Two Recent New Jersey Decisions Affirm That Ambiguous Insurance Policy Provisions Must Be Construed in Policyholder's Favor

Anderson Kill New Jersey Alert

PUBLISHED ON: January 8, 2024

 

Key Points:

  • In two recent decisions, New Jersey courts explicitly upheld the principle that ambiguous insurance policy language must be construed in favor of the policyholder.
  • In one case, a New Jersey Superior Court held that a fungus/mold exclusion did not negate coverage when mold damage resulted from a covered cause of loss.
  • In a second case, the Appellate Division held that a property policy exclusion for damage that occurred away from the insured premises was trumped by an exception for injury to a residence employee.

 

Insurance policies have long been recognized as adhesion contracts because of the unequal bargaining power between insurance companies and policyholders. As a result, courts apply different rules to the interpretation of insurance policies than to most contracts and are supposed to assume a vigilant role in ensuring their conformity to public policy and principles of fairness. For example, when the phrasing of an insurance policy is sufficiently confusing such that the average policyholder cannot make out the boundaries of coverage, an ambiguity exists, and that ambiguity must be construed in favor of coverage. Two recent cases in New Jersey underscore these principles.  In both cases, the court faithfully applied these principles and rejected insurance companies’ efforts to shirk their coverage obligations. 

Court ColumnsIn WCCP Risk Purchasing Group, Inc. v. Lexington Insurance Company, Docket No. CAM-L-1025-22 (Nov. 28, 2023), in the Superior Court of New Jersey, Law Division, Camden County, the Estate of Darlene Pratt sued the Village of Stoney Run for wrongful death as the result of mold infestation at her apartment complex. The Village of Stoney Run was one of several commercial properties for which WCPP purchased general liability insurance through Lexington Insurance Company. Lexington denied coverage on the basis of a fungus/mold exclusion, prompting WCCP to file suit. The parties filed cross motions for summary judgment. Lexington argued the exclusion barred coverage because the exposure to fungus/mold was the cause of the claimed damages and injuries. The plaintiff argued that while the exclusion bars coverage for mold, the exclusion does not bar coverage for mold when the mold is the result of a covered cause of loss, i.e., water infiltration.  The court rejected Lexington’s argument and granted summary judgment in favor of WCCP. The court determined the phrasing of the fungus/mold exclusion was sufficiently confusing and thus ambiguous because plaintiff and defendant proffered equally reasonable interpretations of the exclusion and “it is the interpretation most favorable to the insured which controls.”  Op. at 10. In Berardi v. Franklin Mutual Insurance Company, Docket No. A-2940-22 (App. Div. Nov. 28, 2023), a Tibetan Mountain dog owned by two homeowners bit a residence employee at their second home in Montauk, New York. The second home was insured by Scottsdale Insurance Company. The homeowners’ primary residence, located in Sparta, New Jersey, was insured by Franklin Mutual Insurance Company.  The employee sued the homeowners in the Supreme Court of New York, seeking damages for pain and suffering, lost wages, and medical expenses. Thereafter, the homeowners tendered the claim to Scottsdale and Franklin Mutual. Scottsdale agreed to defend the suit, but the policy only covered up to $10,000 for dog bites. Franklin Mutual, on the other hand, denied coverage.  In May 2022, the homeowners filed a declaratory judgment action against Franklin Mutual in New Jersey Superior Court.  Franklin Mutual moved for summary judgment, seeking to dismiss the homeowners’ complaint. The homeowners filed a cross-motion for summary judgment. On May 1, 2023, the trial court denied Franklin Mutual’s motion for summary judgment, granted the homeowners’ cross-motion, and ordered Franklin Mutual to defend the homeowners in the underlying action. Franklin Mutual appealed the trial court decision, arguing that the trial court erred in finding coverage under the personal liability to others coverage under the Franklin Mutual policy; that the trial court erroneously relied on the medical payments to others coverage under the Franklin Mutual policy; and that the Franklin Mutual umbrella endorsement only provided coverage for claims that exceed $1,000,000. The Appellate Division rejected all three arguments and affirmed the decision of the trial court. The Appellate Division first determined the dog bite was a covered “occurrence,” then looked to the “Locations Not Insured Exclusion” to determine whether the dog bite was covered because it occurred away from the homeowners’ primary residence. While that exclusion pertained to “bodily injury or property damage arising out of any premises owned, rented, or controlled by you, other than an insured premises covered by this policy,” it included an exception for a residence employee. The Appellate Division construed the exclusion narrowly, as required by New Jersey law, and determined that the injury did not “arise out of” the Montauk property and that coverage extended to a residence employee performing duties away from the covered premises. The Appellate Division also determined the claim was covered under the “medical payments to others” coverage because the terms of the policy expressly provide for payment of medical expenses provided the accident either occurred on an insured premises or away from an insured premises, if the accident is caused by animals owned by or in the care of an insured. The court held that was exactly what happened and determined the claim was covered. 

Because the language arguably supported two meanings, one favorable to the policyholder and the other favorable to the insurance company, the Appellate Division held the endorsement was ambiguous and construed the policy in favor of coverage.

Finally, with respect to the umbrella endorsement, Franklin Mutual interpreted the endorsement to mean it is only responsible for umbrella coverage in excess of the overarching maximum limit of primary liability coverage, which is $1,000,000. The plaintiffs, on the other hand, argued Franklin Mutual is responsible for providing umbrella coverage when covered damages exceed any of the sublimits specified in the policyholder's coverage, such as the Scottsdale property's $10,000 limit for medical payments made to others.  The court noted that the umbrella endorsement does not refer explicitly to sublimits, and that the plural reference to “limits” could refer either to the overarching maximum limits of two or more separate policies, or to various limits set forth within either or both the Franklin Mutual or Scottsdale policies. Because the language arguably supported two meanings, one favorable to the policyholder and the other favorable to the insurance company, the Appellate Division held the endorsement was ambiguous and construed the policy in favor of coverage.
These two cases provide great examples of New Jersey courts faithfully honoring well-established principles of insurance policy interpretation and applying them in favor of coverage. This is exactly how these principles should be applied, given the unequal bargaining power between insurance companies and policyholders.
About Anderson Kill
Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estates, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes — with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. The firm has offices in New York, NY, Boston, MA, Denver, CO, Los Angeles, CA, Newark, NJ, Philadelphia, PA, Stamford, CT, and Washington, D.C.
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