One of the issues that frequently comes up in complicated third-party cases is: How far outside the underlying complaint does the carrier have to go to determine whether coverage exists? New Jersey is not an “eight corners” state (in which all the court considers is the four corners of the policy and the four corners of the complaint). The New Jersey Supreme Court has specifically held: “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. 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.’” SL Industries, Inc. v. American Motorists Insurance Co., 128 N.J. 188, 197 (1992) (citations omitted).
Along these lines, some time ago, I wrote about the New Jersey Appellate Division’s decision in Adams-Stiefel Funeral Home v. Zurich American, which involved issues of coverage for companies that were essentially “innocent bystanders” in an illegal plot to harvest body parts from corpses. In a companion case, the New Jersey Supremes have now affirmed the Appellate Division’s ruling of no coverage. The case facts are a little unique (and ghoulish), but the decision raises some important questions about the scope of the duty to defend. The Supreme Court decision is here.
Memorial Properties and Mt. Hebron are the owner and manager (respectively) of a cemetery known as Liberty Grove Memorial Gardens. They were implicated in a scheme in which a New Jersey dentist and a New Jersey “master embalmer” worked in conjunction with funeral homes and crematories to obtain access to human remains, and to sell body parts. Memorial and Mount Hebron denied any involvement in the plot, and consistently maintained that, when they received bodies from funeral directors for cremation, the remains were already in sealed containers that were not opened by Memorial and Mt. Hebron prior to cremation. They also argued that the documentation accompanying the remains appeared proper.
The families of the decedents alleged that, following the deaths of their relatives on various dates in 2003, 2004 and 2005, two persons not connected with Memorial Properties or Mt. Hebron extracted tissue, bones and organs from the remains without authorization, sometimes replacing harvested bone with polyvinyl chloride (PVC) piping so that the bodies would appear intact. The families contended that these persons falsified decedents’ medical and funeral records to conceal the illegal tampering with the remains. The families allege that they were unaware of the “harvesting” until law enforcement authorities told them about it in 2006. They claimed, among other things (and understandably), damages relating to emotional distress.
Two insurance companies – Assurance and Maryland Casualty – denied coverage for the families’ claims. The policies involved are specially tailored to the funeral home industry, but they basically contain “occurrence”-based coverage.
The Assurance policy provided coverage for the year 2003 for claims arising from damage to human remains and bodily injury, including mental anguish. Assurance took a “no pay” position, on the ground that the occurrences were outside of the policy period, since the families only learned of the harvesting scheme in 2006.
In upholding the Assurance denial, the Supreme Court wrote in part: “The decedent’s surviving spouse seeks damages for ‘severe pain and suffering, severe emotional distress and harm, [and] financial or economic loss,’ including lost wages. Her alleged damages derive from her distress upon learning of the unauthorized harvesting of her husband’s tissue, bones and organs, and not from a purported cause of action based on property damage to her decedent’s remains. Accordingly, in the New Jersey case in which the harvesting took place in 2003, the ‘occurrence’ was the plaintiff-spouse’s alleged emotional distress upon discovery of the harvesting scheme in a 2006 conversation with law enforcement, and her claim falls outside of the policy period set forth in the Assurance policy.”
In other words, the Supremes divorced damage to the body (the “property”) from the emotional damage suffered by the plaintiffs. Since the plaintiffs’ emotional damage only took place after 2003 (hence outside the policy period), no coverage. Burt how does this square with the principles of SL Industries? Since the cause of action was in fact based upon damage to the decedent’s body (without that, there would have been no “emotional distress”), wouldn’t a reasonable policyholder expect coverage for this claim?
The other carrier, Maryland Casualty, denied coverage based upon an exclusion removing coverage for claims based upon such activities conducted “by any insured or anyone for whom the insured is legally responsible” including “disarticulation” of body parts from a deceased body, “distribution, sale, loaning, donating or giving away” parts of a deceased body, and “any criminal act.” Based upon this exclusion, the Supremes wrote in part that the underlying plaintiffs had alleged “an active role by Memorial and Mt. Hebron in the harvesting scheme” which fell “squarely within the parameters of the exclusionary clause.”
The problem with the ruling in favor of Maryland Casualty is that the policyholders presented evidence that they had not participated in the scheme, and that the bodies had been delivered to them in sealed containers with appropriate certifications. The Supremes simply resolved that issue against the policyholder without apparently conducting the outside-the-eight-corners analysis required by SL Industries…which is disappointing, to say the least.