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A “Legal Obligation” to Pay Requires a Legal Action Against You (NJ)

May 15, 2020

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<p style="text-align: justify;">The New Jersey Appellate Division, in the context of an insurance coverage dispute, recently held that where the insured sought reimbursement for payments made to its landlord for damage to property, coverage was not triggered because a legal obligation to pay cannot arise absent a legal judgment.</p>
<p style="text-align: justify;">In <em>Churchill Corp. Svc, Inc. v. Rockhill Insurance Co., et al</em>., the Appellate Division recently affirmed the lower court’s grant of Rockhill Ins. Co.’s motion for summary judgement that the insurance policy issued to Plaintiff provided no coverage for the reimbursement sought. The payment at issue was close to $80,000, made to the Plaintiff-Insured’s landlord for property damage caused by a fire in an empty unit. Rockhill initiated a claim investigation, and while it was neither speedy nor entirely conclusive, it did seem that the likely cause of the fire was a cleaning company that may have accidentally engaged a stove top knob igniting cardboard boxes left on the stove by movers.</p>
<p style="text-align: justify;">The landlord applied pressure to the insured for the significant repair costs necessitated by the fire, advising Plaintiff that it had a legal obligation to pay, regardless of whether its insurer would cover the claim. Plaintiff, ultimately relented to that pressure, and made the payment. Subsequently Rockhill declined coverage, finding that it could not amount to a covered “legal obligation” where the insured was never even sued.</p>
<p style="text-align: justify;">On appeal, Plaintiff argued that the lower court should have considered Rockhill’s duty to reasonably investigate claims and to settle covered claims, arguing its actions with respect to both amounted to a breach of fiduciary duty. The Court, however, affirmed the lower court’s decision. In so doing, the Appellate Division affirmed that an insured’s legal obligation to pay another party cannot arise out of those parties’ interpretation of contractual obligations, but must be a part of a judicially rendered decision, following suit. The stark reminder to insureds is, of course, to wary of settling potentially covered disputes on their own.</p>
<p style="text-align: justify;">Thanks to Vivian Turetsky for her contribution to this post. If you have any questions or comments, please contact <a href="">Colleen Hayes.</a></p>


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