The Duty to Defend in New Jersey

Posted by Gene Killian on July 15, 2011

Every now and then, a business owner asks me to review his company’s coverage program to make sure that adequate protection exists.  I always say the same thing. “You’re looking at this all wrong.  Buying insurance isn’t about buying protection.  Buying insurance is about buying a right to sue an insurance company.  Once you accept that, the world becomes much clearer.”

That’s because insurance is such a word game.  One word out of place – one comma out of place – and poof, the insurance company says “no soup for you.” 

With that in mind, let’s revisit the case of Abouzaid v. Mansard Gardens, which I first wrote about earlier this year.  The facts are horrific.  Three kids are in an apartment kitchen. The pilot light on the stove ignites some paint thinner that earlier had been applied to the floor by the landlord’s worker.  The kids’ mothers see them engulfed in a fireball and badly burned.

In count three of their ensuing complaint against the landlord, the plaintiffs alleged that the kids’ parents were “forced to endure emotional distress and suffering resulting from watching . . . their sons becoming engulfed by flames."

The landlord’s carrier denied coverage for count three (naturally), arguing that its policy provided coverage only for “bodily injury,” which under New Jersey insurance law does not include emotional distress without physical manifestations. 

Later, apparently realizing the error of their ways insurance-wise, plaintiffs’ counsel amended count three to state that the adult plaintiffs "had to incur the cost of medical treatment for the physical impact caused by their emotional distress and suffering."

The Appellate Division held that there was no duty to defend count three in the original complaint, but that there WAS a duty to defend once the complaint was amended to allege “physical impact.”

The New Jersey Supreme Court, apparently beset by a bout of common sense, has now reversed and held that the duty to defend existed from the beginning.  After a lengthy recap of New Jersey law regarding the duty to defend (which as some of you know, contains some frightening pitfalls for the uninitiated), Justice Long wrote:  “Although [the third] count was silent regarding the existence of physical manifestations, it did not exclude the possibility that such manifestations would be proved during the course of the litigation.  Accordingly, it was indefinite whether the claim was within the scope of coverage.  In those circumstances, a potential for plaintiffs to prove a covered claim existed and doubts regarding the duty to defend should have been ‘resolved in favor of the insured.’” (Emphasis mine.) 

This is a good decision, consistent with well-settled principles of insurance policy interpretation, and I’m hoping that all courts in New Jersey will now, finally, understand how liability insurance works.  If there’s any possibility of coverage, however remote, the duty to defend exists.

Counsel for the policyholder in the Abouzaid case were Alan Bernstein and David Klein from Brach Eichler.  Nice work, fellas. 

 

 

 

The Duty to Defend an Unclear Pleading

Posted by Gene Killian on January 26, 2011

So here’s a frustrating aspect of coverage work.  The underlying plaintiff sues the policyholder based on a complaint that was inartfully drafted (which, in some instances, is a nice way of saying that the complaint looks like it was written while the lawyer was tripping on mescaline).  The carrier denies coverage because nothing in the complaint seems specifically to trigger coverage.  And now the policyholder is in a dogfight with the carrier. 

I admire the plaintiffs’ bar.  Most of them are truly terrific lawyers.  But how can they draft complaints without even considering the insurance coverage aspects of what they’re saying?  Are they trying to punish the defendant by making it hard to tap into applicable policies?  If so, how are they complying with RPC 1.3, which requires the exercise of “reasonable diligence” in representing a client? 

This issue now rears its ugly head again before the New Jersey Supreme Court.  The case is Abouzaid v. Mansard Gardens Associates, and the facts are unpleasant.  (By the way, I’m not suggesting that the plaintiffs’ lawyer in Abouzaid was tripping on mescaline.  There was definitely a nuance of insurance law that may have been missed, though.)  A pilot light in a stove ignited vapors from a paint thinner that had been applied to a kitchen floor by the underlying defendant’s employees.  Three kids were horribly burned. 

Count one of the underlying complaint specifically addressed the claims of the minor children only, asserting a conventional theory of negligence.  Count two incorporated the allegations of the first count and also added a negligence claim under the theory of res ipsa loquitur. In count three, the plaintiffs alleged that the kids’ parents were “forced to endure emotional distress and suffering resulting from watching . . . their sons becoming engulfed by flames."

The carrier of course denied coverage for count three, arguing that its policy provided coverage only for “bodily injury,” which under New Jersey insurance law does not include emotional distress without physical manifestations.

Later, apparently realizing the error of their ways insurance-wise, the underlying plaintiffs’ counsel amended count three to state that the adult plaintiffs "had to incur the cost of medical treatment for the physical impact caused by their emotional distress and suffering."

In a slightly snarky opinion, the Appellate Division held that there was no duty to defend count three in the original complaint, but that there WAS (barely) a duty defend count three in the amended complaint.  The panel wrote, for example:

“The third count merely recounted the adult plaintiffs' grievance of ‘hav[ing] been forced to endure emotional distress and suffering.’ On its face, this allegation does not constitute the type of harm that triggers coverage for a ‘bodily injury, sickness or disease.’ This stands in stark contrast with the plaintiffs' amended complaint and newly minted third count claiming that the adult plaintiffs ‘had to incur the cost of medical treatment for the physical impact caused by their emotional distress and suffering.’ Although not couched in the most graceful language, these statements were enough to impel [the carrier] to intercede and thereafter provide a defense to Mansard. The differences in language are not mere semantic nitpicking; they go to the heart of the definitional linchpin required for coverage--and a defense--under the insurance policy.” 

I should note that in SL Indus., Inc. v. Am. Motorists Ins. Co., 128 N.J. 188, 198-99, 607 A.2d 1266 (1992), the New Jersey Supreme Court specifically held that the determination of the duty to defend does not depend on the writing skills of the underlying plaintiffs’ counsel. ("To allow the insurance company 'to construct a formal fortress of the . . . pleadings and to retreat behind its walls, thereby successfully ignoring true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insured's defense,' would not be fair." (internal citations omitted)). 

Both sides in Abouzaid appealed to the New Jersey Supreme Court.  The carrier contends that there should be no duty to defend even the amended count three, because the original complaint demonstrated that the only injuries at issue with respect to the parents were “intangible emotional injuries.”  The policyholder contends that the duty to defend should relate back to the original complaint, because the emotional harm caused a physical impact, which the amended complaint merely clarified.   Policyholder counsel argues that his clients suffered from post-traumatic stress disorder, which, he says, is definitely a “bodily injury.”

Arguments were held before the Supremes a couple of weeks ago.  Trying to discern the eventual outcome of the case based upon oral argument is reading tea leaves, of course.  But during the argument, Justice Barry Albin asked the carrier’s lawyer whether the carrier had done anything in its investigation to elicit any information about physical injuries suffered by the adult plaintiffs.  "I don't know," said the lawyer. "I assume they did not." Albin said that was "problematic." 

Stay tuned...