cases in which an insured could reasonably expect
coverage. When the injury caused significantly ex-
ceeds the injury intended or expected and is an im-
probable 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 con-
duct. In that case, there is no policy justification for
denying the victim the possibility of additional
compensation. As the Karlinski court noted, pre-
cluding coverage ‘even if the actual harm far ex-
ceed[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 cover-
age 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 in-
quire as to whether the insured subjectively in-
tended or expected to cause that injury. Lacking that
a aan inc LN eK ni pot
A-58
intent, the injury was ‘accidental’ and coverage will
be provided.
Id. at 1277-78 (citations omitted).
Accordingly, the court affirmed the Appellate Division’s
judgment remanding the case to the Law Division to deter-
mine 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 had the subjective intent to injure
the employee. See Jd. at 1279.
E. Morton International, Inc. v. General
Accident Ins. Co.°
Finally, in Morton, the New Jersey Supreme Court had to
apply the law of “occurrence-based” insurance policies to the
very different realm of injuries to the environment. There, the
insured, Morton International, sued primary and excess CGL
insurers seeking reimbursement for costs incurred in defend-
ing a suit filed by the Department of Environmental Protec-
tion (DEP), as well as indemnity for cleanup and remediation
expenses resulting from the DEP proceeding. Morton, 629
A.2d at 834-835. Morton’s predecessors, including Ventron
Corporation, had polluted a body of water known as Berry’s
Creek to such an extent that “[flor a stretch of several thou-
sand feet, the concentration of mercury in Berry’s Creek
[was] the highest found in fresh water sediments in the
world.” Jd. at 834. Morton’s claims were derived from Ven-
tron as well as other prior owners of the land. See Jd. The
DEP sued Ventron and other prior owners to compel them to
pay for remediating the pollution of Berry’s Creek and the
surrounding area. The environmental damage had been caused
* 134 .N.J. 1, 629 A.2d 831 (1993), cert. denied, —— U.S. —, 114 S.Ct.
2764, 129 L.Ed.2d 878 (1994). The majority and | agree on the signifi-
cance of certain portions of the opinion in Morton, but disagree as to the
meaning of the language. Since it is difficult to eliminate all repetition in
explaining why I disagree, | will be somewhat redundant in discussing
Morton.
A-59
by discharges from a mercury-processing plant operated for
forty years by the various defendants. See New Jersey De-
partment of Environmental Protection v. Ventron C orp., 94
N.J. 473, 468 A.2d 150 (1983).
In the underlying suit to establish liability, the New Jersey
Supreme Court affirmed the Appellate Division’s judgment
holding the defendants jointly and severally liable. The court
reasoned that the discharge of mercury constituted an abnor-
mally dangerous activity, and imposed strict liability against
all defendants. See Id, 468 A.2d at 160.
Morton then commenced a declaratory judgment action to
determine its right to indemnification from the various insur-
ers that had provided primary and excess coverage while the
mercury-processing plant was in operation. The primary issue
that the court had to determine was whether the pollution re-
sulted from an “occurrence” under the applicable policies. To
qualify as an “occurrence” the environmental damage must
not have been “expected nor intended from the standpoint of
the insured.” Morton, 629 A.2d at 836. The trial court granted
the insurer’s motion for summary judgment. The Appellate
Division reversed holding that the trial court had “focused
improperly on the manner in which the injury had been
caused and had erroneously concluded that the policy did not
provide coverage for the unexpected result of a deliberate
act.” Jd. at 877 (citation omitted).
The Appellate Division also relied upon Aflaniic Employ-
ers to conclude that “‘[t]he intentional character of the act is
the basis for the inference that the insured either intended or
was manifestly indifferent to the prospect of injury.’” /d
(citation omitted). In reaching this conclusion, the Appellate
Division (without the benefit of either Voorhees or SL Indus-
tries) noted that the “‘substantial environmental pollution
over a long period’” together with the knowledge by Mor-
ton’s predecessors that “‘the substance being discharged ...
was toxic and harmful’” rendered unacceptable a conclusion
that no harm had been expected. /d. (citation omitted).
A-60
On appeal to the New Jersey Supreme Court, Morton ar-
gued that the Appellate Division’s reliance on Aflantic Em-
ployers improperly equated the discharge of pollutants with
child molestation as acts that could be deemed intentionally
injurious as a matter of law. Morton further argued that “the
Appellate Division improperly invoked an objective standard
for determining whether harm had been intended or expected
under the ‘occurrence’-based policies, ignoring the long-
standing principle that coverage exists for the unintended re-
sults of intentional acts.” Jd.
The court began its analysis by acknowledging the unique
circumstances that surround issues of insurance coverage for
environmental damage.
In applying our holding in Voorhees to claims
seeking coverage for property-damage caused by
environmental pollution under occurrence-based
CGL policies, we acknowledge the impracticality of
adherence to the general rule that “we will look to
the insured’s subjective intent to determine intent to
injure.” Although insureds may concede that pollut-
ants —- even known pollutants — had been inten-
tionally discharged, those insureds are virtually
certain to insist that the resultant harm was unin-
tended and unexpected. Absent “smoking gun’ tes-
timony from a disgruntled empluyee, proof of
subjective intent to cause environmental harm will
rarely be available in [environmental insurance]
coverage litigation.
We noted in Voorhees that an alternative to proof
of subjective intent to injure existed in those cases
in which the insured’s “actions are particularly rep-
rehensible, [so that] the intent to injure can be pre-
sumed from the act without an inquiry into the
actor’s subjective intent to injure.” We cited Atlan-
tic Employers ... as illustrative of conduct that was
so inherently injurious as to warrant the conclusion
that intent to injure could be presumed.... We are
A-61
unpersuaded that environmental-pollution litigation
should generally be included in that category of
cases, typified by Atlantic Employers, in which rep-
rehensible conduct justifies a presumption that in-
jury was intended. Jd, 629 A.2d at 879 (citations
omitted) (emphasis added).
Instead of relying upon such an unwarranted presumption
and thereby extending the “public policy and logic” of Atlan-
tic Employers, the court called for an individualized inquiry
based upon the facts of each case.
[I]nsureds held responsible for remediation of envi-
ronmental pollution vary significantly in their de-
gree of culpability for the harm caused by pollutant
discharges. A general rule in environmental-
pollution coverage litigation that would permit in-
tent to injure to be presumed simply on the basis of
a knowing discharge of pollutants would be unjus-
tified.
Instead, we hold that in environmental-coverage
litigation a case-by-case analysis is required in or-
der to determine whether, in the context of all the
available evidence, “exceptional circumstances
[exist] that objectively establish the insured’s intent
to injure.”
Id. at 879-80 (citation omitted) (emphasis added). The term
“exceptional circumstances” had been used in Voorhees. As
noted above, there, the court stated that, absent exceptional
circumstances, the subjective intent of the insured controlled
whether there was an “occurrence” under an occurrence-based
insurance policy. In Voorhees, the court had stated that it was
adopting the majority view that requires proof of a transgres-
sor’s subjective intent. Voorhees at 607 A.2d at 1255.
The court, however, had also noted that “[w]hen the actions
are particularly reprehensible, the intent to injure can be pre-
sumed from the act without an inquiry into the actor’s subjec-
tive intent to injure.” Jd. at 1265. In the context of Atlantic
A-62
Employers, the reprehensible actions of child molestation did
indeed “‘{a]s a matter of public policy and logic ... warrant [ ]
application of the objective approach.’” Jd. Then, the court
used the language that separates me from my colleagues. The
court added: “[a]bsent exceptional circumstances that objec-
tively establish the insured’s intent to injure, we will look to
the insured’s subjective intent to determine intent to injure.”
Id. (emphasis added).
II. Morton Applied to the Instant Dispute
In Morton, the court was careful to distinguish the policy
considerations in pollution coverage cases from those that
dictated an objective approach in all cases of child molesta-
tion. “We are unpersuaded that environmental-pollution liti-
gation should generally be included in that category of cases,
typified by Atlantic Employers, in which reprehensible con-
duct justifies a presumption that injury was intended.” Mor-
ton, 629 A.2d at 879. This does not mean, as the majority
suggests, that the alleged polluter’s subjective intent con-
trolled. It only means that the act of polluting is not so repre-
hensible that “public policy and logic” require a presumption
that the resulting harm is intended as a matter of law. Rather,
the circumstances surrounding the act of polluting must be
examined in each case to determine if, in that particular situa-
tion, they objectively establish an intent to harm the environ-
ment, thereby negating an occurrence.
The court then listed those circumstances that would ob-
jectively establish this intent.
Those circumstances include the duration of the dis-
charges, whether the discharges occurred inten-
tionally, 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.
A-63
Id. at 880. Accordingly, I cannot agree when my colleagues
state, “[w]e believe the New Jersey Supreme Court designed
the ‘exceptional circumstances’ exception to apply only to
egregious conduct.” Majority Op. at 989. One can only de-
termine if conduct is egregious by examining the “exceptional
circumstances” in which it occurred. Indeed, an examination
of those circumstances may well establish that a particular
polluter’s conduct was not egregious at all.
The majority’s error is reflected in what the court in Mor-
ton did. It did not require proof of the subjective intent to
pollute on the part of the insured or its predecessors. Rather, it
examined the record and determined that the circumstances
before it objectively established an intent to harm. “In deter-
mining whether in the context of this record the trial court
properly concluded, as a matter of law, that Morton’s prede-
cessors had intended or expected environmental injury, we
focus on those factors [i.e. the “exceptional circumstances”)
that we previously have identified to be significant.” Morton,
629 A.2d at 882. The court then noted the duration of the dis-
charge, the intentional nature of the discharge, the insured’s
knowledge of-the likely environmental harm, and the history
of “stonewalling.” In conclusion, the court noted that its ex-
amination of these circumstances confirmed that “damage
qualitatively comparable to that found to exist ... must have
been anticipated by Morton’s predecessors on the basis of ...
prolonged knowledge of and avoidance of compliance with
compiaints by regulatory officials.” Jd. at 884.
This is consistent with the court’s pronouncement that the
mere fact of polluting, even to the egregious extent present in
Morton, was not by itself, such reprehensible conduct that it
required a conclusive presumption of an intent to harm.
Moreover, the “exceptional circumstances” include “the exis-
tence of subjective knowledge concerning the possibility or
likelihood of harm.” However, subjective knowledge is not
used to definitively determine if the insured expected or in-
tended environmental damage. Rather, the insured’s subjec-
tive knowledge is but one of those “exceptional
circumstances” that determine if an “occurrence” has taken
A-64
place. It is not the start and finish of that inquiry as the ma-
jority’s reasoning suggests.
The Morton court concluded that exceptional circum-
stances established as a matter of law that there had been no
occurrence as Morton’s predecessors had to have expected the
pollution they caused. The objective nature of this conclusion
is evident because the court clearly stated that is was not de-
ciding whether Morton’s predecessors “intended” (i.e.
“subjectively”) the damage:
Without determining that such damage was in-
tended, we find inescapable the conclusion that
damage qualitatively comparable to that found to
exist in the Ventron litigation must have been an-
ticipated by Morton’s predecessors on the basis of
their prolonged knowledge of and avoidance of
compliance with complaints by regulatory officials
that the company was discharging unacceptable
emissions, including mercury compounds, into
Berry’s Creek. Based on that conclusion, ... as a
matter of law the property damage to Berry’s Creek
and the surrounding area was not caused by an
“occurrence” within the meaning of the term in the
various CGL policies.
Id. at 884 (emphasis added).
In adopting prior law (particularly the holding in Karlinski)
to environmental insurance coverage, the court in Morton
noted that subjective evidence of the polluter’s intent did not
become relevant merely because the extent of pollution was
greater than anticipated.
Turning to the question whether environmental
injury was intended or expected, we first observe
that although the magnitude of the damage to
Berry’s Creek and the surrounding areas may ex-
ceed any intention or expectation attributable to
Morton’s predecessors, we do not consider that dif-
ferences in harm relating to the severity of
A-65
environmental damage give rise to a finding of
“improbability” of harm that invokes the need for
evidence of subjective intent. Whether Morton’s
predecessors anticipated that discharges of untreated
effluent on the plant site and into Berry’s Creek for
more than forty years would cause environmental
harm of the severity described ... hardly demon-
Strates that the extent of the injury was
“improbable.” The holding in SL Industries was
based on the Appellate Division’s ruling in Karlin-
ski, that in a coverage action arising from a fight
between two young teenagers in which one sus-
tained a broken hip, a factual issue of subjective in-
tent was presented because of the inherent
improbability that the skirmish would result in a hip
fracture. No such inherent “improbability” can be
ascribed to the environmental damage attributable
to Morton’s predecessors.
Id. at 882 (citations omitted).
The majority notes that the district court held that
Chemical Leaman’s actions were not so reprehen-
sible as to justify the presumption of an intent to
cause property damage under the “exceptional cir-
cumstances” exception. It concluded that Chemical
Leaman was not “throwing toxic waste out into the
meadow-lands” as Morton and its predecessors had
done; rather, it had “designed and built the facility
to prevent [harm to the environment].”
Majority Op. at 985-86. (emphasis added). The “exceptional
circumstances” test, however, is not an “exception,” but the
rule that is to be applied in environmental coverage cases. In
addition, although Chemical Leaman was not reducing Berry
Creek to one of the world’s great environmental disasters as
was the case in Morton, there is nevertheless testimony from
which a reasonable jury could conclude that “exceptional cir-
cumstances” objectively establish Chemical Leaman’s intent
to harm the environment.
A-66
The majority holds that after Morton, a court can determine
that an insured is entitled to indemnification under an occur-
rence-based policy as a matter of law absent “exceptional cir-
cumstances.” My colleagues suggest that “exceptional
circumstances” merely
define when no reasonable jury could find the in-
sured did not intend or expect to cause property
damage because objective circumstances — evi-
dence of prolonged, intentional, or flagrant dis-
charges of known pollutants in the face of
regulatory disapproval — establish that the insured
must have intended property damage. The presence
of “exceptional circumstances” requires a court to
enter judgment as a matter of law. Their absence, of
course, does not prevent a jury from finding an in-
sured “expected” or “intended” to cause property
damage.
See Majority Op. at n.7. However, Morton did not quantify
the factors it identified as objectively establishing intent to
pollute. Rather, the “case-by-case analysis” was necessary for
the fact finder to make an individualized determination of
whether the nature of those factors in a particular case justi-
fied denying coverage in lieu of the limitations contained in
the insurance contract. Thus, I agree that the absence of the
factors detailed at footnote 7 of the majority opinion “doe[ |
not prevent a jury from finding an insured ‘expected’ or
‘intended’ to cause property damage,” but not for the reason
stated by the majority. Rather, it is because “subjective
knowledge concerning the possibility or likelihood of harm”
is one of the “exceptional circumstances” that a jury must also
consider. Accordingly, if an insured knows that its actions
will most likely harm the environment, just one, brief, dis-
charge of a known pollutant by one who had otherwise com-
plied with regulatory authorities could preclude coverage
under an occurrence-based insurance policy.
The majority argues that Morton cannot be read as creating
an objective test for intent because an insured who
A-67
“intentional[ly] discharges a known pollutant generally in-
tends ‘some sort of harm,’ however de minimis, and the harm
that actually results is usually a probable result of the dis-
charge.” Thus, (the majority Suggests) an objective test
“would result in a general rule precluding [all] coverage based
on the knowing discharge of a pollutant.” Majority Op. at
987. That is, however, precisely why it is necessary to use
“exceptional circumstances” to prove intent to harm objec-
tively in pollution cases. If the resulting inquiry establishes
that the insured did objectively “intend” to harm the environ-
ment, the inquiry into the foreseeability of the actual damage
makes perfect sense.
The majority expresses a further concern that reading
Morton to require anything other than subjective intent
“would be akin to a negligence standard [,and] [iJf negligent
acts did not fall within the definition of a covered occurrence,
then there would be no point in purchasing comprehensive
general liability insurance.” Majority Op. at 985 (citing Pitt-
ston Co. v. Allianz Ins. Co., 905 F ‘Supp. 1279, 1301
(D.N.J.1995)). A properly guided inquiry into “exceptional
circumstances,” however, does not equate with a negligence
standard. It assigns the cost of environmental remediation not
based upon negligence, but upon the “degree of culpability for
the harm caused by pollutant discharges.” Morton, 629 A.2d
at 879.
III. The Exceptional Circumstances of
The Bridgeport Site.
Throughout the time the pond and lagoon system was in
use there were repeated discharges of waste through the over-
flow pipe to the adjacent swamp. In fact, the very purpose of
the overflow pipe was to allow for these discharges. An In-
spector observed the discharge from the last pond during a
September 12, 1961 visit and thereafter observed similar dis-
charges on about half of his visits to the Bridgeport site. In
November 1968, water pollution inspectors from the New Jer-
sey Department of Health again observed the discharge from
the overflow pipe in the last lagoon. Although it was
mm a a A i Sa
:
|
characterized as a sporadic “trickle”, an engineer employed by
Chemical Leaman (Elston), and at least one other employee
admitted that the overflow pipe did discharge into the swamp
throughout the time the pond and lagoon system was in use.
Moreover, there was evidence that by 1974, the path of this
“trickle” from the last impoundment could “be easily seen by
looking for a 75-foot wide lane of dead trees” in the swamp.
The Morton court concluded that the discharge of pollut-
ants there was intentional once the polluters knew it was un-
acceptable. Morton, 629 A.2d at 882. There, the repeated
demands of the Department of Health that the owner halt the
discharges or install adequate treatment facilities were regu-
larly ignored. /d. Here, the intentional nature of the discharge
is also evident. Chemical Leaman intentionally designed its
waste treatment system so that the overflow pipe would dis-
charge into the swamp. Furthermore, even under the subjec-
tive framework that the jury was given to review the
evidence, it concluded that Chemical Leaman’s releases were
intentional. That conclusion is supported by the record and
Chemical Leaman cannot now successfully argue that the dis-
charges were anything but intentional. Indeed, Chemical
Leaman’s denials illustrate the concern expressed in Morton
that a polluter may admit to the discharge, but would never
admit to intentionally polluting the environment. That con-
cern could only be satisfactorily addressed by the objective
test that the majority today rejects.
Here, as in Morton, the intentional nature of the discharge
is confirmed by Chemical Leaman’s continued evasion of the
State’s demands to stop the discharge. The unacceptable
condition of the discharge from the overflow pipe into the
swamp was brought to Chemical Leaman’s attention by a
governmental inspector in September of 1961. Although
Chemical Leaman installed three more lagoons in an attempt
to alleviate this situation, the overflow pipe remained a staple
of the Bridgeport site and in 1968, Chemical Leaman was still
discharging wastes into the lagoon.
A-69
State officials regularly informed Chemical Leaman that
the effluent flowing from the overflow pipe constituted an
unacceptable discharge into the swamp. In 1961, FGW told
Chemical Leaman that the discharge was an unacceptable
condition and that the resulting pollution should be stopped
within a year. Subsequently, in 1968, the NJDOH told
Chemical Leaman that “the waste emanating from the lagoon
is highly pollutional and [that] immediate measures [should]
be taken to eliminate this discharge or to sufficiently treat the
waste prior to discharge” and in 1969, Chemical Leaman was
ordered to find an alternative method of waste treatment.
Chemical Leaman argues that it was not aware of the harm-
ful propensities of its pollutants because it was not discharg-
ing pure chemicals, but rather “trace amounts” of these
chemicals in highly diluted rinsewater. The uncontroverted
evidence, however, clearly showed that at least by 1968,
Chemical Leaman was alerted that the discharge into the
swamp was “highly pollutional” even in its diluted form.
Furthermore, as noted above, however diluted the discharge
may have been, it was sufficiently potent to sculpt the 75-foot
wide path of. dead trees into the environmental landscape it
touched.
It is certainly true that Chemical Leaman is more sympa-
thetic than the polluters in Morton, who engaged in a deliber-
ate pattern of “stonewalling” characterized by promises of
compliance that went unfulfilled. Morton, 629 A.2d at 882.
As the majority notes, Chemical Leaman apparently thought
that its natural filtration system would reduce the danger of
pollution. In fact, it was designed to do just that. Neverthe-
less, the record here could clearly support a finding that
Chemical Leaman was “stonewalling” regulatory authorities.
There is a pattern of unfulfilled promises of compliance to
State agency requests to abate the polluting discharge.
Even after officials caught Chemical Leaman discharging
into the swamp in 1968 and ordered it to find a better way to
treat wastes in 1969, Chemical Leaman did not improve the
waste treatment system until the summer of 1975, when it
A-70
entered into a disposal contract with Du Pont. In the interim,
40 to 50 million gallons of contaminated waste water had
been processed using the same treatment system.
Thus, from 1961, when the State first notified Chemical
Leaman that the discharge to the swamp was unacceptable,
until 1975, when Chemical Leaman began off-site disposal at
the Du Pont plant, Chemical Leaman responded to regulatory
agencies with promises of compliance that went unfulfilled.
Chemical Leaman was informed that the discharge to the
swamp was unacceptable. Although the state did not articulate
why the discharge was improper, it is difficult to imagine
what other reason Chemical Leaman could have attributed to
the state’s concern if not the impact of the discharge upon the
environment. It is clear from Chemical Leaman’s own argu-
ment in this regard that it never attempted to ascertain the rea-
son for the State’s concern.
Nevertheless, assuming arguendo that in 1961 Chemical
Leaman could not ascertain that its system was damaging the
environment, there is no dispute that Chemical Leaman
learned that the discharges to the swamp were likely to cause
harm as of November of 1968, when it was expressly told that
“the waste emanating from the lagoon is highly pollutional
and [that] immediate measures [should] be taken to eliminate
this discharge or to sufficiently treat the waste prior to dis-
charge.” Even more telling is Harry Elston’s concession at
trial that both at the time of FGW’s inspections in 1961 and
1962, and at the point when NJDOH issued its order in 1969,
he knew that Chemical Leaman’s discharge into the swamp
was causing some damage to the swamp. Finally, it should be
noted that Chemical Leaman never obtained the required
permits for its waste disposal cite. Thus, it took regulatory
authorities even longer to discover the “highly pollutional”
discharge. Once the cite was discovered, Chemical Leaman’s
compliance with regulatory agencies was less than exemplary.
Chemical Leaman discharged approximately 100 million
gallons of contaminated waste water into its unlined ponds
and lagoons for the fifteen years that the Bridgeport site was
A-71
in operation. The bottom of those lagoons was only two and a
half feet above the groundwater, and the insurers’ expert tes-
tified that the soil, groundwater, and swamp contamination
was the probable result of this discharge. That testimony was
not refuted by Chemical Leaman’s expert even though
Chemical Leaman argues on appeal that their unlined treat-
ment system was the state of the art.
I cannot say that such a course of conduct does not negate
the existence of an occurrence under New Jersey law.
IV. Conclusion
Courts that have addressed the issue of the kind of intent
that would negate insurance coverage under an occurrence-
based policy have been guided by certain policy considera-
tions. Courts have attempted to maximize the possibility that
victims be compensated for their injuries while minimizing
indemnification of the wrongdoer. See Voorhees, 607 A.2d at
1264. They have also been concerned that the law in this area
deterred wrongdoers. See SL Industries, 607 A.2d at 1278.
Looking to “exceptional circumstances” to objectively de-
termine intent to harm the environment does just that. To the
extent that those circumstances suggest that the insured did
not intend environmental harm, and cooperated with regula-
tory authorities to avoid it, the insured will likely be indem-
nified for the cost of remediation under an occurrence policy
even where it discharged a known pollutant. To the extent that
those circumstances establish a protracted and/or deliberate
discharge, however, a disregard for the environment, knowl-
edge of the properties of a pollutant, “stonewalling” regula-
tory agencies and the insured’s subjective knowledge of the
possibility of harm; “public policy and logic” require that the
insured, and not its insurers, pay the cost of environmental
cleanup. That allocation of cost deters persons from closing
their eyes to the environmental impact of their activities.
” See Atlantic Employers, 571 A.2d at 304.
A-72
Furthermore, this is consistent with the long-standing doc-
trine of enforcing insurance contracts in a manner that is con-
sistent with the reasonable expectations of the parties. An
insured cannot reasonably expect to escape the “occurrence-
based” limits on its right to indemnification where
“exceptional circumstances” establish its culpability for pol-
lution. Similarly, an insurer should be able reasonably to ex-
pect that it will not be required to reimburse such a polluter
for the environmental damage so callously caused.
This is the result the New Jersey Supreme Court sought to
promote in Morton. Yet, the rule we adopt today will give
polluters comfort and allow them to discharge pollutants in
relative safety because of the obvious impracticality of estab-
lishing their subjective intent to harm the environment. Since
the New Jersey Supreme Court recognized the impracticality
of a subjective approach in environmental coverage disputes,
I find it difficult to believe that it intended this result. The
majority concludes that the New Jersey Supreme Court estab-
lished a subjective standard in environmental insurance dis-
putes while proclaiming such a rule to be so impractical as to |
be unworkable. As a result, our holding places insurers in the
impossible situation the New Jersey Supreme Court sought to
avoid by its thoughtful pronouncement of an objective
“exceptional circumstances” test in disputes over liability for
cleaning up pollution.
Present BECKER, STAPLETON, MANSMANN,
SCIRICA, COWEN, NYGAARD, ALITO, ROTH, LEWIS,
McKEE and SAROKIN, Circuit Judges.
® Indeed, the difficulty with the approach we adopt is even greater than
was expressed in Morton because the “smoking gun testimony from a
disgruntled employee” often needed to establish subjective intent would
surely be subject to effective impeachment by any decent litigator. Thus,
although the employee’s antagonism may motivate him or her to provide
the evidence necessary to establish the employer's intent to pollute, it
would also establish bias and motive to fabricate testimony and thereby
minimize that testimony’s probative value.
q
A-73
SUR PETITION FOR REHEARING
The petition for rehearing filed by appellants Robin An-
thony Gildart Jackson, an Underwriter at Lloyds, London, et
al. in the above-entitled case having been submitted to the
judges who participated in the decision of this Court and to all
the other available circuit judges of the circuit in regular ac-
tive service, and no judge who concurred in the decision
having asked for rehearing, and a majority of the circuit
judges of the circuit in regular service not having voted for
rehearing, the petition for rehearing by the panel and the
Court in banc, is denied. Judge McKee would grant rehearing.
A-74
1
CHEMICAL LEAMAN TANK LINES,
INC., Plaintiff-Appellee
v.
The AETNA CASUALTY & SURETY COMPANY, Et
Al., Robin Anthony Gildart Jackson, an Underwriter at
Lloyd’s, London, Et Al., Defendants-Appellants in No.
93-5777,
The Aetna Casualty & Surety Company, Defendant-
Appellant in No. 93-5794.
Nos. 93-5777, 93-5794.
United States Court of Appeals,
Third Circuit.
Dec. 15, 1995.
Before: SCIRICA, NYGAARD and McKEE, Circuit
Judges.
ORDER FOR PANEL REHEARING
It is hereby ordered that, pursuant to Internal Operating
procedure 9.5.7, panel rehearing is granted in the above cap-
tioned appeal, and the opinion previously filed on October 12,
1995, is hereby vacated.
A-75
CHEMICAL LEAMAN TANK LINES, INC.
Vv.
The AETNA CASUALTY AND SURETY COMPANY;
and Certain Underwriters at Lloyds, London, subscrib-
ing to Insurance Policies 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,
L83-02-09C
Robin Anthony Gildart Jackson, an Underwriter at
Lloyds, London, individually and in his capacity as rep-
resentative Underwriter at Lloyds, London for certain
subscribing Underwriters at Lloyds, London who sub-
scribed 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 Interna-
tional Insurance PLC, formerly Known as Allianz In-
ternational Insurance Company Ltd.; Anglo-French
Insurance Company Ltd.; Argonaut Northwest Insur-
ance Company; Assicurazioni Generali SPA; Baloise
Fire Insurance Company; Bellefente Insurance Com-
pany 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 Insur-
ance Company Ltd.; Drake Insurance Company Ltd.;
Edinburgh Insurance Company; Excess Insurance
Company Ltd.; Fidelidade Insurance Company; Folk-
sam International Insurance Company (U.K.) Ltd.;
A-76
Helvetia Accident Swiss Insurance Company; Indem-
nity Marine Assurance Company, Ltd.; Lexington In-
surance Company Ltd.; London & Overseas Insurance
Company, Ltd.; London & Edinburgh Insurance Com-
pany, 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 Com-
pany Ltd.; River Thames Insurance Company Ltd.;
Scottish Lion Insurance Company; Sovereign Marine
and General Insurance Company, Ltd.; Sphere Insur-
ance Company Ltd.; St. Katherine Insurance Company
Lid.; 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.; Un-
ionamerica Insurance Company; United Standard In-
surance 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.
Nos. 93-5777, 93-5794.
United States Court of Appeals,
Third Circuit.
Argued Sept. 26, 1994.
Decided Oct. 12, 1995.
A-77
Insured brought action against primary and excess compre-
hensive general liability (CGL) insurers to recover costs in-
curred in cleaning up environmental site. After granting
partial summary judgment in favor of insured, 788 F.Supp.
846, the District Court, 817 F.Supp. 1136, Stanley S. Brot-
man, J., found issues of fact precluding summary judgment on
whether insured expected or intended the damage. Excess in-
surer appealed. The Court of Appeals, McKee, Circuit Judge,
held that: (1) environmental harm from overflow pipe and la-
goons for wastewater with hazardous chemicals was not im-
probable and was objectively expected or intended by insured
after it was told that discharge from pipe polluted swamp; (2)
Court of Appeals was not required to parse out components of
environment and determine insured’s intent with regard to
each; (3) objective standard must be used in determining
whether environmental damage was either expected or in-
tended from standpoint of insured: (4) owned-property exclu-
sion did not bar coverage; (5) New Jersey law recognizes
continuous trigger theory; (6) joint and several liability is im-
proper for insurance policies activated by ongoing occurrence:
and (7) insured’s late notice of claim did not bar coverage.
Reversed and remanded.
Scirica, Circuit Judge, dissented and filed opinion.
1. Insurance 178.6
Under New Jersey law, time of “occurrence” 2s used in li-
ability policy is time when complaining party is damaged
See publication Words and Phrases for other ju-
dicial constructions and definitions.
2. Federal Courts 924.1
Court of Appeals on appeal governed by state law must
apply state law as it exists today, even if law may have
changed since judgment of district court.
A-78
3. Insurance 433.2
Under New Jersey law, insured’s conduct can be excep-
tional circumstance warranting judicial finding of intent and
precluding coverage under comprehensive general liability
(CGL) insurance policy, even if conduct is insufficiently rep-
rehensible, egregious, and injurious for damage to be acci-
dent.
4. Insurance 433.2
Under New Jersey law, insured’s subjective intent is rele-
vant to whether accident or occurrence took place under com-
prehensive general liability (CGL) insurance policy if extent
of environmental harm is improbable or unforeseeable; in that
case there is still “accident” or “occurrence” unless insured
subjectively intended to cause that specific harm.
5. Insurance 433.2
Under New Jersey law, case-by-case analysis based on all
available evidence is required to determine whether excep-
tional circumstances objectively establish intent to injure
precluding coverage under comprehensive general liability
(CGL) insurance policy.
6. Insurance 437.2(1)
Under New Jersey law, insured’s objective intent to injure
is not threshold issue to be decided by court as matter of law
with respect to coverage under comprehensive general liabil-
ity (CGL) insurance policy; if there are disputed issues of
fact. trier of fact must examine all evidence and determine
whether exceptional circumstances exist that objectively es-
tablish insured’s intent to injure.
7. Insurance 433.2
Under New Jersey law, environmental harm from overflow
pipe and lagoons for wastewater with hazardous chemicals
was not improbable and was objectively expected or intended
by insured after it was told that discharge from pipe polluted
swamp, and, thus, no “occurrence” or “accident” subsequently
A-79
took place under excess comprehensive general liability
(CGL) insurance policies, even if insured had good faith be-
lief that soil in lagoons acted as natural cleanser; insured de-
signed system so pipe would discharge into swamp and
continued using it for years after being ordered to find better
way.
8. Insurance 433.1
Under New Jersey law, “severity of harm” relevant to
probability of environmental harm and coverage under com-
prehensive general liability (CGL) insurance policies can refer
to different components of environment that are ultimately
injured by pollution.
See publication Words and Phrases for other ju-
dicial constructions and definitions.
9. Insurance 433.2
Under New Jersey law, Court of Appeals was not required
to parse out components of environment and determine in-
sured’s intent with regard to each in order to determine
whether insured intended or expected environmental harm
and coverage existed under excess comprehensive general li-
ability (CGL) insurance policies.
10. Insurance 433.2
Under New Jersey law, objective standard must be used in
determining whether environmental damage was either ex-
pected or intended from standpoint of insured and was cov-
ered under comprehensive general liability (CGL) insurance
policies.
11. Insurance 433.2
Under New Jersey law, if exceptional circumstances objec-
tively establish that insured expected or intended to cause
environmental damage, there is no “occurrence” and no cov-
erage under comprehensive general liability (CGL) insurance
policy, unless extent of damage was unforeseeable: if extent
of damage was unforeseeable, there is coverage unless insured
A-80
subjectively intended or expected that damage was likely to
result.
12. Federal Courts 937.1
Remand was required by district court’s erroneous use of
subjective, rather than objective, test for insurance coverage
when balancing probative value against prejudicial effect of
evidence of environmental problems at insured’s other sites.
Fed.Rules Evid.Rule 403, 28 U.S.C.A.
13. Insurance 434(2)
Under New Jersey law, owned-property exclusion of com-
prehensive general liability (CGL) insurance policies did not
bar coverage for pollution cleanup to remedy groundwater
contamination to wells neighboring insured’s site and prevent
further injury to other wells.
14. Insurance 178.6
New Jersey law recognizes continuous trigger theory of
coverage for progressive indivisible injury or property dam-
age from environmental contamination under comprehensive
general liability (CGL) insurance policy.
15. Federal Civil Procedure 2182.1
Review of instructions is plenary; Court of Appeals focuses
on whether charge, as a whole, fairly and adequately submits
issues to jury.
16. Insurance 512.1(1, 3)
Under New Jersey law, joint and several liability is im-
proper for insurance policies activated by ongoing occurrence
under continuous injury trigger; rather, limits of triggered
policies must be allocated based on degree of risk transferred
or retained by insured during years of exposure.
17. Insurance 178.6
Under continuous trigger of New Jersey law, injury COv-
ered by comprehensive general liability (CGL) insurance
A-81
policy occurs during each phase of environmental contamina-
tion; thus, injury occurs as soon as soil and groundwater are
exposed to contaminants.
18. Insurance 178.6
Under continuous trigger of New Jersey law, injury cov-
ered by comprehensive general liability (CGL) insurance
policy need not manifest itself in each policy year so long as
there is continuous, indivisible process resulting in damage.
19. Insurance 178.6
Under continuous injury trigger of New Jersey law, jury
can find that property damage occurred during each policy
period if there is proof that indivisible injurious process took
place during policy period, regardless of when actual envi-
ronmental injury became manifest.
20. Insurance 539.8
Under New Jersey law as predicted by district court, in-
sured’s late notice of claim did not bar coverage under excess
comprehensive general liability (CGL) insurance policies,
unless insurer showed appreciable prejudice in ability to con-
test coverage; New Jersey Supreme Court would adopt test of
Morales, 423 A.2d 325.
Brian J. Coyle (Argued), Peter E. Mueller, Harwood Lloyd,
Hackensack, NJ, Edward M. Dunham, Jr., Daniel W. Cantu-
Hertzler, Miller Dunham Doering & Munson, Philadelphia,
PA, William H. Jeffress, Jr., Miller, Cassidy, Larroca & Le-
win, Washington, DC, for Appellant Aetna Casualty & Surety
Company.
John G. McAndrews, Henry Lee (Argued), Hannah M.
O'Driscoll, Gary P. Schulz, Mendes & Mount, New York
City, William J. Hanley, Ronca, McDonald & Hanley, Liv-
ingston, NJ, for Appellant Robin Anthony Jackson, An Un-
derwriter at Lloyds, London, and Certain London Market
Insurance Companies (“London Market Insurers’’).
A-82
Kevin B. Clark (Argued), John P. Dean, Carlisle E.
Perkins, Conrad J. Smucker, Willkie Farr & Gallagher,
Washington, DC, for plaintiff-appellee Chemical Leaman
Tank Lines, Inc.
Thomas W. Brunner, John E. Barry, Dennis A. Tosh,
Wiley, Rein & Fielding, Washington, DC, 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, Trenton, NJ, for Amicus Curiae
State of New Jersey, Department of Environmental Protection
and Energy.
Before. SCIRICA, NYGAARD and McKEE, Circuit
Judges.
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
‘ssues are raised on appeal, the primary issue is the appropri-
ate test to determine if Chemical Leaman “expected or in-
tended” environmental damage. We hold that, under New
Jersey law, the appropriate inquiry is the insured’s objective
intent and that the district court erred when it instructed the
jury that it must determine if Chemical Leaman subjectively
“expected or intended” to damage the environment. Since we
determine as a matter of law that Chemical Leaman did ex-
pect 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.
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A-83
I. Background
A. The Bridgeport Site
Chemical Leaman is a tank truck company specializing in
the transportation of hazardous chemicals including carcino-
gens. The Bridgeport terminal at issue here was one of many
terminals that Chemical Leaman maintained across the coun-
try. These terminals included facilities where Chemical Lea-
man would routi
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