Wade Clark Mulcahy LLP

One issue that arises when an insurer issues a reservation of rights letter is whether the insured has a right to choose their own counsel. Policyholders argue that they should have such a right given the potential conflict of interest involved when an insurer has reserved the right to disclaim coverage. In addressing this issue, courts often examine the language of a reservation of rights letter to determine whether an insurer properly advised the insured of their rights and whether the insured consented to the retention of defense counsel chosen by the insurer.    

The New Jersey Appellate recently addressed these issues in United Specialty Insurance Company v. Century Waste Services, LLC. In that case, United Specialty Insurance Company (“USI”) provided a defense through assigned counsel to Century Waste Services, LLC (“Century”) following a car accident. After defending for some time, USI provided Century a reservation of rights letter which, among other things, stated “[i]f we do not hear from you to the contrary, we will assume that you consent to the retention of” the assigned attorney. Century never objected to the selection of counsel.

USI subsequently sought declaratory judgment and argued that it did not owe coverage to Century in the underlying lawsuit. The trial court granted USI’s motion for summary judgment finding, among other things, that Century could not create coverage through estoppel since the reservation of rights letter was sufficient. Century appealed and argued that USI should be estopped from denying coverage because the reservation of rights did not adequately explain that Century could accept or reject the offer of defense and that Century was prejudiced by the choice of counsel.

The Appellate Court disagreed and affirmed, recognizing that the doctrine of estoppel applies when a defense is provided with knowledge of facts that are relevant to a basis for non-coverage, and a valid reservation of rights to deny coverage at a later time is not sent. Century did not dispute that coverage did not exist and its argument hinged on whether it was properly informed of its right to reject the insurer’s choice of counsel. The Court observed that there must be circumstances which suggest that the insured acquiesced in the insurer’s control of the defense.

The Court was satisfied that the “if we do not hear from you” language sufficiently communicated to Century that it had the option to reject a defense from USI. The Court also found that there was acquiescence to the counsel choice through the insured’s silence, which led to an inference that Century chose not to reject USI’s defense. Accordingly, the Court found no basis to apply the estoppel doctrine. Even if estoppel applied, there was no prejudice because Century could not show how the case would have been handled differently had it chosen to retain a different attorney.

This decision clarifies the choice of counsel language that should be used in New Jersey reservation of rights letters and suggests that insurers do not have to specifically state that an insured has a right to accept or reject the insurer’s choice of counsel. Rather, it puts the burden on insureds to object to an insurer’s choice of counsel and silence in response to “if we do not hear from you” language in a reservation of rights letter will a subsequent challenge.