HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY v. M&R MECHANICAL CONTRACTORS INC.

(NOTE: The status of this decision is .)
 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4812-07T24812-07T2

HARLEYSVILLE INSURANCE

COMPANY OF NEW JERSEY,

Plaintiff-Appellant,

v.

M&R MECHANICAL CONTRACTORS,

INC., and MICHAEL GILL,

Defendants-Respondents,

and

DESIGN PLASTIC SYSTEMS, INC. (as

an interested party only),

Defendant,

and

M&R MECHANICAL CONTRACTORS,

INC., and MICHAEL GILL,

Third-Party Plaintiffs,

v.

PEERLESS INSURANCE COMPANY and

EXCELSIOR INSURANCE COMPANY,

Third-Party Defendants.

______________________________________

 

Argued January 26, 2009 - Decided

Before Judges Carchman, R. B. Coleman and Sabatino.

On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-1594-07.

Lance J. Kalik argued the cause for appellant (Riker, Danzig, Scherer, Hyland & Perretti, LLP, attorneys; Mr. Kalik, of counsel; Peter M. Perkowski, Jr., and Mr. Kalik, on the brief).

Susan J. Wall argued the cause for respondents (Steven A. Berkowitz & Associates, P.C., attorneys; Ms. Wall, on the brief).

PER CURIAM

We address in this appeal whether a "first publication" exclusion in a liability insurance policy applies to a certain malicious use of process claim brought against the policyholder. The trial court found the exclusion inapplicable to the circumstances of this case. We agree, and consequently affirm the court's judgment.

I.

The case on appeal is a declaratory judgment action brought by plaintiff, Harleysville Insurance Company of New Jersey ("Harleysville"), against defendants, M&R Mechanical Contractors and Michael Gill (collectively, "M&R"). The goal of Harleysville's declaratory action is to establish that the insurer has no obligation to defend or indemnify M&R with respect to a federal lawsuit (the "Underlying Action") filed in Pennsylvania against M&R by Design Plastic Systems, Inc., ("DPS"). M&R is a general contractor, and DPS is a fiberglass and plastic distributor.

The Underlying Action refers to a series of arbitration proceedings involving M&R and DPS. Initially, in March 1999, M&R submitted a demand for arbitration contending that DPS had breached its contractual obligations to M&R. At the close of that proceeding in December 2002, the arbitrators issued an award in favor of M&R. The award in Design I specified that it was entered "in full settlement of all claims and counterclaims submitted to this Arbitration."

Next, in June 2003, M&R submitted a second demand for arbitration against DPS ("Design II"). M&R sought in Design II the enforcement of the Design I arbitration award. M&R additionally claimed that DPS had supplied it with defective flooring in breach of their contract.

DPS moved to dismiss the Design II arbitration on principles of res judicata, arguing that the claims were all based on the same contract arbitrated in Design I. On November 7, 2003, the arbitrator in Design II granted the motion to dismiss.

Meanwhile, in early 2004, M&R was sued by the Passaic Valley Sewerage Commissioners ("the PVSC"), in which the PVSC sought damages from M&R for alleged breach of contract. In its defense of that lawsuit, M&R took the position that the breaches complained of by the PVSC were actually caused by DPS's failures of performance.

M&R thereafter procured a liability insurance policy from Harleysville. The term of that policy began on November 3, 2004. Shortly thereafter, in December 2004, M&R settled the PVSC's lawsuit for $10,000.

On January 27, 2005, M&R filed a third arbitration ("Design III") against DPS, seeking indemnification for the moneys expended by M&R in connection with the claims asserted by the PVSC. The arbitrator in Design III dismissed the matter, concluding that M&R's indemnification claims against DPS were barred by the prior arbitrations.

Consequently, on December 21, 2007, DPS filed the Underlying Action against M&R in federal court. Its complaint asserted a claim denominated as one for "wrongful use of civil process," which is the equivalent under New Jersey law of a claim for malicious use of process. DPS specifically alleged that M&R had instituted the Design III arbitration "without probable cause primarily for a purpose other than of securing the proper adjudication of the claim on which the proceeding was based." DPS therefore sought recovery from M&R of all expenses it incurred from having to defend Design III.

M&R gave notice of the Underlying Action to Harleysville on or about March 9, 2007. By letter dated March 27, 2007, Harleysville denied coverage to M&R. Three days later, Harleysville filed the instant declaratory action in the Law Division.

M&R filed a counterclaim with its answer seeking a converse declaratory judgment reciting that M&R is, in fact, entitled to coverage under Harleysville's policy. M&R also filed a third-party complaint for declaratory judgment against Peerless Insurance Company and its subsidiary, Excelsior Insurance Company (collectively, "Peerless"), seeking a declaration that it was entitled to coverage for the Underlying Action under the insurance policy issued by Peerless.

After discovery was completed, M&R and Harleysville filed cross-motions for summary judgment. Following oral argument, the Law Division judge denied Harleysville's summary judgment motion, and granted in part and denied in part M&R's motion. In particular, the judge granted partial summary judgment to M&R, adopting its position that exclusion 2(c) of the Harleysville policy -- the so-called "first publication" exclusion implicated in this appeal -- did not apply to this case.

Peerless also moved for summary judgment, for reasons not germane to the "first publication" exclusion in the Harleysville policy. The motion judge granted that motion, and dismissed the third-party complaint against Peerless.

On May 13, 2008, the trial court executed a consent order entering a judgment against Harleysville for $37,949.75, the amount of insurance coverage sought by M&R. The consent order disposed of all issues as to the two parties remaining in the declaratory action, but preserved Harleysville's right to appeal the court's earlier ruling determining that exclusion 2(c) was inapplicable.

As anticipated, Harleysville filed an appeal, arguing that the trial court erred in not applying exclusion 2(c). We now consider that contention.

II.

Exclusion 2(c) of the Harleysville policy reads as follows:

2. Exclusions

This insurance does not apply to:

. . . .

c. Material Published Prior to Policy Period

"Personal and advertising injury" arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.

Harleysville contends that this exclusion applies here because it construes DPS's Underlying Action as a claim for "personal and advertising injury" that arises out of a "first publication" predating the policy period. The term "personal and advertising injury" is defined in Section V(14) of the policy as follows:

SECTION V - DEFINITIONS

. . . .

14. "Personal and advertising injury" means injury, including consequential "bodily injury", arising out of one or more of the following offenses:

. . . .

b. Malicious prosecution;

. . . .

d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

e. Oral or written publication, in any manner, of material that violates a person's right of privacy;

These relevant provisions were subsequently changed, although in ways not germane to the present appeal, by endorsement CG-7244 to the policy, which states:

12. ADVERTISING INJURY REDEFINED

Paragraphs 14. d. and e. of Section V- Definitions are amended by the following:

1. Personal and advertising injury means injury including consequential "bodily injury" arising out of one or more of the following offenses:

d. Oral, written, televised or videotaped publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

e. Oral, written, televised or videotaped publication of material that violates a person's right of privacy[.]

. . . .

16. PERSONAL INJURY-BROAD FORM

a. Paragraph 14. b. of Section V- Definitions is replaced by the following:

b. malicious prosecution or abuse of process.

In essence, Harleysville contends that although M&R initiated the allegedly-malicious Design III arbitration in January 2005, during the policy period that began in November 2004, the two preceding arbitrations in Design I and Design II were "first publications" that nullified M&R's coverage.

The motion judge rejected Harleysville's interpretation. In ruling that exclusion (c) did not apply to the Underlying Action and that M&R was covered by the policy, the judge made the following pertinent observations:

I looked at this case here that's noted that the sole claim for an abusive process in this particular case in the Eastern District of Pennsylvania action is the abuse of process dealing with the third [arbitration] that was brought to the attention of the arbitrator. Specifically, not the first and . . . not the second. So the question becomes whether [the phrase] ["]arising out of["] [in exclusion 2(c)] means that, as [Harleysville] would indicate, but for the earlier incidents, would this occurrence have taken place.

The Court is persuaded that the New Jersey Supreme Court, in determining what the initial date for malicious prosecution is[,] [provides] the more appropriate way of looking at these series of events. The earlier injury -- the earlier statements made or done -- in this case, the applications to the arbitrators --- when there was --- is nothing -- has never been alleged that those particular actions . . . were wrongful, or they were malicious in any way. And this is what we're talking about, specifically malicious prosecution. Those actions were considered by [DPS] as being appropriate, and it was only upon the filing of the third action, and only that third action, which is alleged to have been malicious under the circumstances.

To buy [Harleysville's] argument, the parties would be left to a wide-range of interpretations of nuance or understanding with regard to the interpretation of what is ["]arising out of["]. How could something be somehow attached to, or a predicate to the underlying cause of action? It'd be like saying that [the courtroom sound recorder] here was to say, beyond the coverage period, [the motion judge] is a good guy, and then even say . . . within the coverage period, [the motion judge] is a good guy. And then the next time she says [the motion judge] is a real jerk.

Now does that mean that because she started talking about me three times ago that the policy would cover for something like that? No, it's when she actually commits the offense in some form or another, right or wrongly, in this particular case.

And as far as I'm concerned, the [malicious prosecution] claim was generated--anything arising out of the claim was generated within the third [arbitration]. The third [arbitration] is in the coverage period. And, therefore, [Harleysville] will be responsible for providing a defense.

[(Emphasis added).]

Consequently, the motion judge found that DPS's malicious prosecution claim, i.e., its claim for "personal and advertising injury," arose out of the Design III arbitration. That arbitration's first filing, or "publication", took place on January 27, 2005, after the beginning of the policy period, which was November 3, 2004. Hence, exclusion (c) does not apply.

Because the motion judge's construction of the insurance policy comprises a ruling on questions of law, see Thompson v. James, 400 N.J. Super. 286, 291 (App. Div. 2008), we must review that legal determination de novo. Finderne Mgmt. Co. v. Barrett, 402 N.J. Super. 546, 573 (App. Div. 2008). Even so, we are satisfied, applying such a de novo standard, that the motion's judge's interpretation of the policy was sound.

It is well settled under New Jersey law that "insurance policies are liberally construed to afford coverage that any fair interpretation will allow." American Wrecking Corp. v. Burlington Ins. Co., 400 N.J. Super. 276, 282 (App. Div. 2008) (quoting Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 537 (1990)). A court must "first examine the plain language of the policy and, if the terms are clear, they 'are to be given their plain, ordinary meaning.'" Pizzullo v. New Jersey Mfrs. Ins. Co., 196 N.J. 251, 271 (2008) (quoting Zacarias v. Allstate Ins. Co., 168 N.J. 590, 595 (2001)). However, "[w]hen there is ambiguity in an insurance contract, courts interpret the contract to comport with the reasonable expectations of the insured, even if a close reading of the written text reveals a contrary meaning." Ibid. (quoting Zacarias, supra, 168 N.J. at 595).

The case before us concerns a policy exclusion. Our Supreme Court has held that "[i]n general, insurance policy exclusions must be narrowly construed; the burden is on the insurer to bring the case within the exclusion." American Motorists Ins. Co. v. L-C-A Sales Co., 155 N.J. 29, 41 (1998) (quoting Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997)). Nonetheless, "exclusions are presumptively valid and will be given effect if [they are] specific, plain, clear, prominent and not contrary to public policy." Chunmuang, supra, 151 N.J. at 95 (citations omitted). See also Leo Haus, Inc. v. Selective Ins., 353 N.J. Super. 67, 71 (App. Div. 2002) (same).

Here, the gravamen of DPS's Underlying Action is a claim for what the insurance policy describes in revised paragraph 14(b) as "malicious prosecution or abuse of process." Such a cause of action represents a form of "personal and advertising injury" covered by the policy, unless coverage is otherwise excluded.

Under New Jersey law, the elements of an action for malicious use of process are: (1) that defendant's complaint was "filed maliciously and without probable cause," (2) that the complaint was "terminated favorably" to the plaintiff claiming malicious use of process; and (3) that the plaintiff "suffered a special grievance." Grodjesk v. Faghani, 104 N.J. 89, 102 (1986) (citing Penwag Property Co. v. Landau, 76 N.J. 595, 598 (1978)). In essence, the wrongful conduct of malicious use of process involves commencing a legal action without justification. Hoffman v. Asseenontv.com, Inc., 404 N.J. Super. 415 (App. Div. 2009) (citing Baglini v. Lauletta, 338 N.J. Super. 282, 293 (App. Div.), certif denied, 169 N.J. 607 (2001)).

Because DPS contends in its federal lawsuit that M&R brought the Design III arbitration against it without justification, M&R's conduct in filing that arbitration plainly falls within the coverage afforded to "malicious prosecution or abuse of process" under the Harleysville policy. Harleysville does not dispute that conclusion. The question then becomes whether that coverage is excluded by the "first publication" language in the policy.

DPS's cause of action hinges upon one allegedly malicious filing, Design III, which occurred on January 2005, after the coverage term began in November 2004. Harleysville argues, however, that the malicious filing arose out of earlier "publications" by M&R that predated the policy period. We concur with the motion judge's rejection of that argument. The two prior arbitrations in Design I and Design II were not offensive "publications," as intended by the language of the exclusion.

We are mindful that Paragraph 14 of the policy broadly defines "personal and advertising injury" to include: (a) false arrest, detention or imprisonment; (b) malicious prosecution; (c) wrongful eviction from, wrongful entry into, or invasion of premises; (d) slander or libel; (e) oral or written publication that violates a person's right of privacy; (f) misappropriation; and (g) infringement. Not all of those seven enumerated causes of action require an act of "publication," which commonly refers to something that is "communicated, either intentionally or negligently to another." Anellau v. Barringer Resources, Inc., 260 N.J. Super. 92 (Ch. Div. 1992); see also Feggans v. Billington, 291 N.J. Super. 382, 391 (App. Div. 1996). M&R argues that the "first publication" exclusion pertains only to those torts contained in that list which include the element of "publication," such as libel and slander. Because the tort of malicious prosecution (or malicious use of civil process) does not require, per se, a "publication," M&R submits that the "first publication" exclusion has no relevance to this case.

As Harleysville correctly points out, we rejected that particular aspect of M&R's argument in Tradesoft Technologies, Inc. v. Franklin Mut. Ins. Co., Inc., 329 N.J. Super. 137, 145 (App. Div. 2000). In that case, the insured company, Tradesoft, was sued by a competitor in the underlying action for patent and trademark infringement, misappropriation of trade secrets, breach of contract, tortious interference with contract, and unfair competition. Tradesoft then sought indemnification under a liability policy issued to it by Franklin Mutual. The policy covered, among other things, claims for copyright infringement and misappropriation of advertising ideas. Id. at 147. The policy also covered the "oral or written publication of material" that either slandered or libeled another party; disparaged another party's goods, products, or services; or violated rights of privacy. Ibid. The policy excluded from coverage "[i]njury arising out of oral or written publication of material whose first publication took place prior to the beginning of this policy or such coverage under this policy." Ibid.

Although we recognized in Tradesoft that claims for infringement or misappropriation, unlike claims for defamation and invasion of privacy, do not require publication as an element, "the use of the term 'publication' in respect of defamation and invasion of privacy defines the offense and not the injury." Id. at 148. "The publication element of the injury is obviously common to all four categories of advertising injury [covered by the Franklin Mutual policy], and the first-publication exclusion is, therefore, also common to all." Ibid. Hence, we held that the first-publication exception conceptually applied to the claims of infringement and misappropriation brought against Tradesoft in the competitor's lawsuit. Id. at 148-49.

Similarly here, although "publication" is not commonly thought to be a defined element of a malicious prosecution claim, the filing of the offensive action, whether it be civil or criminal, can reasonably be considered a form of "communication" injurious to another party. The filing of a written demand for arbitration is, in this sense, a form of "publication."

Even so, Harleysville's invocation of the "first publication" exception is unavailing here because the sole offensive and injurious conduct that gives rise to DPS's federal action is M&R's filing of the third arbitration, Design III, against DPS in January 2005. To be sure, the alleged offensiveness of that third arbitration demand relates to the fact that M&R already had its rights under the contract with DPS determined in the two prior arbitrations. But the offensive behavior, and the source of the corresponding injury to DPS, is the third filing, not the ones that preceded it.

DPS is not contending that the first two arbitrations were the tortious source of its alleged injury. Indeed, the first arbitration, Design I, resulted in an award in favor of M&R, which establishes the benign nature of M&R's decision to "publish" its contract grievances in the form of an arbitration demand. Although M&R's second arbitration, Design II, was unsuccessful, DPS does not contend in the federal lawsuit that the second filing was malicious. It is only M&R's third arbitration demand in Design III that comprises the wrongful behavior said to be a malicious use of process. DPS specifically alleges in paragraph 36 of its federal complaint that its damages were "a direct and proximate result of defending itself from [M&R's] false and fraudulent claims in Design III." (Underlining added).

This is not a situation reasonably contemplated by the "first publication" exclusion, which is aimed at insulating an insurer from an exposure for harm that was already inflicted by an earlier publication predating the period of coverage. See, e.g., Applied Bolting Tech. Prod., Inc. v. USF & G, 942 F. Supp. 1029, 1037 (E.D. Pa. 1996) (barring coverage for injuries that arise out of "oral or written publication" of any material, whose publication occurred prior to the beginning of the policy period). There is no allegation here of the republication of an offensive earlier publication. The injury to DPS triggered by the third arbitration is new and distinct, not pre-existing. See also Paterson Tallow Co. v. Royal Globe Ins. Co., 89 N.J. 24, 36-37 (1982) (holding that "the offense of malicious prosecution occurs on the date when the underlying complaint is filed").

The present scenario is factually distinguishable from the circumstances alleged in Tradesoft. As we noted, the record before us suggested that Tradesoft's allegedly wrongful conduct in soliciting brokers, negotiating business agreements, and making representations about its experience and expertise -- all in supposed violation of its competitor's rights -- predated the inception of the Franklin Mutual insurance policy and Tradesoft's website advertising of its new allegedly-infringing business. 329 N.J. Super. at 148. That pre-policy wrongful conduct arguably made Tradesoft's website advertising a republication that was excluded by the policy's "first publication" exclusion. Because discovery about these activities "that might assist in the date-fixing determination" was incomplete, we remanded for a fuller development of the factual record. Ibid. In doing so, we noted that if Franklin Mutual, on remand, could "demonstrate the offending publications first took place prior to the effective date of the policy, it [would] be entitled to the grant of its motion for summary judgment." Id. at 148-49 (emphasis added).

Here, there is no comparable factual assertion by DPS that the first two arbitrations were "offending publications." The policy exclusion does not apply.

We have considered all of the remaining points raised on appeal by Harleysville, and conclude that they lack sufficient merit to warrant discussion. R. 2:11-3(e)(1)(E).

Affirmed.

 

The Underlying Action is captioned Design Plastic Sys., Inc. v. M&R Mech. Contractors, Inc. and Michael Gill, United States District Court for the Eastern District of Pennsylvania, Docket Number 07-0338.

We shall designate that first arbitration as "Design I".

Under New Jersey law, the term "malicious prosecution" is used to refer to an action arising out of a wrongful criminal prosecution, while a comparable action arising out of a wrongful civil suit is called "malicious use of process." Lobiondo v. Schwartz, ___ N.J. ___ (2009) (slip op. at 15 n.5). Since DPS's lawsuit against M&R stemmed from a non-criminal proceeding, i.e., arbitration, we shall refer in this opinion to the Underlying Action as a claim for "malicious use of process." Harleysville apparently does not dispute that if the "first publication" exclusion at issue on this appeal does not apply, the Underlying Action is covered by its policy, whether DPS's lawsuit is described as an action for "wrongful abuse of civil process," "malicious use of civil process," or "malicious prosecution."

The motion judge denied summary judgment to M&R, however, as to other exclusions invoked by Harleysville that are unrelated to this appeal. Subsequently, however, the judge entered an order, with the consent of both parties, declaring those separate exclusions inapplicable.

M&R has not appealed the dismissal of its coverage claims against Peerless.

The parties have not contested the application of New Jersey law to this coverage dispute.

(continued)

(continued)

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A-4812-07T2

June 17, 2009