New NJ Supreme Court Rulings May Alter Duty to Defend

June 2011

In 1992, the New Jersey Supreme Court issued two companion decisions that have since been cited in hundreds of reported and unreported New Jersey coverage decisions on the duty to defend: Voorhees v. Preferred Mutual Insurance Company, 128 N.J. 165 (1992) and SL Industries v. American Motorists Insurance Co., 128 N.J. 188 (1992).


On June 21, 2011, the New Jersey Supreme Court again issued companion insurance coverage decisions that will have a profound impact upon the duty to defend under New Jersey law: Passaic Valley Sewerage Commissioners v. St. Paul Fire & Marine Insurance Company, 2011 N.J. LEXIS 686 (June 21, 2011) (PVSC) and Abouzaid v. Mansard Gardens Associates, LLC, 2011 N.J. LEXIS 684 (June 21, 2011) (Abouzaid).


The holdings in both PVSC and Abouzaid are relatively narrow, but the Supreme Court's analysis of the duty to defend may have a profound impact on New Jersey coverage law for decades to come. We provide a brief summary of the two decisions and a Q&A about New Jersey's duty to defend law in light of those decisions.


Case Summaries


PVSC involved a claims made policy that defined the term "loss" as "Money Damages." The policy further excluded relief "in any form other than Money Damages, including any form of…equitable relief." The Supreme Court held that a non-monetary settlement could not be valued and create an indemnity obligation under the insurance policy. In and of itself, this holding is not very remarkable.


The Supreme Court in PVSC, however, addressed the duty to defend because the policyholder argued that the insurance company's alleged breach of the duty to defend meant that it must indemnify the insured for the settlement, irrespective of whether it was covered under the policy. The Supreme Court in PVSC held that based upon the insurance company's claims handling and its many reservation of rights letters, it had not breached its duty to defend, but instead properly engaged in communications with the policyholder to defend some portion of the underlying case, even though it never agreed to pay 100 percent of the defense bills. Thus, the Supreme Court in PVSC held in favor of the insurance company.


Abouzaid involved an underlying claim of negligent infliction of emotional distress from a mother who witnessed a burning building with her two children inside, also known as a "Portee claim" after the case Portee v. Jaffee, 84 N.J. 88 (1980) or a "zone of danger" claim. Under New Jersey law, purely emotional distress does not amount to "bodily injury" for CGL purposes. The Supreme Court nonetheless held that a complaint alleging a Portee claim must be read broadly in favor of coverage and that emotional distress cases often involve physical symptoms that surface during discovery. Specifically, the Court stated, "we presume that the extraordinary level of emotional distress required to support a Portee claim – severe emotional distress – will, in most cases, bear a physical component." Thus, the Supreme Court created a presumption that a duty to defend a Portee claim existed until the insurance company could eliminate any possibility of physical ailments from the emotional distress claim.


Q&A on New Jersey Duty to Defend


Is New Jersey a "four corners" state with regard to the duty to defend?

No. The policyholder may provide extrinsic evidence outside the complaint that the carrier must consider in providing a defense. Abouzaid v. Mansard Gardens Associates, LLC, supra; SL Industries v. American Motorists, 128 N.J. 188, 198-99 (1992).


Further, there is Appellate Division authority that an insurance company can also rely upon facts outside of the complaint in denying coverage. Polarome Int'l, Inc. v. Greenwich Ins. Co., 404 N.J. Super. 241, 274 (App.Div. 2008). But see W9/PHC Real Estate LP v. Farm Family Cas. Ins. Co., 407 N.J. Super. 177, 192 (App. Div. 2009). Insurance companies should also be cautious in relying upon extrinsic information to deny coverage. The general rule of law in New Jersey remains that a duty to defend "is determined by comparing the allegations in the complaint with the language of the policy." Voorhees v. Preferred Mutual Ins. Co., 128 N.J. 165, 173 (1992).


What if a complaint contains both covered and uncovered counts – must the insurance company defend the entire complaint?

Yes, but with the right to seek apportionment from the insured. See Passaic Valley Sewerage Commissioners v. St. Paul Fire & Marine Insurance Company, supra. In S.L. Industries v. American Motorists Insurance Co., supra, 128 N.J. 188, the Supreme Court held that a carrier was entitled to request a fair allocation of defense costs between covered and non-covered counts. The Court recited the general rule that where defense costs can be apportioned between the covered and non-covered claims, such an apportionment should be made. If the costs are not easily divisible, the insurer must assume the entire cost. Id. at 215. Significantly, the Supreme Court cautioned that in following this approach: "we note that our interpretation differs from that of a number of the Courts that have applied it." Id. Just because an apportionment is difficult does not mean the carrier should pay for the entire defense.


What if an insurance carrier undertakes the defense of a complaint without a valid reservation of rights letter?

The insurance company waives its rights to contest coverage when it defends the case without a reservation of rights letter. Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114, 126 (1962). Further, an inadequate reservation of rights letter can also cause a waiver. Nazario v. Lobster House, 2009 N.J. Super. Unpub. LEXIS 1069, *21-22 (App.Div. 2009).


In addition, even pre-suit, an insurance carrier can be estopped to later deny coverage if its conduct in undertaking the investigation of a claim leads the insured to believe that the matter is covered. Griggs v. Bertram, 88 N.J. 347, 355-56 (1982).


What if an insurance company wrongfully denies a defense – can it be liable for a judgment or settlement that is not otherwise covered?

Uncertain, but PVSC suggests it. Specifically, in PVSC, the Supreme Court stated that an insurer that breaches its duty to defend must indemnify the underlying judgment or settlement, irrespective of its other policy defenses (subject to its limits), unless the underlying settlement or judgment was not reached in good faith and was unreasonable. Specifically, the Supreme Court stated:


Where an insurer wrongfully refused coverage and a defense to its insured, so that the insured is obliged to defend [itself] in an action later held to be covered by the policy, the insurer is liable for the amount of the judgment obtained against the insured or of the settlement made by him. The only qualifications to this rule are that the amount paid in settlement be reasonable and that the payment be made in good faith.

—Passaic Valley Sewerage, 2011 N.J. LEXIS at *32-33

 (quoting Griggs v. Bertram, 88 N.J. 347, 364 (1982))


Notably, in First Trenton Indemnity Co., v. River Imaging, P.A., 2009 N.J. Super. Unpub. LEXIS 2190, *27 (App. Div. 2009) the court found the exact opposite. There, a New Jersey appellate court held that "an insurer that fails to provide a defense for an action asserting both covered and uncovered claims is nevertheless entitled to a determination of whether any judgment entered against its insured was for a covered claim and thus fell within the insurer's obligation to pay."


What if a carrier offers to defend the case under a valid reservation of rights, but the policyholder does not accept it. Can the policyholder bind the insurance company to a settlement that is otherwise uncovered under the policy?

No. See PVSC.



These new decisions on the duty to defend could lead to many lower court N.J. decisions that broaden defense obligations of insurers. PVSC could also require insurers in N.J. to file more preemptive declaratory judgment actions to avoid the penalty of indemnifying uncovered losses. 

For further information, please contact our New Jersey coverage partners:

Thomas F. Quinn
New Jersey

Brian J. Whiteman
New Jersey

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