Goldberg Segalla partners Christian Cavallo and Thomas Wester recently notched a win for their insurer client when the New Jersey Appellate Division affirmed the Law Division’s grant of summary judgment to the insurer, finding that the insurer owes no coverage obligations to the insured.
The case is notable because it not only clarifies that “no magic words” are required in a reservation of rights letter to adequately inform an insured of its rights to accept or reject a defense, but also confirms that an insured must demonstrate some tangible prejudice in order to estop an insurer from disclaiming coverage. Because the insurer in this case adequately communicated to the insured that it could accept or reject the offered defense, and further because the insured had not suffered any prejudice, the Appellate Division held that the Law Division correctly granted summary judgment to the insurer.
The coverage dispute arose out of a motor vehicle accident. An employee of the insured borrowed a company manager’s personal vehicle to run an errand for the company. In the course thereof, an accident occurred. The injured parties sued the employee, the driver of the tort vehicle, the vehicle’s owner, and the insured. The insurer assigned defense counsel to the insured in the personal injury suit, under a reservation of rights, stating in the letter, “[i]f we do not hear from you to the contrary, we will assume that you consent to the retention of” the assigned defense attorney. The insured never objected to the retention of the defense attorney.
The insurer then instituted a declaratory judgment action, seeking a declaration that it owed no coverage obligations to the insured in the underlying action. At the expiration of discovery, the insurer moved for summary judgment and the insured cross-moved. The Law Division granted the insurer’s motion and denied the insured’s cross motion. On appeal, the insured did not challenge the Law Division’s ruling that there was no coverage under the policy, but rather claimed that the insurer was estopped from disclaiming coverage because the insurer did not inform the insured of its right to accept or reject the defense being offered.
New Jersey law is well settled that “[w]ithout the insured’s consent or circumstances that suggest the insured acquiesced in the insurer’s control of the defense, an insurer will be estopped from later disclaiming coverage.” Northfield Ins. Co. v. Mt. Hawley Ins. Co., 454 N.J. Super. 135, 143 (App. Div. 2018). Moreover, an “agreement may … be inferred from the insured’s failure to reject the carrier’s offer to defend with a reservation of rights.” Merchants Indem. Corp. v. Eggleston, 37 NJ 114, 126 (1962). “[B]ut to spell out acquiescence by silence, the letter must fairly inform the insured that the offer may be accepted or rejected.” Id. at 127-28 Northfield, supra previously held that there are “no magic words” needed to constitute a valid reservation of rights.
Here, the Appellate Division found that the “if we do not hear from you to the contrary” language in the reservation of rights letter to the insured adequately communicated that the insured had the option to reject the use of the attorney retained by the insurer. By not objecting, the Appellate Court reasoned, the insured consented to allow the attorney retained by the insurer to control the defense in the underlying action. Having thus determined that the insurer properly reserved its rights, the question of estoppel became moot. The court did note, however, that even if it were to consider the estoppel piece, the insured here was unable to show detrimental reliance because it was unable to show how the case would have been handled differently had it chosen to retain a different attorney of its choice at its own expense. Absent such a showing of prejudice, no estoppel will lie. In so holding, the court here re-affirmed another tenet of Northfield, that an insured seeking to estop an insurer from disclaiming coverage has the burden to demonstrate prejudice, and that prejudice will not be assumed simply because the insurer controlled the defense of the insured without obtaining the insured’s consent.
The decision is valuable in that it expounds upon the concept in Northfield that no magic words are required to adequately communicate to an insured that it has the option to accept or reject an offer to defend under a reservation of rights. Although best practices perhaps dictate that express, unequivocal language such as “you have the right to accept or reject this defense” should be used so as to avoid any future estoppel arguments, insurers issuing reservation of rights letters in New Jersey can be confident that even less direct verbiage, such as “if we do not hear from you to the contrary, we will assume you consent to the defense being offered” sufficiently advises an insured of its rights. The decision also confirms that demonstrable prejudice to the insured is an essential element of estoppel, and the burden of proving such prejudice is on the insured; it will not simply be presumed.
If you have any questions about this, or any other New Jersey insurance coverage question, please do not hesitate to contact us.