I insurer agrees to defend its In pleading a negligence claim, - PDF document

C L A I M D E N I E D January 2005 A publication of the Lowenstein Sandler Insurance Law Practice Group NEW DECISION CLARIFIES NEW JERSEY LAW ON INSURER’S DUTY TO DEFEND By Robert D. Chesler, Esq. n 1992, the New Jersey Supreme Most complaints bundle together intentional conduct and fraud, all Court established that when an covered and uncovered allegations. arising from the same facts and I insurer agrees to defend its In pleading a negligence claim, seeking the same damages, the insured, the insurer has the right to plaintiffs do not hesitate to add insurer may offer to pay 25 percent of allocate defense costs between covered counts of intentional wrongdoing or defense costs. and uncovered claims in the fraud. Plaintiffs frequently allege These are difficult issues for the complaint. The court opined that both negligence and breach of insured to contest. If an insurer such allocation should not prove contract. In D&O cases, some offers to pay 40 percent of defense difficult but it has, in fact, proven a claims may be within the ‘insured v. costs, should the insured refuse and nightmare. insured’ exclusion, while others are file suit, thereby paying all of the not. Moreover, a request for punitive Inside defense costs itself until the court damages is made in a high percentage rules? If the insurer offers 40 percent COVERAGE FOUND FOR of cases. and the insured believes that the PRODUCT LOSS ABSENT The Supreme Court did not give insurer’s correct share is 75 percent, MATERIAL ALTERATION guidance on how the parties were can the insured cost-effectively BROKER DILIGENCE supposed to allocate. Insurers can litigate over the difference? REQUIRED TO AVERT often find an argument that they In Hebela v. Healthcare Insurance COVERAGE DENIALS should pay less than 100 percent of Company , Docket No. A-0417 (App. defense costs because of uncovered SCOPE OF COVERAGE FOR Div. June 28, 2004), the New Jersey allegations. Indeed, insurers AN “ADDITIONAL Appellate Division has now set forth INSURED” REMAINS sometimes simply count the number a clear allocation standard that is IN FLUX of counts, and pay the percentage of very favorable for insureds. covered counts to the total number SILICA LITIGATION of counts: if a complaint alleges In Hebela , a doctor sued a hospital ON THE MARCH negligence, breach of contract, for employment claims, and the This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D

hospital counterclaimed. The doctor The court set forth the standard pay mixed costs incurred with respect sought coverage for the counterclaim that the insurer had to pay all to both covered and uncovered under the hospital’s D&O policy. overlapping costs. The court found claims. Thus, if a complaint asserts The insurer denied coverage on an that the insurer had agreed to defend clearly unrelated claims of negligence unusual public policy ground. Both fully against any covered claim, and and breach of contract seeking the doctor and the hospital were should not benefit from the fact that separate damages, the insurer may insureds under the D&O policy, but its defense incidentally aided the only need to pay for the negligence the policy’s ‘insured v. insured’ insured on uncovered claims. claim. However, if the complaint exclusion applied solely to claims by alleges negligence, breach of individuals, and not by the hospital. While the Appellate contract, intentional wrongdoing, Division was sympathetic Nonetheless, the insurer argued that and fraud, seeking the same damages to the practical difficulties public policy prevented coverage for arising from the same operative facts, of apportionment, it a claim by one insured against the insurer must pay all of the found that the trial court another. The court dismissed this defense costs. needed to make a diligent defense, and next turned to the issue effort to reach “a fair and COVERAGE FOUND FOR of allocation between the insured’s reasonable estimate.” PRODUCT LOSS ABSENT uncovered costs in prosecuting its MATERIAL ALTERATION claim and the covered costs in By Lynda A. Bennett, Esq. The court next turned to the defending against the counterclaim. mechanics of allocation. The court In a favorable ruling for The Appellate Division stated that recognized two distinct situations. policyholders, the Appellate Division “the trial judge found apportionment Sometimes, the insurer agreed to recently found coverage for a product to be difficult and unworthy of more defend and was seeking loss even though the “material or than a cursory effort.” While the reimbursement of uncovered costs chemical composition” of the product Appellate Division was sympathetic from the insured. Other times, as in was not altered. The decision is to the practical difficulties of Hebela , the insurer had refused to important for two reasons. First, it apportionment, it found that the trial defend. In the latter case, the court construes the requirements of “direct, court needed to make a diligent effort placed only a slight burden on the physical loss” and “risk of physical to reach “a fair and reasonable insured to come forward with loss” broadly. Second, it reinforces estimate.” evidence of its costs. The insurer had the canons of insurance policy The court recognized that the case the burden of demonstrating which interpretation requiring insurance before it, involving a claim and a costs were incurred solely with companies to use clear and direct counterclaim, was easier than cases respect to uncovered claims. language in their policies so that in which the court needed to allocate The court thus held that all coverage fulfills the insured’s between covered and uncovered defense costs, presumptively, are reasonable expectations. claims within the same complaint. covered. The insurer has the burden In Customized Distribution Services Still, the court found defense costs of demonstrating which defense costs v. Zurich Ins. Co. , No. A-1586-03T1 incurred by the insured in Hebela that were incurred solely with respect to overlapped between the claim and (Dec. 16, 2004), Customized uncovered claims. The insurer must the counterclaim. Distribution Services (“CDS”) was