Appellate Division Finds That Lack of Cooperation Is Justification for Denial of Coverage
The New Jersey Appellate Division has recently ruled, in Hager v. Gonsalves, that an insurance carrier can properly disclaim coverage when a failure to cooperate causes an “appreciable prejudice” to the carrier, even if counsel has been assigned to defend the putative insured.
In Hager, Tammy Gonsalves, while operating a vehicle owned by Edilberto Chilito, was involved in two separate motor vehicle accidents in less than ten minutes. While the first accident did not result in any claims, the second accident caused serious personal injuries to Nicole Hager and substantial damage to Ms. Hager’s vehicle.
Rutgers Casualty Insurance Company insured the Chilito vehicle. As she was neither a named insured under the policy or a resident of Mr. Chilito's household, Ms. Gonsalves (who was allegedly intoxicated) was only entitled to coverage if she was a permissive user of the vehicle. Neither Mr. Chilito nor Ms. Gonsalves advised Rutgers Casualty of the accidents, and the carrier only became aware of the accidents when it received a letter from Ms. Hager's counsel, more than five weeks after the accidents occurred.
The Rutgers Casualty policy contained a standard “cooperation clause” which required any one seeking coverage under the policty to “[c]ooperate with [the insurer] in the investigation, settlement or defense of any claim or suit.”
Repeated telephone calls and letters, including letters from Rutgers Casualty's special investigation unit warning that, absent a response, Rutgers Casualty would consider Mr. Chilito and Ms. Gonsalves as uncooperative and would close the case, went unanswered.
After Rutgers Casualty notified Ms. Hager that it was denying coverage for the accident due to lack of cooperation, Ms. Hager notified High Point Insurance Company that she would be pursuing a claim under the uninsured (UM) motorist provisions of her High Point policy.
Ms. Hager subsequently filed an automobile negligence lawsuit. Although it had previously denied coverage, Rutgers Casualty assigned counsel to defend Mr. Chilito and Ms. Gonsalves, subject to a reservation of rights. Mr. Chilito and Ms. Gonsalves also failed to respond to any of the letters sent by their assigned counsel asking them to contact him regarding the pending action and explaining the urgency of the situation.
High Point filed an action against Rutgers Casualty that sought, among other things, a declaration that the Rutgers Casualty policy should provide coverage to Mr. Chilito and Ms. Gonsalves. Ultimately, Rutgers Casualty and High Point filed motions for summary judgment regarding the coverage issue.
The trial court concluded that, although Mr. Chilito and Ms. Gonsalves had “utterly failed in their duty under the policy to cooperate”, Rutgers Casualty failed to demonstrate that it had suffered “appreciable prejudice”. Accordingly, the trial court granted High Point's motion for seeking a declaration that Rutgers Casualty must provide coverage to Gonsalves and Chilito. Rutgers Casualty subsequently sought an appeal of the trial court’s decision.
On appeal, the Appellate Division reversed the lower court, noting that an insured’s failure to cooperate with its insurer was a breach of the insurance agreement. However, the Hager court further held that, in order for a carrier to deny coverage, the breach had to result in “appreciable prejudice” to the carrier.
In determining “appreciable prejudice”, a court must consider “whether substantial rights have been irretrievably lost” as a result of the breach, and “the likelihood of success of the insurer in defending against the accident victim's claim” if there had there been no breach.
The Hager court held that Ms. Gonsalves and Mr. Chilito’s failure to cooperate prevented Rutgers Casualty from being able to determine whether the policy issued to Mr. Chilito would provide coverage to Ms. Gonsalves.
Therefore, as a result of the failure to cooperate, Rutgers Casualty “irretrievably lost” the opportunity to determine whether Ms. Gonsalves had permission to use Mr. Chilito's vehicle, and Rutgers Casualty was therefore entitled to disclaim coverage for the accident.
The Hager decision is an important development in protecting the rights of insurance carriers, which may be faced with the dilemma of whether to assign counsel to defend liability claims while the ultimate determination of coverage is still pending.
If you are a claims professional, please do not hesitate to contact Golden, Rothschild, Spagnola, Lundell, Levitt & Boylan, P.C. We would be glad to further discuss this significant decision with you.
David D. Blake, Esq. is an associate of GRSLL&B in the firm’s INSURANCE COVERAGE LITIGATION GROUP. He represents insurance carriers in the defense of coverage and bad faith claims.
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