In Nucci v. American Ins. Co., the New Jersey Superior Court, Appellate Division, examined whether a policyholder’s settlement with alleged tortfeasors precludes an insurer from pursuing subrogation claims against the tortfeasors. While the Court did not issue any precedential decision at this time, the opinion indicates that it may ultimately determine whether tortfeasors who settle a claim with the primary insured while on notice of an insurer’s intent to seek subrogation remain exposed to subrogation claims by the insurer, even if the insurer is challenging coverage and has not paid the claim at the time of settlement.
Nucci concerned a claim for damage to a residence that allegedly resulted from blasting operations during construction on an adjacent property. The plaintiff’s insurer denied coverage, citing policy provisions excluding losses from wear and tear, settling, earth movement, weather, and defects in planning, design, construction, or maintenance of the plaintiff’s property. In its denial letter, the insurer stated that it was reserving all rights under the terms and conditions of the policy.
The policyholder subsequently filed suit against the insurer for the allegedly improper denial of her claim. The lawsuit also included tort claims against the owner of the adjacent property, his general contractor, his engineer, his excavating contractor, and the blasting company. The insurer asserted cross-claims against the co-defendants, based upon subrogation.
The policyholder eventually settled with certain co-defendants, without informing the insurer. Contending that the settlement was confidential, the policyholder declined to disclose any details regarding the settlement, other than to state that the settlement did not fully compensate her for her loss. The insurer then moved for summary judgment, contending the settlement eliminated the insurer’s subrogation rights and consequently forfeited any entitlement the policyholder might have to coverage. The trial court granted the motion and dismissed the action with prejudice.
On appeal, the policyholder initially contended that the insurer’s denial of the claim waived its potential entitlement to subrogation. The Court noted that this was an issue of first impression in New Jersey courts. However, the Court determined that before it could consider this question, it must address whether the settlement of the policyholder’s claims against the co-defendants extinguished the insurer’s subrogation claims against these parties. The Court noted that in Am. Reliance Ins. Co. v. K. Hovnanian at Mahwah IV, the Appellate Division held that a policyholder’s settlement with tortfeasors without an insurer’s consent does not defeat an insurer’s subrogation claims against these parties, if the tortfeasors were aware that the insurer had paid the policyholder for the loss. As the Court observed, this left open the question of whether the same rule applies if the insurer did not pay the claim, but tortfeasors settled while aware of the insurer’s assertion of subrogation claims.
The Court therefore remanded the matter to offer the trial court the opportunity to address this issue. The Court directed that on remand, the plaintiff must disclose the identity of the settling co-defendants, who should be given the opportunity to brief and argue the issue. The Court also stated that on remand, the trial court may consider whether to compel disclosure of all or part of the settlement agreement.
While much remains to be decided in Nucci, the decision demonstrates the importance of taking all steps necessary to preserve subrogation rights. Pending the final outcome of Nucci, insurers faced with coverage litigation in New Jersey that incorporates tort claims against other defendants would be well-served by bringing all potential subrogation cross-claims against co-defendants in the answer. If the tort claims have been brought in a separate action, insurers should consider notifying the tort defendants of the insurers’ subrogation rights. If the Nucci court ultimately holds that the defendant insurer is entitled to pursue cross-claims for subrogation against co-defendants notwithstanding their settlement with the policyholder, insurers who are held liable to policyholders in New Jersey coverage actions may have a valuable tool for recouping some or all of the amounts paid.
