Failure To Cooperate With Investigation May Support Disclaimer 

The Appellate Division of the New Jersey Superior Court recently found that lack of cooperation on the part of two insureds provided sufficient grounds to disclaim coverage. The insureds were the operator and owner of a motor vehicle.  The automobile insurer argued that the insureds' lack of cooperation prevented it from determining whether the operator was a permissive user, and thus entitled to coverage.

The Court reiterated the applicable New Jersey standard that an insured's failure to cooperate may justify a disclaimer of coverage where there is "appreciable prejudice" to the insurer.

 
The case, Hager v. Gonsalves et.al., involved an application of the "Cooperation Clause" found in a standard automobile liability policy. The underlying accident was caused by a driver who was not a named insured on the vehicle's policy. Neither he, nor the owner reported the accident to the carrier. They also failed to respond to the carrier's basic requests for information after an injured party made a claim. The carrier disclaimed coverage for failure to cooperate in the subsequent investigation (not due to lack of timely notice). The carrier successfully argued that the failure to cooperate prevented it from confirming whether the vehicle was being used with the owner's permission. The appellate court agreed and upheld the disclaimer.
 
Although the Court did not change the existing standard of "appreciable prejudice," the case is noteworthy in that New Jersey courts have historically been quite reluctant to allow a liability carrier to rely on lack of cooperation as a basis for a disclaimer. Our courts generally find coverage, reasoning that it is not equitable to deprive an innocent, injured claimant of a remedy. The Court's conclusion in this case may have been swayed by the fact that the injured party was initially compensated by her uninsured motorist carrier, and the case was prosecuted by the injured party's carrier in subrogation.

 

The Court's opinion includes some troubling comments, suggesting that it believed the "appreciable prejudice" standard to be lower where the plaintiff is a subrogating insurance carrier. Although decided in an automobile insurance context, there is nothing in the opinion excluding its applicability to other liability policies.

 

Surplus Lines Insurer's Voluntary Use Of ISO Clause Found To Bind It To Otherwise Non-Applicable Insurance Department Regulations

 

The Appellate Division of the New Jersey Superior Court has recently ruled that a Surplus Lines Carrier should expect to be bound by otherwise non-applicable regulations when it voluntarily includes a clause in a policy that mirrors one included in a standard ISO policy required by insurance regulations.  New Jersey Surplus Lines insurance carriers are permitted to use their own non-standard forms in their insurance policies. These forms are generally exempt from the standard regulations promulgated by the New Jersey Department of Banking and Insurance.

 

The case entitled Piermount Iron Works v. Evanston Insurance Company et.al. began as a serious personal injury claim arising from a construction site accident occurring on March 28, 2002. Claims were lodged against Piermount Iron Works ("Piermount"). Piermount maintained an excess liability policy with Evanston Insurance Company ("Evanston") with an expiration date of March 13, 2002. The policy contained the following standard ISO clause:

 

     19. When We Do Not Renew

 

     If we decide not to renew this policy, we will mail or deliver

     to the first named insured shown in the Declarations written

     notice of the nonrenewal not less than 30 days before the

     expiration date or such other period as may be required by

     law.

     If notice is mailed, proof of mailing will be sufficient proof of 

     notice.

Evanston did not mail a nonrenewal notice. The policy expired on March 13, 2002. After being contacted by a surplus lines wholesale broker on the following day, Evanston refused to bind coverage without a new application being completed and certain additional requirements satisfied. They also quoted a premium that had increased nearly five-fold.

The Court found that Evanston was bound to the notice requirement in the policy, and that the interpretation of what constituted sufficient notice would be determined by the case law regarding otherwise inapplicable State insurance regulations. The Court ruled that the policy was in full force and effect on the underlying loss date since Evanston failed to meet its burden of proof on the issue of notice.

 

The cautionary lesson illustrated here is that surplus lines insurers may be governed by otherwise inapplicable State insurance regulations if their policies mimic ISO or other clauses typically used in standard policies.

 

Court Enforces Cross Liability Exclusion For Injuries To Employees Of Additional Insured Sub-Contractors

 

In American Wrecking Corp. v. Burlington Insurance Company, the Appellate Division of the New Jersey Superior Court, held that a "Cross Liability" exclusion precluded coverage for any injuries suffered by employees of any insured, including the employees of an additional insured named on the policy.
 
Burlington Insurance Company, a surplus lines insurer, issued a CGL policy to American Wrecking Corp., a demolition company.  The policy was endorsed to name a number of sub-contractors as additional insureds, including Island Scrap Metal ("Island") and SECO American Wrecking Corp. ("SECO").  Two workers for Island and SECO alleged they were injured at a worksite where American Wrecking was performing demolition services.
 
The standard CGL form precludes coverage for employees of "the" insured. The Burlington policy included a form entitled "Exclusion - Cross Liability" which modified the standard CGL form to exclude coverage to "a present, former, future or prospective partner, officer, director, stockholder or employee of any insured."  The form further modified the policy to clarify that each exclusion should be interpreted as if "each named insured were the only named insured," thus broadly expanding the exclusion for injuries to any employees of all insureds.
 
The Court found that the exclusion was clear and unambiguous, and did not violate the insureds' reasonable expectations of coverage.  It further found that the exclusion did not violate public policy.  The Court also explained that the issuance of the policy to a commercial policyholder in the surplus lines market was a factor to be considered.  It explained:
 
     The context in which the issue arises is important, and our

     review must take into account that we are dealing with

     policies, covering commercial risks procured through a

     broker, and thus involving parties on both sides of the

     bargaining table who were sophisticated with regard to

     insurance.  Nor can we lose sight of the fact the insureds

     were engaged in high risk enterprises for which insurance

     could only be obtained from a surplus lines carrier.
 
Thus, despite the New Jersey Court's reputation as a "pro-policyholder" state, when faced with a clear and unambiguous exclusion issued by a surplus lines carrier to a commercial policyholder, the Court will enforce the insurance contract as written.