On appeal from the Superior Court, Appellate Division.
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
In this appeal, the Court considers a homeowners' insurer's duties to defend and indemnify when the policy excludes claims "arising out of" the use, transfer or possession of controlled dangerous substances, and when the role that controlled dangerous substances played in bringing about plaintiff's injuries is in dispute.
Plaintiff Wendy Flomerfelt attended a Saturday evening party hosted by defendant Matthew Cardiello. She concedes she may have ingested marijuana prior to arriving, but cannot recall what she ingested at the party. She alleges that Cardiello provided her alcohol and drugs, including a prescription drug containing opiates. She became unresponsive during the party. Cardiello denies being aware of Flomerfelt's condition until Sunday afternoon, when he awoke for the day. Flomerfelt contends that Cardiello delayed calling for help out of fear that police would discover illegal drugs and his parents would learn about the party he hosted while they were away. Flomerfelt was treated for kidney and liver failure. A hospital toxicology report identified alcohol, marijuana, opiates, and cocaine in her system. Her discharge summary listed numerous conditions "probably secondary to drug overdose." Flomerfelt recovered from the effects of her liver and kidney conditions but suffers permanent partial hearing loss. Flomerfelt's expert concluded that the injuries were caused by ingesting multiple drugs and alcohol and were worsened by a delay in treatment. Her expert did not determine the amount of each substance in Flomerfelt's system or when each may have been ingested. His conclusions were based on reports identifying each substance alone as the potential cause for each injury. Cardiello's expert suggested the injuries may have resulted from prior drug abuse preceding an overdose or a genetic predisposition to hearing loss.
After Flomerfelt served her complaint, Cardiello turned to his parents' homeowners' insurer, Pennsylvania General Insurance Company. The insurer refused to defend or indemnify him, pointing to the exclusion in the policy for claims "arising out of" the use, transfer or possession of controlled dangerous substances. Cardiello filed an action seeking a declaration that the insurer was obligated to defend and indemnify him. The court granted Cardiello's motion for summary judgment, directing the insurer to provide both a defense and indemnity. The court reasoned that the insurer has the burden of proving the exclusion applies; the insurer cannot rely on the exclusion because the experts were unable to attribute the injuries to either the drugs or the alcohol; and Cardiello was entitled to the benefit of an inference that the injuries were caused by a covered risk. The Appellate Division reversed and directed that judgment be entered in favor of the insurer. In reviewing the indemnification issue, the panel broadly interpreted the phrase "arising out of" and concluded that because the proofs linked the injuries to both drugs and alcohol, the injuries "arose out of" the excluded act of "use,... transfer or possession" of illegal drugs. The panel did not separately analyze the duty to defend, concluding that the exclusion barred coverage under any circumstances. The Court granted Cardiello's motion for leave to appeal. 200 N.J. 203 (2009).
HELD: The insurer's use of the phrase "arising out of" with no further qualification makes the exclusion ambiguous, requiring an interpretation consistent with the insured's reasonable expectations. For the exclusion to apply, the injury must "originate in," "grow out of" or have a "substantial nexus" to the excluded act of drug use, transfer or possession. The insurer's duty to indemnify cannot be resolved because the present record does not permit answers to questions about the sequence of events leading to Flomerfelt's injuries and the cause or causes of her injuries. The duty to defend attaches because some theories of liability advanced in the complaint would not be excluded from coverage under the policy.
1. An insurance policy is enforced as written when its terms are clear. Generally, exclusionary clauses must be strictly construed against the insurer. Courts must evaluate whether, using a fair interpretation, the language is ambiguous. If an exclusionary clause requires a causal link, courts must consider the nature and extent of that link. If the exclusion uses terms that make it plain that coverage is unrelated to a causal link, it will be applied as written. (pp. 9-13)
2. An insurer's duties to defend and to indemnify must be analyzed separately. When a coverage question has no clear answer in advance of discovery or trial, a court must evaluate the duty to defend. That duty depends upon a comparison between the language of the policy and the nature of the claims asserted in the complaint, rather than the specific details of the incident. Doubts are resolved in favor of reading potentially covered claims in a manner that obligates the insurer to provide a defense. When coverage questions cannot be decided from the complaint, the insurer is obligated to defend until all potentially covered claims are resolved. (pp. 13-17)
3. Courts have generally considered questions about evaluating multiple or concurrent causes of damages only in the context of first-party claims against insurers for coverage. When a series of events occur to produce a loss, the loss is covered if a covered cause starts or ends the sequence of events. If claimed causes, one covered and one not, combine to produce a loss, coverage is generally rejected because the insured bears the burden of proving a covered cause for a loss. (pp. 17-19)
4. In Salem Group v. Oliver (1992), the Court addressed a concurrent cause question in the third-party insurance context as it concerned the duty to defend. The Court held that the insurer had a duty to defend a homeowner who served alcohol to his underage nephew who then drove an all-terrain vehicle and had an accident. Even though the policy excluded a loss "arising out of" use of the insured's motor vehicle, insurers are generally obligated to defend social host claims and the insurer could not avoid that duty simply because the ATV operation was an additional cause of the injury. The Court reasoned that the duty to defend turned on whether the insured could be found liable based on a theory completely independent of the exclude cause, rather than one intertwined with the excluded cause. (pp. 19-23)
5. In this case, the policy covers "damages because of bodily injury," but excludes injury "arising out of the use,... transfer or possession" of a controlled dangerous substance such as cocaine and narcotic drugs. The critical language in the exclusion as it relates to both the duty to defend and indemnify is "arising out of." The phrase has been read broadly to define the link between the conduct and the covered activity as "originating from," "growing out of," or "having a 'substantial nexus.'" In a decision addressing "arising out of the use,... transfer or possession" of illegal drugs in a policy exclusion, the Appellate Division held that the shooting death of a drug dealer was excluded from coverage because there was a "clear nexus" between the shooting and the insured's attempt to obtain illegal drugs. (pp. 23-27)
6. Flomerfelt's complaint asserts her injuries were caused by drugs, by alcohol, by a combination of drugs and alcohol, by serving her alcohol when visibly intoxicated, or by the negligent failure to promptly summon aid. Only some of those theories would support Cardiello's demand that the insurer defend and indemnify him. The potential definitions of the phrase "arising out of" as meaning "originating from," "growing out of" or "having a 'substantial nexus'" each has a potential causal link, but none requires that the excluded act be the proximate cause of the injury. The third one, "having a 'substantial nexus,'" could be read broadly to exclude coverage if the drug use was part of concurrent causes; that is, if the use of drugs has a substantial nexus to the injury, there will be no coverage even if there are other contributing causes. The insurer bears the burden of proving the exclusion applies, and the duty to defend continues as long as there is a potentially covered claim. As noted in Salem Group, use of the phrase "arising out of" with no further qualification of its meaning in circumstances arising from potentially concurrent causes makes the phrase ambiguous, calling for an interpretation consistent with the reasonable expectations of the insured. The insurer's proposed construction that "arising out of" means "incident to" or "in connection with" cannot be correct. That would expand the phrase to mean the injury is connected in any fashion, however remote, to the excluded act, rather than one with a "substantial nexus" to the excluded act. (pp. 27-31)
7. The insurer's duty to indemnify cannot be resolved because the present record does not permit answers to questions about the sequence of events leading to Flomerfelt's injuries and the cause or causes of her injuries. The duty to defend attaches because some theories of liability advanced in the complaint would not be excluded from coverage under the policy. The insurer may defend under a reservation of rights, refuse to defend and reimburse Cardiello after trial if the finder of fact determines that the injury did not "arise out of" drug use, or litigate the coverage issue in advance of trial. (pp. 31-34)
The judgment of the Appellate Division is REVERSED and the matter is REMANDED to the trial court for further proceedings consistent with the Court's opinion.
JUSTICE LaVECCHIA filed aseparate CONCURRING opinion in which JUSTICE RIVERA-SOTO joins, concurring in the judgment solely because the precedent of Salem Group should be respected and is controlling on the issue whether there exists a duty to defend in that case; that duty applies here because the policy did not unambiguously declare that coverage would be excluded for injuries arising out of illegal drug use regardless of any other cause contributing concurrently or in any sequence to the loss.
CHIEF JUSTICE RABNER and JUSTICES LONG, ALBIN and WALLACE join in JUSTICE HOENS' opinion. JUSTICE LaVECCHIA, joined by JUSTICE RIVERA-SOTO, filed a separate concurring opinion.
The opinion of the court was delivered by: Justice Hoens
Plaintiff Wendy Flomerfelt sustained temporary and permanent injuries after she overdosed on alcohol and drugs during a party hosted by defendant Matthew Cardiello at his parents' home while they were out of town. Plaintiff has little recollection of what she drank or ingested either before she arrived or during the party itself. Her complaint, however, asserted that her injuries were caused by defendant, who provided her with drugs and alcohol, served her alcohol when she was visibly intoxicated, and failed to promptly summon the rescue squad when she was found, unconscious, on the porch the next day.
Defendant turned to Pennsylvania General Insurance Company, his parents' homeowners' insurer, tendering to it the defense of Flomerfelt's complaint and seeking indemnification under the terms of the policy. Pennsylvania General, in response, declined either to provide a defense against the claim or to indemnify him, pointing to the language of its policy that excluded claims "[a]rising out of the use,... transfer or possession" of controlled dangerous substances.
The parties dispute the meaning of that language and the scope of the exclusion as it bears on both the insurer's duty to defend and its obligation to indemnify. Accordingly, this appeal requires us to consider the insurer's duties to defend and indemnify when the precise manner in which the injury was caused is in dispute and when the parties disagree about the role that controlled dangerous substances, for which the policy excludes coverage, played in bringing about plaintiff's injury.
Plaintiff was a guest at a Saturday evening party hosted by defendant Matthew Cardiello while his parents,*fn1 the owners of the home, were out of town. At the time, Flomerfelt was twenty-one years old. Cardiello, who was only twenty years old, admitted that he provided his guests with beer, that he was aware that a variety of drugs were being used at the event, and that during the party he saw Flomerfelt ingest cocaine. Although he denied providing plaintiff with drugs, he admitted that he took "Ultracet," a prescription medication, and that empty individual-dose packets of that drug were found in the household trash after the party.
Flomerfelt has little recollection of the party. She concedes that prior to arriving at defendant's home she may have smoked marijuana, but cannot recall what else she might have ingested either before or during the party. In her complaint, however, plaintiff alleged that defendant provided her with alcohol and drugs, including the prescription drug "Ultracet,"*fn2 which contains opiates. Each of those allegations is connected to a toxicology report that identified traces of numerous substances in her urine.
Late Saturday evening or early Sunday morning, Flomerfelt became ill and unresponsive, although precisely when that occurred is unclear from the record. Defendant denies that he was aware of Flomerfelt's plight prior to Sunday afternoon when he finally awoke for the day. According to several of the partygoers, it was not until then that defendant and others found plaintiff on the porch and were unable to rouse her. Defendant admits that he first tried to have plaintiff's sister come to the house and transport her to the hospital. Only after that effort failed did he summon rescue personnel, who took her to the emergency room. Plaintiff contends that defendant delayed calling for help because he was afraid that the police would discover the illegal drugs in the house and because he did not want his parents to learn about the party he had hosted in their absence.
Plaintiff was treated in the Emergency Room and in the Intensive Care Unit for kidney and liver failure. A toxicology report identified alcohol, marijuana, opiates and cocaine in plaintiff's system and her hospital discharge summary included an initial diagnosis of numerous conditions "probably secondary to drug overdose." When plaintiff was released from the hospital, she had recovered from the effects of the acute liver and kidney conditions but she contends that she suffers from permanent partial hearing loss.
During discovery, two experts provided opinions concerning the cause of plaintiff's injuries, both temporary and permanent. Plaintiff's expert, Dr. Michael Buccigrossi, concluded that her injuries were caused by the ingestion of multiple drugs and alcohol, and that the injuries were exacerbated by a delay in receiving medical attention. He did not attempt to quantify the amounts of each of the substances found in her system or to determine when each substance may have been ingested. Rather, he based his conclusions on reports identifying each of the substances, that is drugs or alcohol ingestion alone, as the potential causative agent for each of plaintiff's injuries.
Defendant offered the expert opinion of Dr. James Cinberg, who concluded that "[t]he toxins found in Wendy Flomerfelt's urine have been associated with rapid and irreversible high frequency loss of hearing and with tinnitus." Dr. Cinberg suggested that plaintiff's injuries might have resulted from prior drug abuse, pointing to a reported case history in which hearing loss was linked to regular marijuana use and other drug ingestion that preceded an overdose. He also noted the possibility that Flomerfelt had a genetic predisposition to hearing loss that contributed to her injury. Finally, Dr. Cinberg rejected plaintiff's assertion that defendant's delay in summoning aid had caused or contributed to her injuries. He opined that "[t]reatment that might have been instituted hours earlier would not be expected to have improved her current status."
Following the service of plaintiff's complaint, defendant tendered the defense and sought indemnification for plaintiff's claims to Pennsylvania General, his parents' homeowners' insurer. Pennsylvania General declined to defend or indemnify, pointing to the exclusion in the policy for claims "[a]rising out of the use,... transfer or possession" of controlled dangerous substances. In April 2007, defendant filed a declaratory judgment action, seeking a declaration that Pennsylvania General was obligated both to defend and to indemnify him. That complaint was consolidated with plaintiff's pending personal injury action for discovery and trial.
Early in 2008, Pennsylvania General and defendant cross-moved for summary judgment on the issues raised in the declaratory judgment aspect of the litigation. The insurer argued that the "arising out of" language is unrelated to causation, but instead equates with concepts such as "incident to" or "in connection with." Asserting that all of the evidence ties plaintiff's injuries at least in part to her ingestion of ...