WILLIAM H. HALL CO. v. HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1282-08T21282-08T2

WILLIAM H. HALL CO. d/b/a

EQUIPMENT MARKETERS,

Plaintiff-Appellant,

v.

HARLEYSVILLE INSURANCE

COMPANY OF NEW JERSEY,

Defendant-Respondent.

______________________________

 

Submitted September 24, 2009 - Decided

Before Judges Gilroy and Simonelli.

On appeal from the Superior Court of New Jersey, Law Division, Burlington County, Docket No. L-652-08.

Hagner & Zohlman, LLC, attorneys for appellant (Thomas J. Hagner, on the brief).

Riker Danzig Scherer Hyland & Perretti, LLP, attorneys for respondent (Lance J. Kalik, of counsel; Mr. Kalik and David H. Bavli, on the brief).

PER CURIAM

This is a declaratory judgment action. On August 29, 2008, on cross-motions for summary judgment by plaintiff William H. Hall Co., d/b/a Equipment Marketers, and defendant Harleysville Insurance Company of New Jersey, the trial court entered an order that denied plaintiff's motion and granted defendant's motion. That order determined, among other things, that: 1) defendant is only obligated to indemnify plaintiff against claims for damaged clothing asserted by plaintiff's customers in a third-party liability action; and 2) defendant is obligated to reimburse plaintiff for 10% of plaintiff's costs in defending the underlying action from November 2007 to the date of the order, and ongoing until final resolution of the underlying action. Plaintiff only appeals from that part of the order that limited defendant's obligation to reimburse plaintiff for its defense costs. Plaintiff also appeals from the order of October 27, 2008, that denied its motion for reconsideration. We reverse and remand for further proceedings consistent with this opinion.

Plaintiff sells washing machines and clothes dryers. In 2004, plaintiff sold several washers and dryers to Car Wash Management, Inc., d/b/a On the Go (Car Wash). Between June 2005 and February 2007, four dryers caught fire, causing damage to Car Wash's customers' clothing. On ascertaining that the dryers were defective, Car Wash sent plaintiff a letter on March 29, 2007, demanding plaintiff not only remove the dryers and reimburse it for the costs of purchase, but also reimburse it for monies Car Wash paid "to patrons for laundry that was damaged" by the fires. On May 8, 2007, Car Wash filed a complaint against plaintiff and the manufacturer of the dryers, revoking acceptance of the machines, and demanding that it be reimbursed for all monies paid for the dryers, and for all other monetary loses plaintiff sustained as set forth in the March 29, 2007 letter. The complaint alleged causes of action for breach of the Uniform Commercial Code, breach of contract, and breach of implied warranty (the underlying action).

Defendant insured plaintiff for third-party liability insurance coverage under Business Owners' Policy No. BO-0E0428. That policy required defendant to indemnify and defend plaintiff for third-party personal injury and property damage claims arising out of an "occurrence" as defined in the policy. Plaintiff demanded that defendant undertake its defense and indemnify it for the claims asserted by Car Wash.

On May 29, 2007, believing that Car Wash's claim for the replacement costs of the dryers was not as a result of an "occurrence" as defined in the policy, defendant denied coverage. On July 11, 2007, plaintiff filed its declaratory judgment action against defendant. While the declaratory judgment action was pending, plaintiff ascertained via discovery in the underlying action that Car Wash was asserting a damage claim of $43,035.84 for replacement costs of the dryers, repairs to the dryers, and costs of investigating the cause of the fires, as well as a claim of $313.20 for reimbursements to its customers for damaged clothing.

On July 24, 2008, plaintiff filed a motion for summary judgment. Defendant filed a cross-motion. At oral argument, the parties agreed that: 1) Car Wash's claim for replacement costs of the dryers, repairs to the dryers, and costs of investigating the cause of the fires was not covered under the policy; and 2) Car Wash's claim for reimbursement of monies paid to its customers for loss of their clothing was covered under the policy. Accordingly, the primary issue presented to the trial court concerned the extent of defendant's obligation to reimburse plaintiff for the defense costs that it incurred in the underlying action.

At oral argument, although plaintiff's counsel had not presented the court with time records disclosing the time spent on the various claims asserted in the underlying action, plaintiff demanded that defendant reimburse it for all of its defense costs. Relying on SL Industries v. American Motorists Ins. Co., 128 N.J. 188 (1992), the court apportioned the defense costs, directing that defendant reimburse plaintiff for 10% of the defense costs from the date plaintiff first made a demand for defense of the complaint, to the present, and "ongoing until resolution of the underlying litigation." In so ruling, the court reasoned that the alleged damages, subject to indemnification under the policy, were relatively minor as compared to the non-covered damages.

On appeal, plaintiff argues that the trial court erred in directing that defendant only reimburse it for 10% of the litigation costs it expended in defending the underlying action. Plaintiff contends that defendant is required to reimburse it for all of such costs. In so arguing, plaintiff asserts that the defense costs should not have been apportioned because the complaint in the underlying action only alleged a single claim, the sale of defective dryers, with "different theories of damages."

Alternatively, plaintiff argues that the defense costs of the underlying action cannot reasonably be apportioned between the covered and non-covered claims. Plaintiff contends that the court arbitrarily ruled that defendant was obligated only to reimburse 10% of the defense costs, concluding that the third-party claim for the loss of clothing was less than 1% of the total damages claimed by Car Wash.

Plaintiff's argument that the claim for damages to Car Wash's customers' laundry cannot be parsed from the other damage claims contained in the underlying complaint is without merit. The laundry claim constitutes "a covered claim" which exists alongside other "non-covered claims" in the underlying suit. However, we agree that the court erred in determining that defendant was obligated to reimburse plaintiff for 10% of the defense costs it incurred in the underlying action.

The Supreme Court provided guidance to trial courts in addressing the issue of reimbursement of costs of defense to an insured when the insurer wrongfully refuses to defend a third-party liability complaint.

. . . The general rule is that when the insurer has wrongfully refused to defend an action and is then required to reimburse the insured for its defense costs, its duty to reimburse is limited to allegations covered under the policy, provided that the defense costs can be apportioned between covered and non-covered claims. When the defense costs cannot be apportioned, the insurer must assume the cost of the defense for both covered and non-covered claims.

. . . .

We believe that principle obligates the insurer to pay only those defense costs reasonably associated with claims covered under the policy.

Although we adopt the general rule favored by most jurisdictions, we note that our interpretation differs from that of a number of the courts that have applied it. Those courts presume that apportioning costs will be very difficult, and that the exception, requiring insurers to pay all of the defense costs if they are not capable of apportionment, thus applies more often than the rule requiring apportionment. Those courts implicitly require a greater degree of certainty in determining the allocability of costs than is either necessary or fair. We recognize that insurers, insureds, and courts will rarely be able to determine the allocation of defense costs with scientific certainty. However, the lack of scientific certainty does not justify imposing all of the costs on the insurer by default. The legal system frequently resolves issues involving considerable uncertainty. We presume that the insurer and insured can negotiate a satisfactory settlement that fairly apportions the defense costs. When they are unable to agree, we likewise presume that our courts will be able to analyze the allegations in the complaint in light of the coverage of the policy to arrive at a fair division of costs.

[SL Industries, supra, 128 N.J. 214-16 (internal citations and parentheticals omitted).]

Accordingly, under the above principle, the court is required to exercise discretion in apportioning the cost of defending a third-party liability action between the insured and the insurer.

"Discretion, however, means legal discretion, 'in the exercise of which the judge must take account of the law applicable to the particular circumstances of the case and be governed accordingly.'" Alves v. Rosenberg, 400 N.J. Super. 553, 562-63 (App. Div. 2008) (quoting State v. Steele, 92 N.J. Super. 498, 507 (App. Div. 1966)). "Obviously, '[i]f the trial judge misconceives the applicable law or misapplies it . . . the exercise of legal discretion lacks a foundation and becomes an arbitrary act.'" Id. at 563 (quoting Steele, supra, 92 N.J. Super. at 507).

Here, the trial court apportioned the defense costs plaintiff incurred solely by comparing the amount of the covered claim of $313.20 to the amount of the non-covered claims of $43,035.84. The court found that the covered claim was less than 1% of the non-covered claims and concluded that ordering defendant to pay 10% of the defense costs was reasonable. We conclude otherwise.

We agree with plaintiff that apportionment should have been based on the claims asserted, covered and non-covered, and on the legal services rendered in defending each of the claims, not the claimed damages divorced from the legal services performed. Failure to do so could result in an apportionment of defense costs contrary to the principle of SL Industries. For example, a non-covered claim seeking $100,000 in damages may be disposed of early in the litigation by summary judgment, whereas, a covered claim for $10,000 may not be disposed of until conclusion of the trial.

Accordingly, we reverse and remand the issue of apportionment of the defense costs incurred by plaintiff in the underlying action. On remand, plaintiff's counsel shall file an itemized statement of legal services rendered in the underlying action for the trial court's consideration. The court shall make a determination whether defense costs for covered and non-covered claims are capable of apportionment. If so, the court shall apportion the defense costs based on the reasonable value of the legal services rendered in defending the respective claims and any other factors the court deems relevant. If "the defense costs cannot be apportioned, the insurer must assume the costs of the defense for both covered and non-covered claims." SL Industries, supra, 128 N.J. at 215.

 
Reversed and remanded for further proceedings consistent with this opinion.

On October 27, 2008, the trial court entered an order granting partial summary judgment to plaintiff in the underlying action. On December 12, 2008, the court granted plaintiff summary judgment, dismissing the action in its entirety.

(continued)

(continued)

9

A-1282-08T2

October 13, 2009