WHEN DOES A FACT DISPUTE PRECLUDE READY ACCESS TO INSURANCE COVERAGE IN A LAWSUIT
Challenges in Securing Prompt Adjudication of Insurer’s Duty to Defend
Insurance companies are obligated to investigate and promptly respond when requested to defend a lawsuit. Different forums have different rules about how long insurers can take in that evaluation. They also differ on whether facts beyond those in the Complaint must be addressed before a decision is made as to whether a defense is due.
California Coverage Law
While California permits resort to facts beyond the Complaint that may clarify whether a defense arises, it is not essential that this exercise occur. “Moreover, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could be fairly amended to state a covered liability.” Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 654 (2005).
Challenges arise when the nature of the inquiry is misperceived by the Court as necessarily raising a fact dispute, rather than an issue of law that the Court itself is the only one empowered to address. This article will address missteps by Courts who fail to recognize the ready availability of the declaratory relief action as a vehicle to promptly resolve whether a defense arises.
New Jersey Coverage Law
A problematic approach is evident in a recent decision from the United States District Court for the District of New Jersey, National Union Fire Insurance Co. v. BECTON, Civil Action No. 14-4318(ccc) (2019) USDIST LEXIS 216389 (D.N.J. Nov. 5, 2019). Therein, a number of insurance companies were asked to defend this lawsuit, leading to a settlement for $67,000,000 to resolve class actions in addition to the $30,000,000 spent in defense fees.
National Union requested a Federal Court Judge to determine whether, on a Motion for Summary Judgment on the Pleadings, National Union could establish that it owed no defense obligations in this suit. Judge Linares, addressing an early policy form issued in 1993 that provided express coverage for unfair competition, determined that there were genuine issues of fact as to what the term, “unfair competition” meant as used in this policy.
No justification is offered for why that determination was essential to address the issue of whether a defense arose under the terms of the policy. Either no unfair competition was allegedly committed during the policy period, as National Union contended, or there was extrinsic evidence based on facts that came to light made known to the insurer during the pendency of that lawsuit that was not deemed sufficient to evidence that a defense arose. A questionable ruling by the Third Circuit illustrates the problem.
The answer to that question was peculiarly within the province of the district court as the meaning of that term was to be discerned from how a layperson would understand it based on dictionary definitions under the law of most jurisdictions, including New Jersey. Nonetheless, the district court sought to determine whether the alleged conduct not only encompassed the claim constituting “unfair competition” but whether they were incurred in the “advertisement of the insured” as the policy language also required. See, American Cyanamid Co. v. American Home Assurance Co., 30 Cal. App. 4th 969, 975 (1994):
“If the parties dispute whether the insured’s alleged misconduct is potentially within policy coverage, and if the evidence submitted does not permit the court to eliminate either party’s view, then factual issues exist precluding summary judgment in the insurer’s favor. Indeed, ‘the duty to defend is then established absent additional evidence bearing on the issue.’”
Curiously, the district court permitted the insurer to question whether there was evidence of unfair competition occurring in an “advertisement, publicity, article, broadcast or telecast” by the Claimant. This abandonment of focus on what the allegations of the Complaint stated and inquiry into the merits of the underlying action might be of interest when the question was whether a settlement of the lawsuit was within coverage but should not have impacted the insurer’s duty to defend. See Aurafin-Oroamerica, LLC v. Fed. Ins. Co., 188 Fed. Appx. 565, 566 (9th Cir. June 26, 2006):
“To the extent that the district court found that the counterclaims alleged each element of libel, but that the facts did not support a libel claim as a matter of law, the district court impermissibly considered the merits of the libel claim.’
Ultimately, a different district court judge determined that an answer to this question was required in following up on Answers to Interrogatories posed and in deposition testimony.
Extrinsic Evidence That Presents Potential Coverage is Ignored
Albion Eng’g Co v Hartford Fire Ins. Co, 2019 U.S. App. LEXIS 20488 (3rd Cir. July 10, 2019) affirmed the district court’s ruling on other grounds after acknowledging that extrinsic evidence made known to the insured while the underlying action was ongoing ought to be considered. That Court, however, failed to conclude their Joint Final Pretrial Order (“JFPTO”), which pursuant to Fed. R. Civ. P. 16(e), “supercedes the pleadings”, compelled a recognition of the duty to defend. These claims revealed implicit disparagement. Petree v. Victor Fluid Power, Inc., 831 F.2d 1191, 1194 (3rd Cir. (N.J.) 1987), especially where the JFPTO expressly asserted that the claimant’s competing products were inferior to Albion’s and the claimant, Newborn, was an untrustworthy vendor of quality caulking gun products contending that:
“12. Albion disparaged Newborn’s products imported from Taiwan, as inferior in quality to Albion’s products purportedly made in the United States by Albion, when in fact, Albion’s products were also made in Taiwan.
34. Albion had displaced Newborn as a supplier or thwarted Newborn’s vigorous efforts to supply various distributors by representing itself as the only supplier of dispensing gun products made in the United States.”
The Third Circuit Order elected not to treat the JFPTO as a pleading, nor to explain what the fact allegations above did not support a claim for implicit disparagement, intimating but not directly asserting that this doctrine was inconsistent with New Jersey Law. Yet such a view would render New Jersey substantive law out of step with all of its neighbors and presumes its coverage law was not evolving to bring it into conformity with the majority of jurisdictions nationally. See Garret A. Williams, “Coverage: The Duty to Defend Implicit", Claims, Vol. 19 No. 2. March/April 2009. Notably, New Jersey law embraced inferences from asserted facts to determine if disparagement is alleged. C.R. Bard, Inc. v Liberty Mut. Ins. Co., 473 Fed. Appx. 128, *129 (3rd Cir. (N.J.) 2012). (“Rochester’s complaint listed specific examples of Bard’s unlawful disparaging statements … “nitrofurazone … is an antibiotic.”)
Conclusion
Policyholders must dissuade courts from addressing the merits in evaluating whether a defense arises where facts beyond the Complaint are legally relevant, as is the case in California and New Jersey. This is especially the case where extrinsic evidence is made known to the insurer during the pendency of an underlying action. The insurer’s obligation to evaluate those claims and if they establish potential coverage because of the facts alleged or inferences from them, then a defense should arise. Any other approach reverse delegates the district’s job to the parties to work out facts that had not been the focus of the litigation in the underlying action.
To combat such tactics, emphasis on the breadth of the duty to defend and how it may be implicated by facts, as well as inferences on under New Jersey law, and in California, the potential for amendment of the pleading must be a policyholder’s focus.