Settlement Agreement Negotiated Without Consent Of Insurer Is Not Binding On Insurer That Provides A Defense Under A Reservation Of Rights
October, 2007
The New Jersey Appellate Division recently found that an insurer providing a defense under a reservation of rights to its insured, but excluded from settlement negotiations, was not bound by the resulting settlement agreement. The focus of the Court’s holding was that the insurer, while improperly denying coverage, nonetheless provided the insured with a defense. Therefore, the Court concluded, the insurer did not abandon its insured and the insured was obligated under the terms of the policy to avoid assuming any obligations without the consent of the insurer. As such, the Court held that the insurer was not bound by the terms of the settlement agreement. New Jersey Eye Center, P.A. v. Princeton Ins. Co., 928 A.2d 25, 394 N.J. Super. 557 (N.J. Super. Ct. App. Div. 2007).
Princeton Insurance Company, Defendant in this case, provided professional liability insurance to the New Jersey Eye Center. Dr. Joseph Dello Russo, principal of the Eye Center and a physician specializing in ophthalmology, was the subject of a number of medical malpractice actions brought by patients who alleged that he and the New Jersey Eye Center were negligent in performing lasik eye surgery. Princeton, relying on an endorsement in the policy that excluded vicarious liability for the Eye Center’s physicians and technicians, denied coverage in the malpractice lawsuits, but agreed to provide a defense to the Eye Center under a reservation of rights. Id. at 27, 560-561.
Just before trial on the malpractice claims, the Eye Center sought a declaratory judgment against Princeton obligating Princeton to defend and indemnify the Eye Center for the actions of its physicians and technicians. The Eye Center named the malpractice lawsuit plaintiffs’ attorneys as “parties in interest” to the declaratory judgment action against Princeton. Id. at 28, 563.
The day before arguments on a motion for summary judgment in the declaratory judgment action, the attorneys for Princeton, Dr. Dello Russo, and plaintiffs’ attorneys engaged in extensive settlement discussions. By the end of the day, the discussions stalled and it appeared that nothing would be resolved; the attorney for Princeton left the courthouse. After Princeton’s counsel departed and despite the fact that it was well-after the close of business, settlement discussions resumed. Ultimately, the remaining parties reached a settlement agreement that included the following conditions: the Eye Center, Dr. Dello Russo and the Eye Center’s other physicians and technicians would assign their rights under the insurance policies to the malpractice action plaintiffs; the plaintiffs would only seek recovery from Princeton and Dr. Dello Russo’s personal professional liability carrier; and the parties would participate in binding, non-appealable arbitration on the issue of damages only, as the Eye Center, Dr. Dello Russo and the Eye Center’s physicians and technicians agreed to stipulate to liability. Id. at 28-29, 562-564.
When court reconvened the next morning, Princeton objected to the settlement agreement, arguing that it was not bound by the agreement because the Eye Center breached the duty of loyalty and cooperation owed to the insurer. The court rejected this argument and determined on summary judgment that Princeton was obligated not only to defend and indemnify the Eye Center, but was also duty-bound to defend and indemnify for the vicarious liability of Dr. Dello Russo and the Eye Center’s physicians and technicians. Id. at 29, 564.
Pursuant to the settlement agreement, the parties engaged in a binding arbitration on the issue of damages. Princeton did not participate. The arbitrator issued individual awards ranging from $170,000.00 to $3 million. Following these awards, a hearing was held to determine whether the settlement agreement and resulting arbitration was the result of collusion and whether the awards were reasonable. The hearing court found no evidence of collusion or bad faith, and held that the awards were reasonable. An order was entered for the malpractice action plaintiffs against Princeton for the awards specified in the arbitration. Id. at 29-30, 564-565.
Princeton appealed to the New Jersey Appellate Division the lower court’s decision that it was bound by the settlement agreement; Princeton did not appeal the summary judgment order finding coverage for the Eye Center and for the vicarious liability of its physicians and technicians. Rather, Princeton argued that the Eye Center did not comply with the well-settled rules regarding an insured’s responsibilities to its insurer when entering a settlement agreement after the insurer has improperly denied coverage. Under the seminal case on this issue, Griggs v. Bertram, 443 A.2d 163, 88 N.J. 347 (N.J. 1982), a settlement agreement in this context will be enforced against an insurance carrier only if the agreement is reasonable in amount and entered into in good faith. Thus, Princeton argued that while, pursuant to the summary judgment order, it improperly denied coverage, the settlement agreement was not reasonable nor in good faith. Id. at 30, 565-566.
The Eye Center, however, argued that “Princeton, having abandoned its insured, should not be heard to complain when the parties thereafter adopt a procedure designed to produce a result that is reasonable to all the parties.” Id. at 30, 566. The Eye Center reasoned that by providing a defense only under a reservation of rights and by failing to bring a declaratory judgment action to determine the coverage issue, Princeton effectively abandoned its insured, and therefore was bound by the terms
of the settlement agreement. Id. at 32, 569.
The Court rejected the Eye Center’s arguments finding that “Princeton was defending its insured, Eye Center, in each of the pending malpractice suits. The fact that it was proceeding under a reservation of rights in presenting that defense can in no way be deemed an abandonment of its insured.” Id. Moreover, the Court noted that when a carrier’s position conflicts with an insured’s position so that it cannot “defend the action with complete fidelity to the insured,” the parties should initiate a proceeding to resolve their differences. Id. However, the Court also reiterated the precept that the better course is to “leave it to the contenders to decide for themselves if and when to sue.” Id. at 32-33, 570. Thus, the Court held that Princeton did not abandon its insured by providing a defense under a reservation of rights, or by failing to bring a declaratory judgment action to determine coverage. Id. at 33.
Turning to Princeton’s argument that the settlement agreement was not reasonable or in good faith, the Court found it unnecessary to even reach that issue. Instead, the Court held that the Eye Center breached the terms and conditions of the Policy, thereby releasing Princeton from any obligation to the Eye Center. Specifically, the Policy required the Eye Center to cooperate with Princeton in any “investigation, settlement, or defense of the claim or suit,” and imposed a duty on the Eye Center “not to assume any obligation without Princeton’s consent.” Id. at 33, 570 (internal quotations omitted). The Court concluded that as “the purported settlement represented such a fundamental breach of the insured’s obligations to Princeton,” it was therefore immaterial whether the agreement was either reasonable or in good faith. Id. at 33, 570-571.
Learning Point: When an insurer denies coverage, but nonetheless provides a defense to its insured under a reservation of rights, New Jersey courts will not find that the carrier “abandoned” its insured. As such, the insured remains obligated to its insurer pursuant to the terms of the policy. Thus, in the context of a settlement agreement that breaches the terms and conditions of the policy, New Jersey courts will not enforce that settlement agreement against the carrier, regardless of whether the agreement was reasonable or in good faith.
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