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Hebela v. Healthcare Insurance Company

370 N.J. Super. 260, 851 A.2d 75 (App. Div. 2004)

EMPLOYER-EMPLOYEE; INSURANCE—Even though an employer’s director’s and officer’s insurance policy, as to a company officer, precludes coverage for a claim by one officer or director against another, the carrier is still required to provide coverage to a officer for defense of a suit against the officer by his or her employer.

A hospital’s chief financial officer sued the hospital alleging he was terminated in violation of both the Conscientious Employee Protection Act (CEPA) and the Law Against Discrimination (LAD). The hospital counterclaimed, alleging that its employee was incompetent and was otherwise negligent in the performance of his duties. The employee’s insurance company refused to provide a defense to the hospital’s counterclaim because it was also the hospital’s insurance company. The employee filed an amended complaint seeking consequential damages and a determination that the insurance company was obligated to defend him. The lower court found that the insurance company owed the employee a defense and awarded him damages in the entire amount of his counsel fees.

The Appellate Division affirmed the lower court’s decision, holding that the hospital’s directors’ and officers’ liability policy obligated the insurer to pay on behalf of an insured person as a result of any claim made against him or her for a wrongful act during the policy period. “The policy excluded claims made by any director, officer or trustee against any other director, officer or trustee,” but didn’t exclude claims by the hospital against its ex-employee.

Notwithstanding the policy’s language, the insurance company argued that an extrinsic public policy precluded coverage. The Court disagreed, holding that when an insurance policy is clear, it must be enforced as written. A Court cannot make a better contract for the parties than they themselves had made. Although a court will not enforce contracts contrary to public policy, the Appellate Division held this was not such a case. It rejected the insurance company’s argument that a finding in favor of the employee would result in the triggering of coverage on behalf of one insured in a claim brought against another insured. The Court granted that such was the case here, but held that the insurer failed to identify what New Jersey public policy that would have been violated. The Court acknowledged that a corporate director could not obtain coverage for a claim brought by the corporation or other directors when the director is sued for actions outside the scope of his duties as a director, but that is not what had happened. The hospital’s counterclaim alleged acts performed in the course of its ex-employee’s duties.

As to the counsel fees, the Court held that when an insurer refuses to defend what is ultimately determined to be a covered claim, the insured is entitled to the recover damages proximately caused by that failure, generally counsel fees and expenses. The insurance company’s duty to reimburse is limited to allegations covered under the policy, and defense costs can be apportioned between covered and non-covered claims. If the costs cannot be apportioned, the insured must assume the cost of the defense for both covered and non-covered claims. But, apportionment need not be exact. In fact, courts are rarely able to determine the exact allocation of defense costs with scientific clarity. With that as background, the Court set aside the lower court’s award of the ex-employee’s entire counsel fees. The insurance company was obligated to defend the counterclaim, but not to contribute to the fees and expenses to prosecute the ex-employee’s complaint.

The insurance company also contended that the fees were too high because the employee did not efficiently defend against the counterclaim. The Court rejected that argument because when the insurance company chose not to honor its obligation, it lost the ability to control how the counterclaim should have been handled. As long as the employee took objectively reasonable steps to defend against the counterclaim, the insurance company was required to pay the costs incurred.


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