I had a brief but interesting conversation with a couple of colleagues recently. The topic was so-called “no action” clauses in liability insurance policies. “No action” clauses try to create a “get out of jail free” card for the carrier, at least temporarily. A typical one reads: “You agree not to bring any action against us until the amount of damages you are seeking has been finally determined after an actual trial or appeal…”
Read literally, this language would prevent policyholders from bringing declaratory judgment actions against their carriers to establish coverage until the underlying lawsuit is over. You can see the problem. The policyholder tenders a slip-and-fall case to its carrier, NoPay Insurance Company, and NoPay says, “Sorry. We deny coverage, and also, you have to wait until the slip-and-fall case is over before you sue us.”
But can no-action clauses like this be read literally???
The short answer is no. As one of my colleagues pointed out, Condenser Serv & Eng’g Co v. Am. Mut. Lib. Ins. Co., 45 N.J. Super 31, 41 (App Div. 1957) says: “To attribute significance to the [no-action] restriction would be to render sterile the declaratory judgments act in a substantial area of insurance contract field.”
Also, once the carrier has breached the contract, it cannot enforce the contract’s terms. “When there is a breach of a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement.” Nolan v. Lee Ho, 120 N.J. 465, 472 (1990). If carrier has already breached the contract by not defending a covered claim, it cannot rely on the “no action” language.
Most carriers won’t try to pull this nonsense. But a few will. Don’t put up with it.