STATE FARM INSURANCE v. ENCOMPASS INSURANCE

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1321-07T31321-07T3

STATE FARM INSURANCE,

individually and as insurer

of Patrick O'Neill,

Plaintiff-Respondent,

vs.

ENCOMPASS INSURANCE,

FORMERLY KNOWN AS

CONTINENTAL INSURANCE

COMPANY AND A/K/A CNA

PERSONAL INSURANCE,

Defendants-Appellants.

____________________________________________________________

 

Argued November 19, 2008 - Decided

Before Judges Parrillo and Messano.

On appeal from the Superior Court of New Jersey, Law Division, Ocean County, Docket No. L-1413-07.

Michael D. Fitzgerald argued the cause for appellants.

Kevin Sheehy argued the cause for respondent (King, Kitrick & Jackson, attorneys; Mr. Sheehy, on the brief).

PER CURIAM

Defendant, Encompass Insurance, f/k/a Continental Insurance Company, and a/k/a CNA Personal Insurance (Encompass), appeals from the September 28, 2007 order that granted summary judgment in favor of plaintiff State Farm Insurance (State Farm) in the amount of $36,741.20 plus counsel fees associated with the motion. Encompass raises the following issues for our consideration:

POINT ONE

THE GRANTING OF SUMMARY JUDGMENT BY THE LOWER COURT WAS BASED ON ISSUES NOT BEFORE THE COURT AND/OR WAS PREMATURE.

POINT TWO

THE DOCTRINE OF RES JUDICATA IS NOT APPLICABLE IN THE PRESENT CASE.

We have considered these contentions in light of the record and applicable legal standards. We reverse.

I.

This action arises from a motor vehicle accident that occurred on June 1, 2002. Doreen Whitehead's car was rear-ended by a Chevy Blazer driven by Patrick O'Neill and owned by Patrick Dillon. O'Neill fled the scene and was charged with various motor vehicle offenses. Whitehead's vehicle was insured by New Jersey Manufacturers Insurance Co. (NJM), Dillon was insured by Encompass, and O'Neill was insured under a policy issued by State Farm. In the event O'Neill was operating a "non-owned car," his policy with State Farm provided only excess coverage to any primary coverage that existed on that vehicle.

On July 19, 2002, in response to NJM's claim for property damage to Whitehead's car and after conducting its investigation, Encompass declined payment, "hav[ing] concluded that [its] insured[,] [Dillon,] was not responsible for the occurrence[,]" because "O'Neill was not authorized to use the vehicle owned by [] Dillon." Indeed, the police report from the investigation that followed the accident revealed that Dillon's stepson, Chris Matthews, was in possession of the Blazer pursuant to Dillon's permission. After the police found the unattended vehicle near the site of the crash, they located Matthews who told them that O'Neill had taken the car without his permission when Matthews fell asleep.

On June 1, 2004, Whitehead filed her negligence suit against O'Neill and Dillon, alleging that O'Neill was "the agent, servant and/or employee of . . . Dillon." On August 24, 2004, Whitehead's suit was consolidated with a subrogation action filed by NJM against O'Neill and Dillon seeking reimbursement of payments it made for Whitehead's property damage claim.

Discovery ensued in the consolidated action with State Farm appointing counsel to represent O'Neill and Encompass appointing counsel to represent Dillon. On January 24, 2006, Dillon was deposed with all counsel for all parties present. Dillon testified that he had given permission to his step-son to use the vehicle on the date of the accident, but that no one else had permission to use the Blazer.

On May 3, 2006, once again with both O'Neill and Dillon being represented by counsel, O'Neill was deposed. He testified as follows regarding his conversation with Matthews over the use of the car:

Q: Did you ask him if you could use the vehicle?

A: Yes, I did.

Q: And what did he say?

A: He said, "Huh?"

Q: Okay. And what did you do?

A: I said, "Chris, I'm taking the truck."

Q: And what did he say?

A: Didn't say anything.

Q: Did he ever tell you no, you can't use it?

A: No, he did not.

. . . .

Q: As I understand it, he didn't respond to your comment. Right?

A: How it went was Chris had been drinking, like I said, and had been up all night from driving and possibly doing cocaine and was crashing at that point, you know, physically and mentally, so he was sleeping on his bed. I was watching TV downstairs by myself for 15 minutes, however long, 20 minutes. Went back up to Chris's room where he was sleeping and I said, "Chris, can I borrow your truck to go home?"

And he said, "Huh?"

And I said, "Chris, I'm taking your truck. I'll be back in a little bit."

And the keys were there, and I took the keys, and I took his truck.

O'Neill referred to Matthews as his "big brother and best friend," and said that prior to the accident Matthews had entrusted him with a lot of money and other personal valuables. He also stated that Matthews had never let him use the Blazer or any other vehicle before.

Meanwhile, months earlier, on November 11, 2005, Matthews was deposed. Tellingly, counsel for O'Neill was present, as was counsel for NJM, but neither Whitehead's attorney nor Dillon's counsel was present. Matthews testified that he did not remember giving O'Neill permission to use the vehicle because he had fallen asleep after a night of drinking. He conceded that he never expressly told O'Neill that he could not drive the Blazer. Matthews further stated that he did not believe O'Neill intended to steal the vehicle, but rather used it "to get from one place to the other and possibly get back before [he] even woke up." Although Matthews would not have been angry that O'Neill borrowed the vehicle had the accident not occurred, he nonetheless claimed that if he had been fully awake, he would not have allowed O'Neill to drive the car.

On June 13, 2006, arbitration was held in the consolidated matters pursuant to Rule 4:21A. The arbitrators entered two awards: $35,000 in favor of Whitehead, finding O'Neill one-hundred percent negligent, and neither Whitehead nor Dillon negligent; $3776.50 in favor of NJM. The second award lists the parties to the action as NJM and O'Neill. It assigned no percentage of liability to either, but contained the notation, "O'Neill had permission implied (sic) to drive the vehicle." Whitehead moved to confirm the award and on September 8, 2006, an order was entered confirming the arbitration award and entering judgment in the amount of $35,000 in favor of Whitehead as against O'Neill only.

State Farm paid Whitehead's judgment after Encompass refused. On April 25, 2007, State Farm filed an order to show cause and verified complaint seeking indemnification from Encompass for the "costs and expenses" State Farm incurred in defending O'Neill, as well as the amounts it paid "for the claims arising out of the automobile accident of June 1st, 2002." State Farm filed the complaint as a "summary action," and on June 8, 2007, the order to show cause was granted requiring Encompass to appear on June 8. On the return date, the judge permitted Encompass to file an answer, which it did on June 14, 2007.

At the case management conference held on July 17, 2007, the parties agreed that no additional discovery was required, and State Farm then moved for summary judgment. It argued that O'Neill had permission to use the vehicle and that res judicata barred Encompass from re-litigating the permissive use issue. Encompass responded by noting that Rule 4:21A-4(e) prohibits the use of the arbitrator's factual findings in any subsequent trial de novo. Moreover, it noted that neither State Farm nor Encompass were parties to the arbitration and that the arbitrator's finding that O'Neill's use of the vehicle was with Dillon's implied permission was not entitled to preclusive effect. Lastly, Encompass contended that summary judgment was not appropriate because "factual testimony from the parties involved" was required "to determine whether or not there was in fact permissive use."

The motion was decided without oral argument. The judge did not address State Farm's res judicata argument at all. Instead, he concluded in an oral opinion that "[t]he threshold issue is whether or not there was permission to drive the vehicle." Citing to the deposition testimony of Dillon and O'Neill, the judge concluded that State Farm was entitled to summary judgment under the "so-called initial permission rule," which he characterized as:

[I]f initial permission is given by the owner by someone else to drive the vehicle and that person gives subsequent permission to others after being told they can't give permission, that the initial permission still governs even if they were told not to let anyone else use [the vehicle].

. . . .

[O]nce it's established that the first user had permission from the insured, lack of permission whether expressed or implied of such a named insured for use by a later permitee is irrelevant for purposes of the initial permission rule.

Finding that Dillon had given Matthews permission to use the Blazer, and citing to O'Neill's testimony that Matthews "didn't say anything" when told he was taking the truck, the judge concluded it was "absolutely clear that . . . there was permission." He granted summary judgment and entered the order under review.

II.

When reviewing a grant of summary judgment, we employ the same standards used by the motion judge. Atlantic Mut. Ins. Co. v. Hillside Bottling Co., Inc., 387 N.J. Super. 224, 230 (App. Div.), certif. denied, 189 N.J. 104 (2006). We first determine whether the moving party has demonstrated there were no genuine disputes as to material facts; we then decide "whether the motion judge's application of the law was correct." Id. at 230-31. "[W]hether there exists a "genuine issue" of material fact that precludes summary judgment requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995).

Encompass argues that the matter was not ripe for summary judgment because no discovery had taken place. It contends that to the extent it agreed to waive any further discovery at the case management conference, it did so only because State Farm's complaint was a "summary action" that sought relief solely on the basis of res judicata.

We respectfully disagree with this argument. State Farm's complaint did not so limit its cause of action and the transcript from the conference reveals State Farm, while noting its res judicata argument, in no way limited itself to just that claim. Indeed, in it's motion for summary judgment, State Farm clearly relied upon the discovery that had taken place in the underlying negligence actions to support the allegedly inescapable legal conclusion that O'Neill was a permissive user of Dillon's Blazer and, hence, State Farm's policy was secondary to Encompass' policy. Because we reverse the judgment on other grounds, and further proceedings will be required, we leave the issue of Encompass' claim for additional discovery to the sound discretion of the trial judge.

Nor do we accept Encompass' argument that the motion judge decided a factual issue that "was not the issue before him." State Farm submitted portions of O'Neill's and Dillon's depositions in support of its motion; in its brief, it specifically sought relief on the grounds that there was no genuine disputed fact as to O'Neill's permissive use of Dillon's Blazer. Somewhat inexplicably, State Farm did not include any of Matthews' deposition in its motion papers. Even more inexplicable, Encompass did not include any of Matthews' deposition in its opposition. Thus, the motion judge did not have the benefit of Matthews' deposition when he decided the motion, though a copy of the police report was furnished as part of State Farm's motion. We conclude that the testimony Matthews gave at his deposition, together with the entire motion record, indicates a genuine material dispute existed as to whether O'Neill was a permissive user of Dillon's Blazer, and, as a result, summary judgment was not properly granted.

We need not review in detail our jurisprudence regarding the permissive use of an automobile. It suffices to say that the initial permission rule provides that:

[I]f a person is given permission to use a motor vehicle in the first instance, any subsequent use short of theft or the like while it remains in his possession, though not within the contemplation of the parties, is a permissive use within the terms of a standard omnibus clause in an automobile liability insurance policy.

[Proformance Ins. Co. v. Jones, 185 N.J. 406, 412 (2005)(quoting Matits v. Nationwide Mut. Ins. Co., 33 N.J. 488, 496-97 (1960)).]

When the ultimate user however is not the original permitee, but rather a subpermitee, i.e., one given permission by the original permitee, further analysis is required. As we recently noted,

[A] person seeking coverage as a subpermittee must show that he had the initial permittee's permission to use the vehicle . . . . [B]efore permission can be said to flow from the owner or named insured to the third-person-driver through the alleged initial permittee the latter must be found from the circumstances to have assumed charge or dominion over the car pursuant to the owner's permission and to have remained in that relationship to the vehicle while allowing the third person to drive it. Thus, in a subdelegation situation, the initial permittee stands in the shoes of the named insured, and a person seeking coverage as a subpermittee must show that he or she had the express or implied permission of the initial permittee to use the vehicle.

[Atlantic States Group v. Skovron, 383 N.J. Super. 423, 428-29 (App. Div. 2006)(quotations and citations omitted)(emphasis added).]

As we noted above, on the day of the accident, Matthews told police that O'Neill had taken the car without his permission when he fell asleep. In his deposition, which the motion judge did not have before him, Matthews essentially reiterated that he did not give O'Neill permission, and had he asked for it, O'Neill would have been denied. We think it is clear, therefore, that a material factual dispute existed as to whether O'Neill had secured the "express or implied permission" from Matthews to drive the Blazer. For this reason, summary judgment was inappropriate.

We address the issue of whether the arbitrator's finding of permissive use was "res judicata" for purposes of completeness since the motion judge did not consider the argument below. We conclude that the arbitrator's finding is entitled to no preclusive effect for two reasons.

First, Rule 4:21A-4(e) provides "[t]he arbitrator's findings of fact and conclusions of law shall not be evidential in any subsequent trial de novo, nor shall any testimony given at the arbitration hearing be used for any purpose at such subsequent trial." Thus, in the actual cases that were arbitrated, any finding that O'Neill was the permissive user of the Dillon vehicle would not have been admissible. We are hard-pressed to understand how it could be not only admissible in this related, but different, declaratory judgment case and also be given the power of precluding any evidence to the contrary. Moreover, the fact that the arbitrator's judgment was confirmed by the trial judge below does not give it any more preclusive effect because that judgment was solely against O'Neill, not Dillon. State Farm has not marshaled any stronger argument to the contrary on this point.

Secondly, analyzing the matter under our well-recognized principles applicable to res judicata, it is clear the doctrine does not apply. The party seeking to foreclose re-litigation of an issue must prove that:

(1) the issue to be precluded is identical to the issue decided in the prior proceeding; (2) the issue was actually litigated in the prior proceeding; (3) the court in the prior proceeding issued a final judgment on the merits; (4) the determination of the issue was essential to the prior judgment; and (5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding.

[First Union Nat'l. Bank v. Penn Salem Marina, Inc., 190 N.J. 342, 352 (2007) (citing Hennessey v. Winslow Twp., 183 N.J. 593, 599 (2005)).]

It is clear that the arbitrators' conclusion as to O'Neill's permissive use was extraneous to the proceedings and hence "not necessary to the determination of [an] issue [that] was essential" in reaching their decision. "New Jersey adheres to the common-law rule that the owner of a motor vehicle is not liable for the negligence of a permissive user unless the driver is acting as the owner's agent or employee." Fu v. Fu, 160 N.J. 108, 118 (1999) (citing Haggerty v. Cedeno, 279 N.J. Super. 607, 609 (App. Div.), certif. denied, 141 N.J. 98 (1995)). "[A] conclusion of no agency decides nothing about permission to use the vehicle." Parks v. Colonial Penn Ins. Co., 98 N.J. 42, 46 (1984).

The arbitrators concluded O'Neill was one-hundred percent negligent and Dillon was not negligent. In reaching this decision which was essential to their determination, they applied the case law we have cited above. But, that decision had no relation to the issue of whether O'Neill was a permissive user, an issue which in turn triggered the coverage dispute that is at the heart of this declaratory judgment suit.

Moreover, Encompass was not a party to the arbitrations and counsel was representing Dillon, not Encompass at those proceedings. As we recently noted, "[a]n insurer does not become a party to a proceeding . . . by providing a defense to an insured subject to a reservation of rights." Frappier v. Eastern Logistics, Inc., 400 N.J. Super. 410, 416 (App. Div. 2008); and see Montanez v. Irizarry-Rodriguez, 273 N. J. Super. 276, 286 (App. Div. 1994)(noting "it is clear that insurance counsel is required to represent the insured's interest as if the insured hired counsel directly"). Even if Dillon was in privity with Encompass through his insurance policy, the interests of the two were not the same. Dillon needed only to demonstrate that O'Neill was not his agent, servant or employee to be absolved of any liability, whereas in this case, Encompass needed to rebut any claim that O'Neill was a permitted user, a proposition that was much broader.

In sum, we reverse because a dispute of material facts exists regarding the issue of O'Neill's permissive use of Dillon's vehicle and therefore summary judgment was not appropriate. We further hold that the Rule 4:21A arbitrations that took place in the underlying negligence actions are entitled to no preclusive effect in this declaratory judgment litigation.

Reversed and remanded. We do not retain jurisdiction.

 

We attempted to clarify the reason for their absence at oral argument without much success. State Farm's counsel could not recall whether actual notice of the deposition was provided, and Encompass' counsel could not explain any reason for his absence. In the deposition transcript, O'Neill's counsel recited his efforts of that morning. He indicated that Whitehead's counsel was contacted, decided not to appear, and authorized the deposition to proceed without him. He further indicated that he had "reach[ed] out" to Dillon's counsel, "left a message for him," and had not "received a phone call back."

The record is unclear as to whether State Farm paid the NJM award, however, the judgment entered by the motion judge in this case does not apparently include the NJM award.

We take note at this point that the same attorneys represented O'Neill in the negligence cases and State Farm in the declaratory judgment action, and Dillon in the negligence cases and Encompass in the declaratory judgment case. Indeed, the same counsel have represented the parties in this appeal.

As noted above, no one appeared on Dillon's behalf at the deposition and it is unclear whether Encompass had a transcript of the deposition. It was supplied to us as part of State Farm's appendix.

(continued)

(continued)

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A-1321-07T3

January 12, 2009