New Jersey Supreme Court Finds Ambiguity in the Phrase “Arising Out Of” in Ruling that Insurer Must Defend Homeowner Whose Guest Overdosed

The New Jersey Supreme Court recently held in Flomerfelt v. Cardiello  that an insurer has a duty to defend a homeowner whose guest overdosed on illegal drugs.  This ruling reversed an appeals court decision which found that the insurer did not have a duty to defend because the policy excludes claims “arising out of the use, transfer or possession of controlled dangerous substances."

Plaintiff Wendy Flomerfelt (“Flomerfelt”), who was twenty-one years old at the time, suffered temporary and permanent injuries after she overdosed on alcohol and drugs during a party hosted by defendant Matthew Cardiello at his parents’ home while they were out of town.  Plaintiff’s complaint alleges that defendant caused her injuries, specifically, kidney failure, liver failure and permanent hearing loss, by providing her with drugs and alcohol, and continued to do so after she was visibly intoxicated.  Plaintiff also contends that Defendant failed to promptly summon the rescue squad after she was found unconscious the following afternoon, and that this delay exacerbated her injuries.

Defendant sought to have his parent’s homeowners’ insurer, Pennsylvania General Insurance Company (“Penn General”), defend and indemnify him against Flomerfelt’s claims.  Penn General declined to provide a defense against the claims or to indemnify him, citing the policy language that excludes claims “[a]rising out of the use, . . . transfer or possession” of controlled substances. Defendant argued that defendant’s injuries could have resulted from prior drug use, and that Flomerfelt may have had a genetic predisposition to hearing loss that contributed to her injury. 

The state’s high court found that the phrase “arising out of” with no further qualification makes the exclusion ambiguous, requiring an interpretation consistent with the insured’s reasonable expectations.  The court considered several possible definitions of the phrase and concluded that, in order 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.  Based on its record, the court concluded that the insurer’s duty to indemnify could not be resolved because questions existed regarding the sequence of events leading to Flomerfelt’s injuries and the cause or causes of her injuries.  Nonetheless, the court reasoned that the duty to defend is not dependent upon whether there is a finding that the claim is covered; the duty to defend attaches here because there are potentially covered claims.