Presented by

HARDIN, KUNDLA, MCKEON & POLETTO, P.A.

673 Morris Avenue 110 Williams StreetSpringfield, NJ 07081 New York, NY 10038

973.912.5222 212.571.0111

RESERVING RIGHTS IN NEW JERSEY AND NEW YORK

CONTINUING EDUCATION CREDITS

This course has been approved by the Office of the Commissioner of Insurance for the State of _________for continuing education credits.

• Hardin, Kundla, McKeon & Poletto, P.A.• Presents this

• Certificate of • Attendance and Completion

• To

• ___

• ___ _ April 28, 2015

THE PURPOSE AND OBJECTIVES OF A RESERVATION OF RIGHTS LETTER

• A Reservation of Rights letter must be sufficient to preserve your right to deny coverage later if circumstances warrant.

• A Reservation of Rights letter must be a clear explanation of the position because, while offering to defend, it may be that you will later withdraw the defense should additional facts indicate no defense is warranted and/or it may be that no indemnity obligation exist under once additional facts become known.

• The failure to issue an adequate and effective Reservation of Rights letter may estop you from later denying coverage, even where coverage is excluded under the policy.

THE PURPOSE AND OBJECTIVES OF A RESERVATION OF RIGHTS LETTER

• A Reservation of Rights letter is being issued at the beginning of the claim handling process and an insurer’s action or inaction can adversely affect the insurer’s ability to protect its right to disclaim coverage.

• Policyholders argue that because an insurer undertook the investigation or defense of a claim, the insurer has waived its right to deny coverage for that claim or should be estopped from withdrawing from the defense and/or denying coverage.

• Your Reservation of Rights letter must adequately and effectively apprise the policyholder of the basis for the reservation and of the right to accept or reject the offer of a defense subject to a reservation of rights at the beginning of the claims handling process! 

WHAT ARE YOU PROTECTING AGAINST?

• “A carrier who defends an action unsuccessfully may not later deny coverage without having obtained an express agreement whereby the insured agrees to that reservation.” Burd, supra.

Failing to timely issue a Reservation of Rights letter, or preparing and issuing such a letters without making certain that the contents of the letter comply with the requirements of the particular state, can result in the letter, being deemed invalid.

NATURE OF THE RIGHTS BEING PRESERVED

• Right to control the defense with the consent of the policyholder• Right to later withdraw from the defense• Right to later disclaim coverage• Right to seek reimbursement of defense costs• Right to allocate between covered and non-

covered claims

SIGNIFICANT NEW JERSEY CASES• Merchants Indemnity Co. of New York v. Eggleston, 37 N.J. 114 (1962)

• Burd v. Sussex Mutual insurance Co., 56 N.J. 383 91970)

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

• S.L. Industries, Inc. v. American Motorists Insurance Co., 128 N.J. 188 (1992)

• Aquino v. State Farm Insurance Co., 349 N.J. Super. 402 (A.D. 2002)

• Flomerfelt v. Cardiello, 202 N.J. 432 (2010)

• Petersen v. NJM Insurance Co., 2014 N.J. Super. Unpub. LEXIS 995 (A.D. 2014)

SIGNIFICANT NEW YORK CASES• Allstate Ins. Co. v. Gross, 27 N.Y.2d 263 (N.Y. 1970)

• Hartford Ins. Co. v. County of Nassau, 46 N.Y.2d 1028 (N.Y. 1979)

• General Acci. Ins. Group v. Cirucci, 46 N.Y.2d 862 (N.Y. 1979)

• Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392, [1981]

• Elacqua v Physicians' Reciprocal Insurers, 21 AD3d 702 [3d Dept. 2005]

• QBE Ins. Corp. v. Jinx-Proof Inc., 22 N.Y.3d 1105 (N.Y. 2014)

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

•Timeliness• Clarity • Specificity• Identify conflict• Identify defense arrangement

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• New Jersey law:

• “Unreasonable delay in disclaiming coverage, or in giving notice of the possibility of such a disclaimer, even before assuming actual control of a case or a defense of an action, can estop an insurer from later repudiating responsibility under the insurance policy.” 

• Griggs v. Bertram, 88 N.J. 347, 357 (1982).

IMPLICATION OF COVENANT OF GOOD FAITH AND FAIR DEALING

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

• Upon receiving notice of a possible claim against its insured, an insurer has the duty to investigate the matter within a reasonable time. Considerations of good faith and fair dealing require that the insurer make investigations of any claim within a reasonable time

• Failure to give prompt notice of a conflict or potential conflict between the interests of the insurer and insured is inconsistent with the overriding fiduciary duty of an insurer to deal fairly and candidly with the insured so it can protect itself

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• New York law:

• An insurer is required to issue a disclaimer as soon as reasonably possible after it becomes aware of facts warranting the disclaimer.

• New York courts have held that a delay as short as thirty days in issuing a disclaimer is untimely.

• New York, Insurance Law §3420

§ 3420. LIABILITY INSURANCE; STANDARD PROVISIONS; RIGHT OF INJURED PERSON• (d)[(2)  If under a liability policy issued or delivered in this state,

an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

• Note, § 3420 (d) does not apply where underlying claim does not involve death or bodily injury. Incorporated Village of Pleasantville v. Calvert Ins. Co., 204 A.D. 2d 689 (2 Dept. 1994)

§ 3420. LIABILITY INSURANCE; STANDARD PROVISIONS; RIGHT OF INJURED PERSON• There are no requirements by regulation of Superintendent of Insurance

specifying language to be included in standard reservation of rights letter; it is responsibility of insurer issuing such letter to ensure that letter meets any requirements that may be provided by case law. Insurance Department, Opinions of General Counsel, Opinion Number 05-02-18.

• Reservation of rights letters should not be confused with disclaimer letters in which insurer notifies insured or other party of insurer’s intent to deny coverage or disclaim liability; reservation of rights letters are usually not effective as disclaimer letters. Insurance Department, Opinions of General Counsel, Opinion Number 05-02-18.

“AS SOON AS REASONABLY POSSIBLE”• Allstate Ins. Co. v. Gross, 27 N.Y.2d 263 (N.Y. 1970)

• The question of unreasonableness becomes a question of fact, or if extreme, of law, depending upon the circumstances of the case which make it reasonable for the insurer to take more or less time to make, complete, and act diligently on its investigation of its coverage or breach of conditions in its policy.

RESERVATION OF RIGHTS LETTERS IN NEW YORK• To effectively disclaim liability and deny coverage, an insurer must give written

notice as soon as is reasonably possible of such disclaimer or denial of coverage"

• A failure by the insurer to give such notice as soon as is reasonably possible after it first learns of the accident or of grounds for [3]  disclaimer of liability or denial of coverage, precludes effective disclaimer or denial

• A reservation of rights letter does NOT serve as a notice of disclaimer or denial of coverage, and is relevant only in the event that an insured should claim that the insurer has waived its right to disclaim by conducting the defense.

• A reservation of rights letter has no relevance to the question whether the insurer has timely sent a notice of disclaimer of liability or denial of coverage.

• Hartford Ins. Co. v. County of Nassau, 46 N.Y.2d 1028 (N.Y. 1979)

• Allstate Ins. Co. v. Gross, 27 N.Y.2d 263 (N.Y. 1970)

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• New York law:

• The notice must “promptly apprise the claimant with a high degree of specificity of the ground or grounds on which the disclaimer is predicated.”

• General Accident Ins v. Cirucci, General Acci. Ins. Group v. Cirucci, 46 N.Y.2d 862 (N.Y. 1979)

• A delay as short as 30 days has been held to be untimely.

• W 16th St Tenants Corp. v. Public Serv. Mut. Ins. Co., 290 A.D. 2d 278 (NYAD 2002)

PRACTICE POINTS• Insurer must seek facts with reasonable diligence (i.e. make requests for information

promptly)

• Document insureds’ delay in responding!

• Insurer, once in possession of information, must make a decision within a reasonable period of time and, as the claims handling process continues, decide whether to continue to perform (i.e. defend)

• What is reasonable time is fact sensitive! Jury Question?

• Bonnet v. Stewart 68 N.J. 287 (1975)

• Sneed v. Concord Ins. Co., 98 N.J. Super. 306 (A.D. 1967)

• Battista v. Western World Ins. Co., 227 N.J. Super. 135 (Law 1988)

• In NY – Issue the letter as soon as reasonably possible, and certainly no later than 30 days.

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clarity

• Specificity

• Identify conflict

• Identify defense arrangement

• It is not enough to just list the facts and then separately list a bunch of policy provisions.

PETERSEN V. NJM• “In order to properly reserve its rights, so as

to control the defense while avoiding estoppel, an insurer must advise its insureds of the potential disclaimer, fairly inform the insureds of their right to reject the insurer’s defense on those terms, and secure the insureds’ explicit or implicit consent.”

INFORMING THE INSURED OF THE POTENTIAL DISCLAIMER

• New Jersey requires that an insurer’s reservation of rights must fairly inform the insured of the insurer’s position. • Battista v. Western World Ins. Co., Inc., 545

A.2d 841, 846 (Law Div. 1988), aff’d and rev’d in part, 594 A.2d 260, (App. Div.), certif. denied, 606 A.2d 366 (N.J. 1991).

ADEQUACY AND EFFECTIVENESS OF A RESERVATION OF RIGHTS LETTER

• A reservation of rights letter must effectively inform the insured of all of the potential grounds upon which the insurer may disclaim coverage and identify the relevant defense or policy provisions the insurer relies upon.

• Gen. Acc. Ins. Co. v. New York Marine and Gen’l Ins. Co., 727 A.2d 1050, 1052 (App. Div. 1999); Hanover Ins. Group v. Cameron, 298 A.2d 715, 718 (Ch. Div. 1973). 

• All known coverage defenses and all coverage defenses that the insurer should be aware of upon diligent inquiry should be preserved.

• The ROR letter should indicate that the insurer reserves its right to disclaim based on additional information that may be obtained and future developments that may occur during the claim handling process.

LACK OF CLARITY LEADS TO COVERAGE

• Gomez v. First Jersey Casualty Ins. Co., 2010 N.J. Super. Unpub. LEXIS 710 (A.D. 20100

• Patron at bar injured by bar security employee secured $125,000 default judgment

• Insured advised it would assign an attorney to attempt to vacate the default, but that it was reserving its right to disclaim coverage if the court refused to set the default aside

• Vacated and $134,450 judgment entered.

• Insurer refused to indemnify.

GOMEZ V. FIRST JERSEY CASUALTYCONTINUED

• Court construed the wording of the ROR to possibly mean that the carrier reserved the right to disclaim only if the court refused to vacate the default and that a layperson may have concluded that once the default judgment was vacated, the reservation of rights no longer applied.

• Ultimately decided that the written notice to the policyholder did not explicitly inform the policyholder of the right to reject the defense and thus, the policyholder’s silence could not be construed as acquiescence and that failure resulted in the court holding the ROR ‘did not unambiguously express [the policyholder’s] right to reject the offer to defend

NEW YORK• An insurer will be deemed to have waived possible defenses when it issues a

disclaimer based upon one provision, and later seeks to deny based upon another provision. Cirucci, supra.

• Delay may create a waiver. Hartford Ins. Co. v. County of Nassau, 46 N.Y.2d 1028 (N.Y. 1979)(Carrier’s burden to explain delay in disclaiming and an unexplained delay may be unreasonable.

• 206-208 Main St. Assoc., Inc. v Arch Ins. Co., 106 A.D.3d 403 (1st Dep't 2013), allowed an insurer to disclaim years after litigation commenced IF the insurer’s delay in doing so did not prejudice the insured.

• Estoppel will be applied where the insured would be prejudiced. This decision focused on prejudice as opposed to timing. Has the underlying litigation reached a point where the insured cannot protect him/herself?

NEW YORK: LESSONS LEARNED • QBE Ins. Corp. v. Jinx-Proof Inc., 22 N.Y.3d 1105 (N.Y. 2014)

• Insurer effectively disclaimed coverage for assault and battery claims asserted in an underlying action through two letters sent to the policyholder that specifically and consistently stated that defendant's commercial general liability policy excluded coverage for assault and battery claims, notwithstanding that the letters also contained "reservation of rights" language.

A reservation of rights does not qualify as a timely disclaimer Henner v Everdry Mktg. & Mgt., Inc., 74 AD3d 1776 [4th Dept 2010]);

• A written reservation of an insurer is not a substitute for the required notice of disclaimer" (Allcity Ins. Co. v Pioneer Ins. Co., 194 AD2d 424 [1st Dept 1993]).

NEW YORK: LESSONS LEARNED • a disclaimer must be "unequivocal" and "unambiguous" ( [1109] 

Norfolk & Dedham Mut. Fire Ins. Co. v Petrizzi, 121 AD2d 276 [1st Dept 1986], lv denied 68 NY2d 611 [1986]

• A letter that describes itself  [6] as a "reservation of rights letter" but contains expressly contradictory language suggesting disclaimer is not a valid disclaimer.

• If you want to disclaim, make sure you are being specific and identifying where you are disclaiming and what claims are being denied.

• See also Hartford Ins. Co. v. County of Nassau, 46 N.Y.2d 1028 (N.Y. 1979)

AUDIENCE QUESTION•How many have issued supplemental reservation of rights letters during the claims handling process, or otherwise revised a Reservation of Rights letter during the claims handling process?

PRACTICE POINT• Reservation of Rights letters are NOT static documents.• Once an insurer has learned of grounds for questioning coverage, it then is under a

duty to promptly inform its insured of its intention to disclaim coverage. Griggs v. Bertram, 443 A.2d 163, 168 (N.J. 1982).

• Where you are defending under a reservation, monitor your file closely so you do not unwittingly forfeit your right to disclaim coverage

• You may be held to a continuing “duty” to notify the policyholder of additional grounds for your disclaimer or additional facts that warrant or support your disclaimer

• Update your Reservation of Rights letters as often as need!• Do not forget about the Reservation of Rights letter and assume that what was issued

initially will remain “adequate and effective” to preserve your rights as the claims handling process continues

PETERSEN V. NJM• Assault upon a neighbor by 15 yr. old

• Suit instituted against teenager and parents

• Claim tendered to NJM

• No initial response (4 months)

• Personal counsel vacated default, NJM agreed to defend subject to reservation of rights noting it was first time it had been notified of claim

• Decision clarifying expected and intended exclusion was issued (Villa v. Short, 195 N.J. 15 9(2008) ) extending intentional or criminal acts exclusion to all insureds under the policy, not merely the actor

• NJM withdrew from the defense

• Policyholder contended NJM was estopped from disclaiming because it failed to clearly reserve its rights and secure the policyholders’ consent

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• Battista, supra

• Letter failed to mention exemplary and punitive damages

• Reservation of Rights letter “falls far short” of the kind of express agreement required by Burd and Merchants

• Excelsior Ins. Co. v. Antretter Contr. Corp., 262 A.D.2d 124 (N.Y. App. Div. 1st Dep't 1999)

• Employee liability exclusion

• Initially defending under reservation of rights, later disclaimed when learned plaintiff was employee

NEW YORK

• An ROR is not a disclaimer.• You need to be specific on disclaimer to

comply with requirements of Insurance Law §3420.

BASIC REQUIREMENTSA reservation of rights letter must “fairly inform” inform a policyholder of the reasons why you are reserving your rights.

Merely reciting policy provisions and failing to explain why, under the specific facts known , those provisions are applicable may be insufficient

Setting forth minimal factual references, (i.e. “As you are aware, this lawsuit arises out of an assault and battery on April 27, 2015.”)

Apply the relevant known facts to the policy’s terms, conditions and exclusions

Be sufficiently specific to inform the policyholder of the policy defenses you might assert and how they apply to the known facts and known claims

A reservation of rights must be unambiguous. If it is ambiguous, the court may construe the ambiguity against you

Identify the policy(ies)

Identify specific allegations from the complaint

Identify any terms, conditions, or exclusions which may bar coverage

Identify the claims that may not be covered

Explain why coverage may not exist under the policy and known facts for the claims

Expressly advise the insured of the right to accept or reject the offer of a defense subject to a reservation of rights

Reserve the right to withdraw from the defense and recover expenses

Reserve the right to assert other defenses that may subsequently come into existence.

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• A reservation of rights letter must effectively inform the insured of potential conflicts with its insurer and its right to accept or reject the defense.

NEW JERSEY•The failure to advise an insured that the

insured has the right to accept or deny a defense offered under a reservation of rights may preclude you from later disclaiming coverage for a claim that could have been excluded under the policy.

PRACTICE POINTHIDDEN DANGER

• If an insurer fails to inform the insured that a reservation of rights defense may be rejected or accepted, the insurer may be responsible for reimbursement of all defense expense. Aquino, supra.

• A court may treat the situation as if no reservation of rights letter was issued.

• Language advising the insured of the option to reject the offer of a defense being provided subject to a reservation is required language in your ROR letters

PRACTICE POINTSUGGESTED LANGUAGE

• You have the right to accept or reject this offer of a defense subject to the reservation of rights. Unless we hear from you to the contrary in writing, we will assume that our providing a defense subject to a reservation of rights is acceptable. If not and you reject this offer of a reservation of rights defense, you should notify us in writing immediately.

• “ If [our providing a defense subject to a reservation of rights] is not agreeable to you, we will return the summons and complaint for such action as you think advisable .” or “We are prepared to defend if you are willing to accept the reservation.”

• Kaplan v. Harleysville ins. Co., 2007 N.J. Super. Unpub. LEXIS 380 (A.D. 2007)

IDENTIFYING THE CONFLICT• Under New Jersey law, an insurer and insured may agree to an insurer

defense subject to a reservation of rights, otherwise an insurer’s duty to defend in such circumstances is converted to a duty to reimburse reasonable and necessary expenses attributable to the defense of the claims ultimately determined to be within the scope of the policy. Burd v. Sussex Mutual Insurance Co., supra; S.L. Industries, supra; and Flomerfelt, supra.

• The insured and insurer agree to waive any potential conflict of interest in the defense, such that the defense can be conducted through counsel selected and paid for by the insurer. Flomerfelt, supra. See also Trustees of Princeton University v. Aetna Cas. & Sur., 293 N.J. Super. 296 (A.D. 1996).

INFORMING THE INSURED OF THE RIGHT TO ACCEPT OR REJECT THE OFFER OF A DEFENSE

• Under New Jersey law, an insurer who seeks to control the defense of an insured while reserving, fully and completely, the right to dispute coverage can do so only with the consent of the insured. Merchants Indemnity Corp. v. Eggleston, 27 N.J. 114 (1962)

• The insured’s consent can be inferred from the insured’s failure to reject an offer to defend subject to a full and complete reservation of rights.

• BUT if the insured consents by silence or you seek to argue that the insured consented to the reservation by failing to reject the offer, the Reservation of Rights letter “must fairly inform the insured that the offer may be accepted or rejected.” Id. at 127-128. When an insurer fails to inform an insured of the ability to accept or reject the terms of the defense, the insurer is estopped from later denying coverage.

• A reservation of rights letter must specifically stated that the insured has the right to accept or reject the defense, otherwise a court may hold that it is as though the insurer had assumed the defense without a reservation of rights.

• Cases addressing the principle that an insurer may be estopped from denying coverage because Reservation of Rights letter is deemed inadequate because of a failure to inform the insured that the offer to defend may be accepted or rejected.

• Merchants Indemnity Corp. v. Eggleston, 27 N.J. 114 (1962)

• Nazario v. The Lobster House, et al., Docket No. A-3025-07T1 (App. Div. May 5, 2009) (unpublished decision).

• Sneed v. Concord Ins. Co., 237 A.2d 289, 293-94 (App. Div. 1967).

FAILING TO NOTIFY POLICYHOLDER OF RIGHT TO REJECT OFFER OF DEFENSE INVALIDATES ROR

• Gomez, supra

• Nazario v. Lobster House, 2009 N.J. Super. Unpub. LEXIS 1069 (A.D. 2009)(Two primary carriers estopped from denying coverage where trial court held there was no coverage under policy, both paid $1M limit before umbrella policy required to pay)

NEW YORK• The claimant must be notified of a disclaimer.

• Show the claimant, or more typically claimant’s counsel as a carbon copy recipient if any claims are disclaimed

• Reservation of rights letter is not a disclaimer, but you may want to notify claimant of reservation of rights in the event coverage is disclaimed in the future.

• Claimant must be notified when coverage is disclaimed.

CRITICAL ELEMENTS OF A RESERVATION OF RIGHTS LETTER

• Timeliness

• Clear

• Specific

• Identify conflict

• Identify defense arrangement

• Insurer controlling the defense and using Panel Counsel• Policyholder

controlling the defense and using Cumis Counsel

WHAT IF THE INSURED REJECTS THE OFFER OF A DEFENSE SUBJECT TO A RESERVATION OF RIGHTS• If a policyholder rejects a defense, the policyholder should still select

defense counsel mutually acceptable to the insurer. Dunne v. Fireman’s Fund American ins. Co., 69 N.J. 244 (1976)

• Some authority exists to suggest that the insurer still maintains control over the selection, with potential involvement of the assignment judge if the insured and insurer cannot agree.

• While an insurer can decline to reimburse any defense expenses [Burd, supra], it may also elect to reimburse reasonable and necessary defense expense associated with potentially covered claims on an ongoing basis.

• Reimbursing some portion of the defense may insure the retention of competent counsel and/or prevent a default and/or assignment of rights

GOLDFARB RULE• An insurer is required to advise a policyholder that it is entitled to defense

by an attorney of its own choosing, whose fees were to be paid by the insurer. Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392, [1981]

• Where a lawyer's "duty to the insured would require that he defeat liability on any ground," whereas his or her obligation to the insurer would require defeating liability only with respect to theories that  "would render the insurer liable," it is well established that "the insured must be free to choose his own counsel  whose reasonable fee is to be paid by the insurer" Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392, (1981];

See also QBE Ins. Corp. v. Jinx-Proof Inc., 22 N.Y.3d 1105 (2014)

CONSEQUENCE OF A FAILURE TO INFORM THE INSURED OF THE RIGHT TO INDEPENDENT COUNSEL• The insurer has an affirmative obligation to advise the insured of his right to

independent counsel paid for by the insurer.

• Elacqua v Physicians' Reciprocal Insurers, 21 AD3d 702 [3d Dept 2005]). See also Allstate Ins. Co. v. Noorhassan, 158 A.D.2d 638 (N.Y. App. Div. 2d Dep't 1990)

• The Third Department has gone so far as to hold that an insurer commits a deceptive business practice, under General Business Law § 349, if it fails to advise its insured that it is entitled to retain independent counsel . Elacqua , supra.

• A failure to inform a plaintiff of that right may state a cause of action pursuant to General Business Law § 349. See Wilner v. Allstate Ins. Co., 71 A.D.3d 155, 893 N.Y.S.2d 208 (2d Dept. 2010) (refusal to reach timely decision on coverage);

H.P.S. Mgt. Co., Inc. v St. Paul Surplus Lines Ins. Co., 2011 N.Y. Misc. LEXIS 2537, 22 (N.Y. Sup. Ct. May 12, 2011)

CONSEQUENCE OF A FAILURE TO INFORM THE INSURED OF THE RIGHT TO INDEPENDENT COUNSEL• In failing to communicate to a policyholder that it is entitled to

an attorney of its own choosing paid for by the insurer, the insurer breached its duty to its insured in such a way as to estop it from disclaiming. An insurer that arranges matters so that it exclusively controls its insured's defense, preventing the insured from retaining its own counsel at the insurer's expense, and possibly acting directly against the interests of the insured, cannot then assert that the policy does not cover the claim.

• QBE Ins. Corp. v. Jinx-Proof Inc., 22 N.Y.3d 1105 (N.Y. 2014)

RIGHT TO INDEPENDENT COUNSEL“CUMIS COUNSEL”

• The leading case addressing the rights of policyholders with the respect to the right to independent counsel in “conflicts” cases is San Diego Federal Credit Union v. Cumis Ins. Society, 162 Cal. App.2d 358 (1984).

• Under the Cumis doctrine, when an insurer agrees to defend its insured under a reservation of rights, a conflict exists between the insurer and insured. In those instances, the insured has a right to retain independent counsel to be paid for by the insurer, commonly referred to as “cumis counsel.”

• New Jersey addressed the selection of counsel scenario in Burd v. Sussex Mut. Ins. Co., supra

• New Jersey does not recognize the insured’s right to unilaterally select defense counsel to be paid concurrently by the carrier when a carrier issues a reservation of rights letter.  If the carrier desires to defend under a reservation of rights, the carrier cannot assume control of the defense absent the specific agreement by the insured to the reservation of rights after being informed of the conflict.

• In New Jersey, if the insured does not accept a defense or the reservation of rights, the insured is allowed to select its own defense counsel, with a right of reimbursement from the carrier.

CIRCUMSTANCES THAT MAY CREATE THE RIGHT TO INDEPENDENT COUNSEL

• Situation where covered and non-covered claims are asserted in a complaint

• Situation where certain damages are covered and other damage claims are not covered

• Situation where an exclusion may bar coverage and, if the defense is controlled by the insurer the insured may be concerned that the defense will be conducted so as to trigger the exclusion

INSURERS RIGHT TO REIMBURSEMENT OF DEFENSE COSTS

• Some jurisdictions allow an insurer to seek reimbursement of defense expense when it has defended under a reservation of rights.

• New Jersey arguably allows an insurer to seek reimbursement More likely, New Jersey allows an insurer to seek reimbursement of defense expense if it can allocate the expense between covered and non-covered claims. . See Hebela v. Healthcare Ins. Co., 370 N.J. Super. 260(A.D. 2004), SL Indus., Inc. v. America Motorists Ins. Co., 128 N.J. 188 (1992). Aquinjo v. State Farm, 349 N.J. Super. 402 (A.D. 2002)

• Anticipate that it will be argued that the duty to reimburse rule is inconsistent with New Jersey’s broad duty to defend.

• Anticipate that it is difficult to allocate expense between covered and non-covered claims. NJ does not require scientific certainty but presumes an agreement can be reached and, if not, that its courts can resolve the issue with a fair division of costs. S.L. Indus., supra.

• It is the insurer’s burden to allocate between covered and non-covered claims. If the expense cannot be allocated, insurer would pay all expense. There is no right to reimbursement.

REIMBURSEMENT• “Majority” rule is that an insurer

can seek reimbursement.

• Sparingly enforced

• Does policy language permit reservation with right to seek reimbursement

• Trend is shifting to denying right to seek reimbursement

• NJ among those states that may allow reimbursement

• NY has authority about claims between insurers seeking reimbursement from other insurers

DISCUSSIONAudience Questions

HARDIN, KUNDLA, MCKEON & POLETTO, P.A.

NEW JERSEY OFFICE

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• Fax 973.912.9212

NEW YORK OFFICE

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