NJ Supreme Court Finds Insured’s Failure to Disclose Litigation Caused Loss of UIM Carrier’s Rights to Subrogate or Intervene in Action

The New Jersey Supreme Court recently held that an insured’s failure to give an underinsured motorist (UIM) carrier notice of litigation until after final resolution of the underlying tort action caused irretrievable loss of the carrier’s rights to subrogate and intervene in the action, and, therefore, the UIM carrier did not need to show prejudice to deny benefits under the policy.

Ferrante v. New Jersey Manufacturers Insurance Group

In Ferrante v. New Jersey Manufacturers Insurance Group, 232 N.J. 460 (2018), the plaintiff was injured in a motor vehicle accident where the other driver indisputably caused the accident.  As a result, the plaintiff filed a negligence suit against the driver who had a liability limit of $100,000 under his policy.  During the course of the litigation, the plaintiff participated in mandatory arbitration, at which time he was awarded damages of $90,000; rejected the award and filed a trial de novo and also rejected a settlement offer of $50,000.  The plaintiff subsequently entered into a high-low trial agreement with the tortfeasor, with a range of damages between $25,000 and $100,000, and a jury awarded the plaintiff $200,000, which the trial court entered as a judgment of $100,000 due to the high-low agreement. 

Only after the entry of judgment did the plaintiff inform his automobile insurance carrier New Jersey Manufacturers Group (NJM) that he was seeking UIM benefits under a policy that afforded $300,000 in coverage, as required by Longworth v. Van Houten, 223 N.J. Super. 174 (App. Div. 1988) (holding that an insured who receives a settlement offer from a tortfeasor’s carrier and intends to assert a claim under his UIM coverage must notify his carrier, so that the carrier may either: (1) consent to the settlement or (2) preserve its subrogation rights by tendering the insured the full amount of the tortfeasor’s policy limits in exchange for an assignment of the insured’s rights against the tortfeasor).  More particularly, in his correspondence to NJM, the plaintiff represented that the other driver was willing to settle for $100,000. However, he failed to mention any of the prior proceedings, including the entry of judgment.  Based on the information provided, NJM instructed the plaintiff to accept the offer.  Thereafter, NJM and the plaintiff proceeded to litigate the UIM coverage, during which the plaintiff finally disclosed the previous lawsuit.

As a result, NJM filed a motion to dismiss the plaintiff’s UIM complaint, which was granted by the Law Division based on a determination that the plaintiff violated Longworth by not notifying NJM of the prior proceedings.  On appeal, a split panel of the Appellate Division reversed and remanded the matter, holding that the Law Division did not consider whether NJM was, in fact, prejudiced by the lack of notice by the plaintiff.

Insured Must Act in an Honest Manner During the Claim Process

Upon appeal, the New Jersey Supreme Court stressed the importance of candor by insureds and the obligation to act in an honest manner with their carriers throughout the claim process.  As such, the Court sought “to avoid rewarding insureds for omitting key details in a UIM claim.”  The Court further noted that the duty to notify is also intended to protect the carrier’s right of subrogation, as the law “highly favors” subrogation as “a device of equity to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it.”  To that end, the Court cited its previous decision in Rutgers Casualty Insurance Co. v. Vassas, 139 N.J. 163 (1995), in which it established certain instances where an insured must provide notice to an insurance carrier, specifically:  (1) when he takes legal action against the tortfeasor; (2) if, during the pendency of a claim, the tortfeasor’s insurance coverage proved insufficient to satisfy the insured’s damages; and (3) if the insured received a settlement offer or arbitration award that did not totally satisfy the claim because the tortfeasor was underinsured.

Accordingly, the Court identified that, in the subject litigation, the plaintiff received an arbitration award without notifying NJM.  He also entered into a high-low agreement and took the matter through a full jury trial without informing NJM.  Consequently, the plaintiff’s conduct extinguished NJM’s right to participate in trial and mitigate damages in some way, including NJM’s option to subrogate the plaintiff’s claim by paying him the settlement proceeds and then trying the case in the plaintiff’s stead.

Further, the Court rejected the plaintiff’s request for the trial court to conduct a prejudice analysis, opining that, “due to the numerous landmarks where [the plaintiff] could have, and should have, but did not notify NJM, we need not address his state of mind or weigh any potential prejudice to the carrier.”  Rather, the Court adopted the approach of a dissenting Appellate Division judge that, “if . . . the insured, regardless of his state of mind, fails to gives the UIM carrier any notice of the UIM claim until after the final resolution of the underlying tort action, thereby causing the irretrievable loss of the carrier’s rights to subrogation and intervention before the carrier has ever learned of the existence of the claim, coverage is forfeited.”  As such, the Court reversed the Appellate Division’s decision and reinstated the trial court’s order dismissing the UIM complaint against NJM.

Ferrante not only highlights the importance of insureds to notify their carriers pursuant to Longworth but sends a clear message that insureds will suffer consequences for their failure to comply with same, even where the insured does not intend to mislead or deceive the carrier and/or in the absence of any prejudice to the carrier.  Therefore, it is imperative for insureds to act candidly and honestly during the claim process.