On appeal from Superior Court of New Jersey, Law Division, Hudson County.
Gaulkin, Baime and Ashbey. The opinion of the court was delivered by Baime, J.A.D.
This appeal presents a question of first impression. We are called upon to interpret a clause contained in an insurance policy which requires indemnification by the insurer for damages caused by the insured's tortious acts resulting in "bodily injury" to others. At issue is whether the insurer's duty to defend is triggered by a complaint alleging acts of sexual harassment by the insured's employee resulting in the complainant's emotional distress and mental anguish. The trial judge determined that the psychological sequelae allegedly suffered by the complainant as the result of the employee's nonconsensual sexual acts did not constitute bodily injury. We disagree and reverse.
The facts are not in dispute. Defendant Insurance Company of North America (INA) issued a standard workers' compensation and employer's liability policy which required it to indemnify plaintiff NPS Corporation (NPS) for "all sums the insured shall become legally obligated to pay as damages because of bodily injury by accident or disease. . . ." The term "bodily
injury" is not expressly defined. However, the policy contains the following exclusionary language:
The contraction of disease is not an accident within the meaning of the word "accident" in the term "bodily injury by accident" and only such disease as results directly from a bodily injury by accident is included within the term "bodily injury by accident." The term "bodily injury by disease" includes only such disease as is not included within the term "bodily injury by accident."
Under the policy, an "assault and battery" is deemed a compensable accident unless committed by or at the direction of the insured. The policy further states that the insurer is obliged to defend in any proceeding instituted against the insured "alleging such injury and seeking damages on account thereof, even if such . . . suit is groundless, false or fraudulent. . . ."
During the policy period, Sarah H. Schaeffer, an executive secretary employed by NPS at its Oregon and Texas plants, filed a complaint in the Judicial District Court of Travis County, Texas in which she alleged that a co-employee, the plant manager, had committed repeated acts of sexual harassment by "offensively touch[ing]" her "rear end" and "breasts." Schaeffer alleged that NPS's senior management was aware of this offensive conduct, but took no curative measures. As a result of these instances, Schaeffer claimed that she suffered "serious emotional distress and disruption of her personal life." In her complaint, she sought compensatory and punitive damages.
Upon receipt of Schaeffer's complaint, NPS immediately notified INA of the pendency of the suit and requested it to defend the action in accordance with its obligation under the policy. However, INA declined on the basis that Schaeffer's assertion of emotional distress and mental anguish, if proved, would not fall within the risks covered by the policy. NPS ultimately retained an attorney in Texas and entered into a settlement without the participation, consent or approval of INA.
NPS thereafter instituted this action against INA claiming that the insurer had breached its duty to defend and indemnify under the policy. NPS sought compensatory damages consisting of the amounts expended in its defense in the Texas suit
and the sum paid Schaeffer by virtue of the settlement. In addition, NPS ...