On certification to the Superior Court, Appellate Division, whose opinion is reported at 175 N.J. Super. 501 (1980).
For affirmance in part and reversal in part -- Chief Justice Wilentz and Justices Pashman, Schreiber, Handler, Pollock and O'Hern. For reversal -- Justice Clifford. The opinion of the Court was delivered by Handler, J. Clifford, J., dissenting.
[88 NJ Page 352] William Bertram, a teenaged boy, became involved in a fight with another minor, Clinton Griggs. Anticipating the possibility of a claim, Bertram promptly notified his insurance carrier of the incident. Some months later such a claim was made and turned over to the carrier. Over a year later a personal injury suit was started by Griggs against Bertram and the formal complaint was referred to the insurance carrier. Only after receiving the complaint, did the insurer first advise its insured there was no coverage because the claim involved an intentional tort excluded under the policy. The insurer waited to disclaim despite its earlier awareness that the injuries were sustained in a fight and that the resultant claim against its insured might not be covered under the policy. Bertram then assumed responsibility
for his own defense against Griggs' action and also filed a third-party action against the insurer, asserting that the carrier was estopped from denying coverage because of the delay in disclaiming liability. Following a settlement of the personal injury action, Bertram also sought recovery from the carrier for the amount settled, which the carrier refused. These claims, relating to estoppel and the enforceability of the settlement, constitute the major issues on the present appeal.
The underlying facts are relatively simple. The fight between Bertram and Griggs occurred on May 4, 1974 while both were attending a basketball game at Monroe Township School No. 4. As they were leaving the game, Griggs pushed a friend of Bertram and the two exchanged some fighting words and blows. There is no clear indication from the record as to the nature and extent of the injuries to Griggs. Shortly after this incident, Bertram gave his insurance carrier, Franklin Mutual Insurance Company (Franklin Mutual), notice of a possible claim. During August 1974, Franklin Mutual sent an investigator to interview Bertram, who admitted that he had punched Griggs twice. Thereafter, Griggs made an actual claim for personal injuries, which claim Bertram forwarded to Franklin Mutual on December 4, 1974. At no time after learning of the incident did Franklin Mutual seek or interview other witnesses, nor did it make any efforts to obtain a physical examination of Griggs. Moreover, Franklin Mutual gave no indication that any potential claim or legal action arising from this incident would not be covered under the policy or that it would disclaim coverage in the event such a claim or action were brought.
In January 1976, approximately 17 months after Franklin Mutual had first investigated the claim, Bertram was served with a summons and complaint filed by Griggs for his personal injuries.*fn1 Upon its receipt, Bertram promptly forwarded the
complaint to Franklin Mutual, which, on February 23, 1976, disclaimed coverage, relying on the intentional tort exclusion in the insurance policy. Bertram hired his own attorney and filed an answer to Griggs' complaint. Bertram also initiated a third-party action against Franklin Mutual seeking to hold the carrier responsible under the insurance policy. Thereafter Franklin Mutual sent letters to Bertram's attorney requesting it be kept informed of the status of the original action, including the scheduling of any physical examination or deposition of Griggs.
Before trial of the personal injury action, Griggs and Bertram arrived at a settlement following negotiations in which Franklin Mutual did not participate. The settlement provided that a judgment in the amount of $9,000 would be entered in favor of Griggs. Griggs agreed not to enforce this judgment against Bertram, who assigned to Griggs his interest in the third party action, which the latter agreed to pursue against Franklin Mutual as the exclusive means of satisfying the judgment. Further, Griggs agreed to furnish a warrant of satisfaction of the judgment entered against Bertram, regardless of the outcome of the third-party action. A consent judgment based on this agreement was entered.
At the trial of the third-party complaint, Bertram admitted that he had committed an intentional tort and conceded that his claim was not covered by the terms of the insurance policy. Nevertheless, the trial court held that Franklin Mutual was liable. 163 N.J. Super. 87 (Law Div. 1978). The court determined that the carrier's failure to notify Bertram promptly of its intention to disclaim estopped it from denying coverage. It also ruled that, in order to avoid paying the amount of the consent judgment against Bertram, Franklin Mutual had the
burden of showing that the settlement between Griggs and Bertram was unreasonable. After holding another hearing, the trial court found that Franklin Mutual had failed to sustain this burden of proof. Accordingly, the court entered a judgment in favor of Bertram in the amount of $9,000, payable to Griggs, and $2,185 for counsel fees and costs. Franklin Mutual's motion for a new trial was denied and it appealed to the Appellate Division, which affirmed substantially for the reasons set forth by the trial court. 175 N.J. Super. 501 (1980). Franklin Mutual then successfully petitioned this Court for certification. 85 N.J. 476 (1980).
The principal issue in this case is whether the insurance carrier, having failed for a substantial period of time to notify its insured of the possibility of noncoverage, was estopped to deny coverage of the claim against its insured.*fn2 The trial court acknowledged that Franklin Mutual had a right under the policy to disclaim coverage, as recognized by the case of Burd v. Sussex Mutual Ins. Co., 56 N.J. 383 (1970). However, according to the court, the carrier failed in its duty promptly to notify the insured of its disclaimer so that he could undertake his own investigation and preparation. 163 N.J. Super. at 93-94. The court also determined that under New Jersey case law, given the "equitable nature of estoppel, actual prejudice is presumed and need not be proven by the insured." Id. Consequently, the court ruled that Franklin Mutual was estopped from availing itself of any of the terms of the policy. Id. at 95.
Under certain circumstances an insurance carrier may be estopped from asserting the inapplicability of insurance to a
particular claim against its insured despite a clear contractual provision excluding the claim from the coverage of the policy. The strongest and most frequent situation giving rise to such an estoppel is one wherein a carrier undertakes to defend a lawsuit based upon a claim against its insured. If it does so with knowledge of facts that are relevant to a policy defense or to a basis for noncoverage of the claim, without a valid reservation of rights to deny coverage at a later time, it is estopped from later denying coverage. Merchants Indemnity Corp. v. Eggleston, 37 N.J. 114, 127-129 (1962); O'Dowd v. United States Fidelity & Guaranty Co., 117 N.J.L. 444, 451-452 (E. & A. 1937); cf. Sussex Mutual Ins. Co. v. Hala Cleaners, Inc., 75 N.J. 117, 125 (1977) (estoppel not raised where insured was well aware of dispute over coverage notwithstanding insurer's taking legal action for benefit of insured as well as itself).
The rationale behind estoppel in this context is that once the insurer has acknowledged the claim and assumes control of the defense, the insured is justified in relying upon the carrier to protect it under its policy and to be responsible for any judgment against it. See Eggleston, supra, 37 N.J. at 127. The insured's justifiable reliance arises from the insurer's contractual right to control the defense under the policy. In assuming this contractual right of control, the insurer preempts its insured from defending itself. If the insurer could later repudiate its responsibility and ultimate liability under the policy, it would in effect have left its insured defenseless or seriously hampered in its ability to protect itself. That resultant inequity is a necessary ingredient of an estoppel.
The same reasoning has impelled the conclusion that a carrier may be estopped if it assumes control of a case prior to the filing of a complaint with knowledge of facts on which to disclaim coverage but without any reservation of the right later to do so. Sneed v. Concord Ins. Co., 98 N.J. Super. 306, 320 (App.Div.1967); Hanover Ins. Group v. Cameron, 122 N.J. Super. 51, 65-66 (Ch.Div.1973). In each of these situations -- the control of a case
before litigation and the assumption of a defense after litigation -- the conduct of the insurer forecloses independent or parallel action by the insured to defend itself. In either situation the insured is effectively precluded from acting in its own interest under the policy. Hence, an estoppel properly bars the carrier from later asserting it had no responsibility to protect the insured under the policy.
The specific issue in this appeal is whether these principles of estoppel apply where the insurer has neither assumed the actual control of a case nor undertaken the preparation of any defense on behalf of the insured, but instead has failed for an unreasonable period of time to inform its insured of the possibility of a disclaimer of coverage, notwithstanding the insurer's early notification of a possible claim and awareness of grounds for disclaimer.
Upon the receipt from its insured of a claim or notification of an incident that may give rise to a claim, an insurer is entitled to a reasonable period of time in which to investigate whether the particular incident involves a risk covered by the terms of the policy. See Bonnet v. Stewart, 68 N.J. 287, 296-297 (1975); Jones v. Continental Casualty Co., 123 N.J. Super. 353, 357 (Ch.Div.1973). But once an insurer has had a reasonable opportunity to investigate, or has learned of grounds for questioning coverage, it then is under a duty promptly to inform its insured of its intention to disclaim coverage or of the possibility that coverage will be denied or questioned. See Eggleston, 37 N.J. at 131; Bonnet, 68 N.J. at 297; Sneed, 98 N.J. Super. at 320; Ebert v. Balter, 83 N.J. Super. 545 (Law Div.1964).
Unreasonable delay in disclaiming coverage, or in giving notice of the possibility of such a disclaimer, even before assuming actual control of a case or a defense of an action, can estop an insurer from later repudiating responsibility under the insurance policy. Cf. Bonnett, supra (while the Court spoke in terms of insurer's "retention of control of ...