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Alternate Reality: NJ Court finds Coverage for Spoliation Litigation Strategy that Could Have Been

August 22, 2011

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Typically, whether an insurer has a duty to defend is determined by the four corners of the complaint. But in <em><a href=";hl=en&amp;as_sdt=2&amp;as_vis=1&amp;oi=scholarr">Carlin v. Cornell, Hegerty, &amp; Koch</a> </em>a New Jersey appellate court not only looked to facts that arose “during the resolution of the underlying dispute,” but also considered whether an alternate litigation strategy would have triggered coverage.
In the original lawsuit, plaintiffs, employees of a construction company, alleged that they were exposed to high levels of lead while working on a construction project on the Ben Franklin Bridge; one of the allegations was that the construction company intentionally concealed information about the employee’s lead exposure. CIGNA provided a defense to the construction company, and a no-cause verdict was rendered in favor of the defendants after a jury trial.
Plaintiffs then filed another lawsuit, alleging that the defendants fraudulently concealed or destroyed evidence (commonly known as “spoliation”) during the first trial. But CIGNA denied coverage, finding that such claims were not covered as an “occurrence” under its CGL policy. Ultimately, the trial court agreed with CIGNA.
But the Appellate Division reversed, even though it agreed that the spoliation claims themselves were not covered under the policy. The Court held that there would have clearly been coverage if plaintiffs successfully moved for relief from the trial judgment based on newly discovered evidence," or "fraud… misrepresentation, or other misconduct of an adverse party." The Court found that plaintiffs’ spoliation complaint was, “in effect, an attempt to reopen the first litigation on the covered claim on the ground that it did not have all of the pertinent evidence.” Therefore, the defendant seeking coverage “understandably expected the insurer who provided the defense in the first action to do the same here regardless of the merits.”
Because plaintiffs could have recovered damages for the covered personal injuries by way of motion to vacate the judgment in the personal injury action -- and because plaintiffs would not have been required to prove any intentional misconduct -- the defendants were, in essence, faced with covered and noncovered claims. Under such circumstances, a carrier is required to defend until all covered claims have been resolved.
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