Just 2-3 years ago it would have been difficult to conceive of circumstances in which the New Jersey Supreme Court would not have readily seized upon an opportunity to hold that a liability insurer owes coverage to its policyholder because of some facially plausible ambiguity in the language of the insurance policy. With some exceptions, New Jersey has long been viewed as a state in which the doctrine of contra proferentum has been applied with a vengeance in favor of providing coverage to policyholders. The cases are legion in which New Jersey Courts have held that if there are two competing interpretations of a word or phrase in a liability insurance policy, the Court will interpret the policy to comport with the reasonable expectations of the insured. Stated differently, New Jersey Courts are viewed historically as going out of their way to find insurance coverage, frequently to the frustration of insurers. In this commentary, insurance coverage attorney Mark R. Vespole discusses how the New Jersey Supreme Court, by virtue of its decision and opinion in Villa v. Short, 195 N.J, 15 2008 N.J. LEXIS 604, (N.J. 2008), has given insurers reason to believe that the pendulum may be swinging in their favor. Vespole takes the view that in upholding a disclaimer of coverage based upon its rather conservative analysis of the frequently-litigated intentional act exclusion, the Court may have presaged a change in judicial philosophy regarding the interpretation of insurance policies.
In Villa, the Court considered whether a homeowner's insurance policy excludes coverage for all insureds if any insured under the policy commits an intentional or criminal act after the insureds’ abused niece filed a complaint against her mentally retarded uncle for sexual molestation and her grandparents for negligent supervision of their son in failing to prevent the sexual assaults. Allstate disclaimed coverage under its homeowners' policies based upon exclusions for intentional or criminal acts. A declaratory judgment lawsuit by the policyholders seeking coverage ensued. The commentary delineates the three principal issues addressed in Villa and explains the court’s position on each issue. With respect to the first issue of whether or not the molester could be charged with intentional conduct in light of his mental disability, the author writes: “It is entirely possible that the policyholder's counsel knew more about John's mental condition than was found in the record, which may have weighed against the argument that his diminished mental capacity made him incapable of forming the requisite intent, thereby vitiating the exclusion. However, policyholders with a diminished mental capacity seeking coverage for an intentional act which would otherwise be excluded under the terms of the policy would probably be well served by retaining a medical expert to provide an opinion as to whether their mental incapacity impacts the ability to act intentionally. If a policyholder is incapable of acting intentionally, the exclusion will not apply, and there will be coverage.” Concerning the second issue of whether or not the intentional acts exclusion clearly excludes coverage for all insureds based upon the intentional acts of one insured, the author writes: “In upholding Allstate's disclaimer of coverage, the Court held that the term 'an insured' in the intentional acts exclusion was not ambiguous. Given that the Supreme Court was merely following two well reasoned Appellate Division decisions, which represent the majority position nationwide, perhaps the Court's opinion is not particularly startling to some. However, the Court's opinion was by a 4-2 margin, with Justice Albin, who unequivocally would have sided with the dissent, not participating. Therefore, it is clear that the Court was fairly closely divided on this insurance coverage issue, a conclusion aptly illustrated by Justice Long's cogent dissent.” With regard to the final issue of whether, based upon the changes in the severability clauses of the policies, the conduct of each insured [the victim’s uncle and grandparents] is assessed separately for the purpose of the intentional act exclusion, the author writes: “The policyholders argued that notwithstanding the interpretation of 'an insured,' that phrase nonetheless became ambiguous when read in conjunction with the first sentence of the severability clause of the earlier policy form. The Court's analysis of the severability clause begins by pointing out that it is situated in a different part of the policy than the coverages and exclusions. Even though the severability clause starts with the premise that the insurance applies separately to each insured, the Court held that the first sentence must be interpreted in the context of the entire clause. Because the remainder of the severability clause deals with limits of liability, the Court interpreted the first sentence to mean simply that each insured is entitled to coverage up to the limits of the policy. The Court further held that the severability clause did not in any way impact the ‘unambiguous exclusion for intentional or criminal acts of an insured.’” The author concludes: “It will probably take a few more insurance coverage opinions from the New Jersey Supreme Court to determine whether this subtle shift in judicial philosophy is simply a one or two case aberration or the beginning of a trend. Stay tuned.” Subscribers can access the complete commentary on lexis.com. Additional fees may be incurred.