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reserves its right to disclaim based on further factual devel- opment.
Estoppel
In Grips, the insurer, after initially investigating the claim, did nothing. A year after the initial investigation, a lawsuit was filed, and the insurer for the first time advised the insured that there was no coverage and refused to defend. The court held that the insurer was estopped from denying cover-
age. Extending prior cases, the court ruled that principles of estoppel apply where the insurer has neither assumed the actual control of the case nor undertaken the preparation
of any defense on behalf of the insured, even pre-suit, but instead has failed for an unreasonable period of time to in- form its insured of the possibility of a disclaimer of coverage, notwithstanding the insurer’s early notification of a possible claim and awareness of grounds for a disclaimer. The insurer is under a duty to properly inform its insured of its inten- tion to disclaim coverage or of the possibility that coverage will be denied or questioned after it has had a reasonable opportunity to investigate or has learned of grounds for questioning coverage. In the setting where the insurer has not informed the insured of its coverage position, but still has the exclusive right under the policy to control the claim, the insured is effectively deterred from taking any action to protect himself, including meaningful steps towards an early settlement of the claim, because such steps could be the basis of additional grounds for disclaiming coverage. Grips v. Bertrand, 443 A.2d 163 (N.J. 1982).
In Sussex Mutual Insurance Co., the court ruled that the filing of the answer and obtaining of the stay by the insurer did not estop the insurer from denying coverage based upon the alleged intentional acts of the insured. While the rule that an insurer who defends without a reservation of rights waives its coverage positions retains its full vigor, the actions taken by the insurer in this instance, including obtaining
a stay, did no more than maintain the status quo pending adjudication of the coverage issue. In no sense could the insurer be deemed to have controlled the defense of the insured. Further, it was clear that the relationship between the insured and the insurer was an adversarial one almost from the beginning. Sussex Mut. Ins. Co. v. Hala Cleaners, Inc., 380 A.2d 693 (N.J. 1977).
In Sneed v. Concord Insurance Co., the insurer learned shortly after the incident that an exclusion of coverage ap- plied to the insured. Nonetheless, the insurer continued to discuss settlement with the claimants, and its reservation
of rights agreement contained no language apprising the policyholders that they were at liberty to accept or reject
the company’s defense under a reservation of rights. When the insured was sued, the insurer refused to defend. The court ruled that the reservation of rights agreement was not effective. Defense under a reservation of rights requires the consent of the insured. Since the agreement in question did not indicate the rights of the insured to reject the defense, it was ineffective. Sneed v. Concord Ins. Co., 237 A.2d 289
(N.J. Super. Ct. App. Div. 1967).
In the absence of the agreement, the real issue was whether estoppel existed where the insurer had disclaimed coverage from the beginning of the suit, but had controlled the pre- suit investigation. The court held that such pre-suit investiga- tion, without a prior reservation, also constitutes an estoppel. In this instance, the court found that the insurer’s correspon- dence indicated the insurer’s intent to continue exclusive control of the handling of the claim against the insured, and as such, estoppel applied. Sneed v. Concord Ins. Co., 237 A.2d 289 (N.J. Super. Ct. App. Div. 1967).
Reimbursement for Defense Costs
Sometimes an insurer will include a provision in its reserva- tion of rights letter giving the insurer the right to seek reim- bursement for defense costs it pays if it later establishes that those costs were incurred in defending non-covered claims. Courts have held this type of provision to be unenforceable. Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213 (3d Cir. 1989).
The reason behind this rule is that the insurer should not be permitted to unilaterally amend the policy, especially when the insured may be unschooled in the issues. Also reserva- tion on this issue places insured in position of making a Hobson’s choice between accepting conditions on defense or losing right to defense.
Conflicts of Interest and Independent Counsel
There is no statute in New Jersey that relinquishes the insur- er’s right to choose defense counsel when there is a conflict of interest (i.e. both covered and arguably uncovered counts) or when the insurer issues a reservation of rights letter.
New Jersey case law does not recognize the insured’s right to unilaterally select defense counsel to be paid concurrently by the carrier when a carrier issues a reservation of rights letter. Instead, the New Jersey Supreme Court in Flomerfelt v. Cardiello, 997 A.2d 991, 999 (N.J. 2010) interpreted Burd v. Sussex Mutual Insurance Co., 267 A.2d 7 (N.J. 1970) to mean that an insurer has two choices when there are differ- ent theories of liability (some of which would not be covered under the policy) and where the interests of the insured and insurer are in conflict.
The first choice is that the “insurer could assume the de- fense if the insured agreed, with a reservation of its right to dispute coverage.” Flomerfelt, 997 A.2d at 999. In Burd, the court said that if a carrier issues a reservation of rights letter, it cannot assume the defense unless the insured gives informed consent of the conflict. (“[I]f the trial will leave the question of coverage unresolved so that the insured may later be called upon to pay, or if the case may be so defend- ed by a carrier as to prejudice the insured thereafter upon the issues of coverage, the carrier should not be permitted to control the defense.” Id.; see also Merchs. Indem. Corp. v.
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