New Jersey Appellate Court Finds Estoppel in Two Recent Insurance Cases
February, 2002
New Jersey Appellate Court Finds
Estoppel In Two Recent Insurance Cases
by David J. Roe
droe@clausen.com
The New Jersey appellate court has issued estoppel rulings against insurers in two recent cases: Pasha v. Rosemount Memorial Park, Inc., 781 A.2d 1119 (N.J. App.), and Charter Oak Fire Ins. Co. v. State Farm Mutual Automobile Ins. Co., 782 A.2d 452 (N.J. App.).
Pasha v. Rosemount Memorial Park, Inc.
In Pasha, the appellate court held that a liability insurer’s failure to state a certain coverage defense within its declination of coverage letter estopped the insurer from asserting that defense after the insured executed a settlement agreement with plaintiffs.
Facts
Plaintiffs in Pasha were the five surviving children of a woman who was to be buried at Rosemount Memorial Park. Due to excessive rains, the grave contained approximately three feet of water. During the interment, the casket was lowered into the grave but it tilted and sank to the bottom. The cemetery workers were not cooperative in attempting to retrieve the casket because they feared that the grave might “cave in” due to the water content in the surrounding soil. After the casket was removed from the grave, it was discovered that water had seeped in which required “reconditioning” of the body and burial at another site.
Plaintiffs sued the cemetery seeking damages for emotional distress. The cemetery notified its insurer, which denied coverage based on the grounds that “(1) the incident involving the casket did not constitute an ‘occurrence’ as defined by the policy, (2) coverage was rendered nugatory by the professional liability exclusion, and (3) the cemetery did not report the accident in a timely manner.”
Following the denial of coverage, the cemetery settled plaintiffs’ claims for the amount of $500,000, with an agreement to pay plaintiffs $30,000 and assign the cemetery’s rights against its insurer. Plaintiffs agreed to repay the cemetery the $30,000 if they recovered against the insurer.
The trial court concluded that the incident involving the casket constituted an “occurrence” as defined by the policy. With respect to application of the professional liability exclusion, the court rejected the insurer’s claim that the policy language should be reformed.
The insurer then moved for summary judgment alleging that the plaintiffs’ claim for emotional distress did not allege “bodily injury” as that term was defined by the policy. Plaintiffs responded that the insurer had not previously denied coverage on this basis and was therefore estopped from asserting that the claim was not covered under the policy. The insurer produced letters arguing that the cemetery was provided with actual and constructive notice of its position that the underlying claim did not allege “bodily injury” as defined by the policy. Further, the insurer argued that its declination letter contained a “catch-all phrase” which reserved its right to deny liability “[f]or the reasons given and for any other good and valid reason that may come to light. . . .”
The trial court found that the insurer had not based its denial of coverage upon the definition of “bodily injury” prior to the settlement. The insured and plaintiffs had entered into a settlement agreement, thus changing their position in reliance upon the declination of coverage letter submitted by the insurer. As a result, the insurer was estopped from asserting a new basis for denial of coverage.
Analysis
The appellate court agreed that the declination letter did not identify the failure to allege “bodily injury” as a basis for denying coverage, and that the insurer’s “oblique and cryptic reference” to “any good and valid reason that may come to light” failed to preserve that ground as a basis for disclaiming liability. In sum, the letter did not adequately inform the cemetery of the reason for the declination of coverage advanced after the settlement.
The court further found that the cemetery’s assignment of its rights and plaintiffs’ acceptance of that assignment could reasonably have been based on their belief that the reasons given by the insurer for declining coverage were without merit and would ultimately be rejected in the ensuing litigation. “We are satisfied” the court wrote, “that the reasonable, detrimental reliance by the insured serves to estop [insurer] from changing its position concerning the basis for its denial of coverage.” The court noted that estoppel cannot, as a general rule, expand the coverage available under a policy of insurance; however, the insured’s reasonable, detrimental reliance removed this case from that general rule.
Learning Point: Use of a declination of coverage letter which incorporates a general “catch-all phrase” may estop the insurer from later raising separate coverage defenses which were known at the time the letter was issued, especially where, as here, the insured can show detrimental reliance on the original declination letter. Insurers should accordingly take care to draft specific declination letters tailored to each individual case and addressing each basis upon which coverage may be denied. In the event the circumstances change, insurers should reissue declination letters asserting the specific newly discovered coverage defenses.
Charter Oak Fire Ins. Co. v. State Farm Mutual Automobile Ins. Co.
In Charter Oak, the court ruled that an excess carrier will be equitably estopped from asserting a bad-faith claim against the underlying primary carrier for failure to settle within policy limits where the primary carrier pays its policy limits and relinquishes control of the case at the request of the excess carrier.
Facts
Ronald Hatt was driving along a state route and stopped to make a left-hand turn into a parking lot. His left-turn signal was on when he was struck in the rear by an automobile driven by Henry Gotell. Gotell then crossed into the oncoming traffic and struck another vehicle head-on, severely injuring the driver and killing the driver’s 18-month-old child. Gotell continued and struck another vehicle injuring both occupants. Numerous suits were filed which resulted in Gotell’s insurer depositing its policy limits of $30,000 with the court.
State Farm issued an automobile liability policy to Hatt with liability limits of $300,000. Charter Oak was Hatt’s employer’s automobile liability carrier, which was liable on an excess basis. Charter Oak was not notified of the litigation until two years after the negligence actions had been filed. State Farm claimed that it did not learn of the availability of the excess insurance until after Hatt was deposed. Notice was provided to Charter Oak approximately one year before the liability trial. The senior claims advisor opened a file and retained counsel to represent Charter Oak’s interests by monitoring the pending litigation, making reports and recommendations to the claims adjuster, communicating with State Farm’s attorneys and evaluating Charter Oak’s excess exposure.
At the time Charter Oak came into the litigation, an arbitration panel had determined that Gotell was 100 percent liable for the accident. As a result, State Farm was of the view that its insured (Hatt) bore no liability. The Charter Oak adjuster also concluded that based upon the police reports, depositions and interrogatories, Hatt’s liability, if any, was in the neighborhood of 10 percent. The jury unexpectedly returned a verdict finding Hatt 60 percent and Gotell 40 percent liable. A motion for new trial was filed and temporarily stayed to allow settlement negotiations to go forward. Charter Oak informed State Farm that it would be taking over the settlement negotiations and requested that State Farm pay its policy limits of $300,000. State Farm complied with this request. Charter Oak settled the litigation with a payment in the amount of $782,000 which was excess to State Farm’s coverage. Charter Oak then brought the present action seeking to recover its payment and asserting a bad-faith failure to settle on the part of State Farm and malpractice on the part of counsel retained by State Farm for Hatt. The trial court dismissed the complaint in its entirety and Charter Oak appealed.
Analysis
The appellate court rejected both of Charter Oak’s claims. The court first held that there was no basis for a finding of attorney malpractice. Charter Oak alleged that the attorneys failed to secure an expert and failed to raise appropriate defenses. The court found that Charter Oak’s claims supervisor had raised these issues with appointed counsel and at no time requested or suggested any amendment to the pleadings. Further, Charter Oak reviewed the facts of the case and agreed that liability exposure appeared to be minimal.
As to Charter Oak’s bad-faith claim against State Farm for failure to settle, the court of appeals agreed with the trial court that Charter Oak was equitably estopped from asserting this claim as Charter Oak had deliberately induced State Farm to tender its policy limits and to forego its right to seek a new trial or to continue with the pending appeal, “intending all the while” to proceed with its bad faith claim. Had State Farm known of Charter Oak’s intention “it would never have relinquished its right to challenge the liability verdict, thereby surrendering its opportunity to mitigate, if not altogether to avoid, both its and Charter Oak’s damages.” This change in position estopped Charter Oak from asserting its bad-faith claim against State Farm.
Learning Point: In the event an excess insurer disagrees with the course of action maintained by the primary carrier in defending a claim, it should memorialize that disagreement in correspondence between the insurers in order to preserve any potential future action against the primary insurer or its retained counsel. An excess carrier asking a primary carrier to tender its policy limits and turn over control of the litigation so the excess insurer can pursue settlement (rather than post-trial relief) should likewise obtain a non-waiver agreement from the primary carrier to avoid an estoppel defense should the excess carrier later wish to assert a bad faith claim against that primary carrier.
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