In Northfield Ins. Co. v. Mt. Hawley Ins. Co., the New Jersey Superior Court, Appellate Division, examined a declaratory judgment action brought by a property owner’s insurer against a contractor’s liability insurer. The case arose from a roof installation performed by the contractor and a subcontractor at a hotel in the summer of 2012. Shortly after the work was completed, Superstorm Sandy struck the property, causing roof damage and water damage to the hotel’s interior. The hotel’s property insurer advised the contractor’s insurer of a potential claim. The contractor’s insurer rejected the claim, determining that the damage at issue was caused by winds, rather than construction defects.

Over a year later, the hotel owner and its insurer filed an action against the contractor and subcontractor, contending that the roof developed cracks and collapsed prior to Superstorm Sandy, due to the negligence of the contractor and subcontractor. The contractor’s insurer ultimately disclaimed coverage, citing late notice of the lawsuit; the fact that the lawsuit in part sought damages for replacement of the roof, which fell within the policy’s “your work” exception; and the breach of policy requirements that the policyholder enter into a defense and indemnification agreement with the subcontractor, and that the subcontractor name the policyholder as an additional insured under its policy. However, the insurer offered to provide a “courtesy defense” of the contractor under a reservation of rights. The policyholder did not respond to this letter.

The contractor’s insurer subsequently brought a declaratory judgment action against the hotel, its insurer, the contractor, and the subcontractor, seeking a judgment that it had no duty to defend and indemnify the contractor. The hotel’s insurer filed a motion for summary judgment, contending that the insurer was estopped from denying coverage because of its decision to provide a defense. The contractor’s insurer filed a cross-motion, stating that the evidence clearly established that the policyholder was not entitled to coverage due to the absence of a defense and indemnification agreement with the subcontractor. The trial court granted summary judgment in favor of the hotel’s insurer, finding that the contractor’s insurer was estopped from contesting coverage because it assumed the defense of the litigation without the contractor’s consent. The trial court denied the cross-motion for summary judgment brought by the subcontractor.

On appeal, the Court acknowledged that pursuant to New Jersey case law, an insurer’s decision to control the defense of litigation without the insured’s consent may estop the insurer from later denying coverage. However, the Court noted that in the present case, the insurer merely indicated that it was “willing” to provide a defense, which could plausibly be construed as an offer to provide a defense rather than a demand that it will control the defense. Accordingly, the policyholder’s failure to respond to the letter could be construed as an implied consent to the insurer’s offer to defend the case.

The Court further noted that even if the insurer had assumed the defense of the case without the insured’s consent, estoppel would only be found if the insurer acted with the intention of influencing the conduct of the insured, and if the insured indeed changed its position to its detriment in reliance upon the insurer’s actions. As the policyholder had ceased operations by the time that the insurer offered to defend the action, it was unlikely that either element was satisfied. The Court concluded that as there was insufficient evidence to establish that the contractor’s insurer controlled the defense without the policyholder’s consent and that the insurer’s actions resulted in the policyholder’s detrimental reliance, the hotel’s insurer was not entitled to summary judgment. The Court therefore reversed the trial court’s order granting summary judgment in the insurer’s favor.

As an aside, the Court noted that while New Jersey precedent clearly authorized an injured party to pursue a direct action against a liability insurer if the insured was insolvent, it is less clear whether the injured party would have standing to raise coverage issues concerning the relationship between the insurer and insured, such as estoppel. The Court left this issue to be addressed by the trial court on remand.

Finally, the Court affirmed the trial court’s denial of the cross-motion for summary judgment filed by the contractor’s insurer, holding that the trial court correctly determined that issues of fact existed regarding the relationship between the contractor and subcontractor, and the nature of any agreements between these parties.

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