HAMLIN, J.D.C. (temporarily assigned).
This is a motion for involuntary dismissal pursuant to R. 4:37-2(b) made at the close of third-party plaintiff's case on liability. The motion requires that the court review briefly the current state of the law involving suits between policyholders and "breaching" insurance carriers so as to rule on a specific point of first impression regarding the effect of an independent settlement between an original claimant and the policyholder in the face of a disclaimer by the insurance company. The case between the third-party litigants was tried to the court without a jury.
Prior to and as of May 4, 1975 Bertram, then an infant, was a person included in coverage pursuant to a homeowners' policy issued by Franklin. The policy required Franklin to defend and pay certain damages incurred by the policyholder. The policy contained two provisions which are at issue here. The first is the standard intentional tort exclusion.
On May 4, 1974 Bertram and Griggs attended a basketball game held by the Monroe Township school system. While outside the school building Griggs and Bertram exchanged more words than good sense. Youthful energy matched in equal amount by rashness prevailed, and in the following fight Bertram hit Griggs, knocking him to the ground and then hit him again. Timely notice was given to Franklin of the possible claim. Bertram was interviewed by Franklin's investigator during August 1974. During that interview Franklin's investigator secured from Bertram (then 16 years of age) an admission that his striking was intentional. At the conclusion of the interview there was no indication of an intention to disclaim. No other witnesses were interviewed or sought. Physical examination of the claimant was not sought or secured.
Subsequently Bertram received a claim and representation letter from Griggs' attorney which was forwarded in timely fashion to Franklin and received by it on December 4, 1974. Franklin undertook no investigative action. Indeed, Franklin did nothing after securing the admission that the tort was intentional. Franklin made no indication to Bertram of any intention to disclaim coverage. Shortly before the statute of limitations ran a complaint was filed by Griggs on January 16, 1976 seeking damages from Bertram, the Monroe Township Board of Education and Monroe Township. The latter two defendants were dismissed from the action on motion for summary judgment.
At the original trial call Griggs and Bertram, in the absence of Franklin, entered into a settlement agreement previously referred to. Pursuant to that agreement a consent order for judgment was signed by the judge who presided over the settlement negotiations, approving the settlement in favor of the infant plaintiff Griggs in the sum of $9,000. Thereafter the outstanding third-party action was assigned to the present court for resolution, resulting in this trial and the instant motion.
Bertram contends that Franklin's delay in advising him of its intention to disclaim for 18 months subsequent to its "investigation" estops Franklin from asserting any defense under the terms of the policy of insurance. Bertram specifically abandons any claim of coverage and concedes that the disclaimer by Franklin on the intentional tort exclusion, if made promptly or given in timely fashion, would have been valid. Franklin asserts that its disclaimer has not been shown by Bertram to be untimely or prejudicial on the evidence and, alternatively; that even if the disclaimer is not viable it may rely on the policy provision barring liability unless there was a settlement with company participation
The law regarding disclaiming insurance carriers and their liability therefor is not in itself novel. See, generally, Annotation, "Liability of Insurer on Refusal to Defend," 49 A.L.R.2d 694; 7A Appleman, Insurance Law and Practice, § 4687. It is well settled that an insurance carrier is not a favored party in litigation with its policyholders. Our courts have consistently held that as between a carrier and a policyholder all ambiguities are to be resolved in favor of the insured. Bryan v. Employers Surplus Lines Ins., 60 N.J. 375 (1972). Similarly, exclusionary clauses are to be resolved under the same principle. Butler v. Bonner & Barnewall, Inc., 56 N.J. 567 (1970).
Do the facts here make out a sufficient case to withstand a motion at the close of plaintiff's case, given the standard to be applied? See Dolson v. Anastasia, 55 N.J. 2 (1969).
Generally, an insurance carrier is under a duty upon notice of a possible claim to act diligently on behalf of its insured to investigate the facts of that claim, and if that investigation discloses a basis for the carrier to disclaim liability, it must notify its insured promptly. Failure to do so will estop the carrier from asserting the exclusion of coverage and permit the insured to recover from the carrier any damages along with costs and counsel fees. Merchants Indem. Corp. v. Eggleston, 37 N.J. 114 (1962).
Given the 18-month lapse between the "investigation" by Franklin and its disclaimer, with no indication or reservation in the interim that there was any reason for the
Assuming, then, that there exists a significant enough delay in disclaiming to give rise to the equitable doctrine of estoppel, must Bertram here show specific affirmative proof of actual prejudice? While it is true that a requirement of prejudice was enunciated in Merchants v. Eggleston, supra, it is clear that subsequent case law adopts the principle that by virtue of the equitable nature of estoppel, actual prejudice is presumed and need not be proven by the insured. Hanover Ins. Group v. Cameron and Sneed v. Concord Ins. Co., both supra. Thus, Bertram need not prove actual prejudice on its case in chief to defeat this motion.
Franklin argues that assuming the foregoing, its acts were mandated by and in conformity with the standards set forth in Burd v. Sussex Mutual Ins. Co., 56 N.J. 383 (1970), and it therefore is relieved of liability. Essentially, it is Franklin's position that since Burd prohibits a carrier from controlling the defense in a suit which sounds alternatively both in negligence and intentional tort, it was compelled to disclaim upon receipt of a complaint alleging an intentional tort. While such statement is accurate to that limited extent, it does not address the alleged breach of duty here: the failure to advise the insured in timely fashion so he could undertake necessary investigation and preparation
Must Bertram's claim be defeated because the settlement was not reached after "actual trial" or wherein there was Franklin's "participation"? The answer clearly is in the negative. By reason of its equitable nature, estoppel does not permit the carrier to avail itself of any of the terms of its contract of insurance which it has breached to defeat the interest of the insured. Firemans Fund Ins. Co. v. Security Ins. Co. of Hartford, 72 N.J. 63 (1976); N.J. Mfrs. Ind. Ins. Co. v. U.S. Cas. Co., 91 N.J.Super. 404 (App. Div. 1966).
Lastly, what is the legal effect of the settlement reached here between the infant plaintiff Griggs and Bertram? This is the point not heretofore addressed by our case law. Previous cases have held that while a carrier may be liable for a settlement reached by its insured with a claimant, it was entitled to question the fairness of such settlement. Burd v. Sussex Mut. Ins. Co.; Firemans Fund Ins. Co. v. Security Ins. Co., etc., and N.J. Mfrs. Ind. Ins. Co. v. U.S. Cas. Co., all supra. That proposition in the context of the instant case poses very specific questions. Who has the burden of proof as to reasonableness and fairness of a settlement not participated in by an insurer? How is the burden of proof sustained? What are the rights of inquiry accorded to an insurance carrier?
The long-standing judicial policy of the courts favors settlement. Honeywell v. Bubb, 130 N.J.Super. 130 (App. Div. 1974). Judicial and public policy also favor policyholders in disputes with insurance carriers by reason of their unequal
If the policyholder is required, as suggested by Franklin, to affirmatively prove the reasonableness of his settlement both as to liability and damages, it would, for all intents and purposes, negate the policy enunciated by our courts of permitting a policyholder to settle his claim and seek reimbursement from his insurance company. This conclusion is inescapable when one realizes that were it otherwise, a policyholder could at best only settle with a hope that some court at some other time might approve that evaluation of the case and that, in any event, the main claim would have to be subsequently tried fully to a court in the guise of determining reasonableness. To impose such a burden on the policyholder would discourage settlement so necessary to the orderly disposition of cases.
First, an offer to settle based on a subsequent contingency is not likely to encourage the desirable goal of settlement of disputes. Secondly, a claimant is not likely to avoid trial by settlement if in fact he must try his claim in the subsequent third-party action. Lastly, if the policyholder is to try the main claim in an affirmative manner, there is no purpose to fostering settlement. Settlement under such conditions would at best be problematical and subject to later "ratification."
In the instant matter there is a settlement of $9,000 entered into by the parties on behalf of an infant plaintiff and formalized by an order of judgment signed by the court. In the absence of fraud on the face of the agreement, giving weight to the judgment entered by the court and the policy considerations expressed, it is deemed that in the case at hand Bertram has the duty of going forward with the proof of settlement and, having done so, that settlement and order of judgment creates a rebuttable presumption of reasonableness and fairness.
Of course, defendant Franklin here has the right to inquire into the fairness and reasonableness of such settlement. Indeed,
Thus, as to the amount of settlement entered into in favor of the original plaintiff Griggs, the motion of Franklin for involuntary dismissal must be denied. As to the issue of attorney's fees and costs, they are provable in ordinary course and subject to the same rules of evidence as any other claims for damages not protected by the special consideration outlined here regarding settlement of the principle claim.