RLI Insurance Company v. AST Engineering Corp

Background

RLI issued AST a claims-based professional liability policy effective March 22, 2013, through March 22, 2014. The policy covered claims arising from professional services worldwide, subject to a $1 million limit per claim and a retroactive date of March 22, 2013. It defined a covered “Wrongful Act” as a negligent act, error, or omission in performing professional services.

Before AST applied for the policy, AST had prepared an October 28, 2012 design for a concrete form used at a Manhattan construction project. Concrete later damaged an adjoining building. A subcontractor, J.V.C. Group N.Y. Corp., brought claims against AST in October 2013 for indemnification, contribution, breach of contract, and professional malpractice. AST notified RLI of the claims and asked RLI to select particular counsel, but RLI retained different counsel to defend AST.

RLI received the relevant third-party complaint on October 28, 2013. That complaint identified AST’s October 28, 2012 design and alleged that AST’s engineering services were connected to the project. RLI did not issue a reservation of rights until September 21, 2016—almost three years later. The reservation stated that RLI might deny coverage because the alleged wrongful act occurred before the policy’s retroactive date, but it said RLI would continue defending AST and did not explain that AST could accept or reject that arrangement.

Choice of Law

The parties agreed that New York and New Jersey law differed on when an insurer may be prevented from denying coverage after delaying a reservation of rights. New York generally requires the insured to show prejudice from the delay, while New Jersey generally presumes prejudice when the insurer controlled the defense without properly reserving its rights.

Applying New York’s “center of gravity” approach, the court held that New Jersey law governed. AST was domiciled and operated from New Jersey; the policy was delivered there; RLI billed premiums there; AST paid premiums from there; the policy included a New Jersey surcharge; and the policy covered professional services worldwide. The court rejected RLI’s argument that New York law should apply because the construction project and underlying lawsuits were in New York. This case concerned the insurance contract, not the merits of the underlying construction disputes.

Estoppel Based on the Reservation of Rights

Under New Jersey law, an insurer that controls an insured’s defense while reserving the right to dispute coverage must timely and properly reserve that right, generally with the insured’s consent. An insurer has a reasonable period to investigate, but once it has grounds to question coverage, it must promptly tell the insured that coverage may be denied or questioned. If it fails to do so, it may be estopped—legally prevented—from later denying coverage, even without a separate showing of prejudice.

The court held that RLI knew or should have known by October 2013 that the alleged wrongful act occurred before the policy’s retroactive date. RLI nevertheless waited almost three years to issue its reservation. The court found that delay unreasonable and presumptively prejudicial, particularly because RLI had rejected AST’s request for different counsel. The court also found the reservation defective because it did not tell AST that it could accept or reject RLI’s offer to continue controlling the defense.

The court therefore held that RLI was estopped from denying coverage or repudiating its obligations under the policy. Because this ruling resolved the coverage dispute, the court did not decide whether the policy’s retroactivity provision violated New Jersey public policy.

Request to Amend

RLI stated that, if its summary-judgment motion were denied, it would seek to amend its complaint to add claims that AST obtained the policy through fraud. The court treated that statement as a motion for leave to amend and denied it as futile.

The court held that RLI had waived any fraud claim. Under New Jersey law, an insurer that receives information suggesting fraud or a breach must investigate with reasonable diligence and timely decide whether to continue performing under the policy or rescind it. RLI had known the key facts for nearly six years and had not acted with the required diligence. The court also denied leave to amend to the extent RLI sought to add another argument that JVC’s claim predated the policy period.

Attorneys’ Fees

AST requested attorneys’ fees under New Jersey Court Rule 4:42-9(a)(6), which can permit fees for a successful claimant in an action on a liability or indemnity insurance policy. The court denied the request. Although AST prevailed on RLI’s coverage obligation, the court found a substantial likelihood that AST knew the factual basis for the claims before applying for insurance and may have procured the policy through fraud. In the court’s view, equity did not support a fee award.

Disposition

The court denied RLI’s motion for summary judgment, granted AST’s cross-motion for summary judgment, denied RLI’s request for leave to amend to the extent addressed in the opinion, and denied AST’s request for attorneys’ fees.