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The New Jersey Appellate Division recently affirmed a grant of summary judgment to High Point Insurance Company in High Point Insurance Company v. J.M., et al., ___ N.J.Super. ___, (App.Div. 2008), Docket No. A-0829-06T50829-06T5 (March 12, 2008) declaring that it was not obligated to defend or indemnify a pair of insureds under a homeowner’s policy in a personal injury lawsuit stemming out of sexual abuse.

As a result of events that occurred between August 1999 and April 2000 involving two minors, Sheryl Van Dyke (“Sheryl”) pled guilty to one count of second degree sexual assault and one count of endangering the welfare of minors. In a subsequent personal injury action brought by guardians of the involved minors, Sheryl faced allegations of sexual molestation and emotional injury. In addition, the complaint alleged that George Van Dyke (“George”), Sheryl’s husband, knew or should have known of Sheryl’s behavior and did nothing to prevent it. The Van Dykes were insured pursuant to a homeowner’s policy issued by High Point. High Point defended George subject to a reservation of rights, but declined to defend Sheryl. The case eventually settled.

Subsequently, a coverage action was commenced to determine whether the settlement was covered. The trial Court found Sheryl’s actions to be intentional based on an objective approach thus precluding coverage pursuant to an expected/intended exclusion within the policy. The trial court also denied coverage to George on public policy grounds, asserting that liability coverage should not be provided to spouses of sexual molesters, especially if he knew or should have know about his wife’s sexual proclivities.

George argued on appeal that the trial court should have applied a subjective test to determine an insured’s intent to injure. He further argued that if such a test was applied, summary judgment would have been denied because High Point could not demonstrate that he had any intent to injure. Quoting the New Jersey Supreme Court in Voorhees v. Preferred Mutual Ins. Co., 128 N.J. 165, 184 (1992), the Court stated “[w]hen the actions are particularly reprehensible, the intent to injure can be presumed from the act without an inquiry into the actor’s subjective intent to injure.” Furthermore, the Court reasserted its public policy stance stated in J.C. v. N.B., 335 N.J.Super. 503, 509-10 (App.Div. 2000) that allowing coverage for a spouse in a sexual molestation case would provide that spouse “with an undue incentive to value the stability and privacy of the marriage over the well-being of the child-victim.” Therefore, the Court found that public policy warranted application of an objective approach and as such George’s behavior cannot be labeled an ‘accident’ consistent with the policy’s definition of ‘occurrence’. The award of summary judgment relative to George was thus affirmed.

Also on appeal, Sheryl argued that High Point had a duty to defend and indemnify her based on her lack of subjective intent to cause any harm. Sheryl cited her assertion of a duress defense as support for her argument. The Court found this reasoning unpersuasive, stating that the elements of the crimes for which Sheryl pled guilty to reflect culpability for injury to the minors involved. As a result, the Court found that it did not matter which test (subjective or objective) the Court used to evaluate coverage and affirmed the award of summary judgment relative to Sheryl.

Recent local news reports address actions being taken in response to lead contamination associated with artificial turf fields at New Jersey recreational facilities, including school playing fields. News items like these, and similar ones, like the less-recent Kiddie Kollege fiasco, which led to intensive NJDEP action regarding day-care centers, reemphasize the need to think about environmental risk before a problem arises.

The reports in the papers indicate that the measured lead levels may result from lead compounds used to color the nylon utilized in turf products distributed several years ago. At least for now, the turf itself would appear to be a source of the lead contamination, in whole or part. But it also seems reasonable to consider that one or more of these playing surfaces may sit on a field in an urban, highly-industrialized area of our state, essentially a brownfield, where increased lead levels may be historical in the soils and nearby structures. Obviously, step one is to investigate the situation and understand it so that all reasonable and necessary measures are taken.

But regardless of what the science ultimately shows, as in any situation like this, the recent findings will generate heat, and will have financial costs, at a minimum in the form of investigative work, and field surface replacement, since some fields are already being ripped out. At least three hot-button issues are in play here — protection of childrens’ health, environmental risk and urban - center quality of life. Where there are unexpected costs and issues like these, litigation is a distinct probability.

Typically, one of the first places we look when unexpected costs, especially cost associated with possible bodily injury arise, is liability insurance. To be sure, those who find themselves in the path of this issue have been calling their risk managers, brokers and lawyers, and policies are being pulled out and read. What they find there may or may not be reassuring. Today’s standard liability policy forms would contain exclusions, for example, barring coverage costs from damage to one’s own property or product without actual damage or injury to a third party, as well as a broad so-called absolute pollution exclusion barring coverage for liabilities arising from pollution. Of course, standard insurance policies, like any contract, can be negotiated at its inception to attempt to address the risk of the insured, and even if a risk cannot be transferred, the mere exercise of considering what risk is covered, and what is not, earlier rather than later, facilitates planning. There are commercial insurance products on the market for many years that directly underwrite so-called “pollution liability”. If a turf-war does break out, the degree of insurance protection available may depend on whether those with exposure today sought proper advisors, including lawyers and insurance brokerage personnel, to think about potential environmental exposures of their client and tried to identify and manage such risks when the coverage was procured.

Supreme Court Re-Shifts Burdens of American Home Products, Then Refuses to Defer to First-Filed Action in a State Whose Insurance Law is Less Favorable In Awarding Coverage to Polluters

The Supreme Court delivered a one-two punch in last week’s decision in Sensient Colors, Inc. v. Allstate Ins. Co., et al., __ N.J. __ (2008), Docket No. A-99/100/101-06 (Jan. 29, 2008). First, it revamped the rules for determining the comity stay. Then, applying those rules, it held that a second-filed action should proceed in New Jersey, in part because the polluting policyholder might be less able to obtain insurance reimbursement for the cost of cleanup of its contaminated property in South Jersey if the action were adjudicated in New York under New York law.

Revising The American Home Products Test

In the battle of the forums (or fora if you remember your Latin), the long-standing general rule has been that courts defer to the first-filed action, unless a party can overcome the first-filed presumption and demonstrate the action should be adjudicated in the second-filed forum based on the particular circumstances of the case. For more than 10 years, American Home Products Corp. v. Adriatic Ins. Co., 286 N.J. Super. 24 (App. Div. 1995), has provided the guiding framework on the first-filed doctrine. In its first opportunity to review the American Home Products analysis, the New Jersey Supreme Court modified the Appellate Division’s paradigm.

American Home Products established a three-prong test to determine whether a court should defer to a first-filed action or retain jurisdiction over a subsequently filed suit. Under this test, a party moving for a comity stay or dismissal of a second-filed action in New Jersey has to establish that: (1) there is a first-filed action in other state; (2) both cases involve substantially the same parties, claims and legal issues; and (3) the plaintiff in the second-filed action will have the opportunity for adequate relief in the first-filed jurisdiction. American Home Products, 286 N.J. Super. at 37. Once these are established, the burden shifts to the other party who must demonstrate special equities for allowing the second-filed action to proceed. Id.

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Thanks to McCarter & English, Wilson Elser and Busch & Busch for hosting and all of the lawyers, judges and client-personnel who attended a ”cast party” for the Owens-Illinois case (O-I) at Stage Left in New Brunswick last Friday evening.  The party celebrated the 23 years since the filing of an important and hard-fought asbestos insurance and reinsurance case. 

The case is concluded, but its spirit lives.  If that spirit could be bottled, the entire Bar should be offered at least a sip.  (In fact, if you’re in New Brunswick this week, take a peek in the window of the restaurant.  There may still be some stragglers in there!) 

O-I was a rigorous a litigation work-out.  It involved a lot of money, novel and contentious issues, and a group of lawyers and judges with skill levels  approaching their egos.  Great fun. 

What all enjoyed Friday evening was the affection, respect and camaraderie resulting from having worked hard together on something special.  Former adversaries and allies, some of whom haven’t seen each other in years, ate, drank, joked and told fibs with the same vigor that we once litigated.    People flew in from around the country and joined the fun.  

Recently, I suggested in this space that lawyers getting together and partying might be as beneficial a pathway for New Jersey’s Mandatory CLE program as any alternative under consideration.  I now wish to formalize that suggestion for consideration by the Committee.  Without doubt, Friday’s event was among the most useful CLEs I have been to, right up there with having had the opportunity to do my job alongside this talented and personable group of lawyers, judges and clients.        

On October 7, 2007, the New Jersey Supreme Court heard oral argument in the matter of Sensient Colors, Inc. v. Allstate Ins. Co., et al. on the issue of whether a Complaint filed by an insured in New Jersey for environmental coverage for a New Jersey site, although filed after the insurer filed a similar action in New York, should proceed.

I. Factual and Procedural History

Following the receipt of a PRP letter from the EPA and a suit by a neighboring property owner for cleanup of environmental contamination arising from the insured’s Camden, New Jersey site, the insured (Sensient) put its insurers on notice. Zurich had issued a reservation of rights letter, but it then filed a declaratory judgment action in New York state court. Zurich is a New York company, and the policies were brokered by a New York broker. Sensient is also a New York company, with its principal place of business in Missouri. Zurich subsequently amended the NY complaint to include additional insurers. Less than two months later, Sensient filed its own declaratory judgment action in New Jersey state court, adding a claim against the New Jersey Property-Liability Insurance Guaranty Association (”NJPLIGA”) and alleging that Zurich had breached the implied covenant of good faith and fair dealing. Sensient moved to dismiss the New York action, which the New York court denied, and Zurich moved to dismiss the New Jersey case.

The New Jersey trial court granted Zurich’s motion to dismiss on comity grounds, deferring to the first-filed action in New York. Sensient appealed, and the Appellate Division reversed, finding that the two actions were not substantially similar because NJPLIGA could not be sued in New York and New York does not recognize a cause of action for breach of the implied covenant of good faith and fair dealing. The Appellate Division further reasoned that even assuming that the two actions were substantially similar, the trial court had erred in not considering special equities that justified not deferring to the first-filed action, namely the fact that the site was located in New Jersey and the state had a paramount interest in the health and safety of its citizens and making sure there are funds for remediation of waste sites in furtherance of that public policy.
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New York Governor Eliot Spitzer vetoed legislation that would have imposed a “material prejudice” standard on insurers who deny coverage based on late notice. The bill would also have given claimants a right to bring a direct action against insurers. The bill, if signed, would have imposed dramatic change in New York insurance law.

The bill presented to Governor Spitzer would have made two significant changes in the existing law. First, it would have created a “material prejudice” standard with regard to late notice. In this regard, the bill provided that an insurer “shall not deny coverage for a claim based on the failure of an insured to give timely notice of claim unless [the insurer is] able to demonstrate that it has suffered material prejudice as a result of the delayed notice.” The governor noted that “there are some drafting issues with these provisions.” Of particular concern to the Governor was the burden of proof imposed under the bill. The Governor indicated that if the bill were modified to preclude a defense of late notice where there was no prejudice to the insurer, he would sign it.

Second, the bill sought to amend New York’s declaratory judgment statute by permitting a party who has interposed a claim against a policyholder to bring a declaratory judgment action against that party’s insurers. Governor Spitzer expressed concern that this provision would increase litigation and he urged that his concern be reviewed. Governor Spitzer stated: “this bill’s dual goals – streamlining litigation and prohibiting the denial of coverage for mere technicalities – are sound, and hopefully we can enact a new bill that accomplishes these important goals in a manner that protects the interests of claimants, policyholders and insurers alike.” The Governor’s staff and the Superintendent of Insurance will meet with the legislature and interested parties to further consider these issues.

Indications are that the legislation will be reintroduced in 2008.