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C L A I M D E N I E D February 2003 A publication of the Lowenstein Sandler Insurance Law Practice Group Failure to Cooperate May Eliminate Coverage by Lynda A. Bennett, Esq. E very insurance policy imposes a a liability claim, and generally

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C L A I M

D E N I E D

February 2003

A publication of the Lowenstein Sandler Insurance Law Practice Group

E

very insurance policy imposes a duty of cooperation on the pol-

icyholder. This duty to cooperate

includes providing the insurer with pertinent information about a claim, assisting the insurer with the investigation of the claim, partici- pating in the defense in the case of a liability claim, and generally complying with the insurer’s reasonable requests for information. At times, tension develops between a policyholder and an insurer when a claim has been presented, relevant information has been sup- plied, and the insurer continues to seek additional information, rather than making a coverage determina-

tion. The line between legitimate

requests for information and an insurer’s “paper chase” delay tactic is often gray. To complicate mat- ters, there is a dearth of reported case law that addresses the scope of a policyholder’s duty to cooperate. A recent case from the Southern District of New York, however, demonstrates that coverage may be lost altogether if a policyholder fails to cooperate. In Stradford. v. Zurich Insurance Co., et al, 2002 WL 31819215 (S.D.N.Y. Dec. 13, 2002), a federal judge dismissed a suit filed by a dentist who had submitted property damage and business interruption claims after the dentist refused to cooperate with the insurer’s investigation of the claims. In 1999, the dentist received notice that his policy had been cancelled because the premium had not been paid. In

rder to reinstate the policy, the

dentist had to pay the past due premium and submit a “no claims” letter, certifying that he had no knowledge of any losses to be tendered under the policy. Less than 10 days after his policy was rein- stated, the dentist submitted a series of claims that totaled more than $1.2 million. In accordance with the terms of the policy, the insurer refused to pay the claims until the dentist appeared for an examination under

ath. The dentist appeared for the

first day of the examination but it

This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only.

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Failure to Cooperate May Eliminate Coverage

by Lynda A. Bennett, Esq.

Inside

NEW JERSEY COURTS BROADLY CONSTRUE RIGHTS OF “ADDITIONAL INSURED” By Kristina D. Pasko, Esq. THE MOST RECENT REFINEMENTS TO NEW JERSEY’S CONTINUOUS TRIGGER AND ALLOCATION RULES By Lynda A. Bennett, Esq. NEW ARTICLES ON THE OUTPOST www.insurance-lowenstein.com

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could not be completed in one day because, among other things, the dentist had failed to timely submit documents that had previously been requested. Despite nine requests from the insurer, the dentist refused to appear for a continu- ation of the examination. The dentist also failed to provide additional documents that were requested during the first day of his

examination. Thereafter, the

insurer denied coverage for the tendered claims on the grounds that the dentist had failed to complete the examination under oath, he had failed to cooperate in the claims investigation, and his “no claims” letter was fraudulent. The court held that the dentist was not entitled to coverage because he had breached a condi- tion precedent in the policy, name- ly he had failed to cooperate with his insurer. In so holding, the court rejected the dentist’s argument that he was excused from cooperating because the insurer never had any intention of cover- ing his claim and was using the examination under oath as a pre- text to delay making its final coverage determination. The court also rejected the dentist’s plea for a second chance to appear for the examination because it found “more than ample evidence to indicate that Dr. Stradford’s lack of cooperation was willful.” Id. at *6. As reinforced by the Stradford case, a policyholder’s failure to cooperate with its insurer’s investigation may lead to a complete forfeiture of coverage for an otherwise valid claim. At the same time, policyholders are not required to expend significant time, resources, and cost responding to multiple and unreasonable requests for information from insurers that are engaged in delaying tactics. As a general rule, policyholders should provide their insurers with sufficient facts to demonstrate a claim under the policy and sufficient doc- umentation of the damages that are being claimed. Where a policy requires submission of a proof of loss and/or appearance for an examination under oath, the policyholder must comply. Once this basic information has been tendered to the insurer and additional requests for information are still forthcom- ing, the policyholder should con- sult with coverage counsel to eval- uate whether cooperation or coverage litigation is called for.

NEW JERSEY COURTS BROADLY CONSTRUE RIGHTS OF “ADDITIONAL INSURED”

by Kristina D. Pasko, Esq. The scope of coverage available to an “additional insured” is an impor- tant but often overlooked issue, particularly in the context of construction projects. While the requirement to provide “additional insured” status is standard in many construction contracts, the wording of an “additional insured” endorsement can vary significantly from policy to policy. Some policyholders and/or insurers will attempt to limit the scope of coverage granted to an “additional insured” by wording the endorsement to provide coverage for the additional insured only for damages that arise

ut of the work or operations of the

named insured. Recently, the Appellate Division reviewed this type of endorsement in two premis- es liability cases, and in both instances, broadly construed the endorsement to afford coverage to the additional insured. In Myers v. New Jersey Sports & Exposition Auth., No. A-3750-00T5 (N.J. App. Div. Dec. 12, 2002), a subcontractor’s employee was injured while working on a renova- tion project for the New Jersey Sports & Exposition Authority

. . . a policyholder’s failure to cooperate with its insurer’s investigation may lead to a complete forfeiture of coverage for an otherwise valid claim.

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(“NJSEA”). NJSEA was an additional insured under a liability policy issued by Great American Insurance Company (“Great American”) to S&ME (the archi- tect on the roofing project) “but

nly with respect to liability arising
ut of ‘your work’ [S&ME] for that

insured [NJSEA] by you or for you [S&ME].” Great American declined coverage to NJSEA, arguing that the injury did not arise out

f S&ME’s work, but rather the

work of the contractor on the project, and that there was no finding that S&ME’s negligence caused the

injury. The court, however, found

it improper to ask whether it was S&ME’s negligence that had caused the plaintiff’s injuries; the proper question was whether the

ccurrence grew out of S&ME’s

work, which it did, based on proof

f S&ME’s involvement with the

project, including on-site inspec- tions and supervision. Myers’ holding was based in large part on County of Hudson v. Selective Ins. Co., 332 N.J. Super. 107, 114 (App. Div. 2000), where a subcontractor’s employee was injured before the subcontractor had even commenced its work. The County was an additional insured under a policy procured by its general contractor, Malpere, from Selective Insurance Co., “but

nly with respect to liability arising
ut of ‘your work’ [Malpere] for that

insured [the County] by or for you [Malpere].” Id. at 110. Selective declined coverage to the County

n the ground that the injured

employee had not been engaged in Malpere’s “work” when he fell — he was merely at the construction site to prepare an estimate for a sub-contract. The court found that the accident had originated from Malpere’s work because the phrase “your work” was broad enough to encompass “administra- tive work of a type ordinarily per- formed by a contractor, who is authorized to utilize subcontractors to fulfill its contractual oblig- ations.” Id. at 115. County of Hudson also provided an independent basis for coverage not discussed in Myers: the County had a reasonable expectation that coverage would be provided for the liability in question because of the contract between it and Malpere, which required liability coverage for the County. Even if Selective was not aware of the County’s exact contractual requirements, the insurance company could reasonably anticipate that Malpere would use subcontractors to perform its work, and that subcontractors would send representatives to the construction site to submit bids. Dangerous site conditions were a natural and reasonable incident of the “work,” and therefore were a risk against which Selective would reasonably expect the County to be protected. Based on the above cases, policyholders granting additional insured status to a third party should be prepared to share their available insurance coverage with any entity that is named as an additional insured. Moreover, because most liability insurance policies are silent regarding priority of payment as between a named insured and an additional insured, named insured policyholders should take care in securing ade- quate limits of liability and/or limit- ing the number of entities that will be named as additional insureds under their policies.

While the requirement to provide “additional insured” status is standard in many construction contracts, the wording of an “additional insured” endorsement can vary significantly from policy to policy. Policyholders granting additional insured status to a third party should be prepared to share their available insurance coverage with any entity that is named as an additional insured.

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THE MOST RECENT REFINEMENTS TO NEW JERSEY’S CONTINUOUS TRIGGER AND ALLOCATION RULES

By Lynda A. Bennett, Esq. After nearly twenty years of wran- gling over whether insurance coverage exists for environmental liability claims, New Jersey law is finally set- tled, deciding in favor of coverage. The most significant issue that remains is how to allocate responsibility among various insurers, and under certain circumstances policyholders, for environmental losses that take place over a long period of

time. In particular, insurers and pol-

icyholders battle over the appropri- ate “trigger period” i.e., the time frame that defines which insurers must pay. Because the very nature of environmental contamination is amorphous, it is sometimes difficult for policyholders to demonstrate exactly when bodily injury and/or property damage began. Early in 2002, the New Jersey Supreme Court provided policyholders with significant assistance in this regard by adopting a “bright line rule trig- gering coverage when toxic waste is first deposited in a landfill” as

pposed to requiring scientific proof

regarding the date contaminants were most likely to have leached into the groundwater. See Quincy

Mut. Fire Ins. Co. v. Borough of

Bellmawr, 172 N.J. 409 (2002). At the end of 2002, the Appellate Division addressed when the trigger period should end for allocation pur-

poses. In Champion Dyeing &

Finishing Co., Inc. v. Centennial Insurance Company, 355 N.J. Super. 262 (App. Div. 2002), the court con- firmed that insurers cannot limit their liability by artificially expanding the allocation period to years in which the policyholder was unable to obtain environmental insurance. There, the policyholder was seeking coverage for response costs incurred to remediate leaking underground fuel oil storage tanks. The tanks were installed in the early 1960s and began leaking in 1980. The policyholder became aware of the leakage for the first time in 1997. The insurers attempted to limit their relative shares of responsibility by arguing that the loss should be allocated over a period of 1980 through 1997. The Appellate Division rejected the insurers’ argument because they “failed to prove the availability and affordability of EIL coverage for the risk of leakage from more than twenty-year old underground storage tanks during the relevant time period.” Id. at 271. In particular, the court relied on expert testimo- ny from both sides which con- firmed that no insurance company was willing to write an environmental insurance policy in 1997 that would have provided coverage for the risks associated with twenty year old underground storage tanks. Moreover, the court held that, even if the insurers had been able to demonstrate that coverage was available to the policyholder for that precise type of risk, a fair and reasonable allocation scheme would not allow the insurers to spread costs over a seventeen year period because, after 1986, environmental impairment liability coverage was available on a claims made basis only. As such, the court held, the policyholder could be allocated, at most, only one year of responsibility upon a proper show- ing by the insurers. While Quincy and Champion Dyeing certainly reinforce New Jersey’s commitment to maximizing insurance coverage for policyholders, battles over trigger and allocation are likely to remain at the fore- front of New Jersey’s coverage litigation because these two concepts go to the very essence of how much money will be paid. We will, of course, keep you updated as New Jersey courts continue to refine the trigger and allocation rules.

Insurers cannot limit their liability by artificially expanding the allocation period to years in which the policyholder was unable to obtain environmental insurance.

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For more information regarding these or any other insurance coverage issues, please contact Robert D. Chesler, Chair of the Insurance Law Practice Group, at 973.597.2328 or at rchesler@lowenstein.com, or Lynda A. Bennett, Member of the Firm of the Insurance Law Practice Group, at 973.597.2386 or at lben- nett@lowenstein.com. Or you can visit our Insurance Outpost website at www.insurance-lowenstein.com.

www.insurance-lowenstein.com

Robert D. Chesler, Chair of Lowenstein Sandler’s Insurance Law Practice Group, spearheaded the development of the Insurance Outpost. If you have any questions, please contact Robert D. Chesler at 973-597-2328 or rchesler@lowenstein.com.

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65 Livingston Avenue Roseland, New Jersey 07068-1791 Telephone 973.597.2500 Fax 973.597.2400 www.lowenstein.com

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The Lowenstein Sandler Insurance Law Practice Group Credo

Insurance should provide secu- rity and peace of mind. In exchange for a premium payment, the policyholder exter- nalizes risk. However, the rela- tionship of trust between policyholder and insurer that once existed has vanished. The cav- alry has turned and run, the umbrella lies in tatters and the good hands are a fist. All too frequently, the insurer’s response to a valid request for coverage is ‘claim denied.’ We, in the Lowenstein Sandler Insurance Law Practice Group, still believe that insurance policies provide coverage. We will advise our clients of their rights, guide our clients down the tortuous paths of claims- handling, and partner with our clients to pursue coverage through litigation when neces-

sary. We stand prepared to be

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Insurance Coverage 2003: Claim Trends & Litigation