For a few reasons, New Jersey’s rules concerning duty to defend and reservation of rights are unique.  One of them is the requirement, created by the state’s high court in Merchants v. Eggleston (1962), that an insurer must obtain the insured’s consent to be defended under a reservation of rights.  And I don’t mean a reservation of rights of the type that creates a conflict warranting independent counsel.  I mean a reservation of rights – period. 

The best way for an insurer to comply with this obligation is to simply set out the terms of its reservation of rights and ask the insured for its consent to the insurer retaining counsel subject to such terms.  [I have an approach to do this that I have developed -- and I think it best that it appear at the beginning of the reservation of rights letter and not page 17.]

Of course, what happens when the insured does not respond to the insured’s request for consent?  This is not an infrequent situation.  If the insured does not respond, its consent can be inferred, i.e., acquiescence by silence, but only if the letter fairly informed the insured that the offer can be accepted or rejected.

This was the issue in United Specialty Ins. v. Century Waste Services, No. A-1428-22 (N.J. Super Ct. App. Div. Nov. 20, 2023): did the insurer’s reservation of rights letter adequately inform the insured that it had the right to reject the defense -- to qualify as acquiescence by silence?

The specific language in the ROR letter was as follows: “If we do not hear from you to the contrary, we will assume that you consent to the retention of [counsel] for this matter.”  The insured, Century Waste Services, did not respond.

The New Jersey Appellate Division referred to this language as a “variation of acquiescence by silence.”

While the court’s decision did not get into detail, it held that there was “no magic language” required and the language used here was acceptable for the insured’s non-response to qualify as consent by the insured to being defend under a reservation of rights.

Of course, despite the decision here, it makes sense for a reservation of rights to be more specific.  By specifically advising the insured that it has the right to reject the defense, the insurer can forestall a challenge (or at least it should) that the insured’s non-response to whether it is OK being defended under a reservation, with insurer-chosen counsel, qualified as acquiescence by silence.

Lastly, the court ever so slightly touched on the issue whether an insurer, that defends under a reservation of rights without consent, i.e., fails to comply with Merchants v. Eggleston, can avoid estoppel by proving that the insured was not prejudiced by the defense.  Without answering the question, the court offered the following: “[E]ven if were we to assume for the sake of argument that prejudice is a relevant consideration, here, Century has not shown that it suffered any prejudice. . . . It is not disputed that USI’s reservation of rights letter was sent twenty months after it had retained an attorney to defend Century in the underlying lawsuit. But, as counsel candidly acknowledged at oral argument before us, Century is not able to show how the case would have been handled differently had it chosen to retain a different attorney at its own expense.”