An insurer typically has two distinct, albeit related, obligations under a third-party policy: the duty to defend the insured in connection with potentially covered claims asserted against the insured and the duty to pay any judgments against the insured in connection with covered claims. It is well established that an insurer can be estopped from denying coverage if it undertakes the defense of its insured and fails to timely inform its insured that coverage may not exist and/or may be limited. In other words, failure to inform the insured of a coverage limitation may result in waiver of that limitation. As summarized by the New Jersey Supreme Court:
Under certain circumstances an insurance carrier may be estopped from asserting the inapplicability of insurance to a particular claim against its insured despite a clear contractual provision excluding the claim from the coverage of the policy. The strongest and most frequent situation giving rise to such an estoppel is one wherein a carrier undertakes to defend a lawsuit based upon a claim against its insured. If it does so with knowledge of facts that are relevant to a policy defense or to a basis for noncoverage of the claim, without a valid reservation of rights to deny coverage at a later time, it is estopped from later denying coverage.
Griggs v. Bertram, 88 N.J. 347, 355-56 (1982); see also Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 126 (1962).
The issue of whether an insurer should be estopped from denying coverage after agreeing to defend its insured arises fairly frequently. The most recent case to address this issue is Drive New Jersey Insurance Company v. D’Alessio, 2018 WL 3339796 (N.J. Super. Ct. App. Div. July 9, 2018). In that case, the insurer, Drive New Jersey Insurance Company, agreed to defend its insured in a wrongful death action without issuing a reservation of rights (ROR) letter. Although the Drive policy provided an overall coverage limit of $500,000, it reduced coverage to $15,000 for the use of a vehicle for business purposes. After agreeing to defend its insured without first raising the reduced limit, Drive later sought to limit its liability to $15,000.
The underlying action arose out of a fatal car accident in which Louis A. D’Alessio, Jr., Drive’s insured, struck and killed a pedestrian. At the time, D’Alessio was using his own car to deliver bagels for Bagel Express, his employer. Bagel Express had its own insurance with Sentinel Insurance Company. After undertaking the defense of its insured in the underlying action, Drive commenced a separate declaratory judgment action against D’Alessio, Bagel Express, Sentinel, and the decedent. Drive did not seek to stay the underlying wrongful death action and continued to defend the insured in that action.
After the close of discovery in the declaratory judgment action, Sentinel moved for summary judgment, seeking a ruling that Drive was precluded from avoiding liability for the full amount of the policy limit. During discovery Drive failed to produce a ROR letter, and at oral argument of the summary judgment motion its counsel did not take the position that a ROR letter had been sent. Rather, Drive merely asserted the rather novel argument that such a letter was not necessary because it was only reducing coverage and not denying it.
After losing on summary judgment, Drive filed a motion for reconsideration. This time, Drive produced, for the first time, an unsigned letter that it purportedly sent to the insured’s former counsel. That letter made specific reference to the $15,000 coverage limit, although it did not specifically state that Drive was reserving its rights. The former counsel had been retained to represent the insured only in connection with an examination under oath requested by Drive and did not represent the insured in either litigation. Drive claimed it mistakenly failed to provide the letter to its own counsel, which is why it had not been produced earlier. Drive also produced for the first time a letter to the insured in which it stated that while the insured had $500,000 in coverage, it was possible that a judgment in excess of that amount could be entered against the insured and, for that reason, he may want to retain a personal attorney. It is not clear why Drive believed that that letter supported its position.
The judge scheduled a testimonial hearing to deal with the factual issue raised by the motion for reconsideration. On the date of the hearing, Drive was not prepared to proceed for a number of reasons. The judge subsequently denied the motion. The court noted that there was no evidence that the two letters could not have been located earlier through diligent effort. Without going into any detail, the court further noted that even if Drive could prove that the insured’s former attorney had received the newly discovered letter at a time when he was still representing the insured, it did not qualify as a ROR letter.
The Appellate Division affirmed. The court began its analysis by agreeing with the motion judge that “Drive could not undertake the defense of its insured, without giving the insured advance notice that Drive intended to deny most of the coverage the policy provided and that it would defend under a reservation of that right.” Id. at *4. Citing Griggs, the court went on to note that “[e]ven if a formal ROR letter were not required, an insurer must timely invoke a policy exclusion.” Id. Finding that “[t]he undisputed summary judgment evidence established that Drive neither timely invoked the exclusion nor served its insured with a reservation of rights letter,” the court upheld the lower court’s decision. The court also rejected Drive’s argument that Sentinel had no standing to raise the estoppel issue, pointing out that Drive chose to sue Sentinel.
The court’s decision is not surprising and the result is not that uncommon. It is critical for an insurer to closely examine its policy prior to assuming the defense of its insured, or hire coverage counsel to do so on its behalf, and raise any potential defense and/or limitations as soon as possible. Otherwise, it runs the risk of being estopped from raising those defenses and/or limitations. That is what happened to Drive, and it ultimately cost Drive $485,000.
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