In the recently decided case captioned Mazzoli v. Marina District Development Co., LLC, 2011 U.S. Dist. LEXIS 39116 (D.N.J. Apr. 11, 2011), the United States District Court for the District of New Jersey had occasion to consider New Jersey’s so-called “Eggleston rule” in the context of an inter-insurer dispute. While the court ultimately held that there was no estoppel based on the facts presented, the decision makes clear that the Eggleston rule can apply as between co-insurers.

The “Eggleston rule” derives from the 1962 decision by the New Jersey Supreme Court in Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 179 A.2d 505 (N.J. 1962). The court held that when an insurer assumes control of the defense, without properly reserving its rights to later disclaim coverage, the insurer is estopped from doing so at a later time. Among other things, explained the court, a proper reservation of rights requires the insurer to offer the insured the opportunity to consent to selection of defense counsel.

In Mazzoli, Liberty International Underwriters (“LIU”), the insurer for a subcontractor on a construction project, agreed to provide a defense to the project owner and general contractor as additional insureds in connection with an underlying bodily injury suit. LIU, however, took the position that Selective, the insurer for another subcontractor on the project, also was required to provide a defense to these parties. While LIU and Selective were negotiating a cost-share arrangement, LIU’s named insured was voluntarily dismissed from the underlying suit. LIU thereafter took the position that the underlying injury could not have arisen out of its insured’s work, and as such, it owed no longer owed a defense to the owner and general contractor.

Selective filed a motion against LIU arguing that LIU was estopped from withdrawing its defense of these parties as LIU failed to have properly reserved its rights as required under Eggleston. LIU argued that the estoppel “is solely for the benefit of the insured,” and that Selective, therefore, did not have standing to raise estoppel. Relying on two decisions from New Jersey’s state court appellate division, the Mazzoli court concluded that estoppel could apply as between insurers, reasoning that “in certain instances, an insurer will have exerted so much control over a case that allowing it to disclaim coverage would be prejudicial to both the insured and other insurers of the insured.”

The court, however, went on to conclude that unlike an insured asserting an estoppel argument, Selective was not entitled to a presumption of prejudice. Specifically, the court explained that “[t]here is no reason to presume that the control of a claim by a co-insurer is a ‘material encroachment upon the rights’ of an insurer, nor must we presume that there is a ‘resultant inequity’” since “[o]ften, the interests of co-insurers will be aligned.” Thus, explained the court, Selective had the burden of showing that it suffered actual prejudice as a result of LIU’s control of the defense. Ultimately, the court held that Selective failed to satisfy this burden, and as such, LIU was not estopped from withdrawing from the defense. The Mazzoli decision makes clear, however, that estoppel will result when a co-insurer can satisfy this burden.