INSUREDS HAD ONGOING DUTY TO COOPERATE, AND TO PROVIDE DOCUMENTS AND SUBMIT TO EXAMINATION UNDER OATH IN THIRD PARTY CASE, EVEN AFTER SETTLEMENT (New Jersey Federal)

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The insureds were attorneys sued by an insurance carrier. The insured attorneys sought coverage from their own professional liability carrier, and the malpractice carrier asserted no coverage was due. The attorneys/insureds and the professional liability carrier each sought a declaration in their favor on coverage.

The insureds won an early summary judgment ruling form a magistrate judge that the professional liability carrier had a duty to defend. The magistrate judge denied the professional liability carrier reconsideration and permission to take an interlocutory appeal.  She did not rule on any indemnification responsibility, as the underlying suit against the attorneys remained pending.

The professional liability insurer still wanted to take an examination under oath, and the insured responded by seeking a protective order.  Initially, the magistrate judge administratively terminated the case, pending the outcome of the underlying action.

Issues arose concerning the insured’s cooperation in connection with defending the underlying suit.  The magistrate judge reopened the case, ruling that an examination under oath should go forward, that the insureds had a duty to cooperate under the professional liability policy, and that the insureds were not entitled to defense costs during periods of non-cooperation.

The present decision involves an appeal to the District Court from the magistrate judge’s order.

The magistrate judge found the insureds had failed to cooperate by delaying the examination under oath, failed to respond to the professional liability carrier’s offer of defense, and failed to respond to a request for information. She held that although the insureds did not act in bad faith, their actions did appreciably prejudice the malpractice carrier.

On appeal, the District Court agreed that there had been a failure to cooperate, but this failure was not the result of bad faith. The District Court reversed, however, on the issue of appreciable prejudice, finding none. Most important, the insurer had not “irretrievably lost the opportunity to take [an examination under oath]….” Nor was the carrier “precluded from discovering facts that may weigh against coverage under the Policy.”

The District Court agreed with the magistrate judge that there was no appreciable prejudice due to the insured’s refusal to respond concerning the carrier’s providing a defense, stating: “Irrespective of whether Plaintiffs accepted or rejected the defense offer before the [underlying] suit settlement, the only issue remaining post settlement pertains to indemnification. … Thus, there can be no appreciable prejudice … for its inability to defend the [underlying] suit before it settled. Any dispute regarding Plaintiffs’ alleged failure to provide information, including defense costs, may be addressed when the indemnification issue is decided. Accordingly, because [the professional liability carrier] failed to demonstrate appreciable prejudice, it cannot disclaim coverage for Plaintiffs’ noncooperation under the Policy.”

The District Court affirmed the magistrate’s ruling that there was no defect in the malpractice carrier’s reservation of rights.

Likewise, the District Court upheld the magistrate’s decision that the carrier was entitled to the examination under oath, and finding a failure to cooperate. First, the right to take the examination had not been waived. Nor was the request for the examination unreasonable or unfair: “For the reasons already stated, [the] ROR was proper after this Court determined that [the underlying] suit triggered a duty to defend and reserved on the issue of indemnification. It would defy logic to find that [the professional liability carrier] has a duty to defend and properly reserved its rights as to liability yet preclude an EUO to investigate the underlying claims pursuant to the Policy.”

Finally, simply settling the case did not end the insured’s obligations to cooperate under the policy, which expressly provided the insurer with the right to take an examination under oath.

Date of Decision:  September 23, 2020

Karzadi, v. Evanston Insurance Company, U.S. District Court District of New Jersey No. 17-5470 SDWCLW, 2020 WL 5652442 (D.N.J. Sept. 23, 2020) (Wigenton, J.)

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