N.J. Appellate Division Affirms Granting of Summary Judgment to National Union Upholding Application of Insured vs. Insured Exclusion with no Requisite Showing of Collusion

06.22.17

In a case of first impression in New Jersey, the New Jersey Appellate Division affirmed in a published decision on June 21, the granting of summary judgment to National Union Fire Insurance Company of Pittsburgh, PA. The case represented the first decision in New Jersey interpreting an Insured vs. Insured exclusion in a Directors and Officers (D&O) liability insurance policy. In its decision, the Appellate Division rejected the contention of National Union's insured that proof of collusion is a prerequisite to application of the exclusion.

In Abboud v. Nation Union Fire Insurance Company of Pittsburgh, PA , ( A-3434-14T1) (June 21, 2017), Plaintiff Michael Abboud initially sued Monarch Medical PET Services LLC and four of its members and managers, alleging that they removed him from Monarch's Board of Managers and from his position as its Chief Executive Officer. In their responsive pleadings, Monarch and the individual defendant directors and officers asserted various counterclaims against Abboud. As a result, Abboud subsequently sought a defense and indemnity from National Union against the counterclaims. National Union ultimately denied coverage based upon the presence of an Insured vs. Insured exclusion within the insureds' policy. Abboud filed a declaratory judgment action against National Union which was ultimately dismissed by way of the granting of summary judgment in favor of National Union.

On appeal, Abboud argued that the trial court erred in granting summary judgment because National Union could only rely upon the "Insured v. Insured" exclusion upon a showing of collusion between Abboud and the other Director and Officer counterclaimants. Abboud asserted that the existence of collusion (or lack thereof) presented a genuine issue of material fact precluding the granting of summary judgment to National Union as a matter of law. Abboud also contended that: 1. enforcing the exclusion would frustrate his reasonable expectations of coverage as an insured under the D&O Policy; 2. National Union was estopped from denying coverage based upon its alleged failure to immediately respond to a November 2013 "Notice of Claims Covered" letter from Abboud's counsel; 3. summary judgment was premature because discovery remained pending; 4. the Court should have sua sponte found coverage under the National Union policy's EPL section.

In its review of the granting of summary judgment to National Union, the Appellate Division reaffirmed New Jersey's rules of construction that apply to insurance policies in general, and exclusionary clauses in particular. The Appellate Division ruled that the policy "plainly and unambiguously bars coverage because the counterclaims against Abboud literally fall within the "insured vs. insured exclusion." The Court rejected the plaintiff's contention that proof of collusion between insureds is a prerequisite to application of the "Insured vs. Insured" exclusion. As New Jersey Courts had not previously addressed this question, Abboud relied upon several unpublished decisions from other jurisdictions suggesting that proof of collusion is a prerequisite to applying the "Insured vs. Insured" exclusion. The Appellate Division determined not to rely upon the out-of-state unpublished decisions, and instead agreed with the view that proof of collusion is not a prerequisite to application of the exclusion which the Court found to be "more persuasive and more consistent with our rules of construction." The Court likewise recognized and adopted Judge Richard Posner's rationale in Level 3 Communications v. Fed. Ins. Co., 168, F. 3rd. 956, 958 (7th Cir. 1999), who determined the argument that collusion must be established "confuses a rule with its rationale..." Id. at 958. The Appellate Division similarly ruled that the historical and drafting underpinning of the exclusion (which suggested that the exclusion was designed, in part, to preclude collusive suits amongst directors and officers) would not require the Court to deviate from the exclusion's plain and literal language by requiring an insurer to prove collusion in the absence of express language limiting the exclusion's application to such circumstances. Finally, the Court found no basis not to enforce the exclusion's literal terms based upon Abboud's alleged "reasonable expectations" of coverage, as the policy language is straightforward and "is not so confusing that the average policy holder cannot make out the boundaries of the coverage."

The Court, in rejecting the remainder of the plaintiff's arguments, ruled that they lacked sufficient merit to warrant extended discussion. National Union Fire Insurance Company of Pittsburgh, Pa., was represented by Andrew L. Indeck, Esq., and Jane S. Kelsey, Esq., Partners in the Bedminster, N.J., office of Weber Gallagher.

Comment: In a case of first impression in New Jersey, the Appellate Division considered an "Insured vs. Insured" exclusion, and held that despite the historical underpinnings of the development of this exclusion, proof of collusion is not a prerequisite to applying the exclusion. Furthermore, the Court reinforced an important rule of policy construction, to wit, if the plain language of a policy exclusion is clear and unambiguous, it will be enforced as written.

For more information, please contact Andrew L. Indeck at aindeck@wglaw.com or 973.854.1064 or Jane S Kelsey at jkelsey@wglaw.com or 973.854.1078.

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