New Jersey Insurance Blog

Insurance policies typically contain what are known as other-insurance clauses.  Other-insurance clauses set forth a methodology for apportioning liability when multiple insurers have issued policies that provide coverage for a loss.  There are three basic types of other-insurance clauses:  pro-rata, escape, and excess.  Deciding how different other-insurance clauses apply is like a game of rock-paper-scissors.

A pro-rata clause typically provides that each insurer will pay its proportional share of the loss based on total available policy limits.  An escape clause provides that an insurer will have no liability to the insured when other insurance coverage is available.  The excess clause provides that the insurer will be liable only after the exhaustion of the limits of any other applicable insurance.  In cases where other-insurance clauses can be reconciled, the clauses will be enforced pursuant to their terms and conditions.

For instance, if two policies each contain pro-rata clauses, the insurers will share in the payment of a loss on a pro-rata basis based on the overall limits of the policies.  If one policy contains a pro-rata clause and the other contains an excess clause, the policy with the pro-rata clause will be exhausted before the other policy is triggered.

Other-insurance clauses will not be enforced, however, if they conflict and cannot be reconciled.  For instance, if there are two policies and each contains an excess other-insurance clause, neither clause will be enforced.  In that case, each insurer will share equally in the payment of the loss until the limit of the smallest policy is exhausted.

The New Jersey Appellate Division addressed application of dueling other-insurance clauses in Foerster v. Meckel Enterprises, LLC, 2016 WL 5922746 (Oct. 12, 2016).  The plaintiff in that case was injured when he slipped and fell on the bathroom floor of space leased by Robert S. Foerster Optician, Inc. (“RFO”).  The space was leased from Meckel Enterprises, LLC and Ann Arbor Associates, Inc. (collectively, “Meckel”).

In accordance with the terms of the lease agreement, RFO obtained $1 million in insurance coverage, naming Meckel as an additional insured.  That policy, which was obtained from Penn National Insurance, contained an excess other-insurance clause, which provided:

1. If there is other insurance covering the same loss or damage, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.
2. Business Liability Coverage is excess over any other insurance that insures for direct physical loss or damage.

Id. at *1.

Meckel also had its own insurance policy, which was issued by Citizens Insurance Company of America.  That policy contained a hybrid, pro-rata excess clause.  The clause provided:

This insurance is excess over:

*     *     *

2)   Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.

*     *     *

     c.     When this insurance is excess over other insurance, we will pay only our share of the amount of the loss if any, that exceeds the sum of:

              1)   The total amount that all such other insurance would pay for the loss in the absence of this insurance;

*     *     *

     e.     Method of Sharing

*     *     *

If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer’s share is     based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.

Id.

There was no question that there was coverage under both policies.  The only question was how the two policies should contribute toward the loss.

Meckel claimed that Penn National’s other-insurance clause did not apply.  According to Meckel, Penn National had to provide primary coverage and the Citizens policy was triggered only after coverage under the Penn National policy was exhausted.  Penn National obviously made the opposite argument.  The trial judge agreed with Penn National and Meckel appealed.  On appeal, the Appellate Division affirmed.

Meckel argued that paragraph 2 of the Penn National other-insurance clause limited application of the clause to claims involving “direct physical loss or damage.”  According to Meckel, the claim at issue involved bodily injury and not direct physical loss or damage.  Thus, the Penn National other-insurance clause did not apply.  The Appellate Division rejected that argument, noting that paragraph 1 of the other-insurance clause clearly stated that the Penn National policy provided excess coverage over “other insurance covering the same loss or damage.”  Id. at *2.

The court then noted that the Citizens other-insurance clause called for pro-rata allocation when other primary insurance is available.  The court failed to note, however, that the pro-rata allocation applies only when there is other excess coverage.

The court further noted that the Citizens clause provided that “[w]hen, as here, the other-insurance does not permit contribution by equal shares,” each insurer will contribute its proportional share of the loss based on total policy limits.  Id. at *3.  Once again, the court failed to note that this provision applies only when there is other excess coverage.

The court contrasted the Citizens clause with the Penn National clause, which did not call for a sharing of obligations.  As noted by the court, under New Jersey law:

where one policy has an excess other-insurance clause and another policy on the same risk does not, the former policy will not come into effect until the limits of the latter policy are exhausted.

Id. (quoting W9/PHC Real Estate LP v. Farm Family Cas. Ins. Co., 407 N.J. Super. 177, 197 (App. Div. 2009)).  The court concluded:

because the Penn National policy contains an excess other-insurance clause and the other-insurance provision in the Citizens policy provides for pro-rata sharing of the insurance obligation, the Penn National policy does not come into effect until the Citizens policy limits are exhausted.

Id.  Therefore, the court affirmed the trial court’s ruling.  The court essentially ruled that the Penn National clause was the rock to Citizens’s scissors.

The court appears to have misinterpreted the Citizens clause.  There is no question that the Citizens clause was an excess other-insurance clause.  Indeed, it clearly states that the Citizens policy “is excess over . . . any other primary insurance available to you.”  Thus, the two clauses arguably should have cancelled each other out and the insurers should have shared in the loss.  The court seemed a bit confused, however, by the pro-rata language in the Citizens clause, thereby mistaking the clause for a pro-rata and not an excess clause.  The court seems to have missed the fact that the pro-rata language clearly provides that it applies only when there is excess coverage.

It should be noted that the court did not quote Citizens’s entire other-insurance clause.  Based on the portion of the clause that was quoted, Penn National and/or Meckel could have argued that the Citizens clause was meant to apply only when there was “other primary insurance available.”  Thus, it would have no application in this case because there was no other primary insurance.  In other words, Citizens would have to provide primary coverage, which is the same result the court reached, albeit for a different reason.  It does not appear, however, that anyone made the argument that the clause did not apply at all.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson and/or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Application of a particular state’s law can have a significant impact on the determination as to whether a loss is covered.  Given the impact choice-of-law decisions may have, insureds and insurance companies may “forum shop” to pick the jurisdiction most favorable to resolution of their claims.  This is especially true when it comes to a late notice defense.

An insured is required to provide its insurer with timely notice of a loss.  Insurance policies typically require that notice be provided “as soon as practicable” or, in some cases, “within a reasonable time.”  The purpose of a notice provision is to give the insurer an opportunity to conduct a full investigation of the facts and circumstances concerning a claim while the evidence and the witnesses’ memories are still fresh.  Once it receives notice, the insurer can decide whether to compromise or defend the claim.

The failure to provide timely notice may bar coverage for a claim.  However, the standard that applies differs from state to state.  For instance, under New Jersey law, an insurance company generally must establish that it sustained appreciable prejudice to avoid coverage under a late notice defense.  Under New York law, on the other hand, a showing of prejudice is not always required.  Moreover, a delay in providing notice of just 22 days has been found to bar coverage under New York law with respect to a first-party policy.

The issue of whether to apply New Jersey or New York law to a late notice defense was addressed by the New Jersey Appellate Division in Waldorf Holding Corp. v. Chartis Claims Inc., 2016 WL 4651436 (Sept. 7, 2016).  The plaintiff in that case, Waldorf Holding Corp. (“Waldorf”), was a demolition and construction company incorporated in New York.  Defendant Illinois National Insurance Company (“INIC”), an AIG company, issued a commercial umbrella policy to Waldorf.  The policy listed a Mount Vernon, New York, location as Waldorf’s mailing address.  The INIC policy provided coverage in excess of that provided by a policy issued to Waldorf by Arch Specialty Insurance Company (“Arch”).

Under the policy, the insured was required to notify INIC “as soon as practicable of an Occurrence that may result in a claim or Suit under this policy.”  The insured was further required to “immediately send . . . copies of any demands, notices, summonses or legal papers received in connection with the claim or Suit.”  Notice was to be provided to AIG Domestic Claims, Inc. (“AIG”) at an address in New York.

An employee of a Waldorf subsidiary was injured in May 2008 while working on a construction project in New York.  The employee sued the owner of the project and the general contractor.  Those parties, in turn, filed a third-party compliant against Waldorf.  Waldorf apparently notified Arch of the lawsuit and Arch agreed to provide a defense and indemnification to Waldorf.  Arch sent a copy of its letter accepting the tender of the claim by Waldorf to AIG at a Georgia address.  The letter was not sent to the New York address as required under the INIC policy.

In August 2010, more than two years after the injury occurred, Arch sent a letter to AIG at the New York address listed in the policy, advising AIG of the pending action and indicating that it served as formal notice of the loss.  AIG was further notified that the Arch policy had a limit of $1 million and the plaintiff recently made a $6 million settlement demand. On September 1, 2010, INIC notified Arch and Waldorf that it was denying coverage based on the failure to provide INIC with timely notice of the loss.

After the personal injury action was settled, Waldorf commenced an action against INIC, Arch, and an insurance broker in state court in New Jersey.  After engaging in some discovery, INIC and Waldorf both moved for summary judgment.  INIC argued that New York law applied and Waldorf argued that New Jersey law applied.  According to Waldorf, although it was incorporated under New York law, its only place of business was in Englewood, New Jersey.  Waldorf claimed it had not used the Mount Vernon address since 2006.  Waldorf further claimed that the policy had been procured through a New Jersey insurance broker and delivered to Waldorf in New Jersey.

There was no question that the more than two-year delay in providing notice would bar coverage under New York law.  A more detailed factual analysis would have to be performed to see if coverage was barred under New Jersey law.

Performing a choice-of-law analysis, Judge Susan J. Steele, the trial judge, concluded that New York law applied because New York had the most significant interest in the matter.  According to the judge:

[w]hile the contract was signed in New Jersey through a New Jersey insurance broker, [it] does not outweigh the other contacts which lean in favor of New York.  The policy was issued to Waldorf, a New York corporation with a New York address, which had not changed regardless if the plaintiff asserted the principal place of business of the company is now Englewood, New Jersey and the New York address had not been used for some years.  Nothing set forth before the court indicated the New York address was invalid at the time the policy was executed.

Id. at *2.  Judge Steele went on to note that “the circumstances surrounding the necessity for coverage all occurred in New York.”  Id.  Applying New York law, Judge Steele held that the notice was untimely and, therefore, coverage was barred.  She also rejected an argument that the claim was not untimely because INIC may have had constructive notice of the loss much earlier, noting:

Absent authority to the contrary, of which there appears to be none, that the insurer may have been copied on a letter does not absolve the insured of its obligations under the agreement it signed to timely send notice.

Id. at *3.  On appeal, the Appellate Division affirmed “substantially for the reasons expressed by Judge Steele as reflected in her well-reasoned, thorough written opinion.” Id.

Waldorf appears to be a classic case of forum shopping.  Realizing its claim would be barred under New York law, the insured commenced an action in New Jersey and argued that New Jersey law applied.  The court correctly rejected that argument.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson and/or NJInsuranceBlog.com with appropriate and specific direction to the original content.

When making travel arrangements, you often have the option of purchasing travel insurance, which also is known as trip insurance.  Travel insurance can be purchased directly from the travel agent or trip provider, or from an independent company.  Several of the major insurance companies allow you to purchase trip insurance online after your travel has been booked.

Trip insurance provides coverage in the event you have to cancel your trip last minute due to some unforeseen circumstances.  The insurance typically provides coverage for any cancellation penalties you may incur.  Some insurance also provides coverage for medical expenses incurred while on the trip and will reimburse you for costs incurred in connection with baggage loss or delay.

Travel insurance can be purchased at the time or book you trip or anytime thereafter up until the time you leave for your trip.  One thing you cannot do, however, is purchase such insurance after you learn that you need to cancel your trip as a result of a medical condition.  Travel insurance policies typically contain an exclusion barring coverage for cancellations due to pre-existing medical conditions.  The New Jersey Appellate Division recently upheld such an exclusion in Dombrovskiy v. Travel Guard, 2016 WL 5335258 (N.J. App. Div. Sept. 23, 2016).

In that case, Victor Dombrovskiy booked a family trip to St. Lucia on March 19, 2014.  He did not purchase travel insurance at the time he booked his trip.  However, on May 19, 2014, two days before his departure, he decided to purchase travel insurance from the defendant Travel Guard.  The following day – May 20th – he went to see a dentist, complaining of “very strong continuous pain on the left side of [his] mouth.”  His dentist diagnosed him with acute pericoronitis and advised him not to travel.  Thus, Mr. Dombrovskiy canceled his trip.  He subsequently filed a claim under his travel insurance policy because he was unable to obtain a full refund for his trip.

The policy went into effect on May 20, 2014, just one day prior to Mr. Dombrovsky’s scheduled departure and the same day he went to visit his dentist.  As is typical with travel insurance policies, the Travel Guard policy contained an exclusion for a “pre-existing medical condition,” which “was defined as a medical condition that manifested itself 180 days immediately preceding the policy’s effective date, and included the effective date of the policy.”  Id. at *1.  Because Mr. Dombrovskiy was diagnosed with acute pericoronitis on the policy’s effective date his medical condition constituted a pre-existing condition.  Thus, Travel Guard denied coverage.

Mr. Dombrovsky subsequently sued Travel Guard.  Following a bench trial, the trial judge dismissed the complaint, concluding that the pre-existing medical condition exclusion unambiguously precluded coverage.  On appeal, the Appellate Division “agree[ed] with the trial court that Dombrovskiy’s claim came within an exclusion from coverage that was clear and not ambiguous, requiring the dismissal of his claim.”  Id. at *2.

The court noted that although the exclusion barred coverage for a pre-existing medical condition that manifested itself 180 days prior to the policy’s effective date, there was a provision “by which the pre-existing medical condition exclusion could be waived if an insured purchased the travel insurance policy within fifteen days of making the initial trip payment.”  Id. at *3.  Mr. Dombrovskiy was unable to take advantage of that provision because he paid for his trip two months prior to purchasing the policy.

The purpose of the pre-existing condition exclusion is to prevent fraud.  Specifically, it precludes someone who is already feeling ill from going out and purchasing insurance.  Insurance policies are meant to cover only fortuitous losses, i.e., those happening by chance or which are unexpected.  You cannot purchase fire insurance for your home once it is already on fire, nor can you purchase flood insurance as the flood waters are approaching your home.  Similarly, you cannot purchase travel insurance once you are already sick and realize you may have to cancel your trip.

As the concurring judge observed, “the sequence of events here might have supported a reasonable circumstantial inference that appellant was indeed already developing symptoms when he purchased the coverage months after he made his flight reservations and only two days before his scheduled departure.”  Id. at *5 (Sabatino, P.J.A.D., concurring).  The court did not need to address that issue, however, because the policy clearly excluded coverage.

Another issue not addressed by the court, but mentioned by the concurring judge, is what happens if you become ill after you purchase the insurance but within the pre-existing condition window.  Specifically, Judge Sabatino observed:

By declaring the policy’s effective date to be 12:01 a.m. on the date after the insured traveler pays the premium, and excluding coverage for the full day of that effective date, the policy treats as a disqualifying “pre-existing” medical condition one that first manifests itself at a time that can be as late as forty-seven hours after the coverage was purchased. Literally construed, the policy would, for instance, exclude coverage if the insured paid for the coverage at 12:02 a.m. on a Monday and suffered a sudden heart attack at 11:59 p.m. on Tuesday.

Id. at *4 (Sabatino, P.J.A.D., concurring).  Judge Sabatino noted that at least two other states preclude insurers from defining pre-existing medical conditions “to exclude coverage for a condition that manifests after the insurance has been purchased.”  Id at *5.  However, he went on to note that certain other states had adopted contrary legislation.  Id.

It would appear based on the majority’s decision that a condition that manifests itself after insurance has been purchased, but within the pre-existing condition window, would be excluded based on the clear and unambiguous policy language.  Expressing “serious reservations,” Judge Sabatino did not join in that portion of the majority’s opinion that would support such a conclusion.

The takeaway from this case is that if you want to purchase travel insurance you should do so at the time the trip is booked or shortly thereafter.  As noted by the court, the Travel Guard policy waives the pre-existing condition exclusion if coverage is purchased within 15 days of booking the trip.  Unfortunately, that is something Mr. Dombrovskiy failed to do.  Instead, it appears he waited until his tooth already started hurting and he knew it was unlikely he could travel.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

As a general rule, there is no coverage under a commercial general liability (“CGL”) policy for damage caused by an insured-contractor’s faulty workmanship.  The reasoning behind this was explained by the New Jersey Supreme Court in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), the seminal New Jersey case addressing liability insurance coverage for faulty workmanship performed by a contractor:

Where the work performed by the insured-contractor is faulty, either express or implied warranties, or both, are breached.  As a matter of contract law the customer did not obtain that for which he bargained.  The dissatisfied customer can, upon repair or replacement of the faulty work, recover the cost thereof from the insured-contractor as the standard measure of damages for breach of warranties.

*          *          *

[T]he insured-contractor can take pains to control the quality of the goods and services supplied.  At the same time he undertakes the risk that he may fail in this endeavor and thereby incur contractual liability whether express or implied.  The consequences of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers.

Id. at 239.  Consequently, the insured-contractor and not the insurer is liable for any costs incurred to correct the faulty workmanship.  In Firemen’s Insurance Co. v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006), the Appellate Division extended the holding in Weedo to faulty workmanship performed by a subcontractor.

Consistent with this reasoning, most CGL policies contain an exclusion providing that there is no coverage for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.”  This exclusion, which is referred to as the “your work” exclusion, applies to work performed “by or on behalf of” the insured-contractor and, therefore, would encompass work performed by a subcontractor.

CGL policies typically provide coverage for the insured’s legal liability for property damage arising out of an occurrence covered under the policy.  Occurrence is commonly defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” or “an accident … which results in … property damage neither expected nor intended from the standpoint of the insured.”   Although not addressed by the Weedo court, some courts have held that even in the absence of an express exclusion, there is no coverage for damage resulting from faulty workmanship because such damage did not result from an “accident.”  The reason for this is that faulty workmanship is the natural consequence of “not performing well” and is an inherent part of the construction business.

While there is no coverage for damage to the insured’s work, there may be coverage if the insured’s faulty workmanship causes damage to other property.  Thus, if an insured-contractor is sued for faulty workmanship, and there are no allegations that the faulty workmanship caused damage to anything other than the project itself, an insurer likely will have no duty to defend or indemnify its insured.  On the other hand, if the faulty workmanship results in damage to other property, an insurer may have a duty to defend or indemnify its insured.  Because a general contractor’s work consists of completing the entire project, there generally will be no coverage for damage to any portion of the project even if that damage was caused by faulty workmanship on a different portion of the project.

An issue that often arises is whether coverage exists under the general contractor’s CGL policy for damage caused by a subcontractor’s faulty workmanship.   Because a subcontractor typically works on discrete portions of a project, it is possible that the subcontractor’s faulty workmanship can cause damage to other portions of the project.  For instance, the improper installation of a window can result in water leaking around the window, causing damage to the interior finishes of the project.  Whether coverage exists for such damage was addressed by the New Jersey Supreme Court in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. Aug. 4, 2016).  In a well-reasoned and well-supported decision, the Court concluded that there was coverage under the contractor’s CGL policy for such damage.

Cypress Point involved a claim by a condominium association against its developer/general contractor, seeking recovery for damage to the interior structures, common areas, and individual residential units, including damage to steel supports, exterior and interior sheathing and sheetrock, and insulation.  Id. at *2.  The condominium association also sued the contractor’s CGL insurers, seeking a declaration that the damage was covered under the policies they issued.  The damage at issue resulted from roof leaks and water infiltration around the windows.  It was alleged that the damage was caused by “faulty workmanship during construction, including but not limited to, defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.”  Id.

The policies at issue were based on standard form policies developed by the Insurance Services Office, Inc. (“ISO”), an insurance industry trade organization.  The policies provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of … property damage … caused by an occurrence.”  Occurrence was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Id.  The policies also contained a “your work” exclusion, which provided that there was no coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it ….”  The exclusion contained an exception, however, providing that the exclusion did “not apply if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.”  Id.  The ISO first added this exception to the exclusion to the 1986 version of the standard form policy.  The 1973 version of the exclusion, which was the prior version, did not contain the exception.

The trial court ruled in favor of the insurers, finding that neither faulty workmanship nor the consequential damages resulting therefrom was covered.  The Appellate Division reversed, concluding that damage to other property caused by a subcontractor’s faulty workmanship was covered.  On further appeal, the New Jersey Supreme Court framed the issue before it as “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’ under a property developer’s commercial general liability (“CGL”) insurance policy.”  Id. at *1.  The Court held that it did.

According to the Court, damage to other property caused by a subcontractor’s faulty workmanship met the definition of “occurrence” and “property damage” under the policies.  The Court rejected the argument that faulty workmanship can never result in a covered loss under a CGL policy.  The Court also held that while the “your work” exclusion “would seem to eliminate coverage,” the exception to the exclusion reinstated coverage.  Id. at *13.

In Cypress Point, unlike in Weedo, the faulty workmanship was performed by a subcontractor and there was no question that the faulty workmanship resulted in damage to other portions of the project.  In addition, the policy at issue was based on the 1986 ISO form, whereas the Weedo policy was based on the 1973 version.  Given these differences, and the decisions by courts in other jurisdictions that have considered the issue, the Court’s decision is not surprising.  Indeed, to hold otherwise would have rendered meaningless the subcontractor’s exception to the “your work” exclusion.

It is important to emphasize that the Court did not back away from Weedo, which remains good law.  Thus, there still is no coverage for the costs to correct the faulty workmanship itself regardless of whether that work is performed by the general contractor of a subcontractor.  The Cypress Point decision is limited to damage to other property resulting from a subcontractor’s faulty workmanship.  Under the Court’s decision, that damage is covered absent some other exclusion.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Over a decade ago, I wrote an article titled Off-Premises Defense Washed Up?, which appeared in the May 30, 2005 issue of the National Underwriter Property & Casualty Magazine.  The article involved two appellate court decisions, one issued by a New York court and the other one issued by a New Jersey court,  in which the courts recognized a claim for what has been referred to as take-home toxic-tort liability.  Specifically, the courts allowed the assertion of second-hand asbestos claims by the spouses of employees who had been exposed to asbestos while at work.  The spouses, who developed mesothelioma, claimed that they were exposed to asbestos fibers while washing their husbands’ work clothes.

The New York decision was later reversed by the New York Court of Appeals, New York’s highest court.  See In re New York City Asbestos Litigation, 840 N.E.2d 115 (2005).  The court found that an employer/landowner did not owe a duty to protect an employee’s spouse from exposure to hazardous substances.  The New Jersey decision, in contrast, was affirmed by the New Jersey Supreme Court.  See Olivo v. Owens-Illinois, Inc., 186 N.J. 394 (2006).  In that case, the Court held that an employer/landowner could be held liable for injuries sustained by the wife of an employee as a result of exposure to a hazardous substance through contact with her husband’s work clothes.

Ten years later, the New Jersey Supreme Court revisited take-home toxic-tort liability in  Schwartz v. Accuratus Corp.,  2016 WL 3606026 (July 6, 2016).  The plaintiffs in that case, Brenda Ann and Paul Schwartz, claimed that Brenda was exposed to beryllium that her boyfriend, and later husband, brought home from work on his clothing.  Paul worked for Accuratus Corporation, a ceramics manufacturer located in New Jersey, prior to and after marrying Brenda.   Another employee of Accuratus shared an apartment with the Schwartzes for some time.  Thus, she also was exposed to beryllium that he brought home on his clothing.

The action, which was originally filed in Pennsylvania state court, was removed by the defendants to federal court.  The trial court granted Accuratus’s motion to dismiss the complaint, concluding that Accuratus did not owe Brenda a duty of care.  That decision was later appealed to the United States Court of Appeals for the Third Circuit.  Recognizing the significance of the issue, which was to be determined under New Jersey law, the Third Circuit certified the following question to the New Jersey Supreme Court:

Does the premises liability rule set forth in Olivo extend beyond providing a duty of care to the spouse of a person exposed to toxic substances on the landowner’s premises, and, if so, what are the limits on that liability rule and the associated scope of duty?

Id. at *1.  In answer to that question, the Court stated “that the duty of care recognized in Olivo may extend, in appropriate circumstances, to a plaintiff who is not a spouse.”  Id. at *8.

The Court declined to precisely define the extent of the duty of care or adopt a bright-line rule.  The Court noted:

Although chance contact with a worker transporting home a toxic substance from another’s premises should not suffice to create a duty of care . . . we cannot create an abstract bright-line rule at this time as to “who’s in and who’s out” on a negligence-based take-home toxic-tort cause of action based on Olivo or any previous decision. The contours of the issue defy definition in such manner.

Id. at *7 (citation omitted).

As the Court observed, when expanding tort liability, it is important to make sure that the imposition of liability is not only foreseeable, but also that it is fair, just, and predictable under the circumstances.  Id. at *3, 8.      The Court identified several factors that must be weighed in order to make this determination:  (1) the relationship among the parties; (2) the opportunity for exposure to the dangerous substance and the nature of the exposure that causes the risk of injury; and (3) the employer’s knowledge of the danger of exposure to the substance at the time it occurred.  The determination as to whether liability exists in a particular case will necessitate an assessment and weighing of those factors.

In Olivo, the Court extended the duty of care owed by a landowner/employer to the spouse of an employee who is  injured as a result of a dangerous condition in the workplace.  In Schwartz, the court went a step further.  As the Court observed, “[t]ort law is built on case-by-case development based on the facts presented by individual cases.”  Id. at *5.   Based on the Court’s decision in Schwartz, it is now clear that recovery based on a take-home toxic-tort liability theory is no longer limited to the spouse of an employee.  Nor is it limited to a claim involving exposure to asbestos.  Just how far that theory extends, or the types of “toxic substances” that will give rise to such a claim, however, is not clear.

As a general rule, an insured has no right to settle a claim without the consent of its liability insurer.  If it does so, it runs the risk of losing coverage for the loss.  However, if an insurer improperly denies coverage, or improperly refuses to provide a defense to its insured, it may be bound by a settlement entered into by the insured if it later is determined that the policy provided coverage.

When an insurer has denied coverage for a loss, it is not uncommon for an insured to enter into a consent judgment with the injured party and then assign any rights it may have to seek coverage from its insurer.  As part of such a settlement, the injured party generally will agree not to seek enforcement of the judgment against the insured.  In other words, the injured party will recover, if at all, only against the insurer.  These settlements are known as a Griggs settlements after the New Jersey Supreme Court’s decision in  Griggs v. Bertram, 88 N.J. 347, 368, 443 A.2d 163 (1982).

In order for such a settlement to be binding on the insurer, it must be shown that the settlement amount was reasonable and that the settlement was entered into in good faith.  “The initial burden of going forward with proofs of these elements rests upon the insured and the ultimate burden of persuasion as to these elements is the responsibility of the insurer.”  Griggs, 88 N.J. at 368.  An insurer challenging a settlement generally will request a Griggs hearing, during which a court will determine whether the two conditions have been met.

The enforceability of Griggs settlements recently was addressed by the New Jersey Appellate Division in two decisions decided just two days apart, Comer v. Pacheco, 2015 WL 11004853 (June 13, 2016) and Vrskovy v. Curcio, 2016 WL 3263659 (June 15, 2016).

Comer arose out of a fatal automobile accident.  The decedent was killed when an automobile being driven by her employer ran a stop sign and struck a garbage truck.  The employer was insured under a policy of insurance issued by The Proformance Insurance Company.  Proformance denied coverage on the basis that the automobile in question was not covered under the policy.  The trial court ultimately determined, however, that the automobile was covered under the policy.  Thus, the insurer had wrongfully denied the claim.

Prior to the ruling by the trial court that there was coverage, the insured settled with the decedent’s estate.  The parties put Proformance on notice that they intended to enter into a settlement agreement, but Proformance did not participate in the settlement discussions.  The terms of the settlement agreement were as follows:

Defendants agreed to the entry of final judgment against them in the amount of $400,000, which constituted eighty percent of the Proformance policy limits.  Defendants also assigned any rights they had against Proformance in the instant litigation to plaintiff, who agreed to refrain from docketing or executing upon the judgment against defendants.

Id. at *3.  The agreement further provided:

[I]f a Court of competent jurisdiction determines this Griggs settlement is not reasonable in amount, or has not been entered into in good faith, or is otherwise void in part (or in whole), then at Plaintiff’s sole discretion, this entire settlement agreement shall be deemed null and void in its entirety.

Id.  Proformance moved to set aside the settlement agreement and the plaintiff cross-moved to enforce it.  The trial judge set aside the settlement agreement without addressing the reasonableness of the settlement amount or whether the agreement was entered into in good faith.

On appeal, the Appellate Division concluded that the trial court improperly set aside the settlement agreement.  The court began its analysis by noting:

In Griggs, the Court provided a means by which a tortfeasor, whose insurer has wrongfully denied coverage, may enter into a settlement to limit the tortfeasor’s personal exposure.  “When an insurer violates its contractual obligations to the insured, it forfeits its right to control settlements.”  Upon such a breach by the insurer, the insured may enter a settlement and, if the settlement is both reasonable and made in good faith, the settlement may be enforced against the insurer.

Id. at *8 (citations omitted).  The Appellate Division went on to note that the trial court was “required to conduct an ‘independent review’ to determine if the settlement was ‘reasonable and made in good faith’.”  Id.  Because it failed to do so, the Appellate Division reversed and remanded the case back to the trial court so that it could conduct a Griggs hearing.

Vrskovy also involved the enforceability of a Griggs settlement.  There, the plaintiff, a minor, attended a birthday party at the home of the insured’s daughter at which alcohol was served.  After leaving the party he was involved in a single-car crash and sustained significant injuries.  One of the two insurers that provided coverage, Palisades Property & Casualty Insurance Company, denied coverage, arguing that the loss was not covered under its policy.  Palisades provided both a primary and excess insurance policy to the insured.

The parties entered into an initial settlement agreement pursuant to which the plaintiff agreed to dismiss the claims asserted against the insured in exchanged for an assignment of “any and all rights” the insured had against Palisades.  Palisades moved to set aside the settlement agreement, arguing that it “was an unconditional release, relieving the [insured] from any liability arising from the birthday party and subsequent automobile accident, thus barring plaintiff from further relief.”  Obviously concerned that Palisades was correct, the parties agreed to revise the terms of the settlement agreement and Palisades’s motion to set it aside was denied.

The parties subsequently entered into a revised settlement agreement.  Pursuant to that agreement, the parties entered into a consent judgment in the amount of $2 million and the insured agreed to assign her rights under the policies issued by Palisades.  The plaintiff also provided the insured with a warrant of satisfaction, which could be filed at any time to show that the consent judgment had been discharged.

Both parties subsequently moved for a determination as to whether coverage existed.  In addition, the plaintiff sought to enforce the settlement agreement and Palisades moved to set it aside.  The trial court found that there was no coverage under the primary insurance policy, but that coverage existed under the excess policy.  After conducting a Griggs hearing, the judge also concluded that the amount of the settlement was reasonable and that the settlement agreement was entered into in good faith.  Shortly thereafter, the insured filed the warrant to discharge the judgment.  Palisades then moved for reconsideration, arguing that the filing of the warrant extinguished the insured’s (and therefore the insurer’s) liability to the plaintiff.  The trial court disagreed, and denied that motion.

On appeal, the Appellate Division affirmed the trial court’s conclusion that coverage existed under the excess policy.  In addition, the court rejected Palisades argument that the initial settlement agreement “effected an unconditional release of legal liability form the underlying action, extinguishing the [insured’s] right to be indemnified and, thus, barring plaintiff from recovering further relief.”  According to the court, the trial judge correctly determined that the initial agreement “was withdrawn and voided under the doctrine of mutual mistake.”  Id. at *8.

The Appellate Division also rejected Palisades’s argument that “its legal obligation to indemnify, triggered by the entry of the consent judgment against the [insured], was discharged by her filing of the warrant to satisfy.”  Id. at *7.  The court observed that “[t]he execution of a settlement, assigning subrogation rights and furnishing a warrant of satisfaction, in exchange for a release from personal liability, was precisely the mechanism upheld by the Supreme Court in Griggs.”   Id. at *8.

Finally, with respect to whether the settlement satisfied the requirements of Griggs, the court noted:

At the hearing to determine the reasonableness of the settlement, plaintiff presented documentary evidence to support his position that the settlement amount was reasonable, executed in good faith, and free from collusion. Specifically, he submitted the police report from his accident; the toxicology report establishing his [blood alcohol level] at .205%; an expert report from toxicologist Dr. Robert Pandina, opining about his state of intoxication and level of impairment; an expert report from Dr. Michele Fantasia, describing the nature and severity of his injuries; deposition testimony from several acquaintances who also attended the party; certifications from the [insured’s] attorneys; and his medical bills, including a Medicaid lien of $370,165.63.  Plaintiff also testified as to events which occurred the night of the party.  Palisades did not present any evidence.

Id. The court further noted that “the judge found that liability rested with [the insured], who knew minors were engaged in underage drinking, at minimum, had an opportunity to stop it, and yet failed to do so.”  Id.at 9.  With respect to the “good faith” requirement, the court observed:

Relying on certifications filed by counsel for plaintiff and [the insured], the judge found “the intent of the parties was to allow the plaintiff the opportunity to pursue the insurance

that [the insured] had purchased to protect others who may be harmed by her own negligence.”

Id.  Thus, the Appellate Division agreed with the trial court’s “well-supported conclusion” that the settlement agreement was enforceable and binding on the insurer.

The Griggs decision has long been a Sword of Damocles hanging over insurers that have denied coverage.  If coverage is improperly denied, an insurer runs the risk that it can be bound by a settlement entered into by the insured without its consent.  However, as the Griggs court made clear, and as reiterated in Comer and Vrskovy, not every settlement will binding on an insurer.  Only those settlement that are reasonable and entered into in good faith will be binding.  If a settlement is challenged at a Griggs hearing, both the party seeking enforcement of the agreement and the insurer must be prepare to present evidence concerning both issues.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

In Bardis v. Stinson, 2016 WL 1650509 (N.J. April 27, 2016), the New Jersey Supreme Court addressed the issue of whether the collapse of the insureds’ basement wall was covered under their homeowner’s insurance policy.   Adopting the reasoning of the dissenting judge in the court below, the Court held that there was no coverage.  The Court did not write its own opinion.

The facts of the case are not complex.  In December 2009, one of the basement walls in the insureds’ single-family home collapsed.  The basement was part of an addition to the original home that had been added twenty years earlier.  The policy at issue provided limited coverage for collapse losses.  Specifically, the policy provided coverage for “the collapse of a building or any structural part of a building that ensues” caused by “[h]idden decay, unless such decay is known to an insured prior to the collapse.”

The insureds’ expert concluded that “the cause of the collapse was a lateral bending failure due to excessive horizontal loads” resulting from the improper construction of the basement wall.  The insureds essentially argued that “hidden decay” included “hidden construction defects.”   According to the insureds, because the loss was caused by “hidden decay,” it fell within the limited collapse coverage of the policy.

Both parties moved for summary judgement in the trial court.  The trial judge granted summary judgment to the insurer, concluding that the insured failed to establish that the loss was caused by hidden decay.  Interestingly, the insureds also moved to strike the expert report prepared by the insurer’s expert, arguing that it constituted a net opinion.  Prior to addressing the dueling summary judgment motions, the court granted the insureds’ motion to strike.  In granting summary judgment to the insurer, the trial judge noted that the sole support for the insureds’ hidden decay argument was the insurer’s expert’s report.  Because that report had been stricken, the insureds had no support for their hidden decay argument.

On appeal, the Appellate Division reversed.  Bardis v. Stinson, 444 N.J. Super. 227 (App. Div. Oct. 8, 2014).  Relying to a large extent on the reasonable expectations doctrine, the Appellate Division concluded that the insureds “could have reasonably expected that their homeowner’s insurance policy would cover a gradual decline in strength of their basement wall, followed by its sudden collapse, after it stood for over twenty years.”  Id. at 236.  The court went on to note:

While plaintiffs’ theory and interpretation of the term “hidden decay” may not fall squarely within the covered collapses of a building, it also does not fall within any exclusion or exceptions to a peril insured against. Thus, if the collapse was due to poor or defective construction methods used to construct the basement foundation wall system combined with the factor of twenty years of hydrostatic pressure and excessive loads upon the improperly supported foundation walls, then plaintiffs may be covered.

Id. at 237-38.  Thus, the court concluded that “[a] genuine issue of material fact is presented as to the cause of the collapse and the application of the insurance policy.”  Id. at 239.

One judge dissented from the decision.  He was of the view that the policy was clear and unambiguous and did not provide coverage for the loss.  He agreed with the trial court that “the plain meaning of the term ‘decay’ is not the same as the plain meaning of the term ‘defect’.”  Id. at 240 (Sapp-Peterson, P.J.A.D., dissenting).  According to Judge Sapp-Peterson:

A “defect” connotes imperfection from the outset, while “decay” connotes a decline from a condition that was originally sound.  One cannot force a square peg into a round hole.

Id. at 241.

As noted, the New Jersey Supreme Court did not write its own opinion.  The Court simply reversed the decision of the Appellate Division “substantially for the reasons expressed in Judge Sapp–Peterson’s dissenting opinion.” 2016 WL 1650509.

The Appellate Division’s decision is a prime example of a court straining to find coverage where none otherwise exists.  As observed by the dissenting judge, the court “force[d] a square peg into a round hole” by equating “decay” with “defect.”  As courts often do in such instances, the Appellate Division misapplied the reasonable expectations doctrine in reaching its conclusion.  Absent significant public policy concerns, that doctrine has no application where the language of an insurance policy is clear and unambiguous.  No such public policy concerns existed in the Bardis case and, therefore, the doctrine should not have been applied.

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Most first-party property insurance policies contain an express contractual provision, known as a suit limitation provision, that limits the time period within which an action seeking recovery under the policy may be commenced.  Suit-limitation provisions typically provide that any action must be commenced within twelve months of the date of the loss.

Under New Jersey law, the running of a suit limitation provision is tolled from the time the insured gives notice of a loss to its insurer until the claim is denied by the insurance company.  An issue that has arisen on a number of occasions in connection with Superstorm Sandy claims has to do with what constitutes a denial, thereby starting the limitation period to run again.

In February 2015, I discussed Inacio v. State Farm Fire and Casualty Company, 2015 WL 457049 (D.N.J. Feb. 3, 2015), a case that addressed the issue of what constitutes a denial sufficient to start the running of a suit limitation provision.  In September, I addressed another decision decided by the same judge, Judge Kugler of the United States District Court for the District of New Jersey, Liguori v. Certain Underwriters at Lloyds, 2015 WL 4402851 (D.N.J. July 17, 2015), which involved the same issue.

Another federal judge recently reached a somewhat novel result in a tolling case.  In Preston v. Metropolitan Group Property and Casualty Insurance Company, 2016 WL 1060360 (D.N.J. March 16, 2016), Judge Kevin McNulty of the United States District Court for the District of New Jersey held that a suit limitation provision starts to run again once the last settlement payment is made by the insurer, even though the insurer never expressly denies any further liability.

The insured in Metropolitan, Robin Preston, owned a home located in Asbury Park, New Jersey, that was damaged by Superstorm Sandy on October 29, 2012.  At the time, Preston was insured by Metropolitan Group Property and Casualty Insurance Company.  Preston filed a claim with Metropolitan on November 3, 2012, just a few days after Sandy damaged her home.  Metropolitan inspected Preston’s home and prepared a damage estimate, which was dated November 19, 2012.  Metropolitan conducted two additional inspections of the property, with the final one taking place in January 2013.

Between December 3, 2012 and February 4, 2013, Metropolitan issued a series of seven checks to Preston, totaling $14,721.06.  No payments were made after February 4, 2013.

In August 2013, Preston’s counsel wrote to Metropolitan and requested a copy of the policy issued by Metropolitan and the reports prepared by Metropolitan’s adjuster.  In April 2014—over eight months later—Metropolitan supplied the requested information.  Preston then sued Metropolitan several weeks later in May 2014.  At no time prior to commencement of the lawsuit did Preston demand any additional payments from Metropolitan.

Metropolitan moved for summary judgment, arguing that Preston’s claim for additional damage was barred by the one-year suit limitation provision.  That provision provided:

Lawsuits Against Us.  No suit or action may be brought against us by you unless there has been full compliance with all of the policy terms.  Under Section I of this policy, any suit or action seeking coverage must be brought within twelve months of the loss.

Id. at *2.  Preston argued that while more than one year had passed since the loss occurred, the suit limitation period was tolled from the time notice of the claim was provided and did not start running again.  The court disagreed, and granted summary judgment in favor of Metropolitan.

The court began its analysis by summarizing what it believed to be New Jersey law concerning the tolling of suit limitation provisions:

For insurance claims, the limitations period begins to run on the date of casualty or accident.  It is tolled, however, “from the time the insured gives notice until liability is formally declined.”  That is, the time when the claim is being negotiated or processed by the insurer is not counted against the insured.  Where the insurer has not . . . declined liability, but the parties disagree on the settlement amount, the limitations period is still suspended while the claim is pending—i.e., through the last settlement payment.

Id. at *3 (citations omitted).  Thus, according to the court, “the tolling ceased, and the limitations period began running again, on February 4, 2013, the date that Metropolitan paid Preston the last settlement check.”  Id.  Because more than fifteen months had passed since the last payment, the court held that the claim was barred.

Preston also argued that the doctrine of equitable tolling should apply because, at the time, it was not clear to her that the February 4, 2013 check was the final check.  As observed by the court:

Preston seems to argue that the final check should have announced itself in some way; otherwise, she says, a series of checks is simply an “invitation to submit additional evidence to recover for the loss as well as a promise to make future payments.”

Id.  According to the court, in order for the doctrine of equitable tolling to apply, there must be some type of inequitable conduct on the part of the defendant on which the plaintiff relied to her detriment.  Finding no reliance or inequitable conduct, the court refused to apply the doctrine of equitable tolling:

Nothing about the February 4, 2013 check indicated that more checks were on the way.  If Preston thought additional money was due, or that a fourth inspection was required, she did not submit such a supplemental claim or request such a re-inspection.  Six months after the checks stopped coming, Preston’s [attorney] sent Metropolitan a letter dated August 14, 2013, requesting a copy of the claims file.  Nowhere in that letter does Preston request a re-inspection or demand a readjustment of her claim. Nor does she indicate confusion as to whether her claim was closed or whether additional checks would be forthcoming.

Id. at *5.  The court further observed that “[a]s February 4, 2014 approached, it was unreasonable to refrain from filing in the unsupported belief that the February 4, 2013 check possibly was not ‘final’.”  Id.

In reaching its decision, the court went a step further than other courts in holding “that the date of the last check is the proper time from which to measure the limitations period.”  Id.  Other courts have held that there must be an “unambiguous formal denial” of the claim to restart the running of the suit limitation provision.  See, e.g., Liguori, 2015 WL 44028 at *3-5.  In light of  the Preston decision, an insured needs to be more proactive and commence an action within the twelve month period even in the absence of an “unambiguous formal denial.”  Otherwise, it runs the risk of having its claim dismissed as being untimely.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Most third-party liability policies are occurrence based.  In order for a loss to be covered under such a policy, the damage at issue must “occur” during the policy period.  In most instances, it does not matter when a claim is actually asserted as long as the damage took place during the policy period.  A claims-made policy, on the other hand, provides coverage only for claims first made against the insured and reported to the insurance company during the policy period or shortly after expiration thereof.   A key feature of a claims-made policy is that it provides coverage for acts or omissions that took place prior to the effective date of the policy as long as any claims arising therefrom are first asserted against the insured and reported to the insurance company during the policy period.

Under a claims-made policy, it is not necessary to determine when the particular event that gave rise to the claim occurred because it is the making of the claim that triggers coverage and not the occurrence of the damage that gave rise to the claim.  Thus, insurers can limit the time during which they will be subject to claims being made under a particular policy to a certain finite period.  Under an “occurrence” based policy, in contrast, insurers can be subject to claims many years — and even decades — after a policy has expired.

As noted above, claims-made policies typically require that in order for coverage to exist, a claim must be first asserted against the insured and reported to the insurance company during the policy period, or within a specified “discovery” period following expiration of the policy.  Moreover, most policies provide that notice of a claim be provided to the insurer “as soon as practicable.”  Thus, an insured actually has two notice requirements under a claims-made policy: (1) the claim must be reported within the policy period; and (2) the claim must be reported “as soon as practicable.”  Unless an insured meets both of the notice requirements there will be no coverage under the policy.

The first notice requirement was addressed by the New Jersey Supreme Court in Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 (1985).  There, the insured failed to provide notice of a claim to its insurer prior to expiration of the policy.  The Court held that coverage was barred as a result of the late notice.  The Court ruled that, unlike an occurrence policy, it is not necessary for an insurance company to establish that it was prejudiced as a result of the late notice to avoid coverage.  Id. at 323.  The reason for this, as explained by the Court, is:

In exchange for limiting coverage only to claims made during the policy period, the carrier provides the insured with retroactive coverage for errors and omissions that took place prior to the policy period.  Thus, an extension of the notice period in a “claims made” policy constitutes an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy.

Id. at 324.

The second notice requirement recently was addressed by the New Jersey Supreme Court in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., No. 074572, 2015 WL 529602 (Feb. 11, 2016).  There, the Court dealt with the issue of whether an insurer was required to show prejudice when notice of a claim was received during the policy period, but the insured failed to provide the notice “as soon as practicable.”  That case involved a claim under a directors and officers liability policy, which is a common type of a claims-made policy.  Although the claim at issue was reported to the insurer within the policy period, the insured waited until six months after it had been sued to provide notice to its insurer.  The policy specifically required the insured to provide notice of a claim “as soon as practicable.”

Whether an insured has provided notice of a claim “as soon as practicable” generally presents a question of fact.  However, the Court held that based on the facts before it, the insured failed to provide notice of a claim “as soon as practicable” as a matter of law.  According to the Court:

Because plaintiffs fail to assert why the delay occurred, let alone why we should consider [the insured’s] reporting of the claims to be “as soon as practicable” under the “circumstances,” there is no factual dispute that the notice given was not timely.  Thus, we hold only that on this record the unexplained six-month delay did not satisfy the policy’s notice requirement.

2016 WL 529602 at *9.  The court was unwilling, however, to adopt a “bright line” test for determining “timely compliance with an ‘as soon as practicable’ notice provision.”  Id.  Thus, whether notice was timely will have to be decided on a case-by-case basis.

Significantly, the Court further held that an insurer is not required to show that it was prejudiced as a result of the untimely notice in order to avoid coverage, finding that the notice provision was a condition precedent to obtaining coverage.  Id. at *10-11.  Once again, however, the court was unwilling to adopt a bright-line rule applicable to all claims-made policies.  Rather, the court simply observed:

In this instance we need not make a sweeping statement about the strictness of enforcing the “as soon as practicable” notice requirement in “claims made” policies generally.  We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities.  Its notice conditions contain mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer “as soon as practicable,” . . . thereby preserving the insurer’s rights . . . to associate and influence how the litigation proceeds from its inception.

Id. at *11.

The court’s decision was based, in part, on “the conceptual differences between ‘claims made’ and ‘occurrence’ policies.”  Id. at *5.  As noted by the court:

The prompt notice requirement and the requirement that the claim be made within the policy period in “claims made” policies “maximiz[e] the insurer’s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured” and “mark the point at which liability for the claim passes to an ensuing policy, frequently issued by a different insurer, which may have very different limits and terms of coverage.”

Id. at * 7 (quoting 13 Couch on Insurance 3d §186:13 (2009)).  As discussed above, coverage under an “occurrence” policy is triggered based on the happening of an event during the policy period that gives rise to a claim.  Consequently, it can be very difficult for an insurer to predict its future liability because claims may be made decades after a policy has expired.  Under a “claims made” policy, on the other hand, it does not matter when the particular event that gave rise to the claim occurred.  Rather, what matters is when a claim is first asserted against the insured.  Thus, there is a finite period of time during which the insurer may be held liable.

In ruling in favor of the insurer, the Court placed great weight on the fact that the insured was a “sophisticated” insured represented by an insurance broker in connection with the procurement of the policy.  Many of the special rules governing the interpretation of insurance policies are based on the premise that insurance policies are contract of adhesion.  Most non-commercial insurance policies are based on standard forms used by insurers and insureds have little or no bargaining power to negotiate the terms of the policies.  In other words, policies are presented on a take-it-or-leave-it basis.  That often is not the case, however, with sophisticated commercial insureds.  Such insureds generally are represented by insurance brokers who have the ability to negotiate the terms of the insurance policies.  Indeed, brokers often draft insurance policies that are presented to insurers for review and acceptance.  Those policies are referred to as broker drafted manuscript forms.

There is no question that the insured in Templo was a sophisticated commercial insured and it was represented by an insurance broker in connection with the procurement of the insurance policy at issue.  Specifically, the Court observed:

[W]e note first the importance of the characteristics of [the insured.  The insured] is not an individual and this policy is not a simple personal liability insurance policy.  To the contrary, the insured was an incorporated business entity that engaged in complex financial transactions.  During the initial application process for the Directors and Officers policy, [the insured] listed itself as having at least fourteen full-time employees, two part-time employees, and a human resources department.  The policy covered a broad variety of complex civil and criminal matters, including employment practices claims and security claims.  In the procurement of a complex policy like this one, [the insured] did not simply obtain a professional liability policy on its own; it sought out a broker, who procured the policy on First Independent’s behalf.

Id. at *10.  Consequently, the court refused to treat the insurance policy at issue as a contract of adhesion and strictly enforced the notice requirement.

As argued by the plaintiff in Templo, some courts in other jurisdictions have treated the two notice requirements under a claims-made policy differently.  Specifically, a no-prejudice standard has been applied to the requirement that notice be provided within the policy period, whereas a prejudice standard has been applied to the requirement that notice be provided “as soon as practicable.”  In Templo, the New Jersey Supreme Court essentially rejected any distinction between the two notice requirements and held that a no-prejudice standard applies to both.

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Determining precisely when property damage or personal injury occurred in a case involving exposure to chemicals or other toxic substances over a period of many years can be extremely difficult, if not impossible.  Equally difficult is determining how to allocate such losses among the insurance policies that were in place during the time that the damage occurred.

In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994), the New Jersey Supreme Court adopted the continuous trigger theory for determining which policies of insurance provide coverage for such claims.  Trigger is “a shorthand expression for identifying the events that must occur during the policy period to require coverage for losses sustained by the policyholder.”  Id. at 441.  Under the continuous trigger theory, all policies that were in effect from the date of initial exposure to the injury-producing substance through the manifestation of injury provide coverage.

An issue not addressed by the Court in Owens-Illinois was how to allocate the loss among the various primary and excess policies that were triggered.  That issue was addressed several years later in Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998).  The Carter-Wallace court adopted an allocation method based on the amount of insurance purchased or risk retained in any given year.

In 2014, the Owens-Illinois/Carter-Wallace allocation method was revisited by the New Jersey Appellate Division in IMO Indus. Inc. v. Transamerica Corp., 437 N.J. Super. 577 (App. Div. 2014).  That case is discussed at length in a prior blog post.

The Owens-Illinois/Carter-Wallace allocation method did not address what happens when one or more of the insurers that provided coverage is insolvent.   In Spaulding Composites Company v. Caldwell Trucking PRP Group, 176 N.J. 25, 36 (2003), the New Jersey Supreme Court held that “the insured is required to pay its ‘aliquot’ share of both defense and indemnification on account of years in which it was uninsured, self-insured, or its coverage was exhausted or bankrupt.”  One year later, in Benjamin Moore & Company v. Aetna Casualty & Surety Company, 179 N.J. 87, 100 (2004), the Court likewise held that “policyholders are required to underwrite the risk of insurer insolvency or bankruptcy.”

However, almost a decade later, in Farmers Mutual Fire Insurance Company v. New Jersey Property-Liability Insurance Guaranty Association, 215 N.J. 522 (2013), the Court held that coverage provided by solvent insurers must first be exhausted before recovery may be obtained from the New Jersey Property–Liability Insurance Guaranty Association (“PLIGA”).  In other words, the sums allocated to insolvent insurers must be reallocated among solvent primary and excess insurers.  It is only after all such coverage has been exhausted that PLIGA and/or the insured becomes responsible for any remaining sums allocated to the insolvent insurers.

PLIGA was created pursuant to the New Jersey Property-Liability Insurance Guaranty Association Act, N.J.S.A. 17:30A-1 to -20. (“the Act”).  Under the Act, an insured may make a claim with PLIGA, subject to a statutory maximum limit of $300,000, if its insurer becomes insolvent.  The Act provides that when the insured is covered under more than one policy, it must first exhaust the coverage provided by the solvent insurers.

The word “exhaust” was not defined in the Act and it was not clear how it should be interpreted in a case involving application of the continuous trigger theory.  In December 2004, however, the Act was amended to define “exhaust” as follows:

“Exhaust” means with respect to other insurance, the application of a credit for the maximum limit under the policy, except that in any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied . . . .

See N.J.S.A. 17:30A-5.  The amendment expressly applies only to covered claims resulting from insolvencies occurring on or after December 2004.

The insurer at issue in Farmers was placed into insolvency in August 2007.  Thus, the 2004 amendment applied.  According to the Court, “[t]he 2004 amendment left no doubt that [PLIGA] was the insurer of last resort in long-tail cases.”  Farmers, 215 N.J. at 522.  In a footnote, the court distinguished its holdings in Benjamin Moore and Spaulding Composites on the basis that neither case involved the Act.

In Ward Sand and Materials Co. v. The Transamerica Insurance Company, No. A-1479-13T1, 2015 WL 9694044 (App. Div. Jan. 13, 2015), the Appellate Division was asked to determine who was on the hook for sums allocated to several insurers that became insolvent prior to December 2004.  The court observed:

The primary question we must decide is whether the trial court erred by concluding [the insured] is responsible for the sums allocated to insolvent insurers or whether, as [the insured] argues, the sums allocated to insolvent insurers should be reallocated among solvent primary and excess insurers.

2015 WL 9694044 at 1-2.  The court affirmed the trial court’s decision, concluding that the insured was responsible for the sums allocated to the insolvent insurers in excess of any amounts paid by PLIGA.  Unlike the Farmers court, the Appellate Division was concerned with the pre-December 2004 version of the Act because the insolvent insurers at issue had become insolvent prior to that date.

The insured argued, among other things, that the amendments should be applied retroactively.  The Appellate Division rejected that argument, noting that the New Jersey Supreme Court previously held that the amendments apply only prospectively.

Thus, the date on which an insurer becomes insolvent can have a significant impact on the allocation of losses.  If an insurer became insolvent prior to December 2004, the insured is responsible for the sums allocated to the insolvent insurers in excess of any amounts recoverable from PLIGA.  On the other hand, if an insurer became insolvent on or after December 2004, the other insurers are responsible for the sums allocated to the insolvent insurer and PLIGA and/or the insured are not liable unless the coverage provided by the solvent insurers is exhausted.  Acknowledging this anomaly, the Ward could observed:

We are not insensitive to the unfairness that results when a responsible business has purchased insurance to cover its business risks and the insurer becomes insolvent.  Yet, solvent insurers might argue it is equally unfair to require them to pay claims on risks they have not insured.  The myriad of policy considerations implicated by these considerations, particularly in the context of cleanup costs for environmental contamination, have been carefully considered and weighed by both the Supreme Court and the Legislature.

Id. at 9.

The method adopted by the New Jersey Supreme Court in Owens-Illinois and Carter-Wallace was far from perfect and has left courts and the legislature grappling with allocation issues for approximately two decades.  Unfortunately, as the Ward decision makes clear, not only is the allocation method complex, its application also is not always fair.

A copy of the decision is available here: a1479-13

© William D. Wilson and NJInsuranceBlog.com, 2016.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.