LGC INVESTMENTS, INC., LLC. v. MERCHANTS MUTUAL INSURANCE COMPANY

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5246-04T55246-04T5

LGC INVESTMENTS, INC., LLC.,

Plaintiff-Respondent/

Cross-Appellant,

v.

MERCHANTS MUTUAL INSURANCE

COMPANY,

Defendant-Appellant/

Cross-Respondent.

___________________________________________________

 

Argued May 15, 2006 - Decided June 2, 2006

Before Judges C.S. Fisher and Yannotti.

On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. ESX-L-6144-04.

Dennis J. Crawford argued the cause for appellant/cross-respondent (John C. Dugan, on the brief).

Dennis T. Smith argued the cause for respondent/cross-appellant (Pashman Stein, attorneys; Mr. Smith, of counsel and on the brief).

PER CURIAM

In this appeal, we review the trial judge's determination that the "debris removal" provisions contained in a comprehensive business owner's policy (the policy) issued by defendant Merchants Mutual Insurance Company (the insurer), which provided coverage for a Belleville hardware store owned by plaintiff LCG Investments, Inc., LLC (the insured), was ambiguous and should, thus, be interpreted as providing greater coverage for the expense of removing debris than warranted by the insurer's interpretation or as actually intended by the insurer. By cross-appeal, the insured seeks our reversal of the denial of its claim for attorneys' fees. We affirm in all respects.

I

On November 11, 2003, a fire destroyed the insured's hardware store, generating physical losses that warranted the insurer's payment to the insured of $443,253.97; that payment exhausted the policy limits set forth on the policy's declaration sheet.

The insured also incurred debris removal costs in the approximate amount of $55,000 and sought reimbursement from the insurer. The parties disputed what the policy required the insurer to pay in debris removal costs.

When the parties were unable to resolve their differences, the insured commenced this declaratory judgment action and sought the disputed amount from the insurer. There being no factual disputes, but instead a disagreement about the meaning of the policy's terms, the parties filed cross-motions for summary judgment. After hearing oral argument, Judge James S. Rothschild rendered a written opinion, which thoroughly canvassed the relevant terms of the policy, and entered summary judgment in favor of the insured. The judge also denied the insured's application for fees.

II

The insured's right to reimbursement for debris removal costs turns on an understanding of various provisions of the policy. First, we observe that paragraph C(1) of the policy states that "[t]he most" the insurer would pay "for loss or damage in any one occurrence is the applicable Limit of Insurance shown in the Declarations." Those limits were exhausted by the insurer's payment of $443,253.97 for the insured's direct physical loss.

The insurer also agreed to pay for the insured's debris removal costs. In this regard, the policy states:

5. Additional Coverages

a. Debris Removal

(1) We will pay your expense to remove debris of Covered Property caused by or resulting from a Covered Cause of Loss that occurs during the policy period. . . .

(2) The most we will pay under this Additional Coverage is 25% of:

(a) The amount we pay for the direct physical loss of or damage to Covered Property; plus

(b) The deductible in this policy applicable to that loss or damage.

But this limitation does not apply to any additional debris removal limit provided in Paragraph (4) below.

. . . .

(4) If:

(a) The sum of direct physical loss or damage and debris removal expense exceeds the Limit of Insurance; or

(b) The debris removal expense exceeds the amount payable under the 25% Debris Removal Coverage limitation in Paragraph (2) above;

we will pay up to an additional $10,000.00 for each location in any one occurrence under the Debris Removal Additional Coverage.

Because the trial judge correctly held that these provisions are ambiguous, we agree it is appropriate to broadly interpret the policy terms in accord "with the reasonable expectations of the insured even if a close reading of the written text reveals a contrary meaning." Zacarias v. Allstate Ins. Co., 168 N.J. 590, 595 (2001); see also Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 269 (2004); Mazzilli v. Accident Cas. Ins. Co., 35 N.J. 1, 7 (1961).

We conclude that these provisions are ambiguous because, as the trial judge recognized, this policy language generates at least three plausible interpretations. First, there is the insurer's proposed interpretation that, when the limits of liability have been exhausted, the insured is only entitled to the $10,000 amount referenced in subparagraph (4); the insurer contends that when subparagraph (4) is implicated, the 25% cap contained in subparagraph (2) is rendered inapplicable. The judge held that these provisions suggested a second interpretation whereby the insurer would provide coverage for debris removal costs but in no greater amount than 25% of the direct physical loss; that is, when subparagraph (2) is implicated, subparagraph (4) has no application. And the insured argues that when the policy limits are exhausted, subparagraphs (2) and (4) may both apply if necessary; that is, the insured contends that these provisions permit the reimbursement of debris removal costs in an amount no greater than 25% of the direct physical loss, as subparagraph (2) indicates, but that the insured would also be entitled to what subparagraph (4) refers to as "an additional $10,000" when the damage to the property exceeds the policy limits or the debris removal costs exceed the 25% cap contained in subparagraph (2).

We agree with the trial judge that the meaning of these provisions is not without doubt. Subparagraph (1) clearly expresses the insurer's promise to pay for debris removal without limit. That promise, however, is immediately limited by subparagraph (2), which states that "[t]he most" the insurer will pay for debris removal is 25% of the amount the insurer is obligated to pay for "the direct physical loss of or damage to" the covered property "plus" the deductible applicable to that loss. That part of subparagraph (2) is clear and unambiguous, but it is followed by the enigmatic final sentence of subparagraph (2), which states: "But this limitation does not apply to any additional debris removal limit provided in" subparagraph (4). This sentence underscores our conclusion that the debris removal coverage provisions are ambiguous.

That is, the question at the heart of this controversy is whether this last sentence of subparagraph (2) means that debris removal coverage to the extent of 25% of the loss is not applicable when subparagraph (4) applies, or whether an insured is allowed 25% of the loss together with "an additional $10,000" when the circumstances referred to in subparagraph (4) occur. We conclude that the most sensible reading of these provisions requires that the insured is entitled to the benefits of both subparagraphs (2) and (4) when the circumstances which trigger the latter are present.

The "[b]ut this limitation does not apply" language in subparagraph (2) does not necessarily support the insurer's argument that subparagraph (2) and subparagraph (4) are mutually exclusive. It must be remembered that both subparagraphs (2) and (4) are limitations on the chief promise made by the insurer in subparagraph (1) to "pay your expense to remove debris . . . caused by or resulting from a Covered Cause of Loss." Subparagraph (2), as we have described, limits that promise to 25% of what the insurer has paid for the direct physical loss to the insured's property (plus the amount of the deductible), but that "limitation" on subparagraph (1)'s promise to pay all of the debris removal costs does not necessarily limit the providing of additional compensation to the insured if either of the two events referred to in subparagraph (4) apply. Otherwise, the insured could be placed in the illogical position of being entitled to less in debris removal costs for circumstances that generate greater property loss -- an occurrence which we conclude would not be within the reasonable contemplation of an insured nor sensible in light of the way in which the debris removal provisions are structured.

Thus, we view this policy as containing the insurer's promise to pay all debris removal costs, which promise is limited to 25% of the amount paid by the insurer for the property loss, and, when the insured's loss is even greater than that -- i.e., when the actual direct physical loss or damage exceeds the policy limits, or when the "debris removal expense exceeds the amount payable under the 25% Debris removal coverage limitation" in subparagraph (2) -- then the insured is entitled to reimbursement for the actual debris removal costs to the extent that it does not exceed 25% of the insurer's total payout for the direct physical loss to the property together with "an additional $10,000 for each location in any one occurrence under the Debris Removal Additional Coverage." In essence, our interpretation of these provisions is largely governed by the fact that the $10,000 payment mentioned in subparagraph (4) is referred to as being "additional" -- that is, "additional" to the debris removal costs permitted by subparagraph (1), as further limited by subparagraph (2), and not, as the insurer contends, "additional" to the limits of insurance contained in the declaration sheet.

We acknowledge that our interpretation is not necessarily the only interpretation warranted by the particular language chosen by the insurer to describe its promises in this regard. Reasonable minds can certainly differ. Despite our conclusion that the policy provides, in cases where the direct property loss not merely exhausts but exceeds the policy limits, that an insured is entitled to all its debris removal costs so long as they do not exceed 25% of the policy limits plus $10,000, we also recognize that the same language could be interpreted, when the policy limits are exhausted, to either 25% of the direct loss or only $10,000, as argued by the insurer. It is the fact that there are at least three plausible interpretations that render these provisions ambiguous. This ambiguity requires a broad interpretation that best fulfills the insured's objectively reasonable expectations. See Auto Lenders, supra, 181 N.J. at 269-70.

In considering these terms on their whole, we conclude that a reasonable insured would discern that the insurer intended to create a sliding scale for the payment of debris costs that would call for an increase in the amount of reimbursable debris removal costs as the actual physical loss to the property increases without regard to the policy limits; the insurer suggests, with some reason, that the promise to pay debris removal costs must have some bearing on or link to the insurer's intention to restrict the insured's recovery to the express limits stated in the policy declarations. This position is certainly arguable, but in keeping with the manner in which our courts interpret ambiguous insurance policies, we conclude that an expansive view of recovery for debris removal costs should be adopted.

That is, our approach to this ambiguous policy starts with the assumption that in most cases the more extensive damage to a building the more likely there will be an increase in debris removal expenses. It is difficult to imagine that an insured would assume that its compensation for the loss of its building would be reduced, and in some instances, drastically reduced, by the amount of debris removal costs also caused by the covered loss. As a result, we conclude that in the absence of unambiguous provisions to the contrary, an insured would reasonably expect that the amount of debris removal costs to which it would be entitled would be calibrated and linked to the extent of the direct physical losses incurred -- the greater the property loss, the more extensive the reimbursement for debris removal.

For these reasons, we conclude that not only is the "25% plus $10,000" interpretation the most persuasive result suggested by the policy language, but also that this interpretation best comports with the objectively reasonable expectation of an insured in these circumstances.

III

The insured argues, by way of its cross-appeal, that it was entitled to an award of counsel fees from the insurer pursuant to R. 4:42-9(a)(6).

It is well-established that R. 4:42-9(a)(6), which permits counsel fee awards in actions based "upon a liability or indemnity policy of insurance, in favor of a successful claimant," does not include direct actions against insurers. See Sears Mortgage Corp. v. Rose, 134 N.J. 326, 355 (1993) (holding that "direct action cases typically involve an insured seeking to recover from his or her insurer for damages resulting from losses caused by theft, fire, the diminished value of property, and the like"). R. 4:42-9(a)(6) is based upon a policy intended "to discourage groundless disclaimers and to provide more equitably to an insured the benefits of the insurance contract without the necessity of obtaining a judicial determination that the insured, in fact, is entitled to such protection." Id. at 356 (quoting Guarantee Ins. Co. v. Saltman, 217 N.J. Super. 604, 610 (App. Div. 1987)). The rule was "never intended to apply to a direct monetary claim by an insured against his carrier." Kistler v. New Jersey Mfrs. Ins. Co., 172 N.J. Super. 324, 331 (App. Div. 1980). Indeed, as we observed in N.J. Mfrs. Ins. Co. v. Breen, 297 N.J. Super. 503, 517 (App. Div. 1997), in its rule-making capacity, the Supreme Court has evaluated the argument that the scope of R. 4:42-9(a)(6) should be expanded but, after studying the matter, has maintained this distinction. To adopt the approach suggested by the insured would cause an unwarranted rift in the distinction between suits against insurers that do and do not permit an award of counsel fees to which our Supreme Court has steadfastly adhered.

In an attempt to avoid this consequence, the insured argues that the dispute about the recovery of debris removal costs was generated by the municipality's demands for the removal of portions of the destroyed hardware store that the insured intended on leaving in place. As a result, the insured views its claim against the insurer as something more than a direct claim. The insured also suggests that it could have permitted circumstances to play out in a way that would have altered the nature of this action by simply leaving the debris, ignoring the municipality's demands, and awaiting suit for its removal from the municipality. Following that circumstance, the insured could have then commenced an action against its insurer seeking liability or indemnity coverage. We reject these contentions. The authorities cited above demonstrate that there is a clear line of demarcation between direct claims and claims seeking liability coverage or indemnity. In addition, the fee-shifting rights created by R. 4:42-9(a)(6) have equitable underpinnings and, as a result, our courts should not permit an insured to obtain indirectly what our court rules clearly preclude it from obtaining directly.

Affirmed.

 

This insured's debris removal claim, which we conclude should be paid in full, does not obligate the insurer to pay more than 25% of the amount paid for direct physical loss to the property. The insured incurred debris removal costs in the amount of $55,000, which is far less than 25% of the amount paid by the insurer.

The debris removal provisions in question are those recommended by the Insurance Services Organization (ISO). We are mindful, as the trial judge also observed, that a debris removal provision later adopted by the ISO sought to clarify the provisions in question in a way that would suggest that, in these circumstances, an insured would be entitled to no more than $10,000 in debris removal costs. This change in policy language, of course, does not govern the disposition of the issues in this case, although we are additionally persuaded in our determination that the debris removal provisions in question are ambiguous by ISO's introduction to its new debris removal provisions and its indication that the manner of calculating the debris removal costs reimbursable under the old provisions (i.e., those applicable here) was "potentially confusing."

(continued)

(continued)

13

A-5246-04T5

June 2, 2006