On appeal from Superior Court of New Jersey, Law Division, Essex County, L-1019-95.
Before Judges Baime, Newman and Fall.*fn1
The opinion of the court was delivered by: Baime, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 20, 2001
These appeals present questions concerning the extent to which an insurer who declines to defend a claim against its insured is bound by a settlement agreement entered into by its insured and the injured third party. Also at issue are coverage questions pertaining to the insurance policy issued by the insurer. In separate proceedings, the Law Division concluded: (1) plaintiffs, to whom the rights of the insured were assigned, failed to satisfy their burden of producing evidence that the settlement agreement was reasonable and untainted by bad faith, and (2) the insurer was estopped from denying coverage on grounds that were not presented in its pre-settlement letter disclaiming liability. Plaintiffs appeal from the first holding, and the insurer appeals from the latter. We affirm the judgment entered.
Plaintiffs are the five surviving children of Dorthea Coleman. On February 18, 1993, Coleman was to be laid to rest at Rosemount Memorial Park. Due to excessive rains, the grave contained approximately three feet of water. As the casket was lowered into the grave, it tilted and sank to the bottom. Apparently, cemetery workers were less than cooperative in attempting to re-attach the burial equipment so that the casket could be retrieved because they feared that the grave might "cave in" due to the water content of the surrounding soil. When the casket was pulled from the grave, it was discovered that water had seeped into the structure. Coleman's body was "reconditioned" before being buried at another site.
Plaintiffs brought suit against Rosemount, seeking damages for emotional distress. Rosemount notified its insurer, Pennsylvania Millers Mutual Insurance Company (Penn Millers) who declined the claim on the grounds: (1) the incident involving the casket did not constitute an "occurrence" as defined by the policy, (2) coverage was rendered nugatory by the professional liability exclusion, and (3) Rosemount did not report the accident in a timely manner.
On July 24, 1996, plaintiffs and Rosemount entered into a settlement agreement in the amount of $500,000. Rosemount agreed to pay plaintiffs $30,000. Rosemount's rights against Penn Millers were assigned to plaintiffs. Plaintiffs were to pay Rosemount one-third of the amount they recovered against Penn Millers or $30,000, whichever was less. Rosemount's $30,000 payment and plaintiffs' agreement to return that amount if it were successful in its suit against Penn Millers were to be kept confidential. No similar confidentiality agreement was entered into with respect to plaintiffs' $500,000 settlement with Rosemount. Indeed, plaintiffs' attorney indicated it was anticipated that the settlement agreement with Rosemount would be given some publicity and thus serve as a "wake-up call."
A consent judgment was entered in favor of plaintiffs against Rosemount. Penn Millers moved to set aside the judgment on the ground that it was "collusive." Based upon the documentary submissions, the Law Division granted Penn Millers' motion. In reaching its conclusion that the settlement agreement was tainted by bad faith, the court stressed that no medical or psychological reports had been prepared supporting plaintiffs' claim for emotional distress damages. The court also emphasized that Rosemount was willing to enter into a publicly disclosed consent judgment against it for $500,000, but insisted on keeping secret its payment of only $30,000 to plaintiffs, which payment was to be returned if plaintiffs were successful in their action against Penn Millers.
The coverage questions raised by Penn Millers were decided in separate proceedings. The court initially concluded from the documentary submissions that the incident involving the casket constituted an "occurrence" as defined by the policy. As to the reach of the professional liability exclusion, the court conducted a bench trial respecting whether, as urged by Penn Millers, the policy language should be reformed. At the conclusion of the trial, the court found no basis for Penn Millers' request for reformation.
Penn Millers moved for summary judgment, contending that plaintiffs' claim for emotional distress did not allege "bodily injury," and thus was not covered by the insuring agreement. Plaintiffs responded that Penn Millers had not previously declined liability on this basis and was, therefore, estopped from asserting that the claim was not covered under the policy. A hearing was conducted on this issue. Penn Millers introduced a series of letters which, it argued, provided Rosemount with actual and constructive notice of its declination on the ground that the underlying claim did not allege "bodily injury." Penn Millers also argued that its declination letter contained a "catch-all phrase" which reserved its right to deny liability "[f]or the reasons given and for any other good and valid reason that may come to light . . . ."
Following its review of these documents, the court held that Penn Millers was estopped from declining liability on the basis that plaintiffs' underlying claim did not allege "bodily injury." The court stressed that this ground for denying coverage had not been urged prior to the settlement. The court determined that Penn Millers could not decline liability on this basis after plaintiffs and Rosemount had changed their positions by entering ...