APRO MANAGEMENT, INC. et al. v. ROYAL SURPLUS LINES INSURANCE COMPANY

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3976-05T23976-05T2

APRO MANAGEMENT, INC. and

STEVEN FUTTERKNECHT,

Plaintiffs-Respondents,

v.

ROYAL SURPLUS LINES

INSURANCE COMPANY,

Defendant-Appellant,

and

PROFESSIONAL INSURANCE

ASSOCIATES, INC.,

Defendant.

_______________________________________

 

Argued March 21, 2007 - Decided April 30, 2007

Before Judges C. S. Fisher, Yannotti and Messano.

On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. BER-L-2596-03.

Robert J. Re argued the cause for appellant (Coughlin Duffy, attorneys; Julia C. Talarick, on the brief).

Gary M. Sarno argued the cause for respondents (Newman & Simpson, attorneys; Mr. Sarno, of counsel and on the brief).

PER CURIAM

Plaintiffs Apro Management, Inc. (Apro) and Steven Futterknecht (Futterknecht) brought this declaratory judgment action against defendant Royal Surplus Lines Insurance Company (Royal) seeking a determination that Royal had a duty to defend and indemnify them in respect of certain claims asserted in Sue Wang v. The Ultimate Bldg. Co. The trial court found that Royal had a duty to defend and indemnify plaintiffs and entered a final judgment on February 28, 2006, awarding plaintiffs attorneys' fees and costs for the Wang matter and this case. For the reasons that follow, we reverse.

In June 1999, Sue Wang, Heng Wang, Youmin Wang, and David Ping (the Wangs) entered into a contract with Apro, a mortgage service provider, for the purchase of land and construction of a duplex in Palisades Park for $543,700. The seller was listed as The Ultimate Building Co., Inc. (Ultimate). A rider to the contract designated David Lorenzo (Lorenzo) as the seller, and Apro as the builder. After the Wangs were informed that the duplex could not be constructed as planned because of conditions on the site, and they refused to agree to certain changes in the agreement, the contract was terminated and the deposit monies returned. However, the dwelling was later constructed in accordance with the original building plans, and sold to another buyer for $679,000.

On March 15, 2001, the Wangs filed a two-count complaint against Apro, Lorenzo and Ultimate, alleging that they fraudulently misrepresented the conditions of the property and their ability to construct the building as planned. They additionally alleged that by making these misrepresentations Apro, Lorenzo, and Ultimate violated the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20.

When Futterknecht, who is one of Apro's principals, received the complaint, he forwarded it to Professional Insurance Associates, Inc. (PIA), which was Apro's insurance agent. Frank Covelli of PIA advised Futterknecht that the professional liability insurance policy that Royal had issued to Apro did not cover the claims asserted by the Wangs in their complaint.

On or about May 24, 2001, Lorenzo filed an answer denying the Wangs' allegations and a cross-claim against Apro and Ultimate. Lorenzo alleged, among other things, that he was entitled to indemnification from Apro. Lorenzo also alleged that if he was determined to be liable, the primary cause of any damages sustained by the Wangs was Apro's and Ultimate's negligence.

In November 2001, Apro filed an amended answer and third-party complaint against Arthur Field (Field), an attorney who had represented Apro in the Wang transaction. Apro alleged that Field committed malpractice and fraud, and was negligent in allowing Lorenzo to sign one of the riders to the contract as Apro's president and in naming Apro as one of the builders in another rider.

In May 2002, the Wangs filed an amended complaint adding two counts and additional defendants to their original complaint. In the third count, the Wangs asserted a breach of contract claim. In the fourth count, the Wangs alleged that defendants breached their "duty to use reasonable care in constructing the duplex for the buyers and ascertaining the conditions of the lot upon which the duplex was to be built."

On October 11, 2002, Apro gave notice of the Wang's amended complaint to Royal. Royal replied in a letter dated October 14, 2002, in which it detailed the relevant policy provisions and reserved all of its rights and defenses under the policies. Thereafter, Royal issued a letter dated November 20, 2002, denying coverage because Apro failed to provide notice of the claims within the time required by the policy, and because the claims were not covered by the policies.

On April 10, 2003, plaintiffs filed this action against Royal and PIA seeking a declaratory judgment that Royal was required to indemnify them in respect of the claims in the fourth count of the Wangs' amended complaint, and reimburse them for the costs incurred in defending those claims. Plaintiffs further alleged that Royal breached the contract of insurance, and denied coverage in bad faith. Plaintiffs also asserted a negligence claim against PIA. The Wang litigation was settled on or about April 29, 2003, and in July 2003, Apro's legal malpractice claim against Field was dismissed.

After the parties filed motions for summary judgment, the judge entered an order on September 23, 2005, which declared that Royal had a duty to provide plaintiffs with a defense and indemnification concerning the claims asserted by the Wangs in count four of the amended complaint. The judge ordered that a plenary hearing be held to determine the amount, if any, of the attorneys' fees and costs that were attributable to defending the covered claims. At or about the same time, a stipulation was entered dismissing plaintiffs' claims against PIA.

The plenary hearing was held on February 3 and 23, 2006, and on February 27, 2006, the judge placed her decision on the record. Judgment was entered on February 28, 2006, awarding plaintiffs $20,972.77 in counsel fees and costs for the Wang case, and $43,863.32 for the fees and costs incurred in this action. This appeal followed.

Royal first argues that plaintiffs are not entitled to coverage because they failed to notify Royal of the claims in the time required by the applicable policy. Royal issued two professional liability policies to Apro, one for the period from October 3, 2000 to October 3, 2001, and the other for the period from October 3, 2001 to October 3, 2002. The policies were substantially the same. The policies state in pertinent part that:

The Company will pay on behalf of the Insured as shown in the Declarations, all sums that the Insured becomes legally obligated to pay as Damages and associated Claim Expenses arising out of a negligent act, error or omission, Advertising Liability, or Personal Injury, even if such Claim is groundless, false or fraudulent, in the rendering of or failure to render professional services as described in the Declarations, provided that:

1. The Claim is first made against the Insured and reported to the company during the Policy Period, but not later than 60 days after the end of the Policy Period.

The policies define "claim" as "a written or verbal demand for money or services received by the Insured, including service of suit, or the institution of arbitration proceedings against the Insured." In addition, notice of claim is included as a condition of coverage:

The Insured must notify the Company as soon as practicable of an incident, occurrence or offense that may reasonably be expected to result in a Claim. The Insured must immediately send copies to the Company, of any demands, notices, summonses or legal papers received in connection with any Claim, and must authorize the Company to obtain records and other information.

Here, the trial judge found that plaintiffs did not have any obligation under the policy in force from October 3, 2000 to October 3, 2001, to inform Royal of the Wang litigation even though the original complaint in the Wang case was filed in March 2001, and Lorenzo's cross-claim was filed in May 2001. The judge reasoned that notice was not required at that time because plaintiffs were not seeking defense and indemnification for any claims in Wangs' complaint. In addition, the judge stated that the claims asserted by Lorenzo in his cross-claim were not covered under the Royal policy. The judge commented:

There was no cross-claim that was cognizable or that Royal would have any obligation with regard to. Lorenzo either was or was not an employee. If Lorenzo was an employee, everything that he was claiming against [Apro] was barred by workers' [compensation], so that's not an issue. If he's not an employee, then clearly whatever Royal provides to [Apro] is not applicable to Lorenzo and, therefore, again, it's not applicable.

The judge found that the claims asserted in May 2002 by the Wangs in the fourth count of their amended complaint were the first claims covered under the policy, and plaintiffs reported those claims in a timely manner during the period of time when the second policy was in effect, from October 3, 2001 to October 3, 2002. We disagree with the judge's analysis and conclusion.

Royal's policy is a claims-made policy. In such a policy, "the coverage is effective if the negligent or omitted act is discovered and brought to the attention of the insurer during the period of the policy," regardless of when the act occurred. Zuckerman v. Nat'l Union Fire Ins. Co., 100 N.J. 304, 310 (1985) (quoting Samuel N. Zarpas, Inc. v. Morrow, 215 F. Supp. 887, 888 (D.N.J. 1963)). An insurer's duty to defend is triggered by facts known to the insurer; therefore, the insured is responsible for promptly conveying to the insurer the information that the insured believes will trigger coverage. SL Indus., Inc. v. Am. Motorists Ins. Co., 128 N.J. 188, 199-200 (1992). In general, courts strictly construe notice requirements in claims-made policies. 22 Holmes' Appleman on Insurance 2d, 139.8 (2003). The rationale for such strict construction is that claims-made policies "are based upon a bargained-for exchange that typically provides insurance coverage at a reduced cost to the insured, [but] only for claims made during the policy period and for which notice is provided during the policy period." Ibid.

We are convinced that in this matter plaintiffs were obligated under the notice provisions of the policy to inform Royal of the filing of the Wang lawsuit and the Lorenzo cross-claim during the policy period from October 3, 2000 to October 3, 2001. Although the claims initially asserted by the Wangs were not covered claims because they were based on allegations of intentional wrongdoing rather than any negligent act or omission, the filing of the Wang lawsuit was a reportable event because it was a "claim" as that term is defined in the policy.

Furthermore, even if the filing of the Wang lawsuit was not reportable as a "claim" because the Wangs' initial claims were not "covered" under the policy, the lawsuit should have been reported because it was "an incident, occurrence or offense that may reasonably be expected to result in claims covered by the policy. The Wangs had alleged in their initial complaint that Apro intentionally misrepresented facts concerning the conditions of the property and its ability to build the duplex in accordance with the plans. Based on these allegations, plaintiffs could reasonably anticipate that the Wangs' claim of intentional misrepresentations could result, as it did, in the assertion of a claim for negligence by Apro in ascertaining the conditions of the lot and building the duplex.

Moreover, plaintiffs were required to notify Royal of the filing of Lorenzo's cross-claim in the period covered by the policy in place from October 3, 2000 to October 3, 2001. The trial judge stated that, if Lorenzo was an employee of Apro, his claim was barred by the Workers' Compensation Act (WCA), N.J.S.A. 34:15-1 to -128. However, as we read Lorenzo's cross-claim, he was not asserting a claim for personal injury. He was asserting a demand for indemnification from Apro, on the grounds that the primary cause of any damages sustained by the Wangs was the negligence of Apro and Ultimate. That claim is not barred by the WCA and it falls squarely within the definition of "Claim" in the Royal policy.

The judge also stated that, if Lorenzo was not Apro's employee, there was no coverage because "whatever Royal provides to [Apro] is not applicable to Lorenzo." However, the policy that Royal provided to Apro was applicable to Apro and, in the event that Lorenzo prevailed on his claim against Apro, Royal would have been obligated to pay the judgment and any related defense costs.

Therefore, plaintiffs were required to report the filing of the Wang lawsuit and the filing of the Lorenzo cross-claim no later than 60 days after October 3, 2001, when the policy period ended. Plaintiffs' failure to provide the required notice bars coverage for any claims arising from the Wang action, including the claims asserted by the Wangs in the amended complaint filed in May 2002.

Plaintiffs argue, however, that the judge correctly found that they had no obligation to report the initial filing of the Wangs' complaint or the Lorenzo cross-claim because they never sought coverage for those claims. According to plaintiffs, the policy did not require that they inform Royal about the Wang litigation until the Wangs filed their amended complaint and they sought coverage for the claims asserted in count four. Plaintiffs point out that they notified Royal of the claims within the time required by the second policy.

We disagree. The fact that plaintiffs provided Royal with timely notice of the claims in the fourth count of the Wangs' amended complaint did not cure their failure to provide notice of the initial filing of the Wang lawsuit and the Lorenzo cross-claim. Plaintiffs may not circumvent the reporting requirements under a claims-made policy by picking and choosing the claims for which they seek coverage when those claims all arise out of the same occurrence or incident. Such a result would be inconsistent with the limitations on coverage inherent in a claims-made policy.

It would also deprive the insurer of the opportunity to immediately investigate the claim and defend it. The irony here is that the judge found that plaintiffs had no duty to inform Royal of the filing of the Wang complaint and the Lorenzo cross-claim but ultimately ruled that Royal was obligated to reimburse plaintiffs for their attorneys' fees and costs in defending the Wang suit and Lorenzo cross-claim from the outset. The judge reasoned that the fees and costs incurred prior to notification were reasonably related to the covered claim. If there was a relationship between the facts underlying the Wangs' initial claims and those asserted in the amended complaint, then surely plaintiffs had a duty to notify Royal of the filing of the original lawsuit.

Royal additionally argues that the judge erred by concluding that the exclusions in its policies do not apply to the claims asserted by the Wangs in the fourth count of their amended complaint. Royal contends that the Wangs' claims are not covered because the policy expressly excludes coverage for claims involving "construction activity." Royal also says that coverage is barred by the exclusions for dishonest activities, breach of contract, and cost overruns. Since we have concluded that plaintiffs are not entitled to coverage under the Royal policies because of their failure to provide timely notice of the claims, we need not address these contentions.

We therefore reverse the order entered on September 23, 2005, which declared that Royal had a duty to provide plaintiffs with a defense and indemnification in respect of the claims asserted in count four of the amended complaint of the Wang litigation. We also reverse the order entered on February 28, 2006, awarding plaintiffs attorneys' fees and costs for the Wang matter and this case. We remand for entry of judgment dismissing the complaint.

Reversed and remanded for entry of judgment dismissing the complaint.

 

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A-3976-05T2

April 30, 2007