Duty To Defend On Collision Course

A coverage issue yet to be decided in New Jersey is whether a commercial general liability (CGL) policy, which provides the insurer with the duty and right to defend its insured against third-party claims, also authorizes the insurer to be reimbursed for defense costs that are later determined to be beyond the policy grant of coverage.1

Since the California Supreme Court decided Buss v. Superior Court2 in 1997, and held that an insurer has the right to reimbursement of defense costs for non-covered claims based on a reservation of rights letter, courts nationwide have split over this issue. The growing minority view, however, has uniformly concluded an insurer has no right to reimbursement of defense costs absent an express provision in the written insurance contract authorizing the reimbursement.3 The Pennsylvania Supreme Court, in American and Foreign Insurance Company v. Jerry's Sports Center, Inc.,4 recently joined this growing minority view. The Pennsylvania high court rejected the carrier's contention that it was entitled to reimbursement of defense costs for a claim the lower court had determined was not covered and, thus, there was no duty to defend. The Court's rationale was predicated on Pennsylvania's broad duty to defend, and the plain language of the insured's CGL policy, which was devoid of any language suggesting the carrier had a right to reimbursement.5

The Pennsylvania Supreme Court's recent decision in Jerry's Sports Center, Inc. may be the better-reasoned approach to this issue, since it is more consistent with New Jersey's duty to defend common law, as well as the standard duty to defend language found in CGL policies. Accordingly, when the issue is squarely addressed by New Jersey courts, New Jersey may align itself with the growing minority view that holds an insurer is not entitled to reimbursement of defense costs based on an 'after the fact' drafted reservation of rights letter issued by the insurer.

This article will initially explain the basic principles governing New Jersey's duty to defend, and briefly discuss the Buss holding and those court decisions that have followed its lead. The article will then address those courts that have taken a contrary view to the Buss decision, and will conclude with a discussion of why the authors believe New Jersey should also reject the Buss holding and follow those courts that have found the plain language of the CGL policy does not allow reimbursement of defense costs.

Duty to Defend

Generally, an insurer's duty to defend is broader than its duty to indemnify.6 This is a distinct obligation under the CGL policy that is separate and apart from the insurer's duty to provide coverage.

An insurer is contractually obligated to provide the insured with a defense against all actions covered by the CGL policy. Generally, when a complaint is filed against the insured alleging a covered claim, the insurer's duty to defend is triggered. Thus, when the allegations in the complaint fall within a risk that is covered by the CGL policy, the insurer is obligated to defend. Indeed, as long as the allegations in the complaint comprehend a claim or injury that may possibly be covered by the insurance policy, a duty to defend will arise.7

The question of whether the third-party claim asserted against an insured is potentially covered under the CGL policy is determined by comparing the allegations in the complaint to the insurance policy's language. The duty to defend arises even if the allegations in the complaint are "poorly developed and almost sure to fail."8

That is because the duty to defend is not limited to only meritorious actions. The merit of the claim asserted against the insured is immaterial. The duty to defend does not rely upon whether the claim or cause of action stated in the complaint can be maintained against the insured. In other words, the duty to defend is not defeated simply because the allegations may be "groundless, false, or fraudulent."9

As the New Jersey Supreme Court recently pronounced, the "determination of an insurer's duty to defend requires review of the complaint with liberality to ascertain whether the insurer will be obligated to indemnify the insured 'if the allegations are sustained.'"10

Buss Line of Cases

Buss arose out of an underlying lawsuit in which only one of 27 claims was potentially within the insurance policy's coverage. The underlying action was brought against Jerry Buss, the owner of several sports teams, including the Los Angeles Lakers, who was alleged to have, among other things, breached a contractual obligation with a third party. The underlying complaint alleged 27 causes of action, including one count for defamation, which turned out to be the only potentially covered claim. The insurer provided a defense for all 27 counts pursuant to a reservation of rights letter, which included a right to seek reimbursement of all defense costs.

The coverage action eventually came before the California Supreme Court, which held that because the insurer's duty to defend extended to...