New Jersey Supreme Court: Insurer Must Defend in House Guest Overdose

July 9, 2010

An insurance company must defend a homeowner who was sued after a woman overdosed on drugs at a house party he held, the New Jersey Supreme Court has ruled.

This week’s ruling written by Justice Helen E. Hoens reversed an appeals court decision that had said Pennsylvania General Insurance Co. did not have to defend Matthew Cardiello because its policy excludes claims “arising out of the use, transfer or possession of controlled dangerous substances.”

But the state’s high court found that the term “arising out of” is ambiguous and that the insurer could not simply invoke the exemption because there were possible theories of liability in the complaint that would not be excluded from coverage under the policy.

Plaintiff Wendy Flomerfelt attended a party hosted by Cardiello. She alleged that Cardiello provided her alcohol and drugs, causing her to overdose and suffer liver and kidney problems. She 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. 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 asked his parents’ homeowners’ insurer, Pennsylvania General Insurance Co., to defend him. The insurer refused, citing the exclusion in the policy for claims “arising out of” the use, transfer or possession of controlled dangerous substances.

A lower court directed the insurer to provide both a defense and indemnity, reasoning that the insurer could not rely on the exclusion because the experts were unable to attribute the injuries to either the drugs or the alcohol and that Cardiello was entitled to the benefit of an inference that the injuries were caused by a covered risk.

The appellate court reversed and judged in favor of the insurer when it 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. This court did not separately analyze the duty to defend, concluding that the exclusion barred coverage under any circumstances.

The state Supreme Court has now overturned the appeals court, finding that the phrase “arising out of” with no further qualification makes the exclusion ambiguous, requiring an interpretation consistent with the insured’s reasonable expectations.

Flomerfelt asserted that 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. The high court said that some of those theories would support Cardiello’s demand that the insurer defend and indemnify him. “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,” the decision states.

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