Conford, Freund and Kilkenny. The opinion of the court was delivered by Freund, J.A.D.
This declaratory judgment proceeding was commenced by the plaintiff insurer, Merchants Indemnity Corp. (hereinafter "Merchants"), seeking a determination that it was not obligated to undertake the defense of a separate action against defendants Jean Eggleston and Jacob F. Tussel, Jr. and that it was entitled to rescind an automobile liability policy issued to defendants Jean and Edward L. Eggleston on the ground of fraudulent misrepresentation as to ownership of the subject vehicle. Merchants brings this appeal from a Chancery Division judgment in favor of the defendants.
The policy in question -- a standard "Family Automobile Policy" -- was first issued to the defendant Edward L. Eggleston on October 30, 1957, covering a 1954 Chrysler which he then owned. The instrument contains the usual omnibus clause, defining as "persons insured," with respect to the described vehicle owned by the named insured, "the named insured and any resident of the same household," and "any other person using such automobile, provided the actual use thereof is with the permission of the named insured." On February 4, 1958 the policy was endorsed to extend its coverage to a 1955 Lincoln and to include specifically, as "a named insured," Edward's wife, defendant Jean Eggleston. At the instance of Edward Eggleston, the policy was again endorsed, on April 9, 1958, to eliminate coverage of the Lincoln and to cover instead a 1957 Ford Thunderbird. Except for a slight increase in the stated premium, the terms of the policy were not otherwise expressly altered by the substitution of the Ford for the Lincoln vehicle.
On May 12, 1958 defendant Jacob F. Tussel, Jr., brother of Jean Eggleston, and then about 19 1/2 years of age, was involved in a collision while driving the Thunderbird in Scotch Plains, N.J. Herbert Arthur Krebs, a passenger in the Thunderbird, was killed in this accident. Krebs' administratrix instituted a wrongful death action against Tussel and Jean Eggleston on October 14, 1958. The defendants turned the litigation papers over to Merchants, which continued a previously commenced investigation of the accident, and also engaged counsel to undertake the defense of the insureds. On January 5, 1959, the complaint in the instant action was filed; process was not effectuated on defendants until February 25, 1959. Merchants has continued, nonetheless, to conduct the defense of Tussel and his sister in the primary death action, trial of which, we are informed, is still pending.
The issues herein are whether the insureds falsely represented ownership of the vehicle and, if so, whether such a misrepresentation was material and entitled Merchants to disclaim liability on the policy; and, if it is determined that Merchants had a right to void the policy, whether that right was waived by the insurer's conduct in undertaking to defend Tussel and Jean Eggleston subsequent to acquiring knowledge of the misstatement.
The testimony concerning the purchase of the Thunderbird and the consequent execution of the policy endorsement is somewhat in conflict, but may be summarized essentially as follows. Jacob F. Tussel, Jr., his parents, and the Egglestons all lived on a single tract of land in Clark Township, N.J., though not in one household. Jacob and his mother and father resided in the main house, while his sister and Edward lived in an adjoining trailer. Jacob worked for his father in the contracting business; Jean was employed as an office nurse.
At the time the Egglestons acquired the 1955 Lincoln, they instructed their insurer to prepare the aforementioned endorsement and also informed him that Tussel would be
an occasional user of the vehicle. On or about March 29, 1958, Jacob, his sister and brother-in-law visited a used car lot and placed a deposit on the 1957 Thunderbird. About a week later, the three returned to the lot and Jacob paid the balance of the $2,700 purchase price. The parties concede that Edward and Jean Eggleston did not furnish any of the consideration for the vehicle. The money was paid entirely by Jacob, and represented, to the extent of $700, his own funds, the remainder having been furnished him by his parents. While the receipts for the payments were issued in Jacob's name, the title certificate to the automobile was placed in the name of Jean Eggleston. The Egglestons paid the registration fee and, later, the insurance premiums.
Within a day or two after the purchase, Edward L. Eggleston telephoned his insurance agent, Henry S. Gilbert, for the purpose of substituting the Thunderbird for the Lincoln on the policy. According to Eggleston, he informed Gilbert "that Jacob was interested in a Thunderbird and that we would like to have this car covered by insurance, that Jacob would drive it, and that my wife would use this car instead of the 1955 Lincoln for work." Eggleston admitted under oath that he did not specifically tell Gilbert that Jacob was the "owner" of the car. Gilbert, who was the vice-president of the Braunsdorf Associates Insurance Agency, an authorized agent of Merchants, testified that he was told by Eggleston that the Thunderbird "was owned, as was the Lincoln, by Mrs. Eggleston"; and upon inquiring as to its use by Tussel, he was told it was "the same as for the Lincoln." Gilbert categorically denied having been told that Jacob was interested in purchasing the Thunderbird or that he had put up the money for the vehicle.
Following the collision of May 12, 1958, further endorsements were issued by plaintiff on the Egglestons' policy, one of which had the effect of expressly excluding Tussel from its coverage, as of May 13, 1958, and the other of removing the Thunderbird from coverage.
Almost immediately after the occurrence of the accident, one of Merchants' investigators elicited a statement from Tussel, in which he described the accident and stated that he drove "a 1957 Ford Thunderbird owned by my sister and brother-in-law Jean Eggleston"; he added, "I was driving this car with my sister's permission." About two weeks later, a statement was taken from Jean Eggleston, in which she said: "I have a 1957 Ford Thunderbird registered in my name that is actually owned and was purchased by my brother, Jacob Tussel." The statement further recites that one of the reasons for registering the vehicle in Jean's name was that she was to drive it back and forth to work and that Jacob would operate it only when she was not using it. The other reason was "to get the insurance as cheap as possible." She concluded that "there was no question that he owned the car but we registered it in my name legally for the above stated reasons * * *."
On September 19, 1958, approximately a month before the institution of the death action, plaintiff's investigator obtained additional statements, one from Tussel, and one from the Egglestons. Tussel, while referring to his sister as the "owner" of the Thunderbird, freely admits in his statement that the car was purchased by him. He adds: "I purchased this car in my sister Jean's name because of my age and some other personal reasons." The Egglestons' statement likewise refers to the vehicle as "owned" by Jean, "purchased" by Jacob, and placed in Jean's name because of Jacob's age and for other personal reasons. The testimony of the defendants was uncontradicted to the effect that Jean Eggleston did in fact use the Thunderbird to drive to and from her daily employment.
The trial judge determined that the Egglestons had misrepresented to or concealed from Merchants' agent the true interest of Tussel in the Thunderbird, and that such misstatement or omission was material and, even though perhaps innocently made, would support rescission of the insurance contract. However, the judge concluded that Merchants'
unconditional direction of the defense of its insureds in the death action after having obtained knowledge of the misstatement, with no attempt to reserve its rights or to obtain a non-waiver agreement, amounted to a waiver of the defense of material misrepresentation and estopped it from setting up the policy violation as a bar to its obligation to the insureds.
Merchants contends on appeal that its activities in defense of the death action, prior to commencement of the instant suit, do not constitute a voluntary waiver of its defenses under the policy. It maintains that notice to an insured of an asserted policy violation is timely made if it is given a reasonable time before trial of the action against the insured; here, it says, such notice was communicated within several months of the institution of the primary action, in the form of the filing of the complaint and service of process in the instant declaratory proceeding.
Defendants assert that Merchants' exclusive control over the defense of the death action, knowing all the while of the nature of the alleged misrepresentation, comprised a voluntary decision to relinquish any policy defenses along these lines; further, that the defense activities -- both before and after the commencement of the declaratory action -- put the insurer in the conflicting role of both protecting and oppressing the insureds, the latter having been placed in the intolerable position of having to cooperate with the insurer under the terms of the policy and thus having the defense tailored to the insurer's wishes, while at the same time anticipating the possible loss of coverage under the policy. The prejudicial effect of the insurer's "squeeze play," according to defendants, is so obvious as to require that Merchants be equitably estopped from rescinding the policy.
We deal initially with the issue of whether the Egglestons were in fact guilty of a material misrepresentation entitling
Merchants to avoid liability on the policy. Defendants here question the correctness of the trial judge's ruling in this respect. They assert that legal title to the Thunderbird resided in defendant Jean Eggleston and that they were not requested to detail in the instrument the fact that Tussel had provided the purchase moneys. Additionally, they re-emphasize Edward L. Eggleston's testimony that he did in fact inform Merchants' agent that the car had been purchased by Tussel. Finally, they conclude that the question of what is meant by "ownership" in the context of an insurance contract is certainly a debatable one, and urge that the rule of contract construction favoring the insured should here operate to resolve this issue in favor of an equation of "owner" with the legal titleholder, in accordance with what was allegedly their understanding.
We first consider whether a statement as to ownership in an automobile liability policy is material to the obligation of the insurer. If the statement is expressly embodied in the policy as a "warranty," there is no dispute, for warranties are by definition essential terms of the contract, breach of which permits the insurer to avoid liability. 2 Richards, Insurance , § 305, pp. 1003-06 (5 th ed. 1952). "Representations," on the other hand, whether contained in the policy itself or merely in the applicant's declarations preparatory to issuance of the policy, will only invoke forfeiture of the insured's rights if they are untruthful, material to the particular risk assumed by ...