Suffering a first party insurance loss or facing a lawsuit from a third party can be two of the most difficult and unsettling experiences for an individual or business. To add to the turmoil, being told by the insurance company that there is no coverage for the claim can be enough to turn that bad situation into an unbearable one. The daunting prospect of being forced to navigate the financial or legal landscape alone is overwhelming. On top of that, finding out that the money you spent on insurance premiums does not provide the necessary coverage when it is needed most is like adding insult to injury. Rest assured, there may still be hope.

Insurance is a business, and like any business, the ultimate goal of the insurance companies is to make money, not to spend it. This automatically places an insured in an adversarial position to an insurance company when a claim is made. Given this dynamic, it is not surprising that the insurance company is going to use any avenue to avoid having to pay money. The most likely scenario is that an insurance company will interpret policy language or exclusions in a way that turns an otherwise covered claim into one that is not. However, contrary to what many insured’s may think, this does not mean the insurance company’s interpretation is the only one, or even the right one.

In essence, an insurance company is gambling when it issues a coverage denial letter. It is betting that the insured will take its policy interpretation and carefully crafted denial letter at face value and will fold his or her hand. Luckily, however, the law in New Jersey allows insureds to call the insurance company’s bluff. Through a Declaratory Judgment action, an insured can make an application to the Court to have a judge review the contract of insurance, in light of the facts of the case, and make a judicial determination as to whether coverage exists.  Better yet, New Jersey Courts have held that any policy provision which is found to be "ambiguous" is to be resolved in favor of the insured.

The Declaratory Judgment action may be just what an insured needs to resolve a coverage dispute with an insurance company. This is especially true if the implications of the coverage denial could have drastic financial effects for the insured in the long term. Declaratory Judgment actions can be useful in establishing an indemnification obligation in a first party insurance claim and may be useful in establishing a defense and/or indemnification obligation in a third party insurance claim. Further, in a third party claim it is not necessary for the insured to wait until after it receives a judgment against it to file a Declaratory Judgment action. Therefore, a favorable determination could potentially save the insured from having to pay tens of thousands of dollars in defense costs out of pocket to fight the underlying lawsuit. In addition, a successful insured in a Declaratory Judgment action based on a third party lawsuit can recover the costs of instituting the Declaratory Judgment action from the insurance company.

While some insurance companies will take it upon themselves to file Declaratory Judgment actions where they feel their rights and obligations to an insured are questionable, in the event that they issue a coverage denial letter without taking this prudent step, it can be a powerful mechanism for insureds to utilize as well. Although an insured may be wary of taking on the task of getting the Courts involved, when the alternative is having no coverage available for a claim, it may be the best option available.  Before taking this step, it is important to have a qualified coverage attorney review your insurance policy and evaluate the strength of your coverage claims so you can make the most informed decision possible.  Know your rights and take steps to avail yourself of the all that is available to you.


Tara Speer is a member of  Stark & Stark’s Insurance Coverage & Liability Group in the Lawrenceville, New Jersey office. For questions, please contact Ms. Speer.