INSURERS NOT ESTOPPED FROM DENYING COVERAGE, AND COVERAGE HAD TO BE PROVED (New Jersey Appellate Division)
This long ongoing litigation involved a dispute over whether a subcontractor’s poor workmanship could be a covered “occurrence”. During the pendency of this litigation, the matter went up to New Jersey’s Supreme Court in separate lengthy litigation. The Supreme Court ultimately established law in plaintiff’s favor. In the interim before that decision, however, faced with the uncertainly of coverage, the present insured itself settled with a number of plaintiffs who sued for faulty workmanship.
The case involved multiple insurers and different policy periods. The insured sought reimbursement in connection with the litigation and settlement sums paid. The insured also asserted every policy was triggered by an “occurrence” during each policy period. The plaintiff moved for summary judgment on the bases that the insurers were estopped and that there were covered occurrences. The Law Division denied this motion in significant part.
The trial judge did find the policies were implicated and coverage was triggered. However, that judge also “concluded there were material factual disputes as to the reasonableness of the settlements, both as to the ‘various liabilities of the insurers[,]’ and whether defendants were ‘entitled to a diminution of’ their share of the settlements ‘based on covered claims as opposed to uncovered claims.’” Thus, the trial court denied plaintiff summary judgment.
Plaintiff and defendants then entered a “high-low” settlement. This involved a consent order for judgment, where plaintiff reserved the right to appeal the summary judgment denial, to address the insurers’ indemnification obligations. Per the consent judgment, if the Appellate Division affirmed the trial judge, the insurers would pay the low settlement sum; however, if the Appellate Division reversed the Law Division in its entirety, then the insurers would pay the high settlement sum.
On appeal, “plaintiff contended that because defendants ‘wrongfully refused coverage[,]’ causing plaintiff to defend itself against claims covered by the policy and ultimately settle those claims, defendants were liable for the entire settlement amounts if they were ‘reasonable and … made in good faith[.]’” Plaintiff relied on the seminal case of Griggs v. Bertram.
The Appellate Division framed the issue as, “having denied coverage, must defendants pay the full settlement amounts if reasonable and entered in good faith? Or, despite their denial of coverage under the policies, are defendants entitled to an allocation determination, both temporally and substantively, i.e., whether the homeowners’ claims were for ‘property damage’ covered under the policies?”
The court denied plaintiff relief, distinguishing Griggs. It then affirmed the trial court’s decision, thus resulting in the low settlement sum being due.
Unlike Griggs, in this case the defendant insurers had issued timely coverage denials. Their arguments proved successful during the very early stages of the litigation in the Law Division, and even the Appellate Division left the coverage issue open.
Thus, the court found “no basis to apply equitable principles of estoppel to bar defendants’ challenge to coverage, including a temporal and substantive allocation of covered and uncovered claims.” Rather, “a good-faith challenge to coverage is not a breach of an obligation to defend.” Further, the defendant insurers “were entitled ‘to dispute coverage based upon the language’ of the policies.”
Thus, there was no equitable basis, under Griggs, to prohibit the carriers from asserting contractual coverage defenses. It then fell on plaintiff prove that coverage was due, and the insurers were wrong to deny coverage. “[I]f there is a factual dispute that, once resolved, may indicate that an occurrence is not covered, and it is unlikely to be resolved at trial, an insurer may deny coverage and await judicial resolution.” If the insured can ultimately make out its case, the carrier would have to reimburse “plaintiff for its costs and the settlement amounts, assuming they were reasonable and entered in good faith.”
The court again observed, however, “defendants were well within their rights to contest the coverage issues.” It found there were disputed issues of fact over “the nature, extent and timing of the damages” at issue. This could not be decided on summary judgment, and these factual issues “were properly left for a factfinder to conclusively resolve.”
Thus, “[r]esolution of those factual issues was necessary to determine coverage under the policies, and as a result, whether defendants’ denial of coverage was wrongful. Under controlling precedent and the facts of this case, only defendants’ wrongful denial of coverage would translate into a duty to reimburse plaintiff for reasonable settlements it entered into with the homeowners in good faith.” As there was no unequivocal reversal, plaintiff was left with the low settlement sum at the end of the day.