COMMERCIAL INSURANCE COMPANY v. PHILADELPHIA INSURANCE COMPANY

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3590-04T13590-04T1

COMMERCIAL INSURANCE COMPANY,

Plaintiff-Appellant,

v.

PHILADELPHIA INSURANCE COMPANY,

Defendant-Respondent.

__________________________________

 

Argued May 15, 2006 - Decided June 13, 2006

Before Judges Lintner and Holston, Jr.

On appeal from the Superior Court of New Jersey, Law Division, Middlesex County,

L-7797-04.

Edward J. Rebenack argued the cause for appellant (Hoagland, Longo, Moran, Dunst & Doukas, attorneys; Frank J. Caruso, of counsel and on the brief).

Dorine C. Sirota argued the cause for respondent (Stephen E. Gertler, attorney; Ms. Sirota and Joseph Verga, on the brief).

PER CURIAM

Commercial Insurance Company's (Commercial) declaratory judgment complaint seeking concurrent primary coverage from defendant, Philadelphia Insurance Company (Philadelphia), was dismissed by order of February 4, 2005. The judge applied the entire controversy doctrine. Thereafter, Commercial's motion for reconsideration was denied. Commercial appeals and we reverse and remand for further proceedings.

The relevant facts are undisputed. Amy Petracci-May suffered personal injuries on April 14, 2001, when her vehicle was struck in the rear by a rented vehicle driven by Edward Huff and owned by U-Drive of Lehigh Valley (U-Drive). Huff was insured by Commercial with combined single liability limits of $500,000 and U-Drive was insured by Philadelphia with the minimum required $15,000/$30,000 liability limits covering Huff as user of the U-Drive vehicle. Petracci-May filed suit against Huff and U-Drive in Camden County, and the matter was transferred to Atlantic County by consent order. U-Drive's unopposed motion for summary judgment was granted based upon lack of agency between it and Huff. Thereafter, Commercial settled the Camden County lawsuit, paying Petracci-May $480,000 on behalf of Huff.

Following the settlement, Huff's counsel wrote to U-Drive's counsel on June 15, 2004, advising of the settlement and that, based upon the co-primary coverage of their client's respective insurance companies, U-Drive's carrier was responsible for $15,000 of the settlement amount. Apparently, U-Drive's counsel did not respond. Pursuant to the settlement, an order dismissing Petracci-May's complaint was entered on June 18, 2004. On July 21, 2004, Huff's counsel filed a notice of motion under the dismissed Atlantic County docket number seeking to declare Philadelphia liable for its coverage. U-Drive's counsel responded, raising the entire controversy doctrine. The Law Division judge in Atlantic County denied Huff's motion, noting that the case had been dismissed and that Philadelphia was not a party to the litigation. He did not address U-Drive's contention respecting the entire controversy doctrine, indicating that his denial of Huff's motion was without prejudice to Philadelphia raising the entire controversy doctrine if suit was brought for co-primary coverage in the future. Commercial filed the declaratory judgment action that is the subject of this appeal in Middlesex County on October 26, 2004.

Granting Philadelphia's motion to dismiss, the judge applied the former outdated version of R. 4:30A. The prior version of the Rule read:

Non-joinder of claims or parties required to be joined by the entire controversy doctrine shall result in the preclusion of the omitted claims to the extent required by the entire controversy doctrine, except as otherwise provided by R. 4:64-5 (foreclosure actions) and R. 4:67-4(a) (leave required for counterclaims or cross-claims in summary actions). (emphasis added).

The present version of R. 4:30A, applicable at the time of Philadelphia's motion, provides:

Non-joinder of claims required to be joined by the entire controversy doctrine shall result in the preclusion of the omitted claims to the extent required by the entire controversy doctrine, except as otherwise provided by R. 4:64-5 (foreclosure actions) and R. 4:67-4(a) (leave required for counterclaims or cross-claims in summary actions).

We address briefly the history of the entire controversy doctrine and the derivation of the present version of R. 4:30A. By 1997, the entire controversy doctrine insofar as it required mandatory joinder of parties fell out of favor. In Olds v. Donnelly, 150 N.J. 424, 444-46 (1997), the Court acknowledged the criticism leveled at the entire controversy doctrine and mandatory joinder of parties as well as the sanction of preclusion. It directed the Entire Controversy Doctrine Subcommittee of the Committee on Civil Practice the responsibility to examine the exemptions that should apply to mandatory joinder, as well as any amendments that should be made to R. 4:30A. Id. at 449. The Court stressed that "mandatory joinder should not be confused with mandatory preclusion." Id. at 448.

As a result, effective September 1, 1998, the Court amended R. 4:30A, removing the provisions related to non-joinder of parties and limiting its application to non-joinder of claims. At the same time, the Court adopted R. 4:29-1(b), which permits the trial court on its own motion to "order the joinder of any person subject to service of process whose existence was disclosed by the notice required by R. 4:5-1(b)(2) or by any other means who may be liable to any party on the basis of the same transactional facts." The Court also revised R. 4:5-1(b)(2), requiring a two-prong analysis before applying the sanction of dismissal for non-joinder of parties who are required to receive notice of an action or may be compelled to be joined by the court under R. 4:29-1(b). See Mitchell v. Charles P. Procini, D.D.S., P.A., 315 N.J. Super. 557, 564-65 (App. Div. 1998). Thus, a successive action cannot be precluded unless (1) the failure to give notice to a potentially liable party or join a party compelled to be joined by order of the court is inexcusable and (2) the "right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified" earlier. R. 4:5-1(b).

On appeal, Commercial asserts and Philadelphia concedes that the judge used the out-of-date version of R. 4:30A. Commercial also argues that the coverage litigation was not properly part of the transactional facts of the underlying action. It argues, alternatively, that if the coverage action could have been joined with the underlying negligence case its failure to do so was neither inexcusable nor did it result in substantial prejudice to Philadelphia's ability to maintain a defense.

Philadelphia counters, maintaining that the judge correctly applied the two-prong test. It asserts that Commercial's failure to file its declaratory judgment until after U-Drive was dismissed from the case and its delay in seeking Philadelphia's coverage until after it settled was inexcusable. Philadelphia also argues that Commercial's failure to assert its claim during the underlying litigation results in substantial prejudice because it will "incur additional legal fees in order to re-enter litigation involving the same facts and parties." It also maintains that Commercial's failure to assert a formal claim during the underlying litigation deprived Philadelphia of the opportunity to participate in the settlement negotiations with Petracci-May.

Substantial prejudice in the context of the Rule is synonymous with an inability to maintain an adequate defense, such as the consequences resulting from "'the loss of witnesses, the loss of evidence, fading memories, and the like.'" Mitchell v. Charles P. Procini, D.D.S., P.A., 331 N.J. Super. 445, 454 (App. Div. 2000) (quoting Blank v. City of Elizabeth, 318 N.J. Super. 106, 115, (App. Div.), aff'd as modified, 162 N.J. 150 (1999). Initially, we note that Philadelphia's assertion that it was substantially prejudiced does not focus on its ability to defend the coverage suit. The issue of coverage is contractual and Philadelphia's ability to defend is not dependent on the witness to the accident. Although Philadelphia asserts that it has been prejudiced by not participating in the settlement of the underlying case, it does not assert that the information concerning liability or Petracci-May's injuries has been lost or destroyed. Moreover, Philadelphia concedes that it was aware of Commercial's assertion that there was concurrent primary coverage "during the early part" of the underlying case. Had it wanted to participate in settlement negotiations, it could have requested the opportunity to do so.

Equally unpersuasive is Philadelphia's claim that it has been prejudiced because it will have to spend additional legal fees. Had Commercial brought its declaratory judgment claim during the pendency of the underlying litigation and prior to the dismissal of Petracci-May's complaint against U-Drive, Philadelphia would have had to retain a second law firm because of the inherent conflict of interest between the insured and carrier. Burd v. Sussex Mutual Ins. Co., 56 N.J. 383, 395 (1970). There would have been no savings in litigation costs as asserted.

Because Commercial confronted Philadelphia early on in the underlying litigation about its co-primary policy, there is no inexcusable failure by Commercial to give notice to a potentially liable party as required by R. 4:5-1(b). So too, there was no order compelling Commercial to join Philadelphia in the underlying litigation. Commercial was not a party to the underlying litigation and, therefore, could not have joined Philadelphia.

Finally, we are constrained to point out that the personal automobile negligence case and coverage litigation between co-primary liability carriers are not properly subject to application of the entire controversy doctrine. To be sure, any attempt by either Huff or U-Drive to join Philadelphia would have been unsuccessful. R. 4:29-1(a) permits joinder by either a plaintiff or defendant "if the right to relief asserted by the plaintiffs or against the defendants arises out of or in respect of the same transaction, occurrence, or series of transactions or occurrences and involves any question of law or fact common to all of them." Dovetailing with R. 4:5-1(b), R. 4:29-1(b) permits the court to compel joinder of a party "who may be liable to any party on the basis of the same transactional facts." The facts surrounding the accident bearing upon liability and damages are not dependent on the same transactional facts as the contractual coverage case between co-primary carriers, nor do they implicate the same questions of law. Accordingly, we reverse the order dismissing Commercial's complaint and remand for allocation between the parties of the available co-primary coverage afforded as it relates to the underlying action. See American Home Assurance Co. v. Hartford Ins. Co., 190 N.J. Super. 477, 490 (App. Div. 1983).

 
Reversed and Remanded.

The Philadelphia Policy is not included in the appellate record, however, the rental agreement provides that U-Drive provides the minimum required liability coverage for person's using the vehicle with the permission of the Lessor.

There is no response letter in the appendix on appeal.

(continued)

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A-3590-04T1

June 13, 2006