The Superior Court of New Jersey recently addressed policy exhaustion and an insurer’s obligation to defend its insured.  In National Surety Corp. v. First Specialty Insurance Corp., the Superior Court ruled that an insurer may exhaust its policy to settle claims, even if that settlement did not end all claims.  The court also ruled that once the settlement was approved and the policy limits were exhausted, the insurer was no longer obligated to provide a defense under the policy in connection with any outstanding claims.

In brief, the National Surety matter arose out of an underlying lawsuit commenced against, among others, Universal Protection Services, LLC (“UPS”) and Taubman Centers, Inc. (“Taubman”).  At all times relevant First Specialty Insurance Corp. (“FSIC”) insured UPS under a CGL policy.  Additionally, Taubman qualified as an additional insured under UPS’s FSIC policy.  As such, FSIC began defending UPS and Taubman in connection with the underlying lawsuit.  Ultimately, FSIC entered into a partial settlement with the plaintiff to settle claims against UPS.  Although, FSIC’s settlement with the plaintiff exhausted the FSIC policy limits, the settlement did not include a release of the plaintiff’s claims against Taubman.  After exhaustion of the policy’s limits, it was FSIC’s position that, inter alia, its duty to defend any insured had ended.  National Surety Corp. (“National”), Taubman’s excess insurer, subsequently commenced a declaratory judgment action against FSIC seeking, among other things, a declaration that FSIC still had a duty to defend Taubman against claims and pay for defense costs, regardless of the fact that the FSIC policy limits had been exhausted by FSIC’s settlement for UPS.  Ultimately, the Superior Court concluded that FSIC’s exhaustion of its policy limits extinguished its obligation to defend Taubman.

Thus, this case illustrates, under New Jersey law, the circumstances in which an insurer’s obligation to defend its insured may be extinguished, even though the insured still has claims pending against it.

Thanks to Colleen Hayes for her contribution to this post.