Awaken The Dead: New Jersey Courts Should Revive The Duty To Defend

Originally published in the Anderson Kill New Jersey Alert (June 2014)

In the 1980s and 1990s, New Jersey earned a justified reputation as a pro-policyholder jurisdiction. In those highly contentious days of environmental insurance litigation, New Jersey courts ruled favorably for policyholders on many coverage issues. At the same time, however, on key issues affecting an insurance company's duty to defend, New Jersey is out of step with other states, disadvantaging the policyholder.

There's a High Flying Burd

Burd v. Sussex Mutual Insurance Co., 56 N.J. 383 (1970), is the bête noir for New Jersey policyholder counsel. Burd dealt with a common situation — a complaint accused the defendant of both negligent and intentional conduct. The defendant had insurance. The policyholder and the insurance company shared an interest in defeating the complaint. However, the theory was that an attorney appointed by an insurance company may have interests that conflict with the policyholder's — while the attorney represents the policyholder, that attorney receives his cases from the insurance company. Should the defendant be found liable, the insurance company is better off if the policyholder loses on the uncovered cause of action. In practically every state except New Jersey, in this situation, insurance companies must appoint independent counsel, also known as Cumis counsel, to defend the policyholder. Independent counsel is designed to avoid this potential conflict.

New Jersey alone chose a different path. In Burd, the New Jersey Supreme Court held that when a conflict exists, the policyholder's right to a defense becomes a right to reimbursement. In other words, the policyholder must defend itself and seek reimbursement of its attorney's fees if it wins. Burd is incredibly unfair. When a policyholder purchases a general liability policy, it is purchasing litigation insurance. It knows that if it is sued, the insurance company will step in, appoint counsel, and pay for the defense. Without this structure, the policyholder may not know how to locate experienced counsel, and may not have the disposable income to pay for the defense.

Please, Sir, I'd Like Some More

Many if not most complaints contain mixed allegations of covered and uncovered causes of action. In the majority of states, when there are mixed allegations, the insurance company must pay all of the policyholder's legal fees, subject to certain exceptions. In SL Industries, Inc. v. American...