On certification to the Superior Court, Appellate Division, whose opinion is reported at 248 N.J. Super. 458 (1991).
Garibaldi, Wilentz, Handler, Pollock, O'Hern, Stein, Clifford
The opinion of the court was delivered by
Like Voorhees v. Preferred Mutual Ins. Co., N.J. (1992), also decided today, this case requires us to determine an insurance company's duty to defend and indemnify an insured. We first address whether the duty to defend is determined solely by the information included in the complaint in the underlying action, or whether it can also be triggered by information conveyed to the insurer at a later stage in the underlying action. In this connection, we address the insured's duty to inform the insurer of all relevant information promptly or forego reimbursement for its defense costs. Second, we discuss whether alleged emotional distress, without physical manifestations, constitutes a "bodily injury" covered by SL Industries' bodily-injury policy or a "personal injury" covered by the company's personal-injury policy. Third, as in Voorhees, we consider whether the injuries caused by SL Industries were accidental enough to constitute an "occurrence" covered by the policy. Finally, we address the apportionment of defense and settlement costs between covered and non-covered claims.
SL Industries seeks a declaration of insurance coverage for its liability to Newell E. Whitcomb, formerly one of the company's vice-presidents. According to Whitcomb's complaint, in March 1984 SL Industries' Chief Executive Officer, John Instone, told Whitcomb that the company intended to eliminate his position. Instone suggested that Whitcomb agree to a special early retirement proposal under which he would retire on his sixty-second birthday, in September 1985. Relying on that information, Whitcomb agreed to the retirement proposal. Several months before his departure, SL Industries hired a new executive. Whitcomb alleged that that new executive was his replacement, and that the assertion that his position was to be eliminated was simply a pretext to force his early retirement.
In January 1986 Whitcomb filed a complaint in federal district court against SL Industries and Instone in which he alleged that their inducement of his retirement and provision of an insufficient bonus constituted willful age discrimination in violation of the Age Discrimination in Employment Act, 29 U.S.C.A. §§ 621 to 634 (ADEA). Whitcomb's complaint also alleged common-law fraud based on SL Industries' and Instone's false assertion that his position would be eliminated.
SL Industries was insured by American Motorists Insurance Company and Kemper Insurance Group (American) under two insurance policies. Under its General Liability Policy, SL Industries was insured
for all sums which the Insured shall become legally obligated to pay as damages because of * * * bodily injury * * * caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury * * * even if the allegations of the suit are groundless, false or fraudulent * * *.
The policy defined "bodily injury" as "bodily injury, sickness or disease," and defined an "occurrence" as an "accident * * * which results in bodily injury * * * neither expected nor intended from the standpoint of the insured."
SL Industries was insured for liability from personal-injury claims under a Comprehensive Catastrophe Liability Policy. In that policy, the insurance company agreed
to indemnify the insured for sums which the insured shall become obligated to pay as damages, direct or consequential, and expenses * * * by reason of liability * * * because of personal injury * * * arising out of an occurrence * * *.
The policy defined "personal injury" as
(a) bodily injury, shock, sickness or disease (including death, mental anguish and mental injury resulting therefrom); * * * or (d) injury arising out of libel, slander, defamation of character, humiliation or invasion of right of privacy * * *.
The policy's definition of "occurrence" was essentially the same as that of the General Liability Policy, except that it referred to personal, rather than bodily, injury.
In March 1986 SL Industries sought American's aid in defending against Whitcomb pursuant to the policies' "duty to defend" provisions. In May 1986 the insurance company declined to defend, arguing that SL Industries' bodily- and personal-injury policies did not cover liability for the events alleged in the underlying complaint.
Shortly thereafter, additional information regarding the nature of Whitcomb's injuries was adduced during discovery in the underlying suit. In answer to interrogatories requesting the factual basis for his damages claim, Whitcomb stated that he had "suffered loss of sleep, loss of self esteem, humiliation and irritability." In a supplement to his initial response, he stated that he had "received treatment for his emotional pain and suffering * * *." In his Pretrial Stipulation and Order, Whitcomb indicated that he sought "an additional $150,000 to compensate for physical and mental pain and suffering, including humiliation, loss of self-esteem, irritability and sleeplessness."
In July 1988 SL Industries again requested coverage. At that point, two years after it had received the additional information regarding Whitcomb's injuries, SL Industries finally relayed that information to American by providing the carrier with a copy of the Pretrial Order describing the injuries for which Whitcomb sought compensation. After some independent investigation, American again declined to defend the suit.
A few weeks later, in September 1988, Whitcomb and SL Industries settled for $430,000. SL Industries alleges it spent approximately $100,000 in legal fees.
In January 1989 SL Industries brought suit against American seeking a declaration that the matter was covered by both the General Liability Policy for bodily injuries and the Comprehensive Catastrophe Liability Policy for personal injuries. It also sought compensatory damages, punitive damages, costs of the suit, attorney fees, and any other relief the court deemed just. In March 1990 both parties filed motions for partial summary judgment.
In an oral opinion, the Law Division granted American's motion for summary judgment and denied SL Industries' motion. The court held that the complaint did not obligate American to defend the underlying suit because it did not state any claims falling within the terms of the policies. The sole issue was whether the additional information regarding Whitcomb's injuries adduced through discovery and later forwarded to American triggered the duty to defend. The court held that when the insured provided the insurance company with the information regarding Whitcomb's injuries two years after the suit had been brought and only one-and-one-half months before the case settled, the carrier did not have an obligation to "pick up the defense of the case or to indemnify for that case."
The Appellate Division reversed, holding that "once American possessed knowledge of Whitcomb's claim for emotional damages, its duty to defend was triggered under the terms of the policies." 248 N.J. Super. 458, 466 (1991). Furthermore, citing the line of cases including Voorhees v. Preferred Mutual Insurance Co., 246 N.J. Super. 564 (App. Div. 1991), Wolfe v. State Farm Insurance Co., 224 N.J. Super. 348 (App. Div.), certif. denied, 111 N.J. 654 (1988), Lumbermen's Mutual Insurance Co. v. United Services Automobile Ass'n, 218 N.J. Super. 492 (App. Div. 1987), and NPS Corp. v. Insurance Co. of North America, 213 N.J. Super. 547 (App. Div. 1986), the court concluded that "Whitcomb's claim for mental pain and suffering qualifies as an assertion of bodily and personal injury under the General Liability and Comprehensive Catastrophe policies." 248 N.J. Super. at 464.
The court also held that Whitcomb's emotional damage claim may have constituted an occurrence within the meaning of the policy. Defining an "occurrence" as an accident, the court recognized that "coverage will not be provided for intended results," but emphasized that it "will be provided for the unintended and unforeseen results of an intentional act." Id. at 465. Whether Whitcomb's emotional distress was intended or unexpected required a factual determination. Accordingly, the court reversed the Law Division's grant of summary judgment and remanded for further proceedings. Id. at 466.
With respect to the allocation of costs, the court noted that the statutes under which Whitcomb sued do not permit compensatory damages for emotional pain and suffering. The court therefore directed the trial court to conduct, on remand, a hearing to determine the extent to which the settlement had been based on emotional injury for common-law fraud, and to allocate the coverage and defense costs accordingly. Id. at 467.
We granted American's petition for certification. N.J. (1992).
As we noted in Voorhees, the duty to defend is generally determined by comparing the allegations in the complaint with the language of the policy. N.J. at (slip. op at 7). When the two correspond, the insurer must defend the suit.
Whitcomb's first two counts alleged that by inducing his retirement and providing a smaller bonus than that commensurate with his status and abilities, SL Industries violated the Age Discrimination in Employment Act, 29 U.S.C.A. §§ 621 to 634. Recoverable damages under the ADEA are limited to unpaid minimum wages, unpaid overtime compensation, and, in the event of a willful violation, liquidated damages. 29 U.S.C.A. § 626(b). Judicial interpretation of the ADEA has clearly held that it does not allow the recovery of compensatory damages for emotional injuries caused by age discrimination. Haskell v. Kaman Corp., 743 F.2d 113, 120-21 (2d Cir. 1984); Rogers v. Exxon Research & Eng'g Co., 550 F.2d 834, 840-42 (3rd Cir. 1977), cert. denied, 434 U.S. 1022, 98 S. Ct. 749, 54 L. Ed. 2d 770 (1978). The insurance policies would therefore not cover any liability for potential statutory violations.
The third count of the complaint alleged simply that Instone's acts inducing Whitcomb to retire constituted common-law fraud. Nothing about that allegation could have alerted the insurance company that the fraud had led to bodily or personal injuries potentially covered under the policies. Indeed, at the time SL Industries forwarded the complaint to American, neither SL Industries nor American was aware that Whitcomb had suffered any emotional distress. Because the complaint contained the only information American had about the underlying suit, and because the complaint did not allege any covered injuries triggering the duty to defend, American's May 1986 decision not to defend the action was appropriate. However, by June 1986 SL Industries had learned of additional facts that potentially triggered American's duty to defend. In his response to interrogatories, dated June 1986, Whitcomb stated that as a result of SL Industries' treatment of him he "suffered loss of sleep, loss of self-esteem, humiliation, and irritability." SL Industries failed to forward that information to American until July 1988, over two years later. At that time, shortly before settling with Whitcomb, SL Industries once again requested and was denied coverage.
A. Coverage Based on Facts Extrinsic to the Complaint
The first question is whether the duty to defend is triggered by facts indicating potential coverage that arise during the resolution of the underlying dispute. We conclude that facts outside the complaint may trigger the duty to defend.
Our holding is in accord with most insureds' objectively-reasonable expectations. Insureds expect their coverage and defense benefits to be determined by the nature of the claim against them, not by the fortuity of how the plaintiff, a third party, chooses to phrase the complaint against the insured. See National Indem. Co. v. Flesher, 469 P. 2d 360, 365-67 (Alaska 1970); Loftin v. U.S. Fire Ins. Co., 127 S.E. 2d 53, 59 (Ga. Ct. App. 1962). To allow the insurance company "to construct a formal fortress of the third party's pleadings and to retreat behind its walls, thereby successfully ignoring true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insured's defense" would not be fair. Associated Indem. v. Insurance Co. of N. Am., 386 N.E. 2d 529, 536 (Ill. Ct. App. 1979).
Many states agree that the duty to defend is triggered not only by the allegations in the complaint, but by the later discovery of ...