ROCK-N-ROLLS AUTO SALON, INC., et al. v. UNITED STATES FIDELITY & GUARANTY COMPANY

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6150-04T26150-04T2

ROCK-N-ROLLS AUTO SALON,

INC., JAMES McCOMAS and

JOYCE McCOMAS,

Plaintiffs-Appellants,

v.

UNITED STATES FIDELITY & GUARANTY

COMPANY and ST. PAUL FIRE

& CASUALTY INSURANCE COMPANY,

Defendants-Respondents,

and

FLEET BANK, as successor in

interest to MOUNT HOLLY STATE BANK,

Defendant.

______________________________________

 

Argued May 31, 2006 - Decided June 20, 2006

Before Judges Skillman and Sabatino.

On appeal from Superior Court of New Jersey, Law Division, Burlington County, Docket No. L-1653-02.

Robert T. Cohen argued the cause for appellants (Robert T. Cohen and Associates, attorneys; Mr. Cohen and Rachel L. Friedman, on the brief).

Steven J. Polansky argued the cause for respondents (Marshall, Dennehey, Warner, Coleman & Goggin, attorneys; Mr. Polansky, on the brief).

PER CURIAM

Plaintiff Rock-N-Rolls Auto is the owner of a car wash located on Route 38 in Hainesport, New Jersey. Plaintiffs James and Joyce McComas are principals in the corporation. Plaintiffs' car wash was insured under a business insurance policy issued by defendant United States Fidelity & Guaranty Company (USF&G).

On November 11, 2000, plaintiffs' car wash was seriously damaged by fire. Four days later, USF&G's representative met with plaintiffs at the site and walked through and photographed the damage. In January 2001, USF&G remitted $40,000 to plaintiffs as advances for the fire loss.

On or around January 26, 2001, plaintiffs' public adjuster submitted a claim estimating plaintiffs' total loss to be $773,059. USF&G contacted plaintiffs by telephone on February 12, 2001 and learned that plaintiffs themselves had not reviewed the claim before it was submitted.

USF&G retained a building consulting reconstruction firm to survey the building damage and assist in adjusting the loss. On or around February 6, 2001, this firm estimated the cost of repair to be $306,135.13, which included depreciation. Based on this undisputed amount, USF&G sent plaintiffs a $255,673.20 check on February 20, 2001.

USF&G remitted a $95,000 payment for business personal property loss on July 5, 2001, apparently based on a March 2001 agreement on the amount of this loss. USF&G also remitted a $44,536.10 payment for the building on August 30, 2001.

USF&G declined to pay other claims presented by plaintiffs on the grounds that they were not covered by the policy or had not been properly documented.

One of the primary disputed items was plaintiffs' claim for the cost of installation of a "zero discharge system." This system was required to prevent illegal discharges of waste water from the car wash. Beginning in 1992, the Department of Environmental Protection (DEP) had issued a series of notices to plaintiff of violations for those illegal discharges. After years of negotiations, plaintiffs' counsel submitted a proposal to the DEP in September 2000 to install a "zero discharge" treatment system at the car wash, which apparently was acceptable to the DEP. However, as of the date of the fire, plaintiffs had not yet installed this system or taken any other alternative measure to address the illegal discharge for which the DEP had issued the notices of violation. Consequently, the zero discharge system was first installed as part of the post-fire reconstruction of the car wash.

On May 20, 2002, plaintiffs filed this action alleging that defendants had breached the insurance policy. The complaint also claimed that USF&G had acted in bad faith in processing plaintiffs' claims and sought punitive damages. During the pendency of this action, USF&G disbursed additional amounts to plaintiffs upon the receipt of additional documentation and reinspection of the premises. After the completion of discovery, USF&G filed a motion for partial summary judgment on the grounds that plaintiffs were not entitled to coverage for the zero discharge system first installed during post-fire reconstruction and that there was no factual foundation for plaintiffs' allegation that USF&G had processed its claims in bad faith. On March 5, 2004, the trial court issued an oral opinion granting USF&G's motion and dismissing plaintiffs' claims for reimbursement for the cost of installation of the zero discharge system and for punitive damages for alleged bad faith processing of plaintiffs' claims.

Thereafter, the court granted USF&G's motion to compel an appraisal of the damages to the building, business personal contents and business interruption loss in accordance with the terms and provisions of the insurance policy. The appraisal resulted in an order compelling USF&G to pay an additional $34,688.00 for damage to the building, $14,839.10 for business personal contents and $67,678.10 for business interruption loss. The trial court subsequently awarded plaintiffs pre-judgment interest on these amounts.

Plaintiffs' appeal is directed solely at the order granting USF&G's motion for partial summary judgment on the claims for reimbursement for the cost of installation of the zero discharge system and punitive damages for alleged bad faith processing of their claims. Plaintiffs do not challenge the results of the appraisal or the award of prejudgment interest on the additional liability of USF&G determined by that appraisal.

Plaintiffs present the following arguments:

I. THE ZERO DISCHARGE RECLAIM SYSTEM IS COVERED BY THE INSURANCE POLICY.

1. No ordinance or statute required installation of the zero discharge reclaim system.

2. The cost of the zero discharge reclaim system is covered as an expediting expense.

II. PLAINTIFFS ARE ENTITLED TO PUNITIVE DAMAGES BASED ON THE BAD FAITH CONDUCT OF THE DEFENDANTS.

1. The defendants' agent acted with malice.

2. The Bad Faith conduct of the Defendants caused unnecessary, costly and avoidable delays.

3. The Defendants Insurers offered inexperienced contractors to perform the reconstruction and inferior replacement of fire and water damaged equipment.

We reject these arguments and affirm the grant of partial summary judgment in favor of USF&G substantially for the reasons set forth in the trial court's oral opinion. We add the following supplemental comments.

The policy that USF&G issued to plaintiffs provides coverage for "direct physical loss to Covered Property at the premises . . . caused by or resulting from any Covered Cause of Loss." Plaintiff did not install the zero discharge system before the November 11, 2000 fire at the car wash. Therefore, the cost of installation of that system was not a "direct physical loss . . . caused by or resulting from" the fire.

Plaintiffs claim coverage for the zero discharge system under other sections of the policy. One of those sections provides additional coverage for "Increased Cost of Construction" as follows:

(3) . . . If a Covered Cause of Loss occurs to the covered Building property . . . at the premises . . . , we will pay for the increased cost to:

(a) Repair or reconstruct damaged portions of that building property; and/or

(b) Reconstruct or remodel undamaged portions of that Building property, whether or not demolition is required,

when the increased cost is a consequence of enforcement of building, zoning or land use ordinance or law.

However, this coverage is subject to the following exclusions:

(5) Under this Additional Coverage we will not pay for the costs associated with the enforcement of any ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants."

(6) Under this Additional Coverage we will not pay for loss due to the enforcement of any ordinance or law that:

(a) You were required to comply with before the loss, even if the building was undamaged; and

(b) You failed to comply with.

The DEP required plaintiffs to install the zero discharge system or take other measures to prevent the illegal discharge of waste water from the car wash before the fire. Therefore, the cost of installation of the system was "associated with the enforcement of . . . law[s] which require[d] [plaintiffs] to . . . remove, contain, treat, detoxify or neutralize . . . the effects of pollutants." In addition, the requirement of installation of this system was "due to the enforcement of . . . [a] law that [plaintiffs] were required to comply with before the loss, even if the building was undamaged[.]"

Plaintiffs also contend that the zero discharge system was an "expediting expense" covered under the policy. Pursuant to the policy USF&G agreed to pay "the necessary 'expediting expenses' that [plaintiffs] incur[ed] during the 'period of restoration' that [they] would not have incurred if there had been no direct physical loss to property . . . caused by or resulting from a Covered Cause of Loss." However, it is clear that the DEP would have required plaintiffs to install the zero discharge system or to remedy the illegal discharge of waste water from the car wash in some other manner even if the fire had not occurred. Therefore, the cost of installation of this system was not an expense "incur[ed] during the 'period of restoration' that [plaintiffs] would not have incurred if there had been no direct physical loss to property . . . caused by or resulting from a Covered Cause of Loss."

Plaintiffs' bad faith claim is governed by the tests set forth in Pickett v. Lloyd's, 131 N.J. 457, 481 (1993):

In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits. In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.

The trial court correctly concluded that plaintiffs did not present evidence that could support a finding of bad faith either in the denial or delay in processing plaintiffs' claims. The claims that USF&G denied were fairly debatable, and there were valid reasons for the delays in processing claims. USF&G made timely payments to plaintiffs in accordance with the estimates prepared by the valuation experts it retained. Its denials of the additional amounts claimed by plaintiffs were based on those estimates, and any delays in payments were based on plaintiffs' delays in submitting required documentation to support their claims or reasonable disputes concerning the amounts due.

Affirmed.

 

Plaintiffs' complaint also named as defendants St. Paul Fire & Casualty Insurance Company, which is a company affiliated with USF&G, and Fleet Bank, which was the successor in interest of the party from which plaintiffs had acquired the car wash. Plaintiffs do not challenge the dismissal of the claims against these defendants.

(continued)

(continued)

9

A-6150-04T2

June 20, 2006