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Diamond Shamrock Chemicals Co. v. Aetna Casualty & Surety Co.

Decided: April 6, 1992.

DIAMOND SHAMROCK CHEMICALS COMPANY, PLAINTIFF-APPELLANT,
v.
THE AETNA CASUALTY & SURETY COMPANY; THE LONDON MARKET INSURERS: ACCIDENT AND CASUALTY COMPANY OF WINTERTHUR; ALBA GENERAL INSURANCE COMPANY LTD.; ALLIANZ INTERNATIONAL INSURANCE COMPANY LTD.; ANDREW WEIR INSURANCE COMPANY LTD.; ANGLO-FRENCH INSURANCE COMPANY LTD.; ARGONAUT NORTHWEST INSURANCE COMPANY LTD.; ASSICURAZIONI GENERALI S.P.A. (U.K. BRANCH); AVIATION AND GENERAL INSURANCE COMPANY LTD.; BERMUDA FIRE & MARINE INSURANCE COMPANY LTD.; BISHOPSGATE INSURANCE LIMITED; BRITISH AVIATION INSURANCE COMPANY LTD.; BRITISH NATIONAL INSURANCE LTD.; BRITISH NATIONAL INSURANCE COMPANY LTD. AS SUCCESSOR TO NORTH ATLANTIC INSURANCE COMPANY LTD.; BRITTANY INSURANCE COMPANY LTD.; BRYANSTON INSURANCE COMPANY; CAMOMILE UNDER-WRITING AGENCIES LTD. ON BEHALF OF COMPAGNIE D'ASSURANCES MARITIMES ARIENNES ET TERRESTRES; CITY GENERAL INSURANCE COMPANY LTD.; CNA REINSURANCE OF LONDON LTD.; COMPAGNIE EUROPEENE D'ASSURANCES INDUSTRIELLES S.A.; COMPANHIA DE SEGUROS IMPERIO; COMPANIA AGRICOLA DE SEGUROS, S.A.; DART INSURANCE COMPANY LTD.; THE DOMINION INSURANCE COMPANY LTD.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF THE ANGLO-SAXON INSURANCE ASSOCIATION LTD.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF THE BRITISH MERCHANTS INSURANCE COMPANY LTD.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF LONDON AND EDINBURGH INSURANCE COMPANY LTD.; DOMINION INSURANCE CO. LTD. ON BEHALF OF THE ROYAL SCOTTISH INSURANCE CO.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF THE TRENT INSURANCE COMPANY LTD.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF THE VANGUARD INSURANCE CO. LTD.; DOMINION INSURANCE COMPANY LTD. ON BEHALF OF THE WORLD MARINE AND GENERAL INSURANCE CORPORATION; DRAKE INSURANCE COMPANY LTD.; ECONOMIC INSURANCE COMPANY LTD.; THE EDINBURGH ASSURANCE CO. NUMBER 2 ACCOUNT; EL PASO INSURANCE COMPANY LTD.; ENGLISH AND AMERICAN INSURANCE COMPANY LTD.; EXCESS INSURANCE COMPANY LTD.; FIDELIDADE GRUPO SEGURADOR; FOLKSAM INTERNATIONAL INSURANCE COMPANY (UK) LTD.; HEDDINGTON INSURANCE COMPANY (UK) LTD.; HELVETIA ACCIDENT SWISS INSURANCE COMPANY; HIGHLANDS UNDERWRITING AGENCY ON BEHALF OF HIGHLANDS INSURANCE CO.; HIGHLANDS UNDERWRITING AGENCY ON BEHALF OF AMERICAN HOME ASSURANCE CO.; HIGHLANDS UNDERWRITING AGENCY ON BEHALF OF LONDON AND EDINBURGH INSURANCE CO.; INSCO LTD.; LA ROYAL BELGE GROUP; LATINO AMERICANA DE REASUGURSOS S.A.; LEXINGTON INSURANCE COMPANY LTD.; LONDON & EDINBURGH GENERAL INSURANCE COMPANY LTD.; LONDON AND OVERSEAS COMPANY PLC ('A' ACCOUNT); LONDON AND OVERSEAS CO. PLC ('A' ACCOUNT) AS SUCCESSOR TO HULL UNDERWRITERS ASSOCIATION; LOUISVILLE INSURANCE COMPANY LTD.; LUDGATE INSURANCE COMPANY LTD.; MINSTER INSURANCE COMPANY LTD.; MUTUAL REINSURANCE COMPANY LTD.; NATIONAL CASUALTY COMPANY; NATIONAL CASUALTY COMPANY OF AMERICA LTD.; NEW INDIA INSURANCE COMPANY LTD.; ORION INSURANCE COMPANY LTD.; PRUDENTIAL ASSURANCE COMPANY LTD.; RIVER THAMES INSURANCE COMPANY LTD.; SLATER WALKER INSURANCE COMPANY LTD.; SOUTHERN INSURANCE COMPANY LTD. ; SOVEREIGN MARINE AND GENERAL INSURANCE COMPANY LTD.; SPHERE INSURANCE COMPANY LTD.; STOREBRAND INSURANCE COMPANY (UK) LTD.; STRONGHOLD INSURANCE COMPANY LTD.; SUMITOMO MARINE & FIRE INSURANCE COMPANY LTD.; SUMITOMO MARINE & FIRE INSURANCE COMPANY (EUROPE) LTD.; ST. KATHERINE INSURANCE COMPANY LTD.; SWISS NATIONAL INSURANCE CO. LTD.; SWISS UNION GENERAL INSURANCE CO.; THE TAISO MARINE & FIRE INSURANCE COMPANY (UK) LTD.; TERRA NOVA INSURANCE COMPANY LTD.; THREADNEEDLE INSURANCE COMPANY LTD.; THE TOKIO MARINE & FIRE INSURANCE (UK) LTD.; TUREGUM INSURANCE COMPANY LTD.; UNITED STANDARD INSURANCE COMPANY LTD.; UNIVERSAL REINSURANCE CORPORATION OF NEW JERSEY AS SUCCESSOR TO BELLEFONTE INSURANCE COMPANY; WALBROOK INSURANCE COMPANY LTD.; WINTERTHUR SWISS INSURANCE COMPANY, WORLD AUXILIARY INSURANCE CORPORATION LTD.; YASUDA FIRE & MARINE INSURANCE COMPANY (UK) LTD.; AIU INSURANCE COMPANY; AMERICAN CENTENNIAL INSURANCE COMPANY; AMERICAN EXCESS INSURANCE COMPANY; AMERICAN HOME ASSURANCE COMPANY; AMERICAN RE-INSURANCE COMPANY; CALIFORNIA UNION INSURANCE COMPANY; COMMERCIAL UNION INSURANCE COMPANY (SUCCESSOR TO EMPLOYERS LIABILITY ASSURANCE CORPORATION LTD.); EMPLOYERS MUTUAL CASUALTY COMPANY; EVANSTON INSURANCE COMPANY; FIREMAN'S FUND INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY; GENERAL REINSURANCE CORPORATION; GIBRALTAR CASUALTY COMPANY; GRANITE STATE INSURANCE COMPANY; THE HOME INSURANCE COMPANY; INSURANCE COMPANY OF NORTH AMERICA (SUCCESSOR TO INDEMNITY INSURANCE COMPANY OF NORTH AMERICA); LEXINGTON INSURANCE COMPANY, LTD.; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.; NORTH STAR REINSURANCE CORPORATION; PACIFIC EMPLOYERS INSURANCE COMPANY; PRUDENTIAL REINSURANCE COMPANY; RANGER INSURANCE COMPANY; ROYAL INDEMNITY COMPANY; UNDERWRITERS AT LLOYD'S LONDON, DEFENDANTS-RESPONDENTS, CROSS-APPELLANTS, AND ARROW LIFE INSURANCE COMPANY (SUCCESSOR TO SLATER, WALKER INSURANCE COMPANY); ASSICURAZIONI GENERALI; ASSICURAZIONI GENERALI S.P.A. (U.K. BRANCH); ASSICURAZIONI GENERALI DI TRIESTE E VENEZIA S.P.A.; ATLANTA INTERNATIONAL INSURANCE COMPANY; BELLEFONTE REINSURANCE COMPANY LIMITED (SUCCESSOR TO BELLEFONTE INSURANCE COMPANY); BELLEFONTE INSURANCE COMPANY (U.K. BRANCH); BRITISH MERCHANTS INSURANCE COMPANY LTD.; BRYANSTON INSURANCE COMPANY LTD.; COMPAGNIE D'ASSURANCES MARITIMES ARIENNES ET TERRESTRES; THE CONTINENTAL INSURANCE COMPANY; DART AND KRAFT INSURANCE COMPANY LIMITED; THE FIDELITY AND CASUALTY COMPANY OF NEW YORK; FRIENDS PROVIDENT LIFE OFFICE (SUCCESSOR TO SOUTHERN INSURANCE COMPANY); GREAT SOUTHWEST FIRE INSURANCE COMPANY; HIGHLANDS INSURANCE COMPANY; IMPERIO COMPANHIA DE SEGUROS; THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA; LA ROYALE BELGE I.R. S.A. D'ASSURANCES; LATINO AMERICANO DE REASUGUROS; LONDON GUARANTEE AND ACCIDENT COMPANY OF NEW YORK; NATIONAL CASUALTY COMPANY OF AMERICA LTD.; NORTH ATLANTIC INSURANCE COMPANY LIMITED; PACIFIC AND GENERAL INSURANCE COMPANY LTD.; REPUBLIC INSURANCE COMPANY; ROYAL SCOTTISH INSURANCE COMPANY LTD.; SECURITY INSURANCE COMPANY OF HARTFORD (SUCCESSOR TO NEW AMSTERDAM CASUALTY COMPANY); SOVEREIGN MARINE & GENERAL INSURANCE COMPANY LTD. 'C' ACCOUNT; SOVEREIGN MARINE & GENERAL INSURANCE COMPANY LTD. H.D.N. ACCOUNT; ST. KATHERINE INSURANCE CO. PLC; ST. KATHERINE INSURANCE COMPANY LTD. ; ST. KATHERINE INSURANCE CO. LTD. (X ACCOUNT); ST. PAUL MERCURY INSURANCE COMPANY; SUMITOMO MARINE AND FIRE INSURANCE COMPANY LTD. (TOKYO); SWISS NATIONAL INSURANCE COMPANY LIMITED (BASLE); SWISS UNION GENERAL INSURANCE CO.; TRANSIT CASUALTY COMPANY; TRENT INSURANCE COMPANY LIMITED; TUREGUM INSURANCE COMPANY; TWIN CITY FIRE INSURANCE COMPANY; UNITED STATES FIRE INSURANCE COMPANY; VANGUARD INSURANCE COMPANY LIMITED, DEFENDANTS



On appeal from Superior Court of New Jersey, Chancery Division, Morris County.

Antell, Long and Baime. The opinion of the court was delivered by Baime, J.A.D.

Baime

The opinion of the court was delivered by

BAIME, J.A.D.

This appeal and cross-appeal present a myriad of complex questions concerning the construction of a variety of insuring agreements contained in a series of comprehensive general liability insurance policies issued successively over a period of approximately thirty years. Also at issue is the applicability and interplay of standard form "occurrence-based" language and the war risk exclusion to claims arising out of injuries sustained by military personnel who were exposed to Agent Orange while in Vietnam.

Two separate sets of claims are involved in this litigation. The first relates to claims for environmental pollution caused by the release of dioxins and other hazardous chemicals from plaintiff Diamond Shamrock Chemical Company's (Diamond) plant in Newark, New Jersey. Over the years, these hazardous substances migrated to surrounding areas. In response to actions taken by the New Jersey Department of Environmental Protection (DEP), Diamond has agreed to engage in remedial measures designed to eradicate pollution at the plant and nearby properties. Wholly apart from these remediation costs, Diamond is confronted with extensive claims for property damage and bodily injury by residents of the surrounding neighborhoods. A second set of claims emanates from Diamond's

participation in the settlement of a class action brought by Vietnam veterans who were exposed to Agent Orange. Diamond was one of the major manufacturers of this herbicide and contributed $23,339,417.36 toward the settlement.

Following a disclaimer, Diamond instituted suit against its primary carrier, Aetna Casualty & Surety Company, and 123 excess providers, seeking to compel them to indemnify it for both sets of losses. After a protracted non-jury trial, the Chancery Division determined that the carriers were not obliged to indemnify Diamond for the claims involving environmental damage and bodily injury caused by the release of dioxins and other hazardous substances. The Chancery Division found that the discharge of these substances did not constitute an "accident" or "occurrence" within the meaning of the insuring agreements and, in some instances, fell within the purview of the pollution exclusion. With respect to the Agent Orange claims, the court determined that the injuries resulted from a single, continuous occurrence that took place in the United States and that the settlement was not excluded by the war risk exception or covered by the foreign risk providers.

While we disagree with certain aspects of the Chancery Division's opinion as to the dioxin claim, we are satisfied that the correct result was reached. We find, however, that the war risk exclusion contained in several of the policies issued by the excess providers barred recovery of Diamond's Agent Orange loss. In that respect, we conclude that the exposure of individuals to Agent Orange and the injuries sustained were the result of a hazard or peril incidental to the military engagement of the United States government in Vietnam and were made more likely and probable by the demands of war. With respect to the excess providers whose policies did not contain a war exclusion, we remand for further proceedings to determine whether their obligation should be reduced by amounts that would have been available under foreign risk policies but for Diamond's late notice. We also modify the award of prejudgment interest. Accordingly, the judgment is affirmed in part and reversed in

part, and the matter is remanded to the Chancery Division for further proceedings.

I.

The facts concerning the environmental damage claim differ from those relating to the Agent Orange settlement. Despite some common elements, these claims raise different issues. We thus bifurcate our recital of the facts. We first address the facts surrounding the environmental pollution claim. We then turn to those relating to the Agent Orange settlement.

A.

The salient facts are largely undisputed. Diamond's chemical manufacturing plant was located at 80 Lister Avenue in the Ironbound section of Newark and consisted of approximately 3.4 acres bounded on the north by the Passaic River, on the east by the former Sergeant Chemical Company (which was subsequently purchased by Diamond), at the southwest corner by the Duralak Company property, and on the south and west by the Sherwin-Williams property. The entire area is located in a flood zone.

The property has long been the site of industrial operations. The record discloses that the first manufacturing plant was constructed on the property shortly after the Conclusion of the Civil War. The property was subsequently owned and developed by the Lister Agricultural Chemical Company in the early 1900's, and in 1940 was acquired by Kolker Chemical Works, Inc. (Kolker). Agricultural chemical manufacturing was in process by the mid-1940's. The chemicals manufactured or processed at the plant included dichlorodiphenyl trichloroethane (DDT) and the phenoxy herbicides. DDT production began before the end of World War II. Production of phenoxy herbicides commenced in 1948. Although other chemicals were manufactured at the site, DDT and the phenoxy herbicides were the principal products made by Kolker. In March 1951, Kolker

was acquired by Diamond Alkali Company, which subsequently became known as Diamond Shamrock Chemical Company.

Although Diamond ceased manufacturing some of the types of chemicals made by Kolker, it continued to produce phenoxy herbicides and DDT until the late 1950's. At that point, DDT production ceased, leaving the phenoxy herbicides as the only products Diamond manufactured at the Lister Avenue plant. Two of the intermediates (products which are converted into another 0 end product) of phenoxy herbicides are 2,4-dichlorophe-noxyacetic acid (2,4-D) and 2,4,5-trichlorophenoxyacetic acid (2,4,5-T). Dioxin is an impurity formed as a by-product in the 2,4,5-T process. Agent Orange consists of a mixture of butyl 2,4-D ester and butyl 2,4,5-T ester.

Almost from the day production of the phenoxy herbicides commenced, Diamond's workers experienced a skin disease called chloracne. Chloracne was characterized by Diamond's corporate medical official, Dr. William York, as a "serious . . . very disfiguring social disability." It was clear that by June 1955, Diamond, though not certain of the specific cause of the chloracne, was aware that something in its chemical processing to which its workers were exposed resulted in this inflammation. Diamond was advised to reduce air contamination, and to insist on both personal and plant cleanliness. Specific recommendations for reducing the level of worker exposure to the toxic substance included the covering of conveyor belts, installing spouts through which liquid or powder went into cans or bags with suction around them to prevent spillage, channeling the chemical liquid overflow to pipes, not open gutters, and using 1 the least toxic solvents for cleaning. As testimony from plant employees at trial graphically demonstrated, however, these suggestions were either ignored or poorly implemented.

Although Diamond's former plant managers maintained that dioxin was not identified as the toxic substance causing the chloracne until 1965, this possibility was clearly foreshadowed by information imparted from outside sources. For example,

plant manager John Burton was informed on September 30, 1959, that a German chemical manufacturer had discovered dioxin was the causative agent. At the same time, Burton was told that decreasing the reaction temperature would reduce the production of dioxin in the TCP. This information was ignored, however, because reduction of the temperature in the autoclave where TCP was produced would diminish the conversion rate, thereby decreasing production efficiency. In sum, the record reveals that at a relatively early date, Diamond became aware of the dangerous propensities of dioxins and chose to disregard methods designed to diminish their production.

A number of former plant employees testified concerning Diamond's waste disposal policy which essentially amounted to 2 "dumping everything" into the Passaic River. We digress to note that neither Federal nor State environmental protection agencies have directed Diamond to remediate the damage to the river. As Diamond correctly points out in its brief, the claims which are the subject of this litigation do not encompass losses resulting from the discharge of substances into the Passaic River. We nevertheless recount this evidence because it bears upon the state of Diamond's knowledge and intent regarding the environmental damage caused by its operations. At least to some extent, this evidence disclosed a less than benign indifference to the consequences of Diamond's operations that directly bears upon whether other discharges and their effects were accidental or inadvertent. See Evid.R. 46.

To summarize this testimony briefly, it was clear that prior to 1956, all waste products from chemical processes were either directly discharged or ultimately released into the Passaic River. However, in 1956 an industrial sewer line was installed connecting the plant to the Passaic Valley Sewerage Commission Lister Avenue Line. Nevertheless, the testimony is persuasive that not all of the effluent from 3 the plant was directed to that sewer line. DDT was manufactured until about 1959. So much DDT waste water was directed into the river that a mid-river "mountain" of DDT was created. Employees were

directed to surreptitiously wade into the river at low tide and "chop up" the deposits so that they would not be seen by passing boats.

In 1960, a reaction in a TCP autoclave whose temperature was "out of control" caused an explosion which destroyed the larger of the two process buildings on Diamond's Newark property. The building was reconstructed in 1961 but thereafter production was limited to phenoxy herbicides. The old but undamaged chemical manufacturing building was the site of 2,4-D and 2,4,5-T production along with their esters and amines. Former Diamond employees provided graphic descriptions of the company's heedless indifference to the environmental damage which resulted from its manufacturing operations.

According to one of Diamond's employees, Chester Myko, the floor in the old building was the "dirtiest place in the entire plant." The 2,4,5-T and 2,4-D (Agent Orange ingredients) were "always on the floor." These substances solidified into a slippery, oily film which 4 prevented normal walking. The witness related that "every other week or so" the floor was washed down with sulfuric acid with the waste water flowing into trenches which led outside the building into the river. Walter Blair testified that even after the damaged plant was rebuilt, waste in the form of hydrochloric acid was still being discharged into the river. Although a trench and waste water pit were constructed, they often became blocked, causing the effluent to "back up" and migrate into the river. Blair, too, corroborated Myko's testimony concerning the 2,4-D and 2,4,5-T found on the floor. These substances were washed off the floor and the waste water was allowed to flow outside the building and eventually into the river.

Arthur Scureman, another employee who worked in the plant under both Kolker and Diamond management until 1969, verified the "sloppy practices" tolerated by Diamond's officers. He confirmed that there were numerous leaks in the autoclave room where the TCP was made. There were leaks in the pipes

that ran between the two buildings, and hazardous substances escaped, eventually meandering toward the river. Pipes with caustic material also ran between the 5 two buildings. Often the material would freeze. In order to free the substances, employees would break and then steam clean the pipes. The material steamed from the pipes would either be released onto the ground or discharged into the river. Pipelines along the 2,4,5-T unit constantly became clogged with phenol which would seep into the ground because the trenches designed to carry the substance away from the building had been destroyed by acid. Scureman was also responsible for packaging drums of Agent Orange that were ultimately shipped to Vietnam. He claimed that in the packaging process the material constantly spilled onto the ground.

Aldo Andreini, employed by Diamond between 1959 and 1969, explained that he was a formulator who was required to clean the 10,000 gallon storage tanks located on the plant site. The storage tanks contained amine, butyl-T 2,4,5-T and 2,4-D. The witness recounted that he would clean the tanks by shoveling out the sediment once or twice each month. The procedure was to shovel the sediment to someone outside who was holding a drum and then the filled drums were to be carted away. In the process, both liquid and solid materials fell off the drum 6 onto the ground where they would be washed off. Andreini was also charged with loading railroad cars with Diamond's product. When the insides of these rail cars were washed down with water, the effluent would seep onto the tracks and into the ground.

In addition to the spills and run-off which marked the 2,4,5-T and TCP processes, the vapors which were produced by the chemical reactions were vented into the atmosphere on a daily basis. In 1963, some of this venting was alleviated when the 2,4-D acid process was rehabilitated. The roof of that process building was raised to permit installation of new ventilating ducts which carried the process fumes to a caustic scrubber. In 1967, Diamond constructed a carbon tower through which all

TCP made at the plant was processed. The carbon tower was designed to remove the dioxin to at or below one part per million. Nevertheless, despite installation of the carbon absorption tower there was still no decrease in chloracne among Diamond's workers.

The last TCP production occurred in June 1969. The plant was closed in August 1969 and remained idle until it was purchased by Chemicaland Corporation in March 1971. Chemicaland made benzyl 7 alcohol which it sold through its affiliate, Cloray NJ Corporation. No subsequent purchaser manufactured TCP or any dioxin-containing product on the site.

In 1982 the United States Environmental Protection Agency (EPA) initiated a National Dioxin Strategy targeting facilities that produced 2,4,5-T and its pesticide derivatives for soil sampling and testing for dioxin. A list of contaminated sites was issued with the Lister Avenue property prominently designated. After the DEP was informed that dioxin had been found in the soil of Diamond's Lister Avenue plant, Governor Kean issued an executive order authorizing that agency to engage in emergency measures "necessary to fully and adequately protect the health, safety and welfare of New Jersey citizens." Pursuant to that direction, the DEP issued an administrative order on June 13, 1983, requiring Diamond to implement certain partial site stabilization measures designed to prevent further off-site migration of dioxin.

Two administrative consent orders were entered into between Diamond and the DEP. In March 1984, the first administrative consent order required Diamond to (1) perform a site evaluation to determine the extent and scope 8 of the contamination on its property, (2) prepare a feasibility study to consider various alternatives for remediation, (3) post a letter of credit in the amount of $12,000,000 to guarantee its performance of its responsibilities under the order, and (4) establish a standby trust so that the DEP could draw on those funds to retain its own contractors in the event Diamond failed to perform the

necessary measures. On December 20, 1984, a second administrative consent order was entered into between the DEP and Diamond, supplementing the first. This consent order pertained to off-site remediation. It required Diamond to (1) prepare a study on the remediation of the contamination of surrounding sites, (2) identify the scope and extent of the contamination, and (3) develop a feasibility study concerning the appropriate ultimate remediation of the pollution. The DEP directed Diamond to secure a $4,000,000 letter of credit to insure performance of its obligations.

Deputy Commissioner Michael Catania explained that the studies concerning the scope and extent of contamination required testing to determine if "action levels" of dioxin were present on the surrounding properties and, of 9 course, on the Lister Avenue site itself. An "action level" is the standard utilized by the DEP to determine when remedial action is necessary. In layperson's terms, it is a threshold level of contamination above which some remediation is mandatory. The DEP's action level for dioxin used at the Lister Avenue site was one part per billion -- a standard established by the Center for Disease Control in Atlanta. Testing of the surrounding areas adjacent to Lister Avenue revealed action level amounts of dioxin in an eight- to ten- square-block area. Included in that area were residential properties as well as other industrial and commercial sites. Catania concluded that the dioxin had migrated from the site by natural modes (river flooding and surface water runoff) as well as by human means of transportation (the explosion of the herbicide process building, a local iron and metal works purchase of scrap metal from Diamond which had been stored on Diamond's property with high levels of dioxin contamination, and the workers' own shoes and car tires which moved from the contaminated site onto neighboring properties).

Anthony Wolfskill, Diamond's expert on the occurrence and migration 0 of dioxin on the site and neighboring properties essentially agreed with Catania's opinion concerning the causes

of the contamination. He concluded that the highest concentration of dioxin contamination in the soil at the Lister Avenue plant correlated with the locations where the TCP or 2,4,5-T products had been manufactured, stored or shipped. In his opinion, the contamination of the plant site occurred as a result of numerous small leaks and spills. The likely cause of dioxin contamination of the soil was from plant operations where the dioxin fell to the floor and, through cracks and fissures, entered the soil. From his testing, he determined that the highest reading of dioxin occurred next to the sewer line. This finding was suggestive of the thesis that the primary entry of dioxin into the soil was closely associated with either the sewer, the sump pumps, or the floor slabs that were in the process building. In the area of the processing plant where there was no concrete slab, there was dioxin leakage directly into the ground. Despite these findings, Wolfskill maintained that the Lister Avenue plant was operated in accordance with standard or typical industrial practices 1 with respect to discharges onto the soil, groundwater, surface water and the air.

In January 1985, the EPA and Diamond signed a voluntary cost reimbursement agreement pursuant to which Diamond paid the EPA approximately $2,000,000 representing expenses incurred with respect to the site. As we noted earlier, the amount of Diamond's ultimate liability for environmental pollution has not yet been determined.

During Diamond's ownership of the Lister Avenue plant (1951 to 1971) and beyond, at least through 1984, it was covered by a series of primary and excess insurance policies, which grew in number and coverage amount as the years passed. Throughout this period, Aetna was the primary insurer. With the exception of a brief period (between 1971 and 1975), London Market insurers provided excess coverage. As we will note later in our opinion, Diamond also had foreign liability insurance which was applicable to injuries which took place outside of the United States. We mention at this point that all claims filed against the foreign liability insurers were dismissed on the

ground that Diamond was guilty of late notice under New York law. Although no appeal has been taken from that 2 decision, the foreign risk policies are nonetheless relevant because they provided a layer of coverage which impacts upon the excess carriers' liability. We observe at this point that, as the years passed, the "layers" of excess insurance grew as did the number of excess providers who insured the risk.

Diamond purchased its insurance through the brokerage firm of Alexander & Alexander, one of the largest insurance brokers in the world. Alexander & Alexander had its primary office in New York City. Diamond created an internal insurance department in 1953 and installed Albert Ingley as its first manager. He remained in that position until 1957 when he was succeeded by Donald Purdy, who was in turn succeeded by Robert Stauffer in 1982. Only Ingley and Stauffer testified at trial. Conrad Giles, an Alexander employee, was responsible for Diamond's account from the mid-1950's until 1973. Giles was succeeded by William Green who remained on Diamond's account until Diamond "switched" brokerage firms in 1982. While the witnesses and counsel spoke in terms of "negotiating" the language of the policies, Giles and Stauffer explained that this was a misnomer. Existing policies were used 3 to "negotiate terms" but there were "no real negotiations." Giles explained that certain clauses were standard in the policies and would not be changed by the insurers. Exclusions, for example, were not subject to negotiation. While enlargements of coverage could be negotiated as could amounts of liability, the carriers refused to discuss exclusions. Furthermore, there was no drafting of policy language. Policies were a "cut and paste operation," using provisions from existing standard policies. Policies which were "cut and pasted together" were denominated "manuscript policies," as opposed to printed form policies. Nevertheless, the transcript plainly established that true "negotiations" were severely limited.

There was even less negotiation when it came to obtaining excess insurance from the London Market. The London Market

is a collection of insurers that operates out of London, England. Business from North America is placed on the London Market only through a specific brokerage network, of which Alexander & Alexander was not a part. Lloyds of London is a separate group of insurers who deals with its own approved brokers and obtains business from the United States through 4 them. Lloyds is a collection of syndicates and only a Lloyds' broker is permitted to transact business. Insurance was placed with Lloyds, and presumably the London Market as well, through a "leader," an individual who would indicate policy and premium terms, and conditions on the risk. Once the Lloyds' broker selected a "leader," the broker would give the leader a slip "which contained details about the risk, period of the policy, limits of liability, and other conditions the insured might want in the policy." The leader amended the slip to reflect unacceptable terms and conditions, and if the potential insured agreed, the policy was issued. To the extent there were negotiations in this process, they took place between the Lloyds' broker and the underwriter.

Based upon these facts, the Chancery Division determined that the environmental damage claims were not covered. In reaching this Conclusion, the court distinguished between the insuring agreements contained in Aetna's policies over the course of the thirty year period. The policies issued between 1951 and 1960 were "accident-based." Coverage was triggered by an "accident," which the court defined as a "discrete fortuitous 5 event which happens within a short time at a specific time and place." The court emphasized that the contamination of Diamond's plant and the surrounding area was the result of "a continuous process of discharging and spilling chemicals . . . which gradually produced action levels of a number of priority pollutants." Because "[t]his gradual degradation of the environment (along with possible injury to persons) [was] not attributable to any definite event," the court found that the loss was "not 'caused by accident.'"

The policies in effect between 1960 and 1970 were "occurrence-based." An "occurrence" was defined in the policies as an "accident" or "continuous or repeated exposure to conditions" which results in injury "neither expected nor intended from the standpoint of the insured." In that context, the court found that Diamond's "pollution conduct was fully intentional" and did not constitute an "occurrence" within the meaning of the policy language. The policies issued between 1971 and 1985 were "occurrence-based," but also contained pollution exclusions. Excepted from the exclusions were discharges which were "sudden and accidental." As an additional predicate to its Conclusion 6 that Diamond's losses were not the result of an occurrence, the court further found that the pollution exclusion was applicable. In construing the exclusion, the Chancery Division determined that Diamond was a "sophisticated and knowledgeable insured" and fully understood that gradual contamination was excepted from coverage.

B.

We now describe the facts relating to the Agent Orange claim. "Agent Orange" is a code name developed and used by the United States government to identify a certain kind of phenoxy herbicide. It was used as part of military operations in Vietnam. It was employed to defoliate Vietnamese jungle trails to deny enemy forces the benefit of concealment along transportation and power lines and near friendly base areas. It was also used to destroy enemy camps and food supplies. See In re Agent Orange Product Liability Litigation, 818 F. 2d 187, 193 (2d Cir.1987), cert. denied, 487 U.S. 1234, 108 S. Ct. 2898, 101 L. Ed. 2d 932 (1988).

Defoliant operations began on a limited scale in Vietnam in late 1961. In re Agent Orange Product Liability Litigation, 597 F. Supp. 740, 775 (E.D.N.Y.1984), 7 aff'd, 818 F. 2d 145 (2d Cir.1987), cert. denied, 484 U.S. 1004, 108 S. Ct. 695, 98 L. Ed. 2d 648 (1988). The Air Force expanded the defoliation program in

January 1962 under the code name "Project Ranch Hand." In the beginning, aerial spraying took place near Saigon in order to clear the thick jungle canopy from around the roads, power lines and other lines of communications to lessen the potential of ambush. There was also some ground, hand spraying around gun emplacements to reduce surprise attacks and to maintain open lines of fire. In late 1962, approval was given for the offensive use of herbicides to "destroy planted fields and crops suspected of being used by the Viet Cong." Ibid.

Agent Orange was but one of six different types of phenoxy herbicides used in the defoliation process. Id. at 775-76. After 1964, however, Agent Orange was one of the most widely used of the herbicides because it proved to be an effective defoliant when applied in heavy concentrations on a wide variety of woody and broad leaf herbaceous plants. Id. at 776. The herbicides were applied 8 in Vietnam at the rate of three gallons of herbicide per acre. This can be compared to the domestic use of 2,4-D and 2,4,5-T herbicides which were applied at a rate of only one gallon per acre. Ibid. Even higher concentrations were sometimes dropped on small areas when aircraft malfunctioned or when it was necessary to move quickly to escape enemy fire. Ibid.

Herbicide spraying in South Vietnam reached its peak in 1967. Approximately 1.7 million acres were sprayed, largely for defoliation purposes. Ibid. Increasing controversy arose over the use of herbicides in Vietnam following a report which indicated that 2,4,5-T caused malformed offspring and stillbirth in mice when administered in high doses to the mothers. Ibid. By April 1970, domestic use of herbicides containing 2,4,5-T was suspended. At the same time the Department of Defense suspended military use of 2,4,5-T, including Agent Orange, pending further evaluation. Ibid. In January 1971 the last Ranch Hand mission took place. Id. at 777.

In total, between 17 and 19 million gallons of herbicides, including Agent Orange, were sprayed in Vietnam between

January 1965 and February 9 1971. Between eight and ten percent of South Vietnam's total land area was sprayed. Ibid.

The precursor to this litigation was a lawsuit filed in July 1978 by a Vietnam veteran in the Supreme Court of New York County. Named as defendants were seven chemical companies, including Diamond. The case was removed to the United States District Court for the Eastern District of New York. Ultimately, the case was consolidated with hundreds of similar suits and certified as a class action. In re Agent Orange Product Liability Litigation, 818 F. 2d at 152-53. The District Court Judge defined the class as consisting of "those persons who were in the United States, New Zealand or Australia Armed Forces between 1961 to 1972 who were injured while in or near Vietnam by exposure to Agent Orange or other phenoxy herbicides . . . . The class also includes spouses, parents and children of the veterans born before January 1, 1984, directly or derivatively injured as a result of the exposure." Id. at 154 (quoting In re "Agent Orange" Product Liability Litigation, 100 F.R.D. 718, 729 (E.D.N.Y.1983)). Trial of the class action was scheduled for May 7, 1984. In April, however, the District Court appointed three special masters to assist in negotiations concerning settlement of the class action. On the day trial was to have commenced, the class representatives and the chemical companies, including Diamond, agreed to settle the claims for $180,000,000. Id. at 155. The Judge subsequently conducted extensive hearings on the fairness of the proposed settlement in New York, Atlanta, Houston, Chicago and San Francisco. Ibid. He approved the settlement subject to hearings on counsel fees and preliminary consideration of plans for distribution of the settlement proceeds. In re Agent Orange Product Liability Litigation, 597 F. Supp. at 862. The Court of Appeals subsequently affirmed that approval. In re Agent Orange Product Liability Litigation, 818 F. 2d at 145.

Diamond's share of that $180 million settlement was $21,546,972.85 in principal and $1,792,444.51 in interest. A check in the amount of $23,339,417.36 was forwarded to the Clerk of the

United States District Court for the Eastern District of New York to be deposited in the Agent Orange settlement fund on January 14, 1985.

There is no question Aetna was aware that Diamond intended to participate in the settlement of this class action. On May 4, 1984, Aetna sent a letter to Diamond indicating its awareness that settlement negotiations were being conducted. Aetna noted that, while it reserved its rights on coverage, it would not contest the amount of the settlement. However, Aetna maintained that it was not possible to determine if it was responsible for the settlement amount, because it lacked information as to who was injured, what the injuries were or when they occurred. Aetna considered this information vital in order to determine the number of "occurrences" and the corresponding limits of liability under the respective policies.

Nevertheless, Aetna decided to "take a pragmatic approach" to the problem. Although it would have been easier to deny coverage because so many coverage-determination elements were missing, Aetna considered this course irresponsible in light of the political and social ramifications that would follow. Consequently, Aetna offered Diamond $10,800,000. It arrived at the amount by aggregating the policy limits for all of the covered years between 1966 and 1969. Those dates were chosen because Aetna had determined that the major use of Agent Orange occurred in this period. So too, the highest troop concentration in Vietnam occurred in 1966 and continued on through the early 1970's, until there was a withdrawal of all troops. Using those dates Aetna concluded that "the fairest thing to do" would be to trigger those policies, on a compromised basis, starting with the 1966 policy through 1973 when the final withdrawal occurred. Aggregating the policy limits during that period resulted in a $10,800,000 figure which was "net of the deductibles." Diamond continued to demand full indemnification for its entire settlement contribution.

The question of notice to the excess insurers and foreign risk carriers concerning the settlement is less clear. Suffice it to say, Diamond advised certain of its excess insurers that seven Agent Orange defendants were about to settle the class action for a total sum of $180,000,000. However, Diamond's risk manager conceded that he did not apprise the carriers of the amount of its contribution to the settlement.

The Chancery Division determined that the Vietnam veterans' class action constituted a products liability claim which was covered under the primary and excess policies. Applying New York law, the court found that all of the carriers had adequate notice of the class action and the opportunity to defend. In addition, the court decided that the war risk exclusion was not applicable because the injuries sustained by military personnel did not arise from actual hostile actions. The remaining problems involved allocating coverage to particular policies.

All of the potentially implicated policies provided coverage on an "occurrence" basis. Difficult questions were raised concerning the manner of defining what event or complex of events constituted the "occurrence." Ancillary issues pertained to the timing of the "occurrence," the number of "occurrences," and the place in which they happened. The court rejected the thesis that there was an "occurrence," with a corresponding deductible, each time a soldier was exposed to Agent Orange. In a similar vein, the Judge found no merit in the carriers' claim that there was an "occurrence" for each "batch" of Agent Orange shipped to Vietnam. The court observed that under either theory the stacking or aggregating of deductibles would result in no recovery or a negligible one. The court stressed that, apart from the evident unfairness in reading the policy language to maximize the number of occurrences and corresponding deductibles, the carriers' argument did not comport with the reality of the situation. According to the court, the overriding and pivotal fact was that Diamond's liability was the result of its defective design of the herbicide. Unlike a manufacturing defect, where the product is unsafe because it deviates from a

standard plan, Agent Orange was found to be unsuitable because, as designed, it was unreasonably dangerous. Applying this analytical framework, the court found that the "occurrence," the event that triggered liability, took place when the product was delivered to the military. The Judge thus held that the delivery of Agent Orange in the United States constituted the "occurrence." Moreover, the court found that the entire series of deliveries constituted a single, continuous occurrence. Although the injuries to individual servicemen in Vietnam resulted in the loss, the triggering event upon which coverage was predicated was said to have occurred in the United States.

As we will note later in our opinion, the Chancery Division's findings and Conclusions mirrored those adopted by the United States District Court in Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368 (E.D.N.Y.1988). There, the District Court Judge held that the delivery of Agent Orange to the military constituted an "occurrence" under a similarly worded policy. The Judge also determined that the series of deliveries constituted a single occurrence, thereby obviating the necessity of aggregating deductibles. Id. at 1383.

The Chancery Division also adopted the allocation formula applied by the District Court in Uniroyal. Under this formula, the settlement amount was divided by the total number of gallons of Agent Orange delivered by Diamond to the military. The dates of exposure were estimated by applying the hypothesis that spraying took place four months after the date of the shipment. This analytical construct was based upon military records which disclosed the average interval between shipments of Agent Orange and spraying with the consequent exposure. The thesis was that each gallon shipped resulted in an injury exactly four months after the date of delivery. By applying this formula, a date and dollar value could be fixed for every loss. When coverage under the primary policy in force on a given date was exhausted, the loss would travel up the layers of excess policies. One deductible would be applied against the losses on each of Aetna's primary policies which were triggered.

The insurers were held to be responsible for interest on the settlement amount in proportion to their responsibility for the principal.

It is against this factual backdrop that we consider the arguments advanced. We first review the issues dealing with environmental contamination. We then address the Agent Orange claims.

II.

Diamond asserts that the Chancery Division misconstrued the various insuring agreements contained in the policies issued by Aetna over the thirty year period in which soil and water contamination occurred. Despite the number and complexity of the issues presented, the Conclusion we reach is disarmingly simple. We are convinced from our examination of the record that Diamond intentionally and knowingly discharged hazardous pollutants with full awareness of their inevitable migration to and devastating impact upon the environment. However phrased or defined, the insuring agreements did not cover losses resulting from Diamond's deliberate and willful course of misconduct.

A.

Preliminarily, we take the issues out of order and consider Aetna's claim, asserted in its cross-appeal, that New York law should apply. Aetna asserts that New York law is applicable because that state was the "place of the contract." It is argued that New Jersey may have the overriding interest in seeing that the damage to the environment is cured, but not in determining who will pay for it.

We disagree. It is difficult to imagine any interest that New Jersey could have that would be more compelling, or more dominant and significant, than its concern in determining the availability of funds for the cleanup of hazardous substances within its borders. See Leksi, Inc. v. Federal Ins. Co., 736 F. Supp. 1331, 1335

(D.N.J.1990). Since New Jersey has a paramount interest in the remediation of such waste sites, and in the fair compensation of its victims, this State's urgent concern for the health and safety of its citizens "extends to assuring that casualty insurance companies fairly recognize the legal liabilities of their insureds." Johnson Matthey Inc. v. Pennsylvania Mfrs. Ass'n Ins. Co., 250 N.J. Super. 51, 57, 593 A.2d 367 (App.Div.1991).

We recognize that the law of the place of an insurance contract ordinarily governs the choice of law because it will generally comport with the reasonable expectations of the parties concerning the principal location of the insured risk and will furnish needed certainty and consistency. State Farm Mut. Auto. Ins. Co. v. Simmons' Estate, 84 N.J. 28, 37, 417 A.2d 488 (1980). However, that basic rule yields to the dominant and significant relationship of another state with the parties, the transaction and underlying issue. Ibid. The object is to determine which of the jurisdictions has the most significant governmental interests in the dispute. Here, we are convinced that the state with the site of the peril and ultimate damage has the dominant interest in the controversy. See Gilbert Spruance Co. v. Pennsylvania Mfrs. Ass'n Ins. Co., 254 N.J. Super. 43, 46, 603 A.2d 61 (App.Div.1992); Johnson Matthey Inc. v. Pennsylvania Mfrs. Ass'n Ins. Co., 250 N.J. Super. at 54-55, 593 A.2d 367; cf. Bell v. Merchants and Businessmen's Mut. Ins. Co., 241 N.J. Super. 557, 564, 575 A.2d 878 (App.Div.), certif. denied, 122 N.J. 395, 585 A.2d 395 (1990).

We acknowledge that this issue has received uneven treatment. See Westinghouse Elec. Corp. v. Liberty Mut. Ins. Co., 233 N.J. Super. 463, 476, 559 A.2d 435 (App.Div.1989). It is true that under the view we express here a single insurance policy providing integrated comprehensive coverage for nationwide risks could mean something different in every state. Ibid. However, nationwide uniformity, though desirable, is an illusory

goal in the context of this issue. Site-specific uniformity is more achievable, and represents a choice of law of the jurisdiction most concerned with the outcome. We hold that New Jersey courts should interpret according to this state's substantive law an insurance clause contained in a comprehensive general liability insurance policy, wherever written, which was purchased to cover an operation or activity which generates toxic wastes that "predictably come to rest in New Jersey, and impose legal liabilities there on the insured." Gilbert Spruance Co. v. Pennsylvania Mfrs. Ass'n Ins. Co., 254 N.J. Super. at 51, 603 A.2d 61.

B.

We begin by taking the unusual course of delineating the issues we do not reach. Initially, we have no occasion to decide whether the Chancery Division Judge was correct in defining the word "accident" to mean "a discrete fortuitous event which happens within a short time at a specific time and place." As we noted earlier, the policies issued between 1951 and 1960 provided coverage for injury and damage caused by an "accident." However, none of the policies defined that term. Citing early reported workers' compensation opinions, the Chancery Division adopted a time-specific definition. See Dudley v. Victor Lynn Lines, Inc., 32 N.J. 479, 491, 161 A.2d 479 (1960); Smith v. International High Speed Steel Co., 98 N.J.L. 574, 575, 120 A. 188 (E. & A.1923); United States Radium Corp. v. Globe Indem. Co., 13 N.J.Misc. 316, 324, 178 A. 271 (Sup.Ct.1935), aff'd, 116 N.J.L. 90, 182 A. 626 (E. & A.1936); Liondale Bleach, Dye and Paint Works v. Riker, 85 N.J.L. 426, 429, 89 A. 929 (Sup.Ct.1914). We note that the temporal aspect of this definition in the context of workers' compensation has been questioned in several decisions of our Supreme Court. See, e.g., Spindler v. Universal Chain Corp., 11 N.J. 34, 38, 93 A.2d 171 (1952); Neylon v. Ford Motor Co., 8 N.J. 586, 588, 86 A.2d 577, rev'd on other grounds, 10 N.J. 325, 91 A.2d 569 (1952). We also point to a long line of insurance cases which has

construed the term consonant with "its usual and popular sense" as signifying a "happening by chance" which is "unforeseen" or "unexpected." Riker v. John Hancock Mut. Life Ins. Co., 129 N.J.L. 508, 510-11, 30 A.2d 42 (Sup.Ct.1943); see also Linden Motor Freight Co., Inc. v. Travelers Ins. Co., 40 N.J. 511, 526, 193 A.2d 217 (1963); White v. Metropolitan Life Ins. Co., 118 N.J.L. 149, 151, 191 A. 770 (E. & A.1937); Walters v. Prudential Ins. Co., 116 N.J.L. 304, 307, 183 A. 897 (E. & A.1936); SL Industries v. American Motorists, 248 N.J. Super. 458, 465, 591 A.2d 677 (App.Div.), certif. granted, 126 N.J. 387, 599 A.2d 163 (1991); John's Cocktail Lounge, Inc. v. North River Ins. Co., 235 N.J. Super. 536, 541-42, 563 A.2d 473 (App.Div.1989); Furr v. Metropolitan Life Ins., 111 N.J. Super. 596, 600, 270 A.2d 69 (Law Div.1970); Kobylakiewicz v. Prudential Ins. Co. of America, 115 N.J.L. 382, 384, 180 A. 491 (Sup.Ct.1935). The latter cases comport with decisions in other jurisdictions. See, e.g., United States Mut. Accident Ass'n v. Barry, 131 U.S. 100, 121, 9 S. Ct. 755, 762, 33 L. Ed. 60, 67 (1889); Beryllium Corp. v. American Mut. Liab. Ins. Co., 223 F. 2d 71, 73-74 (3d Cir.1955); Moffat v. Metropolitan Cas. Ins. Co. of New York, 238 F. Supp. 165, 169-70 (M.D.Pa.1964); City of Myrtle Point v. Pacific Indem. Co., 233 F. Supp. 193, 197 (D.Or.1963); Employers Ins. Co. of Ala. v. Rives, 264 Ala. 310, 324, 87 So. 2d 653, 656-57 (1955), certif. denied, 264 Ala. 696, 87 So. 2d 658 (1956); Canadian Radium & Uranium Corp. v. Indemnity Ins. Co., 411 Ill. 325, 332, 104 N.E. 2d 250, 255 (1952); The Travelers v. Humming Bird Coal Co., 371 S.W. 2d 35, 38 (Ky.Ct.App.1963); McGroarty v. Great Am. Ins. Co., 43 A.D. 2d 368, 373-74, 351 N.Y.S. 2d 428, 433 (1974), aff'd, 36 N.Y. 2d 358, 368 N.Y.S. 2d 485, 329 N.E. 2d 172 (1975); Wolk v. Royal Indem. Co., 27 Misc. 2d 478, 482-83, 210 N.Y.S. 2d 677, 682 (Sup.Ct.1961); Taylor v. Imperial Cas. & Indem. Co., 82 S.D. 298, 144 N.W. 2d 856, 859 (1966). In any event, we leave resolution of the issue to another day.

We also need not determine whether the environmental losses fell within the pollution exclusion, as ...


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