Posted: September 26, 2018

Duty to Defend is Merely Duty to Reimburse Until Question of Coverage is Resolved

On July 20, 2018, the New Jersey Appellate Division issued a decision in Woodbury Medical Center Associates, LLP v. Selective Insurance Company, Docket No. A-5526-15T1, holding that an insurer’s duty to defend was merely a duty to reimburse until the question of whether claims are covered is resolved, explaining:

At the outset, we agree with the judge that, when disputes arise between the insured and insurer, the duty of an insurer to defend is generally determined by a side-by-side comparison of the policy and the complaint, and is triggered when the comparison demonstrates that if the complaint’s allegations were sustained, an insurer would be required to pay the judgment. In making that comparison, it is the nature of the claim asserted, rather than the specific details of the incident or the litigation’s possible outcome, that governs the insurer’s obligation.

The interpretation of an insurance policy upon established facts is a question of law for the court to determine. Generally, when interpreting an insurance policy, courts should give the policy’s words their plain, ordinary meaning. An insurance policy is a contract that will be enforced as written when its terms are clear in order that the expectations of the parties will be fulfilled.

As this court held in New Jersey Manufacturers Insurance Co. v. Vizcaino, in permitting the dispute of uncovered claims, courts protect both parties by ensuring that the insurer does not incur responsibility for uncovered claims and that the insured is entitled to both defense and indemnity if the dispute is resolved in its favor. In line with those principles, exclusions in insurance policies are presumptively valid and enforceable if they are specific, plain, clear, prominent, and not contrary to public policy. In contrast, courts will find a genuine ambiguity to arise where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.

Generally, exclusions are narrowly construed. The insurer has the burden of bringing the case within the exclusion. Courts must be careful, however, not to disregard the clear import and intent of a policy’s exclusion. Far-fetched interpretations of a policy exclusion are insufficient to create an ambiguity requiring coverage.

In a situation where two or more identifiable causes — one a covered event and one excluded — may contribute to a single property loss, there is coverage absent an anti-concurrent or anti-sequential clause in the policy. As noted, the policy at issue contains within the exclusion language an anticoncurrent and anti-sequential clause and excludes coverage from any loss or damage regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. We do not consider the exclusion language to be ambiguous. A fair reading of the exclusion is that, despite other potential causes, mold must be excluded as a causative factor in order for there to be a covered loss.

The judge concluded that Selective owed a defense to Woodbury Medical while acknowledging that mold was averred in the complaint as a causative factor. The judge found that the complaint averred other environmental hazards as causative factors thus requiring a defense. However, other than referencing those allegations, the judge did not analyze whether the anti-concurrent and anti-sequential language in the exclusion would bar coverage or, at a minimum, raise a substantial question as to the existence of coverage.

Succinctly, in the absence of a comparison of the complaint with the exclusion’s anti-concurrent and anti-sequential language, we conclude that the issue of coverage was not of such clarity at this stage of the action to require Selective to defend. In reaching our conclusion, we are informed by the following.

Neither the duty to defend nor the duty to indemnify exists except with respect to occurrences for which the policy provides coverage. Here, the judge cited Flomerfelt as authority, which provides that:

in circumstances in which the underlying coverage question cannot be decided from the face of the complaint, the insurer is obligated to provide a defense until all potentially covered claims are resolved, but the resolution may be through adjudication of the complaint or in a separate proceeding between insured and insurer either before or after that decision is reached.

There are two exceptions to this general rule.

The insurer need not provide the defense at the outset if the allegations include claims that are not covered by the policy as well as claims that are covered or if the question of coverage is not, by its nature, capable of determination in the underlying action against the insured. In those situations, the insurer’s obligation to defend becomes an obligation to reimburse for defense costs to the extent that the defense is later determined to have been attributable to the covered claims and, if coverage is not determinable in the underlying action, it is later determined that there was in fact coverage.

In short, if an insurer believes that the evidence indicates that the claim is not covered, the insurer is not always required to provide a defense.

Although the duty to defend is broader than the duty to pay, the duty is not broader in the sense that it extends to claims not covered by the covenant to pay. Therefore, if an excluded claim is made, the insurer has no duty to undertake the expense and effort to defeat it, however frivolous it may appear to be.

Grand Cove II addressed an alternative to the duty to defend, the duty to reimburse.

Where a conflict exists between an insurer and its insured by virtue of the insurer’s duty to defend mutually-exclusive covered and non-covered claims against the insured, the duty to defend is translated into a duty to reimburse the insured for the cost of defending the underlying action if it should ultimately be determined, based on the disposition of that action, that the insured was entitled to a defense. Similarly, where an insurer did not undertake defense of the case at the inception of the litigation, the duty to defend may be converted into a duty to reimburse.

In Grand Cove II, this court found the insurance coverage issues in the case created problems with the trial court’s mandate that the insurance company must immediately assume defense of all the causes of action of the insured. Such issues included, but were not limited to: the trial court’s concession that certain claims were not covered, an inherent conflict due to late-raised claims, and the fact that the underlying litigation would not resolve the coverage issues. Therefore, we held the insurers’ duty to defend should have been converted to a duty to reimburse pending the outcome of the coverage litigation.

Here, through our comparison of the averments in the complaint to the policy’s exclusion, we conclude it was premature to order Selective to assume responsibility for the defense since it was unclear, based on the anti-concurrent and anti-sequential language in the exclusion, whether any claims would be covered. Therefore, as in Grand Cove II, we hold that the duty to defend should be converted to a duty to reimburse pending resolution of the coverage action.

Insurance coverage disputes are a substantial part of our practice. Sometimes, whether an insurer can be made to cover a claim makes the difference between a defendant in a civil or criminal proceeding being able to mount a vigorous defense or not. Contact Schlam Stone & Dolan partner John Lundin at or Schlam Stone & Dolan partner Bradley J. Nash at if you or a client have a question regarding whether the defense of a claim is covered by an insurance policy.

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