In the seminal case of Merchants Indemn. Corp. v. Eggleston, 37, N.J. 114 (1962), the Supreme Court of New Jersey held that a liability insurer can be estopped from denying coverage, when defending an insured under a reservation of rights, if the insurer does not obtain the insured’s consent to the defense. Last month, the Appellate Division, in Northfield Insurance Co. v. Mt. Hawley Insurance Co., No. A–1771–16T4, 2018 WL 1513162 (N.J. Super. Ct. App. Div. Mar. 28, 2018), rejected the assertion that prejudice to the insured is presumed as a matter of law when an insurer provides a courtesy defense under a clear reservation of rights. The court also reversed and remanded for further findings as to whether an injured plaintiff may attempt to invoke estoppel against a defendant’s liability insurer.
In Eggleston, the New Jersey Supreme Court ruled that a liability insurer waived its right to disclaim coverage based on the insured’s material misrepresentation because the insurer had assumed defense of the lawsuit without consent. The court found that an insurer’s control of the defense is “vitally connected with the obligation to pay the judgment.” Id. at 511. Therefore the court concluded that an insurer may defend the insured while reserving the right to dispute liability only when the insured consents to such defense. The court ruled that an explicit expression of consent is not necessary. Rather, the insured’s consent may be inferred from the failure to reject the offer of a defense under a reservation of rights, so long as the insurer informed the insured of the right to reject the offer.
