Following the trend of cases across the country, the New Jersey Superior Court has found that settling a case without the consent of the insurer, when the insurer provides a qualified defense under a reservation of rights, does not necessarily violate policy's consent clause.
The unpublished decision of the New Jersey Superior Court in Phibro Animal Health Corp. V Nat'l Union Fire Ins. Co., No. A-5589-13T3. 2016 N.J. Super, affirms the ability of an insured to settle a case when the insurer refuses to consent when coverage is uncertain.
In Phibro Animal Health Corp. V Nat'l Union Fire Ins. Co., the insured produced a veterinary drug designed to prevent a specific disease in chickens. While the drug was effective in preventing the disease, it had the unintended consequences causing a significant decrease in feed consumption and poor conversion of the feed the birds consumed to meat, which resulted in stunted growth.
Phibro put Chartis, an affiliate of National Union and hereinafter referred to as National Union, on notice and soon after advised National Union the potential damages exceeded the $2Mil limit of liability. National Union initiated an investigation under a reservation of rights.
Phibro requested permission to settle with one claimant (Customer A). National Union refused to consent as the damages were yet undefined. Phibro proceeded to settle with Customer A and later, National Union verbally informed the insured of their intent to deny coverage for all claims and losses reltated to production of the drug.
In January 2012, Phibro filed a complaint seeking a declaratory judgment of coverage, and alleging breach of contract and bad faith.
While the DJ was pending, customer B filed an action in another state alleging breach of expressed and implied warranties, negligence and strict liability. National Union defended under a reservation of rights and moved for summary judgment seeking a declaration of no coverage. Phibro cross-moved seeking a declaration in favor of coverage.
The trial court ruled in favor of National Union and Phibro appealed. While the appeal was pending, Phibro settled with customer B and now Customer C.
While not addressing the application of all exclusionary language or the reasonableness of the settlements, the appellate court reversed the grant of summary judgment for National Union, found the circumstances to be an occurrence and the damages to be property damage. Then then remanded this to the trial court on the issues of exclusionary language and other issues. The appellate court held:
"When Phibro settled with Customer A, approximately two and one-half months had already passed since Phibro submitted its notice of claim to National Union and it had not yet received a response. Given this delay, the record sufficiently reflects that Phibro did not act in bad faith when it settled with Customer A, especially since the reasons asserted in the trial court and now on appeal by National Union for denying the claim should have been immediately known to National Union.
...Phibro was uncertain if National Union would cover the claim. In that situation, Phibro made a reasonable business decision to settle, to ensure continued relations with an important customer and to avoid the risks and costs of litigation."
These comments illustrate the growing trend of courts to allow an insured who is faced with an uncertainty of coverage to resolve the case directly with the claimant/plaintiff. Consent of the insurer is not required.
It is also important to note the Phribo request permission to settle and was refused. The settlement was not affected without any notice to the insurer
1.The appellate court did not address if National Union had a reasonable basis for a denial of coverage.
2. Coverage decisions must be timely
3. Seeking consent of the insurer to settle is wise
4. Decide if it is better to issue an ROR or a disclaimer, the end result may be the same.