I seriously don’t know why so many judges have seem to have such a difficult time applying insurance law. Don’t tell anyone, or coverage lawyers like me may have to reduce our hourly rates, but the whole body of insurance law really comes down to Four Simple Rules:
- Coverage provisions are supposed to be given the broadest reasonable construction in favor of the policyholder.
- Exclusions from coverage are supposed to be given the narrowest possible construction against the insurance company.
- As in baseball, ties go to the runner. The policyholder is the runner. So, if there is more than one reasonable construction of a word or a phrase in a policy, the policyholder wins.
- If any possibility of coverage exists for a lawsuit, the insurance company is supposed to defend its policyholder.
Really, that’s it. I just saved you from having to read thousands of pages in Appleman on Insurance Law.
Flomerfelt v. Cardiello, 202 N.J. 432 (2010) reviews The Four Simple Rules in detail, and is worth reading on the subject. The case involves an insurance company’s unsuccessful effort to escape liability coverage for serious injuries caused by a drug overdose at a party. You can read it here.
Which brings us to the very recent case of Port Authority v. RLI. The Port Authority case proves that even large organizations can get burned by judges who are uncomfortable with The Four Simple Rules. You can read the Port Authority decision here.
RLI sold a liability insurance policy to a company called Techno Consult. The Port Authority was an additional insured under the policy. The Port Authority hired Techno Consult to discover and report upon any unsafe conditions at a project at the Harrison PATH Station. Unfortunately, Michael Fiume, who was an employee of a subcontractor called Halmar, was injured when he slipped on wet ground and fell at the site. Fiume presumably collected substantial workers’ compensation benefits, which prevented him from suing his own employer. So he sued Techno Consult and the Port Authority.
Although there are several troubling aspects of the Appellate Division opinion from the point of view of policyholders, I want to focus on only one. Some New Jersey courts seem to be on a mission to eviscerate insurance companies’ duty to defend their policyholders under liability insurance policies, and to defeat The Four Simple Rules. The Simple Rule relating to the duty to defend is, again, crystal clear in 49 states: If there is a potential for coverage of an underlying lawsuit, the insurance company must defend. We can see this in Flomerfelt also, where the New Jersey Supreme Court stated: “The [underlying] complaint should be laid alongside the policy and a determination made as to whether, if the allegations are sustained, the insurer will be required to pay the resulting judgment, and in reaching a conclusion, doubts should be resolved in favor of the insured.” (Emphasis mine.)
In RLI, the definition of “additional insured” in the policy included “any person or organization that you agree in a contract or agreement requiring insurance to include as an additional insured on this policy but only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused in whole or in part by you or those acting on your behalf…” (Emphasis mine.)
Amazingly but perhaps not surprisingly, the Court found that, because the Fiume case settled and there had been no finding that Techno Consult had actually caused Fiume’s bodily injury, there was no coverage for the Port Authority. This portion of the decision turns the duty to defend on its head. Remember, if there is any possibility of coverage, the duty to defend exists. Here, there was a possibility that bodily injury had been caused by someone acting on the Port Authority’s behalf.
The RLI policy contained a “professional services” exclusion. The Court also held that, because Fiume’s injuries were allegedly caused by a company that had been retained to perform “professional services,” there was no duty to defend. This portion of the decision is disturbing because the Court does not discuss its own ruling in S.t. Hudson Engineers, Inc. v. Pennsylvania National Mutual Casualty Co., 388 N.J. Super. 592, 607-08 (App. Div. 2006). In that case, which involved an engineering company’s failure to discover and warn about defects in a pier, the Court held:
“Allegations respecting a professional’s failure to provide adequate engineering, supervisory, inspection, or architectural services or to discover or remedy a condition for which the professional services were engaged would necessarily fall within the exclusion as dependent on the professional services provided. However, allegations encompassing the violation of a duty to provide information about a known danger resulting from either a negligent omission or commission, whether based upon the relationship of the parties or legal principle, are not dependent on the rendering of professional services. Instead, such allegations arise from the information actually possessed and not provided by a party obligated to disclose such information. Thus, for example, Robert Hudson’s alleged failure to advise the owners of the pier and nightclub that the pier was in imminent risk of collapsing, after obtaining that information from Tyson, would not be excluded simply because he had previously done engineering work. So too, any negligent misrepresentation regarding the condition of the pier would relate to the appropriate disclosure of known information, rather than the failure to provide professional services.”
The relevant question in the Port Authority case should have been: Is there any possibility that the Port Authority or Techo Consult could be held liable for failing to provide information about a known danger, irrespective of the purpose of Techno Consult’s engagement? Of course there was, and that means the Port Authority should have gotten a defense.
What are the takeaways from this? First, if you’re a plaintiff’s lawyer, you need to be very careful about how you phrase your complaints. Insurance is a word game, and as they used to say in Dragnet, anything you say can and will be used against you in a court of law. Say the wrong thing, and you may lose access to insurance coverage for your client’s injury. Second, if you’re a policyholder, you likewise must be very careful what you say when you notify your carrier of a claim. Optimally, the policy should be carefully reviewed by a coverage attorney and the notice of claim should be phrased in a way that brings the underlying lawsuit within coverage, or at least doesn’t blow coverage up. (No, that’s not a plug for business. It’s just a fact.) And third, this ruling is obviously very scary for policyholders. The Port Authority can afford not to have a defense for a personal injury suit. A mom-and-pop store cannot. Sadly, it seems as though you can’t count on insurance, which makes risk control and (legitimate) asset protection measures even more important.