In the recent case of Carter-Wallace, Inc. v. Admiral Insurance Co., the New Jersey Supreme Court examined the issue of how coverage should be allocated among excess insurers where underlying primary policies have not been exhausted throughout the entire coverage period. The Court held that an insured is not required to exhaust all primary insurance coverage throughout the entire coverage period (or "horizontal exhaustion") before looking to excess insurers for coverage. The Court instead determined that allocation among excess insurers requires calculation of the share of responsibility attributable to each year of the trigger period, followed by application of the primary (and any first-layer secondary) policy limits for each year to "vertically exhaust" the coverage for that year. The excess carrier would then be responsible for any amount allocable to that year that exceeds the primary (and first-layer excess, if applicable) policy limits in effect for that year.
In addition, the Supreme Court also found that the insurer bears the burden of proving that the contamination was expected or intended by the policy holder, and that jurors must be instructed to examine the "exceptional circumstances" outlined in the Supreme Court's Morton decision in order to determine whether the insured expected or intended the injury.
Carter-Wallace had contributed to the cleanup of the Lone Pine Landfill, at which it had disposed of hazardous wastes over a period of years. Following the cleanup, Carter-Wallace sued 20 insurance companies, seeking defense reimbursement and indemnity. All of the insurers except Commercial Union settled with Carter-Wallace, and the case between Commercial Union and Carter-Wallace went to trial. The jury found that because Carter-Wallace had not expected or intended to cause property damage at Lone Pine, Commercial Union's policies were triggered. However, in the second phase of trial, the court found that none of Carter-Wallace's damages came within Commercial Union's second-layer excess policies because Carter-Wallace had not first exhausted all primary and first-layer excess policies in effect throughout the coverage period. In other words, the Court required Carter-Wallace to horizontally exhaust all primary coverage within the coverage period before looking to any excess carrier for coverage.
Both parties appealed to the Appellate Division, which held that the trial court had erred in requiring horizontal exhaustion. However, the Appellate Division did not provide an allocation scheme and remanded the case to the trial court to hear more evidence. The Appellate Division affirmed the trial court's determination that the insurer had the burden of proving that Carter Wallace expected or intended the contamination.
The Supreme Court adopted the "vertical exhaustion" allocation scheme set forth in the District Court of New Jersey's decision in the Chemical Lehman Tank Lines v. Aetna Cas. & Sur. Co. case. This scheme requires the parties to calculate the total loss throughout the trigger period and determine the loss that is allocable to each year of that period. Within each year, the insured must first exhaust any primary coverage limit for that year, and in turn exhaust the first-level excess policy limit for that year. Only then can the insured look to the excess carrier for coverage. The Court found that this allocation preserves the risks that the parties transferred or retained in each year of exposure, and is consistent with the insurance contract language, because the excess policy for any given year will not be reached until the primary and any first-level excess policies for that year are exhausted.
The Supreme Court also affirmed the lower court's decision that the insurer bears the burden of proof that the insured expected or intended the contamination at Lone Pine. The Court's analysis concluded that the terms "unexpectedly and unintentionally" act as an exclusion to coverage for purposes of assigning the burden of proof in environmental coverage cases. Since the general rule is that the insurer bears the burden of proof that an exclusion precludes coverage, the insurer must then prove that the environmental damage was expected or intended. Further, the Court found that it is both impractical and unfair to require an insured to prove a negative fact, such as that the insured did not intend or expect environmental damage.
Last, the Court analyzed Commercial Union's argument that the trial court should have charged the jury with the exceptional circumstances standard set forth in the Morton decision, which provides that the jury can consider five "exceptional circumstances" in determining whether environmental damage is intended or expected. (These five factors are: 1) the duration of the discharges; 2) whether the discharges occurred intentionally, negligently or innocently; 3) the quality of the insured's knowledge concerning the harmful propensities of the pollutants; 4) whether regulatory authorities attempted to discourage or prevent the insured's conduct; and 5) the existence of subjective knowledge concerning the possibility or likelihood of the harm.) The Supreme Court found that although the trial court did not explicitly instruct the jury on the Morton factors, the jury instructions did provide sufficient guidance as to the appropriate legal standards for resolving the issue, and it emphasized that the jury could consider any circumstantial evidence presented in determining whether the insured expected or intended the damage. Accordingly, any failure of the court explicitly to instruct the jury on the Morton factors was harmless in light of the extensive instructions provided.
This decision provides both insureds and insurers with clear guidance for allocating excess policy coverage over a continuous trigger period, a common scenario in environmental contamination cases. The case also lessens an insured's load in proving its case by placing the burden of proving that the "expected or intended" exclusion applies on the insurer, and provides courts with broad guidelines for charging the jury in environmental coverage cases.
