Overserved: Practical considerations surrounding motions for substituted service on insurers

It is a frequent situation. A contractor obtains a liability policy from an insurer. Down the road, a construction defect claim is asserted, and suit is brought against the contractor. By this point the contractor is no longer in business, with no known valid address, and all reasonable efforts at service of process on the contractor fail. The claimant then moves for substituted service on the contractor’s insurer. Even if the insurer files an objection to the motion for substituted service, the court may focus only on the diligence of the claimant’s efforts to serve the contractor and grant the motion. The insurer is now in the lawsuit.  

Practical considerations abound. Is the claim even potentially covered under the policy? Does the insurer now have to defend its recalcitrant or non-existent insured? How does the insurer accomplish this, given the lack of ability to contact its insured, no access to the insured’s records, and no means of conferring with the missing insured regarding the development of an appropriate defense? Does the prudent insurer retain defense counsel and file an answer on behalf of the nonexistent/recalcitrant/missing defendant? Does the insurer move to seek a declaration of no coverage? And if so, how does the insurer serve the defendant insured?  

This is the complex world of substituted service on insurers. On the federal level, Fed.R.Civ.P. 4(e) governs service generally and provides only that service can be effectuated by “following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the district court is located or where service is made.” In New Jersey, when personal service cannot be effectuated, state court rules allow for substituted service on others so long as the proposed form of service is “provided by court order, consistent with due process of law.” See, N.J. Ct. R. 4:4-4(b)(3). Due process requirements were enunciated by the United States Supreme Court in Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). As held by the Supreme Court, the means of substituted service must be more likely to notify the party of the action [here the evasive or non-existent insured] than any of the other customary means of service.  

The New Jersey Supreme Court, in turn, set forth its own balancing test to determine whether substituted service comports with due process. The factors are: (1) the plaintiff’s need; (2) the public interest; (3) the reasonableness of the plaintiff’s efforts to inform the defendant and (4) the interests of the defendant. Feuchtbaum v Constantini, 59 N.J. 167, 178 (1971). Feuchtbaum held that in limited circumstances, a party may serve an insurer as a substitute for a party defendant because “the carrier’s interest in defeating plaintiff’s claims will coincide with defendant’s interest.” 59 N.J. at 178.  Arguably, that’s not always the case. For example, are the espoused due process concerns met by substituted service upon an insurer having no obligation to provide coverage for the claim, or in a situation where the carrier may have already declined coverage? 

To this point, the right to serve an insurer in lieu of an absent party is not absolute. New Jersey law provides that a party seeking leave to effectuate substituted service on a defendant’s insurance carrier must demonstrate a prima facie showing that the claims against the defendant are covered under the relevant insurance policy. Houie v. Allen, 192 N.J. Super 517 (App. Div. 1984) (fairness to the defendant construed to require a prima facie showing by plaintiff that the claims asserted against defendant are covered by the latter's insurance policy; a carrier which is not under a duty to defend or indemnify defendant has little incentive to seek out and notify him of a claim pending against him.)

Houie recognized that the mutuality of interest noted in Feuchtbaum does not always exist; there is no alignment of interest where there is no coverage. In addition, not all claims are the same. A responsible party in a motor vehicle accident knows he or she has been involved in an accident, while the situation is very different in the context of a latent construction defect claim.  

Indeed, not all cases find that substituted service is warranted. In Toro v. Rodríguez, 2006 WL 3350857 (L.Div. Nov. 17, 2006), the court held that substituted service is unavailable where the insurer has no duty to defend the claim at issue or has denied coverage. “Substituted service … is not a vehicle to impose unwarranted liability on insurers for defendants’ evasive conduct.” Id. at *2. Toro recognized that there is no basis to allow substituted service on a defendant’s insurer if the insurer does not have a “common incentive to serve the missing defendants nor a contractual obligation to defend the insured.” Id.  

As to what the carrier should do if and when it is brought in on a motion for substituted service, White v. Austin, 172 N.J. Super. 451 (L. Div. 1980) provides a cautionary tale. Plaintiff, claiming damage from a car accident, was unable to serve the defendant and obtained an order to serve State Farm, the company named by defendant as his carrier when registering his vehicle. State Farm acknowledged receipt of service.  State Farm then did nothing; it did not disclaim liability, did not file an answer and failed to oppose plaintiff’s motion for default judgment. After the fact, State Farm filed to remove the execution of judgment.  It turned out that defendant’s car was not insured by State Farm and that defendant used a relative’s policy number in order to register his car. That policy was not even in force on the day of the accident.

Nevertheless, the court ruled that State Farm was estopped by its conduct over a period of 6 years to assert a defense of noncoverage and found State Farm inexcusably dilatory. Significantly, the court found that a “necessary implication of Feuchtbaum, is that a carrier receiving such service has a duty to respond to it in some fashion even where the carrier believes that it does not provide coverage for the absent defendant.” Id. at 455.

On June 14, 2022, the New Jersey Appellate Division issued a ruling on an interlocutory appeal in a case where the trial court relied only on a certificate of insurance in determining that a prima facie showing had been made to warrant substituted service. In Greenway Run Condominium Association, Inc. v. K. Hovnanian at Howell, LLC, et al., Docket No. A-939-21, the Appellate Division examined “an order that permitted service of process on an unlocatable defendant through service on that defendant’s alleged insurer.” The appellate court reversed the trial court ruling and held that substituted service was inappropriate on the record provided—i.e. the certificate of insurance. The Court did not, however, foreclose a further request for substituted service on a more “fulsome” record than presently exists. The fact that the certificate of insurance alone was held to be insufficient to justify substituted service is a welcome line in the sand.