On certification to the Superior Court, Appellate Division.
For affirmance -- Chief Justice Wilentz, and Justices Clifford, Schreiber, Handler, Pollock, O'Hern and Garibaldi. For reversal -- None.
[98 NJ Page 20] The Appellate Division affirmed the judgment in favor of defendant, Aetna Life & Casualty Insurance Company, substantially for the reasons set forth in the comprehensive written opinion of Judge Skillman. We granted plaintiff's petition for certification and likewise affirm substantially for the reasons
expressed by Judge Skillman. His unpublished opinion reads in pertinent part as follows:
This case involves a claim on a liability policy of insurance issued to Tilden-Yates Laboratories, Inc. (Tilden-Yates) by defendant, Aetna Life & Casualty Insurance Company (Aetna), for the amount paid in satisfaction of the judgment in Sherman v. Tilden-Yates Laboratories, Inc., L-7774-74, as well as the costs of defending that suit. The plaintiff is Hartford Accident & Indemnity Company (Hartford), which defended and paid the judgment entered against Tilden-Yates and thereby became subrogated on Tilden-Yates' claim against Aetna. The total amount of the claim is $282,025.24, consisting of $198,262.17 paid in satisfaction of the judgment, counsel fees of $64,623.07 and other litigation costs of $19,140.
The theory of liability in the Sherman action, which must be accepted in the present case as having been established (See N.J. Evid. R. 63(21)), was that Tilden-Yates failed to adequately warn Dr. Donelson R. Manley of the dangers of using Atropisol, a product manufactured by Tilden-Yates, that that failure was a substantial factor influencing Dr. Manley's decision to dispense the drug to two-and-a-half year old Ann Marie Sherman and that her ingestion of the drug was a proximate cause of her consequent physical injuries.
The present lawsuit had its genesis in the fact that Aetna provided liability coverage to Tilden-Yates during part of the time period relevant to the Sherman claim while plaintiff Hartford provided coverage during another part of that time period. Aetna provided coverage as of February 4, 1971, which is the date on which Atropisol was dispensed to the parents of Ann Marie Sherman, and that coverage remained in effect through February 10, 1971. Hartford assumed coverage of Tilden-Yates on February 11, 1971 and that coverage remained in effect through February 21, 1971, which was the date on which the personal injuries to Ann Marie Sherman first manifested themselves. There is a substantial question whether Atropisol was actually administered to Ann Marie Sherman on or before February 10, 1971, that is, within the coverage period of the Aetna policy, and if so, whether the administration of the drug had any immediate effect upon her.
One theory advanced by Hartford is that, regardless of when the drug was actually administered or caused bodily injury to Ann Marie, Aetna should be held liable for 50% of the amount of the judgment and defense costs because it breached its duty to defend Tilden-Yates and such a breach imposes liability upon Aetna as a matter of law. The factual basis for this theory is that the complaint in the Sherman action alleged that the events establishing the liability of Tilden-Yates occurred "in and about the month of February 1971." The legal foundation for Hartford's theory is the line of cases which say that the existence of a duty to defend is determined by whether the allegations of a complaint, upon its face, fall within the coverage provided by an insurance policy. See, e.g., The Ohio Cas. Ins. Co. v. Flanagin, 44 N.J. 504 (1965).
The trial began on August 30, 1982 and was continued on September 1, 1982. * * * At the close of Hartford's case Aetna moved to dismiss. * * * The court at that time indicated that it would file a written opinion detailing its reasons * * * for dismissing at the close of plaintiff's case.
The starting point in evaluating any claim that an insurer has breached a duty to defend its insured in litigation must be the policy of insurance. The duty to defend is not a product of statute or of common law. It is solely a contractual undertaking of the insurer and it can be as limited or as broad as the insurer sees fit to provide through its policy. Indeed, an insurance policy may provide indemnification for loss without any duty to defend litigation. Therefore, the source for any claim that Aetna breached its duty to defend must be those provisions of the policy of insurance issued to Tilden-Yates which delineate the scope of that duty.
Although the source of any duty of Aetna to defend Tilden-Yates must be the policy of insurance issued Tilden-Yates, a copy of that policy could not be located by either Aetna or Tilden-Yates and hence was not offered in evidence at trial. However, the parties have submitted the case to the court on the basis of a stipulation that the policy issued Tilden-Yates included the standard "duty to defend" clause contained in Aetna's Comprehensive General Liability Insurance policies, copies of which have been submitted to the court. This clause is appended to the sentence describing the insurer's general duty to indemnify the insured and must be read in that context to be understood. The pertinent policy language reads as follows:
The company will pay on behalf of the Insured all sums which the insured shall become legally obliged to pay as damages because of . . . bodily injury . . . to which this insurance applies, caused by an occurrence, and the company shall have the . . . duty to defend any suit against the insured seeking damages on account of such bodily injury. . . even if any of the allegations of the suit are groundless, false or fraudulent . . . [Emphasis added].
It is evident on the face of the "duty to defend" clause that the duties to indemnify and to defend are closely related and that neither duty exists except with respect to occurrences for which the policy provides coverage. It is irrelevant to the duty to defend whether the suit is well founded or groundless (Danek v. Hommer, 28 N.J. Super. 68 (App.Div.1953) aff'd o.b. 15 N.J. 573 (1974)), but the duty extends only to claims within the coverage of the policy. Stated another way, the duty to defend extends only to claims on which there would be a duty to indemnify in the event of a judgment adverse to the insured.
The cases in this state dealing with "duty to defend" clauses in insurance policies provide firm support for this interpretation. The leading case is Burd v. Sussex Mutual Ins. Co., [56 N.J. 383] supra. See also Williams v. Bituminous Cas. Corp., 51 N.J. 146 (1969). The fact pattern in Burd was somewhat similar to the present case. The plaintiff was an insured who called upon his insurer to defend a claim, was refused and then had a verdict entered against him. The complaint which had been filed against the insured alleged both
negligence, which was within the coverage of the policy, and an intentional tort, for which there was no coverage. The insured's theory, which the trial court accepted, was that the insurer had a duty to defend the insured because one count of the complaint fell within the coverage of the policy and that after refusing to provide such defense, the insurer was foreclosed from contending that the judgment was predicated upon an ...