Source: https://njinsuranceblog.com/author/abjwilson/
Timestamp: 2019-04-22 03:14:11+00:00

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Under certain circumstances an insurance carrier may be estopped from asserting the inapplicability of insurance to a particular claim against its insured despite a clear contractual provision excluding the claim from the coverage of the policy. The strongest and most frequent situation giving rise to such an estoppel is one wherein a carrier undertakes to defend a lawsuit based upon a claim against its insured. If it does so with knowledge of facts that are relevant to a policy defense or to a basis for noncoverage of the claim, without a valid reservation of rights to deny coverage at a later time, it is estopped from later denying coverage.
Griggs v. Bertram, 88 N.J. 347, 355-56 (1982); see also Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 126 (1962).
The issue of whether an insurer should be estopped from denying coverage after agreeing to defend its insured arises fairly frequently. The most recent case to address this issue is Drive New Jersey Insurance Company v. D’Alessio, 2018 WL 3339796 (N.J. Super. Ct. App. Div. July 9, 2018). In that case, the insurer, Drive New Jersey Insurance Company, agreed to defend its insured in a wrongful death action without issuing a reservation of rights (ROR) letter. Although the Drive policy provided an overall coverage limit of $500,000, it reduced coverage to $15,000 for the use of a vehicle for business purposes. After agreeing to defend its insured without first raising the reduced limit, Drive later sought to limit its liability to $15,000.
The underlying action arose out of a fatal car accident in which Louis A. D’Alessio, Jr., Drive’s insured, struck and killed a pedestrian. At the time, D’Alessio was using his own car to deliver bagels for Bagel Express, his employer. Bagel Express had its own insurance with Sentinel Insurance Company. After undertaking the defense of its insured in the underlying action, Drive commenced a separate declaratory judgment action against D’Alessio, Bagel Express, Sentinel, and the decedent. Drive did not seek to stay the underlying wrongful death action and continued to defend the insured in that action.
After the close of discovery in the declaratory judgment action, Sentinel moved for summary judgment, seeking a ruling that Drive was precluded from avoiding liability for the full amount of the policy limit. During discovery Drive failed to produce a ROR letter, and at oral argument of the summary judgment motion its counsel did not take the position that a ROR letter had been sent. Rather, Drive merely asserted the rather novel argument that such a letter was not necessary because it was only reducing coverage and not denying it.
After losing on summary judgment, Drive filed a motion for reconsideration. This time, Drive produced, for the first time, an unsigned letter that it purportedly sent to the insured’s former counsel. That letter made specific reference to the $15,000 coverage limit, although it did not specifically state that Drive was reserving its rights. The former counsel had been retained to represent the insured only in connection with an examination under oath requested by Drive and did not represent the insured in either litigation. Drive claimed it mistakenly failed to provide the letter to its own counsel, which is why it had not been produced earlier. Drive also produced for the first time a letter to the insured in which it stated that while the insured had $500,000 in coverage, it was possible that a judgment in excess of that amount could be entered against the insured and, for that reason, he may want to retain a personal attorney. It is not clear why Drive believed that that letter supported its position.
The judge scheduled a testimonial hearing to deal with the factual issue raised by the motion for reconsideration. On the date of the hearing, Drive was not prepared to proceed for a number of reasons. The judge subsequently denied the motion. The court noted that there was no evidence that the two letters could not have been located earlier through diligent effort. Without going into any detail, the court further noted that even if Drive could prove that the insured’s former attorney had received the newly discovered letter at a time when he was still representing the insured, it did not qualify as a ROR letter.
The Appellate Division affirmed. The court began its analysis by agreeing with the motion judge that “Drive could not undertake the defense of its insured, without giving the insured advance notice that Drive intended to deny most of the coverage the policy provided and that it would defend under a reservation of that right.” Id. at *4. Citing Griggs, the court went on to note that “[e]ven if a formal ROR letter were not required, an insurer must timely invoke a policy exclusion.” Id. Finding that “[t]he undisputed summary judgment evidence established that Drive neither timely invoked the exclusion nor served its insured with a reservation of rights letter,” the court upheld the lower court’s decision. The court also rejected Drive’s argument that Sentinel had no standing to raise the estoppel issue, pointing out that Drive chose to sue Sentinel.
The court’s decision is not surprising and the result is not that uncommon. It is critical for an insurer to closely examine its policy prior to assuming the defense of its insured, or hire coverage counsel to do so on its behalf, and raise any potential defense and/or limitations as soon as possible. Otherwise, it runs the risk of being estopped from raising those defenses and/or limitations. That is what happened to Drive, and it ultimately cost Drive $485,000.
When will it end is a refrain that must be on many liability insurers’ minds when it comes to liability under commercial general liability policies issued decades ago. Many such policies contain anti-assignment clauses, the purpose of which is to allow an insurer to limit its liability to successor companies and better gauge its potential future liability. In Givaudan Fragrances Corp. v. Aetna Cas. & Sur. Co., 442 N.J. 28 (2015), however, the New Jersey Supreme Court held that an anti-assignment clause in an insurance policy is no bar to the post-loss assignment of an insurance claim.
Givaudan dealt with the issue of the assignment of claims under decades-old insurance policies. The Court held that “once an insured loss has occurred, an anti-assignment clause in an occurrence policy may not provide a basis for an insurer’s declination of coverage based on the insured’s assignment of the right to invoke policy coverage for that loss.” The reasoning behind this rule is that liability under an occurrence-based policy attaches once the occurrence takes place even though no claim has been asserted. Thus, the insurer becomes obligated to the insured on the date of the loss and that obligation may freely be assigned.
Recently, the Appellate Division reached a similar conclusion in Cooper, LLC v. Columbia Cas. Co., 2018 WL 1770260 (April 13, 2018). The real issue in Cooper, however, was not whether the claims could be assigned, but rather whether they had, in fact, been assigned. That case involved coverage for environmental damage under multiple policies that were in effect during the period from 1971 through 1980. The policies had been issued to McGraw-Edison Company. The plaintiff, Cooper, was named as a potentially responsible party at a hazardous waste site that had been owned by McGraw-Edison. As the successor in interest to McGraw-Edison, Cooper sought coverage under the McGraw-Edison policies.
In May 1985, McGraw-Edison, which the court refers to as Old McGraw, was acquired by Cooper. A series of complex transactions concerning the business operations, assets, and liabilities of Old McGraw then took place.
First, Old McGraw’s business operations were divided among ten “Mirror Image Companies.” The Mirror Image Companies owned an acquisition company named CI Acquisition. CI Acquisition, in turn, owned another acquisition company named CM Mergerco. Neither acquisition company owned any operating assets.
On May 30, 1986, Old McGraw and CI Acquisition merged. As part of the merger, CI Acquisition assumed all of Old McGraw’s obligations and liabilities. The merger agreement stated that “all the property, rights … and other assets of [every] kind and description” were being transferred from Old McGraw to CI Acquisition. Although the agreement makes no refence to insurance policies or claims, the appellant-insurers did not dispute that Old McGraw’s rights under its insurance policies were transferred to CI Acquisitions.
Five minutes after the merger took place, five of the Mirror Image Companies were merged together to form McGraw-Edison Company, which the court refers to as New McGraw. CI Acquisition then distributed all its assets (which just minutes ago had been owned by Old McGraw) to New McGraw and the remaining Mirror Image Companies. The transfer of assets took place by way of bills of sale. In the New McGraw bill of sale, CI Acquisitions transferred “all of [its] assets, rights and projects of every kind and nature … used in or related to all operations other than its Power Systems, Controls, Clark and Service operations.” Once again, the agreement made no reference to insurance policies or claims. It did indicate, however, that New McGraw assumed all of CI Acquisition’s liabilities. After the transfer of assets, CI Acquisition, which only held the assets for a matter of minutes, was liquidated.
Over the next eighteen years, Cooper owned New McGraw and the remaining Mirror Image Companies. In November 2004, Cooper merged New McGraw into itself.
There was no dispute that if the insurance rights had been transferred to New McGraw as part of the 1986 bill of sale, they would have been transferred to Cooper as part of the 2004 merger. Thus, the bill of sale between CI Acquisitions and New McGraw was the critical document. The bills of sale purportedly transferred various rights to New McGraw and the surviving Mirror Image Companies, but the specific rights that were transferred to each company were never identified.
As noted by the court, “in interpreting the 1986 Bill of Sale between CI Acquisition and New McGraw, the analysis boils down to whether the language alone clearly provided for the transfer of the insurance rights, and, if so, which entity received those rights.” Id. at *4. The court found the language in the bill of sale (“all … assets, rights and properties of every kind and nature”) was sufficient to transfer any insurance rights. The dispositive question, however, was whether those rights were transferred to New McGraw or one of the Mirror Image Companies.
Because the bill of sale was not clear with respect to that issue, the court relied on the deposition testimony of several witnesses. One witness was the general counsel of Cooper, who previously worked in the law department. She testified that the bill of sale was intended to transfer all of the assets and liabilities of Old McGraw, which had been acquired by CI Acquisitions, to New McGraw. She further testified that the Mirror Image Companies did not receive any new rights through the asset sales and that they had no interest in the insurance rights. However, she did not participate in the drafting of the bill of sale, although she had general knowledge concerning Cooper’s business operations.
The other two witnesses worked in Cooper’s risk management and insurance department. Although neither individual was involved in the 1986 asset sale, they claimed to have knowledge of Cooper’s business operations prior to and after the sale. In addition, and more significantly, they had knowledge concerning Cooper’s dealings with Old McGraw’s insurers. Significantly, they testified that Cooper had made retroactive premium payments to the insurers and had submitted claims under the policies, which were, in fact, paid by the insurers. There also was documentary evidence supporting this testimony.
While general knowledge about Cooper’s business practices arguably has questionable relevance on the issue of the parties’ intent, the fact that the insurers treated Cooper as having rights under the policies directly supported the argument that Old McGraw’s rights under the policies had been transferred to Cooper.
Under N.J.R.E. 602, witnesses may not testify to a matter unless they have personal knowledge of it. One exception to that requirement is set forth in Rule 4:14-2, which provides that a party may depose a corporation, and the corporation must designate one or more persons to testify on its behalf. These corporate witnesses may then testify “as to matters known or reasonably available to the organization,” even if these matters are outside the witness’ personal knowledge.
Id. at *5. While the court’s recitation of the rules is correct, the corporate designee must still have a basis for his or her testimony. That is something that seemed to be lacking in this case in that no reference was made to the source of the information about which the witness testified.
In light of the Givaudan decision, the Appellate Division’s ruling in Cooper that the insurance rights could be transferred is not surprising. Because liability for environmental contamination attached at the time the contamination occurred, which in this case was in the 1970s and early 1980s, there was no question that any potential right to assert a claim arose long before the transfer of Old McGraw’s rights under the policies.
What the case shows is how difficult it is to predict when an insurer’s potential liability will end. It does not appear that insurance coverage was on the mind of Cooper when it undertook the series of transactions that ultimately resulted in it being named as a potentially responsible party at a hazardous waste site 23 years later. Unfortunately for the insurers, their acceptance of premiums and payment of claims under policies issued decades earlier undercut their argument that Cooper had no rights under the policies.
Property insurance policies, like other insurance policies, contain an overall limit of liability, which is the maximum amount that the insurance company will pay for any given loss. In addition to an overall limit, policies may also contain “sublimits” of liability that apply to certain types of perils or damage. A sublimit is less than the overall policy limit. It is not uncommon to see sublimits pertaining to catastrophic losses, such as losses caused by hurricanes, earthquakes, and floods. In addition, sublimits typically apply to business interruption losses and the cost to remove the debris resulting from a covered loss.
An issue that often arises in connection with large losses is whether an insured can “stack” multiple sublimits under a policy to increase its overall recovery. In other words, can an insured recover under multiple sublimits as long as the total of the potentially applicable sublimits does not exceed the overall policy limit? Resolution of that issue obviously turns on the particular policy language at issue. However, courts do not always interpret policy language in the same way, which can give rise to inconsistent decisions.
In Oxford Realty Group Cedar v. Travelers Excess and Surplus Lines Company, A-85-15, 077617 (N.J. May 25, 2017), the New Jersey Supreme Court dealt with a stacking issue involving flood damage caused by Superstorm Sandy. The insureds in that case were the owners and managers of an apartment complex located in Long Branch, New Jersey, which sustained significant flood damage.
The policy contained a $1 million sublimit for “all losses” caused by flood. However, the policy also contained a separate, “additional” $500,000 sublimit for debris removal. The insureds sought to recover $207,961.28 in debris removal expenses in addition to the $1 million in flood coverage. The insurer denied any claim in excess of the $1 million flood sublimit.
If more than one Annual Aggregate Limit of Insurance applies to loss or damage under this endorsement in any one occurrence, each limit will be applied separately, but the most [Travelers] will pay under this endorsement for all loss or damage in that occurrence is the single highest Annual Aggregate Limit of Insurance applicable to that occurrence.
The “single highest Annual Aggregate Limit of Insurance” that applied to the loss at issue was the $1 million flood sublimit.
The trial court held that the policy unambiguously limited the insureds’ maximum recovery to the $1 million flood sublimit. The Appellate Division, interpreting the same policy language, reversed, concluding that the insureds could recover under both the flood and debris removal sublimits. On further appeal, in a five-to-two decision, the New Jersey Supreme Court agreed with the trial court and reversed the decision of the Appellate Division.
fortifies this hard cap by explaining that, even if multiple Annual Aggregate Limits of Insurance apply to flood damage, the Limit of Insurance specified in Section B.14 of the Supplemental Coverage Declarations is the most Travelers will pay. Section B.14 sets that Limit of Insurance at $1,000,000.
The Court observed that the Eighth Circuit’s decision in Altru Health System v. American Protection Insurance Co., 238 F.3d 961 (8th Cir. 2001), further supported its conclusion. The court in that case dealt with similar policy language, and also concluded that the insured’s losses were capped by the flood sublimit.
Insureds procure surplus lines policies covering commercial risk through insurance brokers, thus involving parties on both sides of the bargaining table who are sophisticated regarding matters of insurance.
Thus, it appeared that the Court was of the view that neither doctrine was applicable because the insureds in the case before it were sophisticated commercial insureds. At the conclusion of its opinion, however, the Court stated that “[b]ecause we do not find the terms of the Policy ambiguous, we need not address Oxford’s contentions about contra proferentem or the doctrine of reasonable expectations,” thus rendering the Court’s comments dicta.
Because reasonable minds can differ about the meaning and interplay of the flood insurance and debris removal clauses in the insurance policy and because Travelers drafted the ambiguous policy terms, I believe that the insured’s interpretation should prevail under the doctrines of contra proferentem and reasonable expectations. I therefore respectfully dissent.
The flood sublimit clearly stated that it applied to “all loss or damage caused by Flood.” The phrase “all loss or damage” is clear and unambiguous. Moreover, the flood endorsement clearly stated that in the event multiple sublimits applied, the most Travelers would pay would be $1 million. Thus, the majority reached the correct decision. The Court’s decision also is consistent with sublimit decisions by courts in other jurisdictions, like Six Flags, Inc. v. Westchester Surplus Lines Ins. Co., 565 F.3d 948 (5th Cir. 2009), New Sea Crest Healthcare Ctr., LLC v. Lexington Ins. Co., 2014 WL 2879839 (E.D.N.Y. June 24, 2014), EL-AD 250 W. LLC v. Zurich Am. Ins. Co., 13 N.Y.S.3d 68 (N.Y. App. Ct. 2014), and Orient Overseas Assoc. v. XL Insurance America, Inc., 2016 WL 2770278 (N.Y. Sup. Ct. May 11, 2016), as well as Altru, which was specifically cited by the Court.

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