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Schmidt v. Smith

November 6, 1996


On appeal from the Superior Court of New Jersey, Law Division, Somerset County.

Approved for Publication November 8, 1996. As Corrected December 9, 1996. Second Correction January 27, 1997,

Before Judges King, Keefe and Loftus. The opinion of the court was delivered by Keefe, J.A.D.

The opinion of the court was delivered by: Keefe

The opinion of the court was delivered by KEEFE, J.A.D.

Third party defendant United States Fidelity and Guaranty Co. (USFG) appeals from a judgment entered on cross motions for summary judgment that USFG had a duty to defend and indemnify defendants Dennis Smith (Smith) and Smith's employer, Personalized Audio Visual, Inc. (PAV), for plaintiff Lisa Schmidt's claim of hostile work environment sexual harassment. We affirm in part and reverse in part for the reasons stated herein.

PAV, a closely held corporation, was hired by the Somerset Hilton Hotel (Hilton) to run the hotel's business center. Smith was the president of PAV, and his father, Wilton Smith, was apart-time employee and the corporation's chief executive officer. Plaintiff was hired in December 1990 by Smith to work as the office manager of the business center. She began to work for PAV on January 2, 1991, and resigned on February 19, 1991 because she was being sexually harassed by Smith.

On September 9, 1991, plaintiff filed a complaint against PAV and Smith alleging hostile work environment sexual harassment in violation of the Law Against Discrimination (LAD), assault, assault and battery, intentional infliction of emotional distress and invasion of privacy. Plaintiff later amended her complaint to add negligence counts against both defendants.

Defendants sought coverage for the claims alleged by plaintiff from PAV's insurance carrier USFG under PAV's Comprehensive General Liability (CGL) policy and Workers Compensation policy. USFG denied coverage and refused to defend against plaintiff's claim. Defendants instituted a third party action against USFG for declaratory judgment seeking defense costs and coverage. After answering the third party complaint, USFG requested that plaintiff's action against defendants be tried before the declaratory judgment action. The trial court granted USFG's request.

Plaintiff testified at trial that Smith's sexual harassment of her began after she was hired, but before she began working for PAV. Approximately five days before her first day of work, following a meeting with Smith to discuss her job responsibilities, plaintiff was invited to attend a Christmas party at the Hilton. After the party, Smith tried to kiss plaintiff in the elevator, which she resisted, and, later attempted to have oral sex with her. Once plaintiff started work Smith repeatedly requested to have sex with her, and on several occasions grabbed her buttocks and breasts and tried to kiss her. According to plaintiff, no other PAV employees witnessed anything that Smith did or said to her.

Plaintiff testified that as a result of Smith's conduct she suffered severe emotional distress, accompanied by physical manifestations. Specifically, she testified that she had a relapse of anorexia and bulimia after the harassment began at PAV. Additionally, shebegan drinking excessively and attempted suicide on four occasions.

The jury returned a verdict in favor of plaintiff in the amount of $80,000. Specifically, in answers to interrogatories, the jury found that plaintiff was the victim of a hostile work environment and sexual harassment, that she had been assaulted by Smith, that Smith committed an assault and battery upon her, and that he had intentionally inflicted emotional distress upon her. As to proximate causation, the jury was asked and answered the following question:

CLERK: Was the sexual harassment, question one; the assault, question two; the assault and battery, question three; or the intentional infliction of emotional distress the proximate cause of any physical or emotional injury to Lisa Schmidt?


Plaintiff moved for an order granting attorney's fees pursuant to R. 4:42-9(a)(8), as provided under LAD. The trial court entered an order of final judgment against Smith and PAV in the amount of $181,730.36, which included damages, counsel fees, and prejudgment interest. The final judgment was not appealed. USFG was given the opportunity to do so on behalf of the defendants but declined.

Thereafter, plaintiff filed a motion to intervene in the declaratory judgment action between defendants and USFG pursuant to R. 4:33-1. The court granted plaintiff's motion.

USFG and defendants cross-moved for summary judgment in the declaratory judgment action. The trial court ruled that PAV and Smith were entitled to coverage for plaintiff's damages, all taxed costs (including plaintiff's counsel fees), and for defense counsel fees and costs. *fn1 This appeal followed.


The trial court found that in order for USFG to have been entitled to summary judgment as to PAV, USFG had to demonstrate that PAV intentionally caused Schmidt's injuries. According to the trial court, no such evidence existed. The court noted:

Seems clear to me, hopefully I'm right, that USFG must pay in this case. It can't deny coverage to PAV based on an intentional act committed by one of its employees. There is absolutely no evidence whatsoever which indicates that PAV acted intentionally or participated or condoned or had knowledge of the illegal activity. Although PAV was found vicariously liable for creating a hostile work environment, it hardly follows that one can conclude that PAV intended to harm the plaintiff. See, whatever it means, Lehmann versus Toys R Us, Inc. 132 N.J. 587, 626 A.2d 445 (1993).

USFG argues that its duty to indemnify PAV extends only to the specific liability that the jury in the underlying action found to exist. USFG correctly observes that "there can be no doubt that the jury's findings were that PAV was liable only for hostile work environment sexual harassment and that Dennis Smith was liable for both that sexual harassment and for the intentional torts he committed against plaintiff." As such, it is USFG's position that the jury did not find that PAV was vicariously liable for the intentional torts of Smith, and therefore it was error for the trial court to find coverage based upon PAV's vicarious liability. USFG cites to the instructions given to the jury regarding PAV's liability, and notes that the charge did not include instructions on how PAV may be vicariously liable for the intentional acts of Smith. Further, the special interrogatories did not ask the jury whether PAV was vicariously liable for the actions of Smith.

USFG may not now argue that the trial court erred in its instructions to the jury regarding the vicarious liability of PAV. USFG refused to defend PAV in the underlying action, and further refused to participate at the trial in any way. In addressing this topic in colloquy with USFG's trial counsel *fn2 at the summary judgment hearing, the trial court noted:

That is why I begged you to get into this case when it was being tried because they are not going to attempt to extricate PAV. You left them in a situation where as a matter of tactics they wanted to, some assurance that if there was a judgment it would be against PAV. That's why you had the opportunity to come in and defend this case. That was a tactical decision that you made. You were in the courtroom for much of the trial, if not the entire trial. You declined to participate. . . . If you had been there as a party to the action, you would have control over the defense. You chose not to.

Moreover, USFG elected not to represent PAV's interest upon appeal. Accordingly, the judgment entered against PAV is final, and USFG's motion for summary judgment, contending as it did that there were no genuine fact issues, necessarily acknowledged that it was bound by the record developed in the Schmidt action. That judgment was based upon the jury finding that Schmidt was subjected to a hostile work environment in the course of her employment by PAV.

Based upon the evidence presented at the trial as well as the jury's verdict, we agree with the trial court that the facts of this case are such that an employer will be held vicariously liable for a hostile workplace. Lehmann v. Toys ' R' Us, Inc. 132 N.J. 587, 617-620, 626 A.2d 445 (1993). In Lehmann, the Court held that "employer liability for supervisory hostile work environment sexual harassment shall be governed by agency principles." Id. at 619. The Court cited Section 219 of the Restatement (Second) of Agency, which outlines the liability of a master for the torts of a servant.

(1) a master is subject to liability for the torts of his servants committed while acting in the scope of their employment.

(2) A master is not subject to liability for the torts of his servants acting outside the scope of their employment, unless:

(a) the master intended the conduct or the consequences, or

(b) the master was negligent or reckless, or (c) the conduct violated a nondelegable duty of the master, or

(d) the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the ...

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