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August 21, 2014


Argued March 18, 2014 Decided


Before Judges Fisher, Espinosa and O'Connor.


On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-4942-11.


Christopher J. O'Connell argued the cause for appellants (Sweeney & Sheehan, attorneys; Mr. O'Connell, of counsel and on the brief; Neal A. Thakkar, on the brief).


John T. Coyne argued the cause for respondent (McElroy, Deutsch, Mulvaney & Carpenter, L.L.P., attorneys; Mr. Coyne, on the brief).


In this declaratory judgment action, plaintiff American States Insurance Company (American) sought to compel defendant Philadelphia Insurance Company (Philadelphia) to reimburse it $135,000, the amount American paid to settle a case on behalf of the parties' insured, as well as for attorney fees and costs. The trial court granted American's motion and denied Philadelphia's cross motion for summary judgment. We affirm.

Elite Fitness (tenant) leased a store in a shopping mall from Trans Equity Realty, LLC (landlord). The lease specified that the demised premises did not "extend beyond the rear wall or window of the proposed store or beyond the actual storefront." The landlord agreed to maintain the common areas, which included the stairways, in good condition. The lease further stated as follows.

SECTION 8.01 - Tenant, at its sole expense, shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises. All such insurance shall insure performance by tenant of the indemnity provisions of Article XV and shall name landlord, tenant . . . as the insureds.


ARTICLE XV In addition to any and all other obligations of tenant to indemnify and save landlord harmless as set forth in this lease, tenant will indemnify and save harmless landlord against and from all liabilities, obligations, damages, penalties, claims, costs, charges, and expenses, including without limitation, any and all architects and attorney's fees, which may be imposed upon or incurred by or asserted against landlord by reason of any of the following occurring during the term of the lease:

. . . .


(c) any injuries to persons occurring on or about the demised premises; . . . .


In compliance with the lease agreement, the tenant added the landlord as an additional insured on its liability policy with Philadelphia. The "Additional Insured" endorsement states in relevant part:

WHO IS AN INSURED [The policy] is amended to include as an insured [the landlord] but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tenant.]

On January 23, 2008, Brett Pessel, part equity owner of the tenant, exited the rear door of the tenant's premises and stepped onto an exterior steel staircase. As he was descending, a step gave way, causing him to lose his balance and tumble down the rest of the flight of stairs. Pessel claimed he injured his back in the fall. A managing partner of the landlord admitted the landlord was responsible for maintaining the stairs and, further, was aware the step was in need of repair before the accident.

On March 18, 2009, Pessel filed a personal injury action against the landlord; the complaint was subsequently amended to name as a defendant the landlord's property manager, Klein Property Management, LLC. The landlord promptly notified its insurer, American, of Pessel's complaint, but neither American nor the landlord notified Philadelphia of the lawsuit until September 2010.

In a letter to Philadelphia dated September 28, 2010, American advised Philadelphia of Pessel's lawsuit, and asserted Philadelphia was obligated to provide a defense and indemnification to the landlord under the additional insured endorsement of the Philadelphia policy. By the time American sent the September 28, 2010 letter, the discovery end date in the personal injury action had passed and the case was scheduled for a mandatory arbitration hearing. See R. 4:21A-1(a)(2).

By letter dated October, 25, 2010, Philadelphia advised American it was declining the tender because Pessel's injury occurred outside of the leased premises and in an area under the landlord's control. Philadelphia concluded that, as "our insured" was not legally responsible for Pessel's injuries, Philadelphia did not have to provide coverage. Philadelphia's reference to "our insured" was to the tenant and not the landlord, even though the landlord was also an insured under the additional insured endorsement.

The parties in the personal injury action proceeded to mandatory arbitration. The arbitrator found defendants ninety percent and Pessel ten percent liable for the fall. Finding Pessel's damages to be worth $100,000, plaintiff received a net award of $90,000. One of the parties (the record does not reveal which) demanded a trial de novo and the matter was returned to the trial calendar for disposition. See R. 4:21A-6(c).

In December 2010, American sent a letter to Philadelphia urging it to reconsider its position. American warned that, if Philadelphia did to provide coverage to the landlord, American would file an action against Philadelphia to compel not only that coverage be afforded by Philadelphia to the landlord, but also that Philadelphia reimburse American for all fees and costs it incurred in connection with the defense of the personal injury and in the pursuit of obtaining coverage from Philadelphia for their insured.

Philadelphia did not waiver in its position. The parties in the personal injury action continued to prepare for trial. After attending private mediation, the matter settled for $135,000, just before trial. American then filed the within declaratory judgment action.

American and Philadelphia filed motions for summary judgment. The trial court denied Philadelphia's and granted American's motion, and ordered Philadelphia to reimburse American $135,000. The trial court also ordered Philadelphia to pay the counsel fees and costs American expended defending the personal injury action, but only for the period after American tendered notice of the action to Philadelphia; those fees were $3,429.40. The trial court also ordered Philadelphia to pay $16,441.10 in counsel fees and costs American incurred to prosecute the declaratory judgment action.


In reviewing a summary judgment decision, we apply the same standard as the trial court. Murray v. Plainfield Rescue Squad, 210 N.J. 581, 584 (2012). Viewing the evidence "in a light most favorable to the non-moving party," we determine "if there is a genuine issue as to any material fact or whether the moving party is entitled to judgment as a matter of law." Rowe v. Mazel Thirty, LLC, 209 N.J. 35, 38, 41 (2012) (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 529 (1995)). We review questions of law de novo, State v. Gandhi, 201 N.J. 161, 176 (2010), and need not accept the trial court's conclusions of law. Davis v. Devereux Found., 209 N.J. 269, 286 (2012).

Philadelphia argues the holding in Pennsville Shopping Center Corp. v. American Motorists Ins. Co., 315 N.J. Super. 519 (App. Div. 1998), certif. denied, 157 N.J. 647 (1999) mandates a reversal. In Pennsville, the plaintiff was the owner of a shopping mall (owner). The defendant carrier insured one of the owner's tenants. A customer of the tenant sued the owner and the tenant after she fell into a pothole in the parking lot of the mall and sustained injuries. When the matter was resolved, the owner's carrier paid the full amount of the settlement.

In a declaratory judgment action, the owner and its insurer sought to compel the tenant and its insurer to provide a defense and indemnification or contribution. The trial court found in favor of the tenant. We affirmed, finding the tenant's insurer did not have to provide coverage to the owner because, under the lease agreement, the tenant was not obligated to indemnify the owner for damages caused by conditions in a common area but only those caused by conditions on the demised premises. Pennsville, supra, 315 N.J. Super. at 521-22. Further, the lease agreement expressly provided that the owner would be solely responsible for the common areas. Id. at 523. We stated that

[a]bsent an express and unambiguous contractual undertaking to do so, a tenant cannot logically be seen to be providing insurance to a landlord in respect of a liability for which the landlord has assumed sole responsibility and has agreed to indemnify the tenant. . . . Its undertaking to name landlord as an additional insured must be taken to be coextensive with the scope of tenant's own liability.



In other words, the parties in Pennsville did not intend that the landlord have coverage under the tenant's policy, as the landlord assumed sole responsibility for the common areas and the landlord expressly agreed to indemnify the tenant for any losses or liability occurring in the common areas.

Here, although the landlord was responsible for the common areas, the lease did not confine the tenant's responsibility to indemnify the landlord to the area within the demised premises. The lease states that the tenant "shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises." (Emphasis added). Consistent with that responsibility, the tenant obtained the additional insured endorsement to the Philadelphia policy, which states the landlord is an insured with respect to liability arising out of the ownership, maintenance or use of the leased premises. In addition, the lease did not state that the landlord would indemnify the tenant for any accident that occurred in a common area.

The phrase "arising out of the use of" has been interpreted "in a broad and comprehensive sense to mean 'originating from the use of' or 'growing out of the use of'" the leased premises. Franklin Mut. Ins. v. Sec. Indem. Ins., 275 N.J. Super. 335, 340 (App. Div.), certif. denied, 139 N.J. 185 (1994). In Franklin, the tenant's invitee fell and was injured on exterior steps while exiting from the tenant's premises. The steps were not part of the leased premises. The invitee brought a personal injury action against both the landlord and the tenant. The landlord's liability carrier sought coverage under the tenant's liability policy, which named the landlord as an additional insured in an endorsement that provided coverage for liability "arising out of the ownership, maintenance or use" of the leased premises. The tenant's liability carrier contended the endorsement did not provide coverage to the landlord because the accident did not occur within the leased premises.

We concluded the tenant's liability policy covered the landlord for the incident, finding that the use of the steps was essential to the use of the leased premises and that the injured party's use of the steps had originated from the use of those premises. Franklin, supra, 275 N.J. Super. at 341. Therefore, even though the accident did not take place precisely within the confines of the leased premises, there nevertheless existed a sufficient nexus between the occurrence and the use of the leased premises to confer coverage upon the landlord. Id. at 341-42.

Here, use of the exterior steps where Pessel fell was essential to the use of the leased premises. While he fell outside of the premises, the fall originated out of the use of the leased premises. The lease specifically states the tenant must provide liability insurance for the landlord for any liabilities arising out of the use of the demised premises, and that is what the language in the additional insured endorsement in the Philadelphia policy provides. Under the circumstances, Philadelphia must provide coverage to the landlord under the tenant's policy.


Philadelphia contends that it should not have to reimburse American for the settlement money it paid in the personal injury action or for counsel fees and costs, as American failed to give timely notice of the underlying action. We reject this argument.

First, an insurer must show that it was appreciably prejudiced in order to disclaim coverage based on a failure to provide timely notice of a claim. Hager v. Gonsalves, 398 N.J. Super. 529, 534 (App. Div.), certif. denied sub nom., High Point Ins. Co. v. Rutgers Cas. Ins. Co., 195 N.J. 522 (2008); see also Sagendorf v. Selective Ins. Co. of America, 293 N.J. Super. 81, 93 (App. Div. 1996). While Philadelphia claims to have suffered appreciable prejudice from the delay in learning of the personal injury action, Philadelphia does not specify what prejudice it suffered.

Second, when American first sought to tender the matter to it, Philadelphia did not reject the tender on the grounds it was prejudiced by the late notice. Philadelphia declined to accept the tender because it concluded the tenant was not responsible for Pessel's injuries. Philadelphia took the risk its legal conclusion was infallible, and forfeited an opportunity to involve itself in the litigation that remained and the subsequent settlement negotiations.

We have considered the remaining arguments and conclude they do not merit discussion in a written opinion. R. 2:11-3(e)(1)(E).





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