In a recent decision for publication, a New Jersey intermediate appellate court clarified certain circumstances in which an insurer can deny coverage even though the insured did not respond to the insurer’s offer of a “courtesy defense.” In Northfield Ins. Co. v. Mt. Hawley Ins. Co. et al., Slip Op., No. A-1771-16T4 (App. Div. March 28, 2018), the Appellate Division of the New Jersey Superior Court, finding fact issues, held that an insurer would not be estopped from denying coverage where it offered a “courtesy defense,” received no response from the insured, and then proceeded to control defense of the underlying litigation. 

The court found there was insufficient evidence to grant summary judgment to the insured on the coverage issue as a matter of law under the estoppel doctrine first recognized in Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 127 (1962). In Eggleston, the New Jersey Supreme Court had found that an insurer was estopped from denying coverage where it reserved its rights or denied coverage while at the same time it failed to request it’s insured’s consent to control the defense of the underlying action. The Court stated that “[c]ontrol of the defense is vitally connected with the obligation to pay the judgment,” that “it would be unfair to permit a carrier to control the defense without the consent of the insured and then leave the judgment for his payment,” and then ruled that “if a carrier wished to control the defense and simultaneously reserve a right to dispute liability, it can do so only with the consent of the insured.” Id.

In Northfield, a roofing contractor, CDA, insured by Northfield, did roofing work on a hotel, Empress, pre-Superstorm Sandy. The hotel was damaged by Sandy. The hotel submitted a claim to CDA, asserting the damage was due to CDA negligence. The hotel and its insurer, Mt. Hawley, subsequently sued CDA alleging that pre-Sandy roof problems leading to damage were due to CDA negligence (Empress Lawsuit). 

Northfield disclaimed coverage of the Empress Lawsuit to CDA and although denying an obligation to indemnify CDA, it stated that it was “willing to provide [CDA] with a courtesy defense for this lawsuit.” Id., Slip Op. at 6. Northfield also reserved its right to withdraw from the defense of the Empress Lawsuit at any time and all other rights as to its coverage decision. CDA did not respond to the offer (the appellate court noted that based on the factual record CDA was “defunct”). Northfield then filed an action seeking a declaration that it had no obligation to defend or indemnify CDA in the underlying Empress Lawsuit (DJ Action). Empress and Mt. Hawley sought summary judgment in the DJ Action, on the ground that Northfield was estopped from denying coverage because it did not have consent from CDA to control the defense of the Empress Lawsuit. The trial court granted summary judgment to Empress and Mt. Hawley, concluding that Northfield could not deny coverage because it had not obtained consent from CDA to control the defense of the Empress Lawsuit. The appellate court disagreed and reversed that ruling on appeal.      

The Appellate Division observed that Eggleston did not “impose only one way in which the insured’s rights upon a disclaimer or coverage denial may be observed.” Id., Slip Op. at 10. Rather, the court noted that here the offer of a “courtesy defense” could be viewed as the offer of a defense in the underlying action, not that the insurer was insisting on controlling the defense. That led the court to find that “if interpreted as an offer, CDA’s following silence could be interpreted as acquiescence in Northfield’s control of the defense; such a circumstance would not offend Eggleston.” Id., Slip Op. at 12.  The Appellate Division concluded that the trial court’s “application of the doctrine of estoppel was precipitous and cannot stand.” Id., Slip Op. at 13. It further found that there were “too many factual uncertainties to allow for the application of estoppel as a matter of law,” and remanded the case for further proceedings. Id., Slip Op. at 14, 21. 

The takeaway is that there are situations where the estoppel doctrine of Eggleston will not apply, and the issue of an insured’s consent to an insurer controlling the defense will be heavily fact-sensitive. Coverage counsel should be aware of that when advising insurers who seek to reserve rights or deny coverage, while at the same time offering to control or controlling the defense of an underlying litigation.

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