                                                                                                                           Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-25-1999

Chemical Leaman v. Aetna Cslty & Surety
Precedential or Non-Precedential:

Docket 97-5735,97-5736




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Recommended Citation
"Chemical Leaman v. Aetna Cslty & Surety" (1999). 1999 Decisions. Paper 144.
http://digitalcommons.law.villanova.edu/thirdcircuit_1999/144


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Filed May 25, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NOS. 97-5735 and 97-5736

CHEMICAL LEAMAN TANK LINES, INC.,

       Appellant in No. 97-5735

v.

THE AETNA CASUALTY AND SURETY COMPANY, and
CERTAIN UNDERWRITERS at LLOYDS, LONDON
Subscribing to Insurance Policies Numbers WAR 6771,
WAR 6772/A C62P 10-117, L62P 10-117, 64P 3-121,
L64P 3-121A, L64P 3-121B, C64P 3-121B, C65P 5-119,
C65P 5-119A, L65P 5-119A, L66P 5-119A, C67P 4-158,
L67P 4-158, C68P 2-116, L68P 2-116, C68P 2-116A,
C68P 2-116B, L68P 2-116A, L68P 2-116B, C71-03-03-13,
L71-03-03-13, C71-03-03-13A, C71-03-03-13B,
L71-03-03-13A, L71-03-03-13B, C74-03-18-02,
77-01-19-23, 77-01-19-23A, C77-01-19-23B, 79-04-19-10,
C80-02-19-09, C80-02-19-09B, L80-02-09A,
L80-02-19-09A, L80-02-19-09B, C83-02-19-09,
L83-02-19-09A, L83-02-19-09B, L83-02-19-09C

CHEMICAL LEAMAN TANK LINES, INC.

v.

AETNA CASUALTY AND SURETY COMPANY; ROBIN
ANTHONY GILDART JACKSON, an Underwriter at Lloyds,
London, individually and in his capacity as representative
Underwriter at Lloyds, London for certain subscribing
Underwriters at Lloyds, London who subscribed to certain
liability insurance policies issued to plaintiff Chemical
Leaman Tank Lines, Inc.; ACCIDENT AND CASUALTY
COMPANY OF WINTERTHUR, (now known as Winterthur
Swiss Insurance Company); ALBA GENERAL INSURANCE
COMPANY LTD.; ALLIANZ CORNHILL INTERNATIONAL
INSURANCE, PLC (formerly known as Allianz International
Insurance Company Ltd.); ARGONAUT NORTHWEST
INSURANCE COMPANY; ASSICURAZIONI GENERALI SPA;
BALOISE FIRE INSURANCE COMPANY; BELLEFONTE
INSURANCE COMPANY LTD.; CNA INTERNATIONAL
REINSURANCE CO. LTD. (formerly known as CNA
Reinsurance of London Company Ltd.); DELTA LLOYD
NON-LIFE INSURANCE COMPANY; DOMINION
INSURANCE COMPANY LTD.; DRAKE INSURANCE
COMPANY LTD. (now known as Sphere Drake Insurance
plc); EXCESS INSURANCE COMPANY LTD.; FIDELIDADE
INSURANCE COMPANY; GAN MINSTER INSURANCE
COMPANY LTD. (formerly known as Minster Insurance
Company Ltd.); HELVETIA ACCIDENT SWISS INSURANCE
COMPANY (now known as ELVIA Swiss Insurance
Company Ltd.); LONDON AND EDINBURGH INSURANCE
COMPANY, LTD.; NATIONAL CASUALTY COMPANY;
NATIONAL CASUALTY INSURANCE OF AMERICA, LTD.;
NEW LONDON REINSURANCE COMPANY, LTD. (now
known as NRG Victory Reinsurance Ltd.); RIVER THAMES
INSURANCE COMPANY LTD.; SCOTTISH LION
INSURANCE COMPANY; SPHERE INSURANCE COMPANY
LTD., (now known as Sphere Drake Insurance plc); ST.
PAUL INTERNATIONAL INSURANCE COMPANY LTD.
(formerly known as St. Katherine Insurance Co. Ltd.);
SWISS UNION GENERAL INSURANCE COMPANY LTD.;
MITSUI MARINE & FIRE INSURANCE COMPANY
(EUROPE) LTD. (formerly known as Taisho Marine & Fire
Insurance Company (U.K.) Ltd.); TOKIO MARINE & FIRE
INSURANCE COMPANY (U.K.) LTD.; TUREGUM
INSURANCE COMPANY; UNIONAMERICA INSURANCE
COMPANY LTD.; WORLD AUXILIARY INSURANCE
CORPORATION LTD.; YASUDA FIRE & MARINE
INSURANCE COMPANY OF EUROPE LTD., (formerly
known as Yasuda Insurance Company (U.K.) Ltd.)
(hereafter collectively referred to as
"Jackson & Companies"),

       Appellants in No. 97-5736

On Appeal From the United States District Court
For the District of New Jersey

                               2
(D.C. Civil Action No. 89-cv-01543)
District Judge: Hon. Stanley S. Brotman

Argued September 15, 1998

BEFORE: STAPLETON and ROTH, Circuit Judges, and
LONGOBARDI,* District Judge

(Opinion Filed May 25, 1999)

       Kevin B. Clark
       John P. Dean (Argued)
       Conrad J. Smucker
       Lisa K. Coleman
       Willkie Farr & Gallagher
       Three Lafayette Centre
       1155 2lst Street, N.W.
       Washington, D.C. 20036-3384

        Attorneys for Chemical Leaman
        Tank Lines, Inc., Appellant in No.
        97-5735

       Henry Lee (Argued)
       Olympia Bizekis
       Allen R. McKay
       Mendes & Mount
       750 Seventh Avenue
       New York, NY 10019
        and
       William S. Wachenfeld
       Adam M. Smith
       Mendes & Mount
       One Newark Center
       Newark, NJ 07102

        Attorneys for Robin Anthony
        Gildart Jackson, et al., Appellants
        in No. 97-5735
_________________________________________________________________

*Honorable Joseph J. Longobardi, Senior United States District Judge for
the District of Delaware, sitting by designation.

                               3
       Laura A. Foggan
       Elizabeth A. Eastwood
       Peter J. Skalaban, Jr.
       Wiley, Rein & Fielding
       1776 K Street, N.W.
       Washington, D.C. 20006

        Attorneys for Insurance
        Environmental Litigation
        Association, Amicus Curiae

OPINION OF THE COURT

STAPLETON, Circuit Judge:

I.

This appeal marks the second appearance of this case
before our Court and comes after more than nine years of
litigation.1 Seeking indemnification for costs connected to
the environmental cleanup of its Bridgeport, New Jersey,
facility, Chemical Leaman initially filed this declaratory
judgment and damages action against its primary and
excess insurers in April, 1989.

Chemical Leaman is a tank truck company specializing in
the transportation of various chemicals and other liquids.
Since 1960, it has provided tank truck cleaning services at
its Bridgeport truck terminal facility. In 1969, the New
Jersey Department of Health ordered Chemical Leaman to
_________________________________________________________________

1. A more detailed history of this case is found in the prior published
opinions. The District Court's pre-trial opinions are reported at Chemical
Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 788 F.Supp. 846
(D.N.J. 1992) and Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur.
Co., 817 F.Supp. 1136 (D.N.J. 1993). Our initial opinion in this case was
vacated on a petition for rehearing en banc. See Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. & Sur. Co., 68 F.3d 658 (3d Cir. 1995), vacated
68 F.3d 685 (3d Cir. 1995). Our subsequent opinion is published at 89
F.3d 976 (3d Cir. 1996). The District Court's opinion following remand is
reported at Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
978 F.Supp. 589 (D.N.J. 1997).

                                4
construct a waste water treatment and/or disposal plant to
alleviate the strong odors emanating from the on-site ponds
and lagoons where Chemical Leaman disposed of water
from the cleaning process. Chemical Leaman continued to
use the ponds and lagoons system until it installed a water
treatment system in 1975. By 1977, Chemical Leaman had
drained and filled the ponds and lagoons.

In 1981, the New Jersey Department of Environmental
Protection ordered Chemical Leaman to investigate the
extent and degree of groundwater contamination at and
around the Bridgeport site. The investigation revealed that
the ponds and lagoons were primary sources of
groundwater contamination. In 1984, the federal
Environmental Protection Agency ("EPA") placed the
Bridgeport site on the National Priorities List of Superfund
sites pursuant to Section 105 of the Comprehensive
Environmental Response, Compensation and Liabilities Act
("CERCLA"), 42 U.S.C. S 9605. The EPA alleged that
Chemical Leaman was strictly liable for injury to,
destruction of, or loss of natural resources, as well as the
reasonable costs of assessing such damage to natural
resources, and for all costs of removal or remedial action
incurred by the United States or the State of New Jersey.

In July 1985, Chemical Leaman entered into a consent
order with the EPA, admitted liability under CERCLA, and
agreed to remediate the Bridgeport site or pay for its
remediation. Additionally, this order directed Chemical
Leaman to undertake a Remedial Investigation and
Feasibility Study ("RI/FS") of the groundwater. Chemical
Leaman has incurred substantial costs in conducting this
study and expects to accrue considerable future removal
costs and damages.

After entering this consent order, Chemical Leaman
notified its various insurers. Chemical Leaman had
purchased comprehensive general liability ("CGL") policies
from Aetna, its primary insurer, for one-year periods
covering April 1, 1959, through April 1, 1985. Under these
policies, Aetna agreed to pay on behalf of Chemical Leaman
all sums that Chemical Leaman became legally obligated to
pay as damages because of property damage. Additionally,
Aetna agreed to defend Chemical Leaman in suits seeking

                                5
recovery for such property damage. From April 1, 1971,
through April 1, 1985, Aetna's policies contained a
pollution exclusion, indicating that the policies did not
apply to the discharge of pollutants unless such discharge
was "sudden and accidental." Chemical Leaman had also
purchased multi-year excess liability insurance policies
through Lloyd's insurance market spanning the period April
1, 1958, through April 1, 1986. These excess policies
covered property damage but did not contain a similar
defense obligation. The excess policies covering April 1,
1971, through April 1, 1985 contained pollution exclusions
similar to those in Aetna's CGL policies.

When these insurers denied coverage, Chemical Leaman,
a Delaware corporation with its principal place of business
in Pennsylvania, filed suit against Aetna, a Connecticut
corporation with its principal place of business in
Connecticut, and "Certain Underwriters at Lloyd's, London
subscribing to Insurance Policies [specifically enumerated]."
(LMIa47) The complaint claimed that diversity jurisdiction
was proper and alleged that "Certain Underwriters" were
"various insurance companies organized and existing under
the laws of the United Kingdom." (LMIa48)

On August 9, 1989, the parties stipulated to a change in
the complaint "substitut[ing] `Robin Anthony Gildart
Jackson, an Underwriter at Lloyd's, London on behalf of
himself and all other Underwriters at Lloyd's, London,
subscribing to [specifically enumerated policies], [and forty
specifically named insurance companies]' in place of and
instead of defendants `Certain Underwriters at Lloyd's,
London subscribing to Insurance Policies [specifically
enumerated].' " (LMIa57-59) The stipulation stated that any
final judgment against Jackson would be binding on those
underwriters subscribing to the enumerated policies and
thus within the scope of Jackson's purported
representation. In a similar vein, the stipulation indicated
that a final judgment in favor of Jackson would inure to the
benefit of those same underwriters.2 Jackson, the
_________________________________________________________________

2. The amended stipulation also included several additional policies
within the scope of Jackson's purported representation and stated that
these underwriters would be bound or benefitted by a final judgment for
or against Jackson.

                                6
underwriters he is alleged to represent, and the specifically
named insurance companies are underwriters of Chemical
Leaman's various excess policies purchased through Lloyd's
insurance market. This stipulation was signed by the
attorneys for Chemical Leaman, Jackson, and the named
insurance parties. On August 29, 1989, the District Court
entered an order amending the complaint and designating
Jackson and the named insurance companies (hereinafter
collectively "the excess insurers") as defendants.

Following extensive discovery, the parties filed cross-
motions for summary judgment on various grounds. The
District Court held that New Jersey law governed the
insurance policies at issue. See Chemical Leaman Tank
Lines, Inc. v. Aetna Cas. & Sur. Co., 788 F.Supp. 846, 850-
51 (D.N.J. 1992). The primary and excess insurance
policies were standard form "occurrence-based" policies,
meaning that they insured against "occurrences" as defined
in the policies. The District Court concluded that Chemical
Leaman bore the burden of proving an occurrence. See
Chemical Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co.,
817 F.Supp. 1136, 1143-44 (D.N.J. 1993). And because
Chemical Leaman's insurance policies defined "occurrence"
as an event neither expected or intended, the Court
concluded that Chemical Leaman also had to prove that it
did not subjectively expect or intend the property damage
for which it sought coverage. See id. at 1144.3

Furthermore, the District Court concluded that, under
New Jersey law, the "continuous trigger" theory of liability
would apply and trigger a particular insurance policy if (1)
damage took place during that policy year; and (2) the
damage in that policy year was part of a continuous and
indivisible process. See id. at 1153-54. At the time of trial,
New Jersey's continuous trigger law indicated that
_________________________________________________________________

3. The pre-1961 policies insured against "accidents" as opposed to
"occurrences." New Jersey law defines the term "accident" in the
accident-based policies in substantially the same manner as the
definition of an "occurrence" in the occurrence-based policies--an event
neither expected nor intended by the insured. Thus, the District Court
concluded that Chemical Leaman bore the same standard of proof under
both types of policies. See 817 F.Supp. at 1148. The insurers did not
challenge that holding on appeal. See 89 F.3d at 982 n.2.

                               7
insurance policies so triggered were jointly and severally
liable to policy limits for all damages resulting from that
occurrence, including damages that occurred before and
after the policy period. See id. at 1153. Because Chemical
Leaman began depositing contaminants into the ponds in
1960 and did not contest the insurer's assertion that the
contamination began to migrate to the groundwater
immediately, the District Court ruled as a matter of law
that damage had occurred to the soil and groundwater in
the 1960-1961 policy year. See id. at 1148. The District
Court did not discuss whether the same contamination
immediately spread to the wetlands.

Once a policy was deemed triggered, the District Court
concluded, the insurers bore the burden of proving that
coverage was precluded by an applicable pollution
exclusion. See id. at 1157. Finding the record replete with
evidence that Chemical Leaman intended to discharge
pollutants into the soil at the Bridgeport site, the Court
granted summary judgment under the pollution exclusion
to the insurers on Chemical Leaman's claims for soil
damage after April 1, 1971. See id. The District Court
denied summary judgment under the pollution exclusion
with respect to groundwater contamination, and did not
address contamination to the surrounding wetlands. See id.

Based on the District Court's legal conclusions, the jury
was asked to respond to a series of special interrogatories.4
The jury found that property damage had occurred to the
soil in every policy year between April 1, 1961 to April 1,
1971;5 to the groundwater in every policy year between
April 1, 1961, to April 1, 1981;6 and to the wetlands in
_________________________________________________________________

4. Chemical Leaman originally sought coverage from its insurers under
the policies covering years 1960-1985. As we noted in our first opinion,
the parties appear to agree that Chemical Leaman dismissed its claims
under the 1981 to 1985 policies. See 89 F.3d at 983 n.4.

5. Because of the District Court's determination that the pollution
exclusion barred coverage for soil damage after 1971, the jury was not
asked to determine whether soil damage occurred after that time.
Additionally, as noted above, the District Court had previously found
that soil damage occurred in the 1960-1961 policy year.

6. The District Court had already concluded that groundwater damage
occurred in the 1960-1961 policy year.

                               8
every policy year between April 1, 1961, to April 1, 1978.7
For every year in which property damage to a particular
medium occurred, the jury also found that (1) the damage
was part of a continuous and indivisible process; and (2)
Chemical Leaman did not expect or intend to cause that
damage at the time that it occurred. Furthermore, the jury
found that Chemical Leaman did not intend or expect to
discharge pollutants into the groundwater between 1971
and 1981, but did find that Chemical Leaman intended and
expected to discharge pollutants into the wetlands between
1971 and 1978.

Based on its own legal conclusions and the jury's verdict,
the District Court issued a judgment order on April 7,
1993. This order proclaimed that Chemical Leaman was
entitled to recover "the full amount of any and all costs of
investigating and remediating" soil, groundwater, and
wetlands contamination at Bridgeport. (JA30-32) Moreover,
the order provided that the 1960-71 Aetna and excess
insurance policies were jointly and severally liable up to
their policy limits for investigation and remediation costs
connected to soil contamination; that the 1960-81 policies
were jointly and severally liable up to policy limits for
groundwater contamination; and the 1961-71 policies were
jointly and severally liable up to policy limits for wetlands
contamination.

Aetna and the excess insurers appealed to this Court.
Following oral argument but before we issued our decision,
Chemical Leaman entered into a settlement agreement with
Aetna. In this agreement, Aetna agreed to pay Chemical
Leaman $11,500,000 to settle Chemical Leaman's claims
against Aetna based on its 1959 to 1985 CGL policies. This
agreement purported to settle not only Chemical Leaman's
claim for damages and indemnification related to the
Bridgeport site but also its claims against Aetna involving
numerous other contaminated sites.8 Chemical Leaman and
_________________________________________________________________

7. The jury specifically found that no property damage occurred to the
wetlands in the 1960-1961 policy year or in the 1978-1981 policy years.

8. On October 6, 1994, Aetna had filed a declaratory judgment action
against Chemical Leaman and Chemical Leaman's excess insurers in the
United States District Court for the Eastern District of Pennsylvania.

                               9
Aetna allocated the $11,500,000 settlement amount among
the various contamination sites; $5,226,750 was allocated
to Bridgeport.9 Moreover, Chemical Leaman and Aetna
agreed that this settlement exhausted Aetna's CGL policies
covering April 1, 1959, to April 1, 1985. Because of the
settlement, Aetna withdrew from the appeal and is no
longer a party to the dispute.

On June 20, 1996, a panel of this Court affirmed the
District Court's judgment "except as to the allocation of
liability." (JA98-99) We remanded with instructions that the
District Court reallocate the damages "among applicable
polices in accordance with the New Jersey Supreme Court's
holding in [the intervening case] Owens-Illinois [v. United
Insurance Co.], 650 A.2d 974, 993-995 (N.J. 1994)." (JA99)
In Owens-Illinois, the New Jersey Supreme Court addressed
the allocation of liability when the continuous trigger theory
established the time of an occurrence as spread over a
series of years. The New Jersey Supreme Court rejected
joint and several liability and instead held that"any
allocation should be in proportion to the degree of the risks
transferred or retained during the years of exposure[to
injurious conditions]. . . i.e., proration on the basis of policy
limits, multiplied by years of coverage." Id. at 993.

On remand, the District Court heard oral argument and
accepted briefs on the reallocation of damages. As a
threshold matter, the District Court concluded that all of
Chemical Leaman's costs associated with the government-
_________________________________________________________________

Aetna Casualty & Surety Co. v. Chemical Leaman Tank Lines, Inc., No.
94-CV-6133 (E.D. Pa.). Aetna's complaint enumerated various
contamination sites for which Chemical Leaman had requested coverage
and alleged that it had no duty to defend or indemnify Chemical Leaman
for any claims arising out of these sites. Chemical Leaman
counterclaimed against Aetna and alleged that Aetna's policies did
provide coverage for all of the relevant claims. On July 17, 1995, the
District Court suspended the Pennsylvania litigation pending the
outcome of the instant case.

9. The amount allocated to each site was determined by estimating the
cleanup costs by site, calculating each site's percentage of the total
estimated cleanup cost, and then multiplying this percentage by the
settlement amount.

                                10
mandated RI/FS were indemnity costs, rather than defense
costs, and thus subject to recovery under the excess
insurance policies. See Chemical Leaman Tank Lines, Inc. v.
Aetna Cas. & Sur. Co., 978 F.Supp. 589 594-96 (D.N.J.
1997). Analyzing the effect of Aetna's settlement on the
allocation of liability, the District Court concluded that
Aetna's CGL policies had been exhausted by the settlement.
See id. at 600-01. As a result, the District Court concluded
that Aetna's policies and their limits should not be included
in its subsequent reallocation of liability pursuant to
Owens-Illinois. See id. at 604. Nonetheless, the District
Court concluded that the excess insurers were entitled to a
credit of $11,055,000, an amount reflecting Aetna's 1960-
1981 per-occurrence policy limits. See id. at 601-03. The
District Court also determined that this Court's earlier
opinion precluded any allocation of liability related to soil
and wetlands back to Chemical Leaman based on the
liability-phase determinations that pollution exclusion
clauses in the 1971-1981 policies barred coverage for soil
and wetland coverage in those years. See id. at 603.

Because the District Court calculated the total Bridgeport
past indemnity costs as $11,084,226, see id. at 597-98, the
District Court concluded that the excess insurers were
responsible for $29,226, the past indemnity costs over and
above the $11,055,00 credit, and all future indemnity costs
associated with Bridgeport. See id. at 602. The District
Court determined that the $29,226 in remaining past costs
constituted costs attributable to groundwater. See id. at
610.

The District Court then set about allocating the relevant
indemnity costs among the excess insurers. In accord with
its earlier holdings, the District Court concluded that all
future soil indemnity costs associated with Bridgeport
would be allocated among the 1960-71 policy years; that
$29,226 and all future groundwater indemnity costs would
be allocated among the 1960-81 policy years; and that all
future wetlands indemnity costs would be allocated among
the 1961-71 years. See id. at 605. The District Court
assigned a percentage of the liability for each medium to
each policy year deemed liable for that particular medium.
The District Court calculated these percentages by adding

                               11
up the policy limits of all the excess policies in a particular
policy year and dividing that amount by the total policy
limits of all excess policies in all policy years deemed liable
for that medium. See id. at 605-06; 610-12. 10 Because
several layers of excess policies overlay the Aetna primary
policy in each policy year, the District Court directed that
each layer of excess coverage in a given year must exhaust
before the next layer of excess insurance would be required
to begin paying indemnity costs to Chemical Leaman. See
id. at 606.11

Because a single per-occurrence limit existed in each
excess insurance policy sold through Lloyd's, even those
policies with terms greater than one year, the District Court
was required to address whether the Bridgeport
contamination should be treated as one occurrence or a
separate occurrence in each policy year. The District Court
held that the policies of greater than one year would be
liable up to the per-occurrence limit for a separate
occurrence during each policy year. See id. at 608. As a
final matter, the District Court found that each underwriter
of the excess insurance policies sold through Lloyd's was
independently liable for its own share of that policy, and
thus that defendant underwriters should not bear the loss
of insolvent underwriters or underwriters not named as
defendants in the action. See id. at 608-09.

Both Chemical Leaman and the excess insurers appeal
the District Court's order on remand. The excess insurers
appeal the District Court's determination that all of costs
associated with the government-mandated RI/FS are
indemnity costs subject to recovery under the excess
insurance policies rather than defense costs. Additionally,
the excess insurers contend that the District Court erred by
_________________________________________________________________

10. For example, the total excess coverage in policy years 1960-1971 was
$131,225,000. Because the excess policies in 1960 offered $1,225,000 in
coverage, the District Court assigned 0.93% ($1,225,000/$131,225,000)
of all future soil indemnity costs to the policies in 1960.

11. This vertical allocation, beginning with the lowest policy layer and
proceeding upward through each succeeding policy layer in a particular
year, was subsequently adopted by the Supreme Court of New Jersey in
Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116 (N.J. 1998).

                               12
allocating all indemnity costs related to the soil and
wetlands to the excess insurers rather than requiring
Chemical Leaman to absorb a portion of these costs based
on the applicable pollution exclusion after 1971. Chemical
Leaman challenges the District Court's award of an
$11,055,000 settlement credit to the excess insurers rather
than a lesser credit of $5,226,750, the amount Chemical
Leaman allocated to Bridgeport in its settlement agreement
with Aetna.

II. EXISTENCE OF SUBJECT MATTER JURISDICTION

Prior to the entry of a final order in the District Court,
the excess insurers brought the attention of the Court to
Lowley-Williams v. North River Ins. Co., 884 F. Supp. 166
(D.N.J. 1995), a declaratory judgment action brought by a
Lloyd's underwriter in which the Court held that the
citizenship of all underwriters on a Lloyd's policy had to be
taken into account in determining diversity jurisdiction.
The excess insurers simultaneously informed the Court
that there were underwriters who subscribed to Chemical
Leaman's excess policies who were residents of
Pennsylvania and Delaware. However, neither the excess
insurers nor any other party took the position that the
District Court lacked subject matter jurisdiction. The
District Court apparently concluded before entering its
judgment that it had diversity jurisdiction.

Before us, all parties affirm that the District Court had
diversity jurisdiction under 28 U.S.C. S 1332 and that we
have appellate jurisdiction under 28 U.S.C. S 1291. We
have conducted our own inquiry, however, as to whether
the subject matter jurisdiction of the District Court can be
questioned at this stage of the proceedings and, if so,
whether it had diversity jurisdiction.

A. No Bar To Judicial Consideration of this Issue

The first issue we face is whether the existence of subject
matter jurisdiction is an issue open to judicial
consideration at this procedural juncture. The general rule
is that "where non-waivable subject matter jurisdiction is
lacking but not raised, a final judgment has res judicata

                               13
effect in a subsequent proceeding, and a collateral attack
based on the want of subject matter jurisdiction is barred."
Mitchell v. Commission on Adult Entertainment
Establishments, 12 F.3d 406, 408-09 (3d Cir. 1993) (citing
Hodge v. Hodge, 621 F.2d 590, 592 (3d. Cir. 1980)). This
rule applies whether or not the issue of subject matter
jurisdiction was litigated. See id. The logical corollary to
this general rule is the rule that as long as a case is
pending, the parties or the court on its own motion may
raise the issue of federal court jurisdiction at any stage of
the proceedings. See Depex Reina 9 Partnership v. Texas
International Petroleum, 897 F.2d 461, 464 (10th Cir. 1990)
(citing 1 Moore's Federal Practice P 0.60[4] (2d ed. 1981)).
Specifically, if there is no final judgment outstanding into
which the defense of lack of jurisdiction can merge and
proceedings are continuing, res judicata does not operate to
bar consideration of a challenge to the jurisdiction of the
court. See id.; DeNafo v. Finch, 436 F.2d 737, 740 (3d Cir.
1971).

In this case, the District Court entered a final declaratory
judgment declaring each primary and excess insurer that
provided coverage to Chemical Leaman during the relevant
periods jointly and severally liable in accordance with the
limits of its policy for the entire amount of investigation and
remedial costs incurred in connection with the Bridgeport
site. On appeal from this judgment, our opinion stated that
"[the excess insurers] correctly dispute the district court's
holding that all policies are jointly and severally liable."
Chemical Leaman Tank Lines v. Aetna Cas. & Sur. Co. , 89
F.3d 976, 995 (3d Cir. 1996). The opinion concludes by
saying:

       For the foregoing reasons, we will affirm the district
       court except as to the allocation of liability among
       applicable policies. We will remand to the district court
       for a reallocation of damages among applicable policies
       in accordance with the New Jersey Supreme Court's
       holding in Owens-Illinois, 650 A.2d at 993-95.

Id. at 997.

While our opinion said we were affirming the "district
court," the Clerk's Office's mandate stated the District

                               14
Court's "judgment" was being affirmed in some respects
and not in others:

       On consideration whereof, it is now here ordered and
       adjudged by this Court that the judgment of the said
       District Court entered November 18, 1993, be, and the
       same is hereby affirmed except as to the allocation of
       liability among applicable policies and the cause is
       remanded to the District Court for a reallocation of
       damages among applicable policies in accordance with
       the New Jersey Supreme Court's holding in Owens-
       Illinois, 650 A.2d 974, 993-95 (N.J. 1994). All of the
       above in accordance with the opinion of this Court."

(JA98-99)

Although our mandate should have stated that the
judgment of the District Court was reversed and that the
matter was remanded for further proceedings and the entry
of a corrected declaratory judgment, the language chosen
by the clerk must be construed in the context of our
opinion to mean the same thing. The District Court's
judgment was clearly not a valid and enforceable judgment
following our action on appeal.

It is important to note that subject matter jurisdiction
was not an issue litigated in the first district court
proceeding. When an appellate court approves something
the district court has done and not others, issue preclusion
does foreclose further consideration of an issue on which
the district court has been "affirmed." However, the
doctrine of claim preclusion bars consideration of an issue
not litigated below only if there exists a valid, enforceable
judgment into which a claim or defense has merged. We do
not have one here. See International Telephone & Telegraph
Corp. v. General Telephone & Electronics Corp., 527 F.2d
1162 (4th Cir. 1975) (noting that because Court of Appeals
reversed judgment in part, no final judgment existed on
which defendant could advance res judicata defense).

We are aware that Chemical Leaman terms the
proceedings on remand as supplemental proceedings after
the issuance of a final declaratory judgment. This is a
reference to 28 U.S.C. S 2202. Section 2202 provides that
"[f]urther necessary or proper relief based on a declaratory

                               15
judgment or decree may be granted, after reasonable notice
and hearing, against any adverse party whose rights have
been determined by such judgment." As Wright and Miller
note, Section 2202 "permits the original [declaratory]
judgment to be supplemented either by damages or by
equitable relief " [even] "long after the declaratory judgment
has been entered, provided that the party seeking relief is
not barred by laches." 10B C. WRIGHT, A. MILLER & M. KANE,
FEDERAL PRACTICE & PROCEDURE [hereinafter WRIGHT &MILLER]
S 2271 at 682 (3d ed. 1998). Chemical Leaman's view of the
procedural posture of this action is incorrect. The
reallocation of liability on remand is part of the declaration
of the "rights and other legal relations" of the parties before
the court, 28 U.S.C. S 2201, while a motion to recover
amounts due in accordance with the declaration would
constitute supplementary relief. See WRIGHT & MILLER
S 2771, at 682 (supplemental relief, such as damages or an
injunction, available against parties "whose rights have
been determined").

Because we find no bar to our consideration of the
propriety of subject matter jurisdiction, we now examine
whether a proper basis exists.

B. Diversity Jurisdiction

When this action was commenced, district courts had
original subject matter jurisdiction where the matter in
controversy exceeded $10,000 and was between citizens of
different States, or between citizens of a State and citizens
of a foreign state. See 28 U.S.C. S 1332.12 Though not
constitutionally required, the Supreme Court has long
insisted, as a matter of statutory interpretation, that
complete diversity between plaintiffs and all defendants
exist. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267
(1806).

An understanding of Lloyd's is helpful at the outset. Our
information concerning Lloyd's comes from the stipulation
_________________________________________________________________

12. The effective date of the 1988 amendment raising the jurisdictional
amount to $50,000 was May 18, 1989. Because this action was filed on
April 12, 1989, the $10,000 jurisdictional amount applies.

                               16
of the parties filed in Lowsley-Williams and relied upon by
the parties here. Lloyd's is an association that provides the
physical premises and the administrative services and staff
to enable insurance underwriters to carry on their
business. Lloyd's is not an insurance company, but rather
is an exchange or market where various individuals or
groups bid on the right to insure a given risk. Lloyd's takes
no part in the business of underwriting; policies are
underwritten at Lloyd's and not by Lloyd's.

An individual must pay a membership fee, keep certain
deposits at Lloyd's, and meet several specific requirements,
including possession of a certain degree of wealth, in order
to have access to the Lloyd's insurance market. Once they
have joined the market, these individuals may underwrite
risks in this market. The individuals are alternatively
referred to as members, underwriters, or names. In order to
increase the efficiency of underwriting risks and to combine
the resources of numerous individuals, names form groups
called syndicates. However, syndicates are not legal
entities. Syndicates do not assume liability or underwrite
risks; names do. Each name has unlimited personal
liability yet only to the extent of the percentage share of the
risk that he or she has assumed. The holders of Lloyd's
policies thus enter into contractual relationships with
specific names who have subscribed to the policy for the
portion of the risk each name has agreed to underwrite.

Within each syndicate, a Managing Agent is responsible
for the underwriting and management of each individual's
investments. The Managing Agent receives this authority
through contracts with each individual. The Managing
Agent, typically a partnership or limited company, appoints
one of its employees to serve as the Active Underwriter for
the syndicate. The Active Underwriter has the authority to
bind all the individuals in the syndicate. The Active
Underwriter selects the risks to underwrite, determines the
conditions to which a risk will be subject, assigns each
individual in the syndicate a percentage of the risk, and
decides whether to pay a particular claim.

The complaint originally filed in this case designates as
parties defendant Aetna and the underwriters at Lloyd's
who subscribed to Chemical Leaman's excess policies. It

                               17
alleges that each of these parties has agreed to submit to
the jurisdiction of any court of competent jurisdiction in the
United States and has designated Mendes and Mount in
New York as its agent for service of process.

As we have noted, however, Chemical Leaman agreed
early in the litigation to amend its complaint. The Amended
Complaint designates as defendants Aetna, forty insurance
companies identified by name, and "Robin Anthony Gilbert
Jackson, an Underwriter at Lloyd's, London on behalf of
himself and all other underwriters at Lloyd's, London
subscribing to" Chemical Leaman's excess policies. The
parties agree that there is complete diversity between
Chemical Leaman, Aetna, the forty named insurers and
Jackson.13 A jurisdictional problem would exist only if this
Court were required to consider the citizenship of the
underwriters within Jackson's purported representation.
Given the complaint before us, we are not so compelled.

Chemical Leaman has not brought suit against Jackson
as an agent of the individual underwriters or against the
syndicates of which they are members. There are no
allegations in the amended complaint to support such
theories.14 The amended complaint is based solely on the
_________________________________________________________________

13. While the parties agree that neither Jackson nor the named
insurance policies have the same citizenship as Chemical Leaman, the
complaint, as amended pursuant to the stipulation, does not so allege.
The plaintiff has the burden of pleading the existence of the court's
jurisdiction, see Fed.R.Civ.P. 8, and, in a diversity action, the
plaintiff
must state all parties' citizenships such that the existence of complete
diversity can be confirmed. See 5 Wright & Miller S 1208, at 100 (2d ed.
1990). We are authorized to permit Chemical Leaman to amend its
complaint to make the necessary allegations by statute. See 28 U.S.C.
S1653 ("Defective allegations of jurisdiction may be amended, upon
terms, in the trial or appellate courts."). We have previously stated: "It
is
not only within the power, but it is a duty, of a federal court to
consider
on the merits a proposed amendment of a defective allegation once the
court's attention is called to the defect." See Kiser v. General Electric
Corp., 831 F.2d 423, 427 (3d Cir. 1987). Accordingly, we instruct
Chemical Leaman to remedy its inadequate jurisdictional allegations.

14. Chemical Leaman's complaint cannot reasonably be read as asserting
a claim against an individual underwriter as an agent for his syndicate.
Compare Certain Interested Underwriters at Lloyd's v. Lane, 26 F.3d 39
(6th Cir. 1994). Nor can it be reasonably read as asserting a claim
against a syndicate itself. Compare Indiana Gas Co., Inc. v. Home Ins.
Co., 141 F.3d 314 (7th Cir. 1998).
18
excess policies and the underwriter names share no
common liability under those policies. The only relevant
allegation is that Jackson subscribed to the excess policies
in the same manner as all other subscribers, i.e., that he is
a member of a class of similarly situated persons. Thus,
while Jackson is sued "on behalf of . . . all other
Underwriters at Lloyd's, London subscribing to" the excess
policies, the amended complaint identifies no basis for
binding "all other underwriters" absent a class certification.

There has been no class certification here. Accordingly,
the only claim against Jackson that the District Court
could adjudicate was the claim against him in his
individual capacity. See Davis v. Romney, 490 F.2d 1360
(3d Cir. 1973) (treating the action as an individual claim in
the absence of class certification); Jackson v. O'Bannon,
633 F.2d 329 (3d Cir. 1980) (concerning itself only with the
factual situation involving the named parties since the
purported class had not been certified and neither party
raised the class issue on appeal).15

Because Aetna, Jackson and the named insurance
companies were the only defendants after the complaint
was amended, only their citizenship and liability amounts
on the insurance policies are relevant to the exercise of
subject matter jurisdiction under 28 U.S.C. S 1332. In
reaching this conclusion, we are not unmindful of the fact
that Chemical Leaman and the underwriters of the excess
policies have agreed in their stipulation to be bound by the
judgment in this action for or against Jackson. However,
this stipulation did not place before the District Court any
of the underwriters not named in the amended complaint,
and the judgment of the District Court is not directly
enforceable by or against them. Accordingly, we do not view
this voluntary side agreement as depriving the District
Court of its jurisdiction.16
_________________________________________________________________

15. If the District Court had properly certified a class, the existence of
complete diversity would be determined without reference to the
citizenship of the members of the class other than Jackson and the
named insurance companies. See In Re School Asbestos Litigation, 921
F.2d 1310 (3d Cir. 1990).

16. Chemical Leaman states a valid claim against Jackson as an
underwriter of one or more of its Lloyd's policies. This, accordingly, is

                               19
III. CHARACTERIZATION OF RI/FS COSTS AS DEFENSE
       OR INDEMNITY COSTS

Turning to the propriety of the District Court's order on
remand, we examine the District Court's determination that
all of Chemical Leaman's mandated RI/FS investigation and
remediation costs are indemnity costs rather than defense
costs. Because the excess insurance policies carry only a
duty to indemnify, and not a corresponding duty to defend,
the excess insurers would necessarily benefit from a partial
allocation of the RI/FS costs to defense costs.17
_________________________________________________________________

not a situation in which diversity jurisdiction has been manufactured to
secure an adjudication of a controversy over which a district court would
not otherwise have diversity jurisdiction. See 28 U.S.C. S1359 ("A
district
court shall not have jurisdiction of a civil action in which any party by
assignment or otherwise, has been improperly or collusively made or
joined to invoke the jurisdiction of such court."); Boyer v. Snap-On Tools
Corp., 913 F.2d 108 (3d Cir. 1990) (noting that court will abide by
plaintiff 's election of defendants unless the plantiff impermissibly
manufactured diversity or used an acceptable device to defeat diversity);
McSparran v. Weist, 402 F.2d 867 (3d Cir. 1968) ("manufactured"
diversity of citizenship, by appointment of out-of-state guardian to
prosecute suit of resident minor, did not constitute adequate foundation
for federal jurisdiction).

Moreover, we perceive no reason why Chemical Leaman should not be
entitled to sue less than all of the names if it so chooses. According to
the terms of the Lloyd's policies, the names are liable "each for his own
part and not one for another." See 978 F.Supp. at 609 (quoting policy
language). Thus, while the absent names would be proper parties to this
suit, they are not necessary parties. Complete relief may be accorded to
those already parties to the action without impairing or impeding the
absent names' ability to protect their interests and without subjecting
any party to multiple or otherwise inconsistent obligations. See
Fed.R.Civ.Proc. 19(a); Janney Montgomery Scott v. Shephard Niles, 11
F.3d 399 (3d Cir. 1993) (noting that joint and severally liable obligors
are
not necessary defendants under Rule 19(a)).

17. A duty to indemnify requires an insurer to pay on behalf of the
policyholder all sums that the insurer is contractually obligated to pay
as damages because of harms or losses covered by the policy. A duty to
defend obligates the insurer to pay the costs incurred preparing for and
defending a lawsuit brought against the policyholder. See General
Accident Ins. Co. v. State Dep't of Envtl. Protection (Fairclough), 672
A.2d
1154, 1155 (N.J. 1996).

                                20
The New Jersey Supreme Court addressed the
appropriate characterization of government-mandated
RI/FS costs in General Accident Ins. Co. v. State Dep't of
Envtl. Protection (Fairclough), 672 A.2d 1154 (N.J. 1996).18
Fairclough, the insured, operated a fuel storage business.
After an act of vandalism caused a discharge of
approximately 1,300 gallons of fuel oil from Fairclough's
facility, the New Jersey Department of Environmental
Protection ordered Fairclough to conduct an RI/FS.
Fairclough's insurer initially disputed its obligation to
defend or indemnify Fairclough. However, it later entered
into a consent order and agreed to indemnify Fairclough up
to $100,000 and to defend claims related to the oil
discharge until its indemnity limit was exhausted. After
paying more than $100,000 in response costs, the insurer
sought a declaration that it owed no further duty to
Fairclough in connection with the oil discharge. The
propriety of such a declaration required an allocation of the
response costs between the insurer's defense and indemnity
obligations.

The New Jersey Supreme Court declined to adopt a
bright-line rule that all costs associated with a mandated
RI/FS were either exclusively indemnity costs or exclusively
defense costs. Rather the Court stated:
_________________________________________________________________

18. The New Jersey Supreme Court decided General Accident in March
1996, after the District Court's 1993 judgment holding Aetna and the
excess insurers liable "for the full amount of any and all costs of
investigating and remediating" contamination at the Bridgeport terminal
and three months before our first judgment in this case. Because the
excess insurers did not specifically allege on appeal that the District
Court's order erroneously required them to cover defense costs, Chemical
Leaman contended on remand that the excess insurers had waived that
challenge. The excess insurers countered that they had appealed their
liability for defense costs in the form of appealing the joint and several
liability component of the judgment. The District Court did not decide
this waiver issue and instead properly determined that it was bound to
revisit the issue in light of the intervening New Jersey Supreme Court
decision. See 978 F.Supp. at 595. As this Court stated in Air Products
and Chemicals, Inc. v. Hartford Accident & Indem. Co., 25 F.3d 177, 181
(3d Cir. 1994), "[w]e agree that a federal court exercising diversity
jurisdiction is bound to follow the law as decided by the highest court of
the state even if it has changed during the pendency of the federal
action."

                               21
       [W]e believe the only fair result is a balanced solution
       that takes multiple factors into account. If it is clear
       that the expenditure clearly kills two birds with one
       stone in the sense of fulfilling a defense obligation
       while also relieving the policyholder of a potential claim
       for damages, the proper solution appears to be a fair
       allocation of the RI/FS costs between defense and
       indemnity provisions of the policy.

Id. at 1162. However, to avoid needless litigation in the
form of a war of experts on the allocation issue, the New
Jersey Supreme Court--as the District Court correctly
noted--established a presumption that the costs of an
RI/FS mandated by a government agency are indemnity
costs. With respect to this presumption, the Supreme Court
stated:

       We believe that there should be a presumption that
       mandated costs are indemnity costs to be allocated to
       the indemnity provisions of the policy. The burden
       should be on the policyholder to show that the
       insurance company has derived an unjust benefit from
       such an allocation to the extent that it has relieved the
       insurance company of an expense that it would
       otherwise have incurred under its obligation to defend.

Id.

On remand, the District Court interpreted this language
in Fairclough to preclude an allocation of mandated RI/FS
costs in part to defense costs unless "the insured shows
that the allocation to indemnity alone would provide a
windfall to its insurance company." 978 F.Supp. at 596
(emphasis added). Because Chemical Leaman did not
contest, but in fact embraced, this presumption, the
District Court ruled that all of Chemical Leaman's costs
associated with the mandated RI/FS were indemnity costs.
See id.

In so holding, however, the District Court failed to
acknowledge an important distinction between Fairclough
and the instant action. In Fairclough, the presumption that
all costs associated with a government-mandated RI/FS are
indemnity costs cut in favor of the insurer and against the
policyholder. This is because Fairclough involved an insurer

                                22
with both a duty to indemnify and a duty to defend. To the
extent that RI/FS costs were characterized as indemnity
costs, these costs not only served to exhaust the policy
limits, but also served to eliminate the insurer's duty to
defend. In the instant case, the presumption operates in
favor of the policyholder, Chemical Leaman, and against
the excess insurers. To the extent that the costs associated
with the mandated RI/FS are characterized as indemnity
costs, the excess insurers are obliged to pay these amounts
pursuant to their duty to indemnify. To the extent that the
RI/FS costs are characterized as defense costs, the excess
insurers are relieved of any obligation for these costs.
Because Aetna paid no defense costs as part of its
settlement with Chemical Leaman, Chemical Leaman must
absorb any RI/FS costs characterized as defense costs.19

We do not agree that the New Jersey Supreme Court's
decision in Fairclough established a presumption capable of
being rebutted only by a policyholder without regard to who
is actually aggrieved by such a presumption. Rather, we
believe that Fairclough should be understood to stand for
the proposition that a party disadvantaged by the
presumption that the costs associated with a government-
mandated RI/FS are indemnity costs is entitled to rebut
that presumption. Thus, we hold that the District Court
erred by precluding the excess insurers from rebutting the
Fairclough presumption.

On appeal, Chemical Leaman does not seriously
challenge this proposition. Rather, it argues that the excess
insurers have proffered no evidence relevant to overcome
the presumption. We disagree. In the context of the
situation before us, financial responsibility is transferred
from Chemical Leaman to the excess carriers and Chemical
Leaman derives an unjust benefit whenever an expense
that should be allocated to defense costs is instead
allocated to indemnity. The record indicates that Chemical
Leaman itself regarded as defense costs many of the
expenses the District Court assigned to indemnity pursuant
_________________________________________________________________

19. In the settlement agreement, Chemical Leaman and Aetna allocated
the entire settlement payment of $11,500,000 to Chemical Leaman's
indemnity claims under Aetna's 1959-1985 policies.

                               23
to the Fairclough presumption. When it asserted its claim
for defense costs against Aetna, Chemical Leaman
characterized numerous items of expense associated with
the RI/FS as coming within Aetna's defense obligation.
Additionally, the record contains the affidavit of an
environmental consultant, Douglas J. Swanson, in which
the various RI/FS costs associated with the Bridgewater
contamination are classified as either defense costs or
indemnity costs.20 We view this affidavit as also providing
some evidence tending to rebut the Fairclough presumption.
We do not hold that the excess insurers have on this record
rebutted the presumption. That is an issue better left to the
District Court in the first instance. On remand, the District
Court will also have discretion to determine whether the
parties should have the opportunity to supplement the
record now that the presumption has been held to be
rebuttable by the excess insurers.

Additionally, we note that the New Jersey Supreme Court
has not specified an exact method by which courts should
attempt to accomplish a fair allocation once a fair allocation
is deemed necessary. In Fairclough, the New Jersey
Supreme Court merely stated that:
_________________________________________________________________

20. Swanson classified these costs according to the following guidelines
set forth in Endicott Johnson Corp. v. Liberty Mutual Ins. Co., 928
F.Supp. 176, 184 (N.D.N.Y. 1996), appeal dismissed, 116 F.3d 53 (2d
Cir. 1997):

       To the extent that an expense is primarily attributable to remedial
       investigations--which address the sources and extent of the
       contamination, whether environmental damages can be mitigated by
       controlling the sources, or whether additional action is necessary
       because of migration of contaminants from the site--the expense
       will be treated as a defense cost. To the extent an expense is
       primarily attributable to feasibility studies--which comprise plans
       for selecting and implementing the remediation alternative for the
       site--the expense will be treated as damages to be indemnified.

While the excess insurers encourage us to adopt Endicott Johnson's
bright-line rule for allocating costs associated with a mandated RI/FS
between defense and indemnity obligations, we decline to do so.
Adoption of a rule that all costs associated with remedial investigations
are defense costs and all costs associated with feasibility studies are
indemnity costs would eviscerate Fairclough's starting point that all
RI/FS costs are presumed to be indemnity costs.

                               24
        Such disputes seem ideally suited for mediation or
       arbitration under court-annexed programs of alternate
       dispute resolutions or on the parties' own initiative.
       Failing such resolution of the dispute in whole or in
       part, trial courts (upon recommendation of a master if
       one is appointed by the court) shall have broad
       discretion to resolve, based on written submissions
       without any additional expert testimony, a fair
       allocation of the costs between the defense and
       indemnity provisions of the policies.

Fairclough, 672 A.2d at 1162. The Court emphasized that it
sought, not to simplify the substantive issues, which it
recognized as intrinsically complex, but rather to "provide
procedures to simplify their resolution." Id. at 1163. "An
allocation that is swift, with perhaps a rough measure of
justice, appears to us to be the best procedure to simplify
resolution of these issues." Id. Nonetheless, the Court
enumerated the following non-exclusive factors that it
deemed relevant to any such "fair allocation" undertaken:

       (1) the relative risk that the [potentially responsible
       party] bore if it did not produce the RI/FS; for example,
       how realistic was the threat of treble damages; (2) the
       extent to which the details of the RI/FS may have been
       mandated by the environmental agencies; (3) the extent
       to which the RI/FS studies provide a means by which
       the insurance company or the policyholder would be
       relieved of or be able to mitigate potential claims for
       damages; and (4) the cost of producing the RI/FS in
       relation to the policy limits provided.

Id. at 1162.

Accordingly, we remand for a determination as to
whether the excess insurers have sufficiently rebutted the
Fairclough presumption, and, if necessary, for an allocation
of the past and future costs associated with the
government-mandated RI/FS between defense and
indemnity costs with reference to the above enumerated
factors and any other factor that the District Court deems
relevant.

                               25
IV. SETTLEMENT CREDIT

We now turn to the issue raised by Chemical Leaman on
appeal. Chemical Leaman challenges the District Court's
holding that the excess insurers are entitled to a credit
against their liability in this case of $11,055,000 based on
Chemical Leaman's settlement with Aetna. The credit
amount extended to the excess insurers determines at what
point the excess insurers must begin covering Chemical
Leaman's indemnity costs associated with Bridgeport.
Chemical Leaman contends that the excess insurers should
only receive a credit of $5,226,750, the amount of the
settlement that Chemical Leaman and Aetna allocated to
the Bridgeport site in their agreement.

In support of its argument, Chemical Leaman asserts
that the limits set forth in Aetna's CGL policies are both
per-occurrence and aggregate limits.21 It is undisputed that
Aetna's full per-occurrence policy limits applicable to
Bridgeport total $11,055,000.22 Because Chemical Leaman
maintains that Aetna's policies contain aggregate limits
equal to their per-occurrence limits, Chemical Leaman
contends that allocation of the $11,055,000 among
Chemical Leaman's various contamination sites is
necessary. Moreover, Chemical Leaman claims that the
excess insurers should be bound by Chemical Leaman's
and Aetna's decision to allocate $5,226,720 to Bridgeport
because they originally disclaimed coverage.

Chemical Leaman's arguments present at least three
separate issues of New Jersey law: (1) whether in the event
of a settlement between an insured and its primary insurer,
_________________________________________________________________

21. Chemical Leaman put forth definitions of these types of limits that
were subsequently adopted by the District Court. See 987 F.Supp. at
599 n12. A per-occurrence limit sets a maximum amount payable on a
particular claim, but does not impact coverage available for other claims
of the same type. An aggregate limit sets a cumulative amount of
coverage for all claims of a particular type. See id.

22. Aetna provided total per-occurrence indemnity limits of $55,000 in
the 1960 policy year; annual per-occurrence limits of $500,000 for policy
years April 1, 1961, to April 1, 1979; and annual per-occurrence limits
of $1,000,000 for policy years April 1, 1979, to April 1, 1981. See
Appellee's Brief at 7.

                               26
excess insurers are entitled to a credit in the amount paid
by the primary insurer or in the amount of the relevant
policy limits; (2) whether, assuming (a) there are aggregate
policy limits in the primary policies, (b) multiple covered
sites have been contaminated, and (c) the insured and the
primary insurer have allocated the settlement payment
among the various covered sites, the court in thefirst suit
to go to judgment should afford a full policy limit credit to
the excess insurers or should limit the credit to the amount
allocated in the settlement to the site(s) in that suit, leaving
the excess insurers to assert the remaining credit in
subsequent cases; and (3) whether the credit, whatever it
is, should be offset against the total indemnity costs
involved in the suit, or should first be allocated among the
relevant policy years and then set off against the indemnity
cost allocated to that year.

A. Settlement Amount v. Policy Limits

With respect to the first issue, the District Court
predicted that the New Jersey Supreme Court would adopt
the reasoning of UMC/Stamford, Inc. v. Allianz Underwriters
Ins. Co., 637 A.2d 182 (N.J. Super. 1994), the one
published New Jersey case on point. In UMC, the plaintiffs
sought coverage for environmental pollution claims under
various primary and excess insurance policies. After the
plaintiff settled with primary insurers, a non-settling excess
insurer moved for disclosure of the settlement amount. See
id. at 190. Denying the motion, the UMC court reasoned
that the excess insurer had no need to know the terms of
the settlement. Instead, it ruled that "an excess carrier is
entitled to a credit, not based on the primary carrier's
settlement, but based on the amount allocable to the
primary under its policies. In other words, the excess carrier
is entitled to a credit for the full amount of the primary
carrier's coverage before it is required to pay[under the
excess policies.]" See id. (emphasis added).

As the District Court noted, the UMC approach tracks "a
widely-followed corollary to the doctrine that a settlement
with a primary insurer exhausts the primary coverage.
Under this approach, the insured forfeits any right to
coverage of any dollar difference between the settlement

                               27
amount and the primary insurer's policy limits. The excess
insurer cannot be made liable for any part of this difference
because the excess insurer never agreed to pay for losses
below a specified floor (i.e. below the limits of the
underlying policy)." 978 F.Supp. at 602 (internal citations
omitted). This rule prevents the insured from securing a
double recovery.

We do not disregard a decision of an intermediate
appellate state court on an issue of controlling state law
unless we are "convinced by other persuasive data that the
highest court of the state would decide otherwise." See
Pittston Co. v. Allianz Ins. Co., 124 F.3d 508, 516 (3d Cir.
1997) (quoting West v. American Telephone & Tel. Co., 311
U.S. 223, 237 (1940)). Here, we find no basis for predicting
that the Supreme Court of New Jersey would decide
otherwise. Accordingly, we hold that the excess insurers are
entitled to a credit of $11,055,000, even though Chemical
Leaman alleges that it received only $5,226,720 for its
claims against Aetna regarding coverage at Bridgeport.

B. Full Credit v. Allocation on Basis of
Settlement Agreement

We now turn to the issue raised by the fact that the
primary and excess policies cover sites other than
Bridgeport that have given rise to claims against Chemical
Leaman and are the subject of other suits included within
the Aetna settlement. Chemical Leaman acknowledges that
if Aetna's policies contain only per-occurrence liability
limits, as the excess insurers insist, no allocation of the
settlement amount is required; the excess insurers are, in
that event, entitled to a credit equal to Aetna's per-
occurrence limits for each separate occurrence they are
called upon to cover. Chemical Leaman argues, however,
that Aetna's policies include an aggregate limit equal to the
per-occurrence limit and therefore some account must be
taken of the portion of settlement payment attributable to
sites other than Bridgeport.

We find it unnecessary to decide whether the Aetna
policies have aggregate policy limits. We assume, without
deciding, that they do. Even making that assumption,

                               28
however, we conclude that where, as here, the primary and
excess policies cover claims asserted against Chemical
Leaman based on occurrences wherever they happen, 23 the
Supreme Court of New Jersey would hold that the excess
insurers are entitled to a credit equal to the total per-
occurrence limits in the first suit to go to judgment. By
granting the excess insurers in a particular year a credit in
the amount of Aetna's per-occurrence policy limits for that
year in the instant case, we do not prejudice Chemical
Leaman or unduly benefit the excess insurers. Chemical
Leaman may raise the issue of aggregate limits in
subsequent litigation involving the liability of the excess
insurers under the applicable policies.

The Supreme Court of New Jersey has repeatedly favored
a pragmatic approach to issues of this kind, choosing the
rule that will simplify resolution of disputes. See Owens-
Illinois, 650 A.2d at 993 (seeking efficient and
administratively simple allocation of liability among various
insurers); Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d
1116, 1124 (N.J. 1998) (noting that the need for"efficient
response" to the logistical challenge posed by environmental
insurance litigation constituted factor relevant to allocation
decisions). Even assuming that Aetna's policies contained
aggregate limits, we believe the simplest and most
straightforward approach is to extend the full credit
amount to the excess insurers initially, rather than
accepting Chemical Leaman's subjective allocation of this
amount to the various contamination sites. If we were to
hold that the excess insurers were only entitled to a credit
amount of $5,226,750, the District Court would have to
allocate this amount among the various policy years.
Allocation of this amount in proportion to the amount of
insurance purchased from Aetna in each policy year, while
feasible, is unnecessarily complicating. It is much simpler
to allow the excess insurers the full credit at Bridgeport
rather than requiring allocation at each contamination site.
Moreover, this solution eliminates the need for any court to
pass on the fairness of Chemical Leaman's subjective
allocation among the various contamination sites.
_________________________________________________________________

23. The primary and excess policies cover the same occurrences; neither
is site specific.

                               29
Finally, extension of the full credit to the first case
against the excess insurers that goes to judgment or settles
eliminates any chance of double recovery by an insured. If,
for example, the total past and future indemnity costs
associated with Bridgeport were $10,000,000, and we only
extended a credit in the amount of $5,226,750 to the
excess insurers, the excess insurers would be responsible
for the difference of $4,773,250. Assuming further that the
total damages to all other sites in the same policy years
was less than $4,000,000, Chemical Leaman would have
received a double recovery. Chemical Leaman would have
received more in response costs from its insurers than it
was required to pay out. While this may be a case in which
the likelihood of overrecovery by the insured is remote, we
believe the Supreme Court of New Jersey would be
disinclined to adopt a rule that would entail a risk of
overrecovery.

C. Credit Applied to Total Indemnity Costs v. Allocation
       Among Relevant Policy Years

While we affirm the District Court's determination that
the excess insurers are entitled to a settlement credit of
$11,055,000, we note that the District Court subtracted the
entire settlement amount from $11,084,226, the total past
indemnity costs for Bridgeport on the record at that time,
and determined that the excess insurers would be liable for
the difference plus all future indemnity costs. This
wholesale cancellation of the credit did not respect the
contractual rights of the excess insurers in the various
policy years. For example, if these past costs were
responsive entirely to soil contamination, then the excess
insurers in the policy years 1960-1971 were the recipients
of the entire $11,055,000 credit and the excess insurers in
the policy years 1971-1981 were denied the benefit of any
credit based on Aetna's underlying policy limits.

In order to respect their contractual rights, the excess
insurers in a particular year should only begin covering
Chemical Leaman's Bridgeport indemnity costs when the
total costs allocated to that particular year exceed Aetna's
policy limits for that year. Thus, on remand, the District
Court should allocate the $11,055,000 settlement credit

                               30
according to Aetna's policy limits in each year. In order to
determine when the costs in a particular year exceed
Aetna's limits in that year, the District Court should (1)
allocate all indemnity costs on the updated record as
between soil, groundwater, and wetlands; (2) allocate the
costs associated with each medium between the relevant
policy years according to its Owens-Illinois calculations; and
(3) calculate the total costs allocated to a particular year by
adding the soil, groundwater, and wetlands costs for that
particular year. For example, the excess insurers covering
the policy year April 1, 1960, to April 1, 1961, should
receive a credit in the amount of $55,000, Aetna's policy
limit for that year. The excess insurers in that year should
only pay for those indemnity costs allocated to that year
when that amount exceeds $55,000.

V. ALLOCATION OF COSTS TO CHEMICAL LEAMAN
       BASED ON POLLUTION EXCLUSION

The excess insurers challenge the District Court's
conclusion on remand that Chemical Leaman was not
required to absorb a portion of its past and future
indemnity costs related to soil and wetlands contamination
at Bridgeport based on the liability-phase determinations
that pollution exclusions in the 1971-1981 policies barred
soil and wetlands coverage in those years. The District
Court based its conclusion on a literal reading of this
Court's prior opinion. Our opinion stated that we remanded
for a reallocation "between the [excess] insurers and among
the triggered [excess] policies." See 89 F.3d at 995. Our
mandate stated that we remanded the instant case for
reallocation of damages "among the applicable policies in
accordance with the New Jersey Supreme Court's holding
in Owens-Illinois." (JA99) The District Court interpreted our
use of the term "triggered policies" as limiting allocation of
all of Chemical Leaman's indemnity costs, beyond those
covered by Aetna's policies, to those excess policies deemed
liable in the District Court's previous order. See 978
F.Supp. at 603. Thus, the District Court concluded that we

                               31
had "ruled against any allocation back to the plaintiff
insured on account of the pollution exclusion clauses." Id.24

The District Court's reading of our "triggered policy"
language is understandable. Nevertheless, the question of
whether Chemical Leaman was required to share in those
costs was not before us, and we did not address it in our
opinion. In this context, we believe the fair import of our
mandate remanding for reallocation was simply to point out
that an intervening New Jersey Supreme Court decision
was controlling and therefore changed the damage
allocation.

Having decided that our prior opinion does not preclude
Chemical Leaman from absorbing a portion of its past and
future indemnity costs related to soil and wetlands
contamination at Bridgeport, we must decide whether
requiring Chemical Leaman to bear such costs is
appropriate under New Jersey law. We rely once again on
Owens-Illinois.

As indicated previously, the Owens-Illinois Court held
that in continuous trigger cases--situations where there is
progressive, indivisible injury--damages should not be
allocated among insurers under a theory of joint and
several liability. Rather, the New Jersey Supreme Court
held that "allocation should be in proportion to the degree
of the risks transferred or retained [by the policyholder]
during the years of exposure." 650 A.2d at 993 (emphasis
added). To demonstrate how the necessary allocation
should proceed and reflect periods of self-insurance, the
Court offered the example of a company that was liable for
continuous and indivisible damages spanning a nine-year
period. The Court assumed that the company had
purchased a constant level of insurance in years four, five,
_________________________________________________________________

24. As noted above, the District Court deemed the past indemnity costs
associated with Bridgeport to be covered by the $11,055,000 settlement
credit and the excess amount properly allocated to groundwater. As a
result, the District Court allocated only future soil and wetlands
indemnity costs associated with Bridgeport to the excess insurers. The
District Court allocated all future soil costs among the 1961 to 1971
policy years and all future wetlands costs among the 1961 to 1971 policy
years.

                               32
and six of the damages period, but had purchased no
insurance in the remaining years. Accepting the constant
levels of the policy limits as evidence of constant risks over
the nine-year period, the Court concluded that the carriers
on the risk in years four, five, and six should each be
responsible for one-ninth of the company's losses. See id. at
994.

While this hypothetical involved periods in which the
company purchased no insurance, the Court nonetheless
foresaw the exact issue raised on this appeal. Following this
hypothetical, the Court noted that "of course, policy limits
and exclusions must be taken into account." Id. (emphasis
added). On this appeal, the excess insurers seek to have
the damages to the soil and wetlands allocated, not only to
those years when Chemical Leaman had coverage for its
pollution damages, but also to those years when damages
continued to occur as part of a continuous and indivisible
process but for which coverage was barred due to an
applicable pollution exclusion. The necessary effect of this
reallocation would be to reduce the amount of damages
allocated to each year in which the excess policies are liable
for Chemical Leaman's damages.

Because the failure to purchase any insurance and an
applicable policy exclusion both involve the retention of risk
by the insured, we conclude, as suggested by the Owens-
Illinois Court, that they should be treated similarly when
allocating liability in accordance with Owens-Illinois and its
progeny. This does not end our inquiry, however, for as the
parties note, Owens-Illinois differentiates between a period
of no insurance that reflects a choice to assume or retain
a risk and a period of no insurance that reflects an inability
to obtain coverage. The Owens-Illinois Court indicated that
"[w]hen periods of no insurance reflect a decision by an
actor to assume or retain a risk, as opposed to periods
when coverage for a risk is not available, to expect the risk-
bearer to share in the allocation is reasonable." Id. at 995.
We interpret this statement to mean that if insurance was
not available to Chemical Leaman to cover its pollution
damages to the soil and wetlands after April 1, 1971, then
Chemical Leaman should not be required to absorb part of
its indemnity costs related to those two media. If, however,

                               33
insurance was available and Chemical Leaman chose not to
purchase it, then Chemical Leaman should be required to
shoulder part of those costs. On appeal, the parties
disagree about whether the insured or the insurer should
have the burden of proof on the availability of insurance.

While no published New Jersey case has reached this
exact issue, the New Jersey Supreme Court has previously
indicated its "inherent reluctance to place the burden of
proving a negative fact on a litigant." Carter-Wallace, 712
A.2d at 1126. The Court has noted that, because of the
difficulties associated with proving a negative, the burden of
establishing the negative is "something the law rarely, if
ever, imposes." Barbato v. Alsan Masonry & Concrete Inc,
318 A.2d 1, 10 n.2 (N.J. 1974). Thus, rather than require
Chemical Leaman to prove that insurance was not available
to cover its pollution damages to the soil and wetlands after
1971, we conclude that, under New Jersey law, the
insurers should bear the burden of proving that insurance
coverage was available.

If the excess insurers prove on remand that Chemical
Leaman could have purchased insurance to cover its post-
1971 damages to the soil and wetlands, Chemical Leaman
should be required to absorb a portion of its past and
future indemnity costs for those years in which those two
media were damaged as part of a continuous and
indivisible process but for which Chemical Leaman did not
purchase available insurance. We will remand for the
necessary factual finding on the availability of insurance,
and, if necessary, for a reallocation of soil and wetlands
damages. We note that the jury previously determined that
damages occurred to the wetlands as part of a continuous
and indivisible process between April 1, 1971, to April 1,
1978, and that no further damage occurred to the wetlands
after April 1, 1978. However, because of the District Court's
pre-trial ruling that the pollution exclusion in the 1971-
1981 policies barred coverage for soil contamination, no
factual findings have been made as to whether damage
occurred to the soil as part of a continuous and indivisible
process after April 1, 1971.25 We leave it to the District
_________________________________________________________________

25. Because the contaminated rinse water passed through the soil before
it reached the groundwater and because the jury found continuous and

                                34
Court's discretion, if allocation of damages to post-1971
years is found to be necessary, to determine the percentage
of soil and wetlands damages to be absorbed by Chemical
Leaman.

VI. CONCLUSION

On remand, the District Court should first determine
whether the excess insurers have rebutted the Fairclough
presumption. If so, it should allocate the cost associated
with the government-mandated RI/FS between defense
costs and indemnity costs. Second, the District Court
should allocate all indemnity costs on the updated record
as between soil, groundwater, and wetlands.

After determining the total past indemnity costs for each
medium, the District Court should then allocate these costs
among the applicable policy years for each medium. The
excess insurers have not challenged the District Court's
allocation of groundwater costs. However, they have
challenged the District Court's holding that the excess
insurers are responsible for the entire soil and wetlands
indemnity costs. On remand, the District Court should
determine whether insurance was available to Chemical
Leaman to cover its post-1971 damages to the soil and
wetlands. If insurance was available after 1971, then
Chemical Leaman should be required to absorb a portion of
its past and future indemnity costs for damage to the soil
and wetlands that occurred after April 1, 1971, as part of
the continuous and indivisible process of damage begun
prior to that date.

Finally, the District Court should allocate the
$11,055,000 credit amount such that the excess insurers
in a particular policy year receive a credit in the amount of
Aetna's policy limits for that year. Before the excess
insurers of a particular policy year are to begin providing
coverage, the total liability assigned to that policy year--the
_________________________________________________________________

indivisible groundwater damages between 1971-1981, common sense
suggests that the jury, if faced with the issue, would have found soil
damage as part of a continuous and indivisible process between 1971-
1981. However, we make no factual findings of our own on this issue.

                               35
sum of the soil, groundwater, and wetlands indemnity costs
--must exceed the limits of Aetna's policy limits in that
year.

The judgment of the District Court will be reversed, and
this matter will be remanded to the District Court for
further proceedings consistent with this opinion. Chemical
Leaman will bear the costs.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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