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An insurer bears the burden of demonstrating that a policy exclusion applies, and the duty to defend continues as long as there is a potentially covered claim.
Plaintiff Wendy Flomerfelt attended a Saturday evening party hosted by defendant Matthew Cardiello. She conceded she may have ingested marijuana prior to arriving, but cannot recall what she ingested at the party. She alleged that Cardiello provided her alcohol and drugs, including a prescription drug containing opiates. She became unresponsive during the party. Cardiello denied being aware of Flomerfelt's condition until Sunday afternoon, when he awoke for the day. Flomerfelt contended 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. 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.
Is the insurer liable to provide a defense to Cardiello by virtue of the exclusion phrase in the policy?
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 proposed construction that the court read the phrase in the exclusion to mean "incident to" or "in connection with" cannot be correct. That reading would expand the phrase "arising out of" to mean that the injury is connected in any fashion, however remote or tangential, to the excluded act, rather than one that "originates in," "grows out of" or has a "substantial nexus" to the excluded act. 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. Here, 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. 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.