New Jersey’s Appellate Division recently issued an unpublished decision in C.M.S. Investment Ventures Inc. v. American European Ins. Co., in which it affirmed a trial court’s grant of declaratory judgment to C.M.S. Investment Ventures (“CMS”), a policyholder with American European Insurance Company (“AEIC”). The declaratory judgment action arose when CMS, which owned an apartment building, faced a claim by one of its tenants/residents pertaining to a sexual assault. The claimant alleged that CMS had been put on notice of a window that didn’t lock, and failed to correct the issue, thus allowing the sexual assault to occur.
After becoming aware of the incident, the insured put its insurance carrier on notice, and the carrier began investigating the claim. The policy at issue contained a commercial general liability form, with several endorsements. One such endorsement related to assault and battery claims, and it provided the following exclusion:
“We will not provide any coverage under this policy for any claim, demand or suit based on Assault and Battery, or out of any act, actual or alleged, or omission in connection with the prevention or suppression of such acts, whether caused by or at the instigation or direction of any “insured”, their employees, patrons or any other person or entity.”
After the liability carrier received a request for reimbursement of medical payments from the claimant, the adjuster denied coverage and invoked an exclusion under the policy for medical payments incurred as a result of an injury sustained on a normally occupied premises. The adjuster then closed the claim file without informing the insured. Nine months later, CMS was sold to a third party, with no reference to the pending claim for sexual assault in the contract for sale because the insured assumed that the claim had been resolved. Three weeks after the sale, the claimant’s attorney sought to initiate a claim for liability under the policy. Three months later, suit was filed. On April 6, 2015, the carrier disclaimed coverage, and characterized the lawsuit as an allegation of assault and battery, excluded by the above-cited clause. CMS, in turn, filed a declaratory judgment action in 2016 seeking defense and indemnification. CMS moved for summary judgment, arguing that the assault and battery exclusion was ambiguous, and that the carrier, AIEC, should be estopped from denying coverage. The trial judge agreed, explaining that the phrase “based on assault and battery” was ambiguous and capable of limitless meaning, and thus should be construed in favor of the insured. The judge also ruled, alternatively, that even if the exclusion was unambiguous, the claimant’s claim sounded in negligence, not in assault and battery.
In coverage disputes between policyholders and insurance carriers, New Jersey courts “give special scrutiny” to insurance contracts “because of the stark imbalance between insurance companies and insureds in their respective understanding of the terms and conditions of insurance policies.” Zacarias v. Allstate Ins. Co., 168 N.J. 590, 594 (2001). Courts will enforce insurance contracts as written, unless the language of the contract is ambiguous. If a contractual term is ambiguous, the ambiguity will be construed in the insured’s favor. Katchen v. Gov’t Emp. Ins. Co., 457 N.J. Super. 600, 605 (App. Div. 2019). In New Jersey, an insurance carrier’s duty to defend is based upon the allegations contained in a complainant’s pleadings, which should be reviewed with liberality to ascertain whether the insurer will be obligated to indemnify the insured if the allegations, as pleaded, are sustained.
The Appellate Division disagreed, to some degree, with the trial court’s findings. In particular, on appeal the court determined that the “based on” language did not have limitless meanings, but rather plainly “applies to claims, demands or suits where “Assault and Battery” forms or serves as the claim’s foundation.” Citing Flomerfelt v. Cardiello, 202 N.J. 432, 444 (2010), the court determined that injuries “can have several proximate causes, and when one cause is excluded under an insurance policy, it does not necessarily mean all causes of the injury are excluded.” Because the claimant was asserting a premises liability theory – one sounding in negligence – the “based on” exclusion did not bar coverage. If the claims were based only on the sexual assault, however, the court ruled that the exclusion would apply.
Moreover, the Appellate Division found that the insurer’s neglect in not promptly notifying the insured of disclaimer of the policy supported a finding for defense and indemnification of the insured on the doctrine of estoppel. Though the insurer was entitled to a reasonable amount of time to investigate the claim, the Court found that they had acted unreasonably by being aware of the sexual assault and failing to timely render a decision to the insured regarding coverage – taking some twenty (20) months. Thus, the insurer’sactions compelled the court to find that the insured was entitled to defense and indemnification of the claim against it by the plaintiff.
Although the decision is unpublished, it is a helpful guide to how New Jersey courts will examine similar exclusions in the future, and a reminder of the policyholder-friendly jurisprudence of the State. For more information on this topic, please contact MKC&I’s Tom Emala at (973) 822-1110. Special thanks are in order to MKC&I’s Summer Associate Angel Hierrezuelo for editorial and research work on this article.