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Insurer Not Barred from Disclaiming Coverage after Providing Courtesy Defense

By on April 6, 2018 in Coverage with 0 Comments

The Appellate Division recently decided a very interesting case addressing the impact of an insurance carrier issuing a “reservation of rights” letter to its insured while also simultaneously agreeing to provide a defense for the insured, but failing to clearly request the insured’s consent to the insurer’s control of that defense.

Northfield Insurance Company v. Mt. Hawley Insurance Company as subrogee of Empress Properties, Inc., 2018 N.J. Super. LEXIS 51 (App. Div. March 28, 2018), was approved for publication on March 28, 2018.  The Appellate Division indicated that the fact pattern required it to consider whether a third party may take advantage of an estoppel doctrine- first recognized in Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114 (1962)- that has been found applicable when an insurer, while reserving its rights or otherwise declining to provide coverage, fails to clearly request its insured’s consent to the insurer’s control of the defense to be provided. The Court held that the insurer should not be estopped from denying coverage because there was no clear evidence that the ostensibly defunct insured changed its position to its detriment even if the insurer assumed the defense without explicit consent. The Court also rejected the argument that Eggleston permits avoidance of estoppel only if the insurer uses certain “magic words” in communicating with its insured, finding that in this matter the carrier’s letter disclaiming coverage could reasonably be interpreted as conveying an “offer” rather than a unilateral declaration of a right to control the defense. Thus, the Appellate Division reversed the entry of summary judgment on behalf of the party seeking estoppel, specifically the alleged victim of the insured’s purported negligence and its property damage insurer.

Empress Properties, Inc. hired CDA Roofing Consultants, LLC to perform roof installation work on a hotel in Asbury Park in June 2012.  CDA subcontracted out some of the necessary labor. The work was deemed completed in July 2012.

The hotel was located less than 1000 feet from the Atlantic Ocean.  “Superstorm Sandy” subsequently made landfall on the Jersey Shore on October 29, 2012, allegedly resulting in roof damage and water damage to the interior of the hotel.

CDA was insured by Northfield Insurance Company both when the roof work was performed as well as when the storm hit. However, CDA apparently did not notify Northfield of the claim being asserted by Empress Properties and its insurer, Mt. Hawley Insurance Company.  However, in correspondence dated November 28, 2012, counsel for Mt. Hawley notified Northfield of the same.  Thereafter, on January 24, 2013, Northfield responded to Mt. Hawley’s counsel denying the claim based on its investigation, including the opinion of an expert apparently retained by Northfield that the damage was caused by Superstorm Sandy’s winds as opposed to any negligence by CDA.

Then, five days later, on January 29, 2013, Northfield wrote to its insured, CDA, regarding its investigation of Mt. Hawley’s claim and citing numerous policy provisions before advising that based upon an “assessment of the information presently available” that coverage under the policy was excluded. However, Northfield did indicate that while one policy provision excluded any “damage to the roof that occurred after (CDA’s) work was completed,” the same would not apply “if the damaged work or the work out of which the damage arises was performed on (CDA’s) behalf by a subcontractor.”  Northfield expressly indicated that it was not admitting or waiving any available coverage defense or limitation, and was reserving any rights it might possess, including the right to modify its position at any time upon receipt of additional information. Further, CDA was advised to “promptly” forward a copy of any Complaint filed for Northfield’s “consideration.”

Empress Properties, Inc. and Mt. Hawley did file suit on March 17, 2015, more than a year later. Significantly, it was claimed that various defects had developed in the ceiling of several rooms on the top floor of the hotel in early October 2012, that CDA was immediately notified of the same, but denied responsibility and took no action.  Most significantly, however, it was alleged that the roof collapsed on October 22, 2018, a week before Superstorm Sandy made landfall. Accordingly, it was alleged that these roof problems were caused by the negligence of CDA, its subcontractor, or both.

Northfield thereafter wrote to CDA on June 9, 2015, advising that it was “disclaiming any obligation to indemnify.” Northfield set forward various bases for the same, including CDA’s failure to timely advise of the claim and the failure of the subcontractor to agree to defend, indemnify and hold harmless CDA, or to name CDA as an additional insured on the subcontractor’s policy.

However, after denying an obligation to indemnify, Northfield nonetheless volunteered to provide what it described as “a courtesy defense for this lawsuit” for CDA.  Northfield identified an attorney to whom the defense had been assigned, and requested CDA’s “complete cooperation” with that counsel. Northfield also indicated that while “providing (CDA) with a defense for the entire lawsuit… (Northfield was) further reserving (its) right to withdraw from the defense of this action at any time and seek reimbursement of defense costs (for) any (defended but uncovered) causes of action.” Northfield then reiterated that nothing in the letter should be construed as an admission or waiver of liability or any coverage defense, and that Northfield “reserves any legal and policy defenses it may have in connection with these matters whether stated or not in this letter” and also “reserves the right to modify its coverage position at any time upon receipt of additional information.”

Six months later, Northfield commenced the instant suit against Mt. Hawley, Empress, CDA and the subcontractor, seeking a declaration that it had no obligation to defend or indemnify CDA in the underlying suit brought by Mt. Hawley and Empress.  That underlying suit was stayed pending resolution of this declaratory judgment action.

Mt. Hawley and Empress thereafter filed a Motion for Summary Judgment, alleging that Northfield should be estopped from denying coverage for the claim against CDA in the underlying action.  The motion Judge granted Mt. Hawley’s motion, holding that Northfield’s actions as set forth above did not comport with Eggleston because Northfield failed to properly seek CDA’s consent to Northfield’s control of the defense and, as such, Northfield could not rightly disclaim coverage for CDA in the underlying action.

On appeal, the Appellate Division held that it did not view the wording of Northfield’s disclaimer as inconsistent, as a matter of law, with Eggleston. Further, it held that the estoppel doctrine has no application absent a showing of prejudice to or detrimental reliance by the insured. The Court held that the facts of this matter were then “too uncertain to make such a determination.”  Finally, the Court also held that Mt. Hawley’s standing to claim application of the estoppel defense was also “plagued by an uncertain context.”

The Appellate Division then discussed Eggleston in some detail. In short, the holding of Eggleston is that “if a carrier wishes to control the defense and simultaneously reserve a right to dispute liability, it can only do so with the consent of the insured.”  37 N.J. at 125.  Without the insured’s specific consent or circumstances that suggest that the insured “acquiesced” in the insurer’s control of the defense, the insurer will be estopped from later disclaiming coverage.  Griggs v. Bertram, 88 N.J. 347, 356 (1982); Sneed v. Concord Ins. Co., 98 N.J. Super. 306, 320 (App. Div. 1967).

While an explicit indication of consent from the insured is obviously preferable, significantly, the Appellate Division made clear that, in Eggleston, the Supreme Court recognized that “an agreement may be inferred from an insured’s failure to reject an offer to defend upon those terms,” although it also recognize that “to spell out acquiescence by silence, the letter must fairly inform the insured that the offer may be accepted or rejected.”  37 N.J. at 127-128.  In this matter, the Court found that Northfield’s correspondence to its insured did meet this standard.  For example, it noted that the reference to a “courtesy defense” could plausibly be interpreted as an offer of a defense, as opposed to Northfield’s insistence on controlling the same. And, if interpreted as such an offer, the silence of insured CDA in response could then be interpreted as “acquiescence by silence” which would not offend Eggleston.

The Appellate Division also made clear that Eggleston “in no way suggests that estoppel immediately attaches when an insurer, while reserving its rights or declining coverage, assumes control of the defense without first obtaining the insured’s consent.”

The Court observed that there was no evidence that CDA – which was apparently defunct by the time that Northfield declined coverage and assumed its defense- in any way relied upon what Northfield wrote or changed its position to its detriment.

Therefore, this opinion is important for its clarification of the potential significance of language utilized by an insurance carrier in a reservation of rights letter to its insured if the carrier also, for any reason, agrees to provide any level of defense to the insured.

Clearly, it is always far preferable to obtain written consent from the insured.  However, in this matter, the Appellate Division makes clear that even in the absence of the same, if the carrier is careful to comply with the requirements previously set forth in Eggleston and now further examined in Northfield v. Mt. Hawley, it can fully preserve all of its rights.


About the Author

About the Author:

Mr. Carlson’s practice concentrates on the defense of New Jersey and Pennsylvania personal injury matters on behalf of insurance companies, self-insured entities and third-party administrators in the fields of premises liability, transportation law, and construction claims. He has also handled commercial, insurance coverage, fire loss, trucking accident, Dram Shop, subrogation and first party “Personal Injury Protection ” (PIP) matters, as well as Hazmat rapid response services to trucking accidents.


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