An insurance company’s due process rights to sue for a declaration rescinding an insurance agreement are to be protected.

This lawsuit was an action for injunctive relief in which the plaintiff, a commercial insurance carrier, sought rescission of a property and liability insurance policies issued by it to the defendant, a New Jersey partnership that owns and operates apartment complexes. Pursuant to the policies, but subject to a standard reservation of rights letter, the insurer was funding part of the defendant’s defense costs in a state court action against a group of tenants in which it was alleged that the defendant knowingly provided contaminated drinking water. The crux of the coverage lawsuit was that the defendant materially misrepresented its knowledge regarding this uranium contamination when it applied for insurance coverage. In response, the defendant brought a counterclaim for bad faith against the insurer. The court noted that the defendant failed to allege any bad faith action; rather, the claim stemmed from the fear of the defense funds in the state action being withdraw. The court did not allow the counterclaim because it would effectively deny an insurance company its due process rights to sue for a declaration rescinding an insurance agreement.

Case Law Alerts, 2nd Quarter, April 2014