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Szelc v. Stanger

2010 WL 551200 (U.S. Dist. Ct. D. N.J. 2010) (Unpublished)

INSURANCE — An insurer’s duty to defend, unlike the duty to reimburse or indemnify, does not turn on the actual facts of the case, but turns on whether the complaint states a claim that could possibly trigger indemnification or reimbursement.

A dispute arose between an individual, who was a defendant in an underlying action, and a title company, who was a third-party defendant that allegedly owed the individual a duty to defend. The underlying suit alleged fraud, conspiracy, racketeering, and other unlawful acts against the individual related to “a sham sale-leaseback scheme designed to strip equity from [a homeowner’s] home.” The United States District Court held that the title company had a duty to defend on some, but not all, of the claims made against the individual as its insured. The title company filed a motion to reconsider, believing that it did not owe any duty on any of the claims. The individual responded by asserting that the title company owed him a duty to defend on all of the claims.

The District Court denied both motions, holding that: (a) those claims alleging knowing wrongdoing on the part of the individual were subject to a policy exclusion, i.e. the title company did not have a duty to defend; but (b) the duty to defend exists whenever there is a possibility that the insurer may be liable to compensate its insured for the underlying claims, i.e., the title company could be liable on those claims that did not allege the individual’s knowledge of or participation in the forgery scheme. For example, Counts III and IV of the underlying complaint depended on a showing that the individual failed to make certain disclosures required by the Truth in Lending Act. The Court held that the statute did not require the insured to knowingly or purposefully fail to make those disclosures. Therefore, it was possible that the individual could be liable on these counts without being aware of their unlawful activity. Count V alleged the individual failed to exercise due care in making certain disclosures. The Court held that such a failure was akin to negligence, and did not require proof that the insured acted deliberately or knowingly. Count IX added a request for equitable relief, and to the extent such relief was predicated on other “covered” claims, the Court held that such a request was similarly within the coverage of the policy. Finally, Count X sought to rescind certain transactions on the basis that they were “so one sided as to be … unconscionable.”

The Court held that these claims might be proven simply by showing that the terms of the transaction were grossly unreasonable - which does not require a showing that the insured knowingly created a voidable contract. The Court noted that the proofs at trial might be that the insured did knowingly create or allow the alleged violations, in which case the title company would likely be not liable to indemnify and reimburse its insured for any award based on these counts. The Court ruled that the duty to defend – unlike the duty to reimburse or indemnify – does not turn on the actual facts of the case, but turns on whether the complaint states a claim that could possibly trigger indemnification or reimbursement. Any claim to the contrary, the Court declared, would frustrate the purpose of an insurance contract that includes a duty to defend. Further, it held that the party bringing the action cannot eliminate the individual’s right to an insurer-provided defense on otherwise covered claims by making additional allegations of intentional misconduct. For purposes of assessing an insurer’s duty to defend, the Court looked to the allegations and stated it would only deny coverage if it wa
s clear that under no set of circumstances would the individual be entitled to coverage. The Court also held that the general rule is that when an insurer wrongfully refuses to defend an action and is then required to reimburse the insured for its defense costs, its duty to reimburse is limited to allegations covered under the policy, provided the defense costs can be apportioned between covered and uncovered claims. When the defense costs cannot be apportioned, the insurer must assume the entire cost of defense. Here, the Court presumed that the parties could work out how the defense costs should be apportioned, and, if they were unable to agree, the lower court would be able to arrive at a fair division of costs.

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