Claims of Unintentional and Intentional Conduct – Deny Coverage or Defend Upon Reservation of Rights?
What options are available to an insurer faced with overlapping allegations of intentional and negligent conduct? Certainly it is not a new issue as attorneys representing injured parties have long attempted to plead in such fashion as to trigger coverage. But, notwithstanding existing precedents, insurer responses to such cases are frequently not consistent with their obligations under the insurance contract and open insurers to claims of bad faith and attorneys’ fees.
More than thirty (30) years ago the New Jersey Supreme Court decided the case of Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165 (1992). There, the Court addressed an insurer’s obligation to its insured where there were overlapping allegations of intentional and negligent conduct. Voorhees involved allegations of negligent and intentional infliction of emotional harm in the context of statements made by the insured concerning a teacher at a Board of Education meeting. The insurer refused to defend its insured pointing to the allegations of intentional conduct while ignoring the allegations of negligent conduct. The Court initially addressed the issue of the insurer’s duty to defend in light of the allegations in the underlying Complaint. Noting that there were allegations of negligence, the Court concluded that the insurer was required to defend until “every covered claim is eliminated.” The insurer’s defense obligation continued “unless and until a subjective intent to injure had been demonstrated.” 128 N.J. AT 174.
Of course, simply because an insurer has a defense obligation does not necessarily mean that there is a duty to indemnify if the insurer can establish a subjective intent on the part of the policyholder. But, allegations in the underlying pleading of intentional conduct are not sufficient to establish the requisite intent to injure. There must be a finding of fact that includes an intent to injure. For example, a criminal conviction that requires a finding of intent to injure would qualify as such a finding. But, if the conviction did not include the requisite intent, the conviction is not binding on the policyholder. Likewise, a conviction that is a precondition to entry into Pretrial Intervention is not binding if PTI is successfully completed. The conviction is extinguished.
If there is no binding criminal conviction, in order to establish the applicability of an intentional act exclusion, the insurer can commence a declaratory judgment action seeking the requisite finding. But, should the insurer fail in its proofs, the result could be a binding finding of negligence on the part of the insured to the detriment of the insurer. On the other hand, a finding of an intent to injure would relieve the insurer of both the defense and indemnity obligations.
Should the insurer determine that a declaratory judgment action is not in its best interests, with the consent of the insured, the insurer could simply await the outcome of the underlying case utilizing special interrogatories to have the jury determine whether the insured’s conduct was intentional, i.e. with a subjective intent to injure, or unintentional.
An insurer’s initial reaction to a demand for coverage in an action involving overlapping intentional and unintentional conduct might be to deny coverage, defense and indemnity. Yet, in doing so, it exposes itself to claims of breach of its duty to defend and bad faith, but more importantly, it loses the ability to affect the outcome to protect its own interests.