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DOCKET NO. A-1313-14T3








Argued March 7, 2016 Decided April 7, 2016

Before Judges Fasciale and Higbee.

On appeal from Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-2085-13.

Patricia M. Henrich argued the cause for appellant (Reilly, Janiczek, McDevitt, Henrich, Cholden, P.C., attorneys; Ms. Henrich and Maura G. Murphy, on the brief).

Barry J. Muller argued the cause for respondent (Fox Rothschild, L.L.P., attorneys; Mr. Muller, on the brief).


Defendant Utica Mutual Insurance Company (Utica) appeals from a September 2, 2014 order applying Texas law, requiring it defend its insured, plaintiff The Borden-Perlman Insurance Agency (Borden-Perlman), against allegations raised in a Texas lawsuit (the Texas lawsuit), and ordering Utica reimburse Borden-Perlman's legal fees and costs, incurred defending both the Texas lawsuit and this declaratory judgment (DJ) case (the DJ lawsuit); and an October 27, 2014 order denying Utica's motion for reconsideration. We affirm, concluding Utica is obligated to defend Borden-Perlman in the Texas lawsuit and reimburse incurred legal fees and costs.


Orchestrate HR, Inc. (Orchestrate) filed the Texas lawsuit against Anthony L. Trombetta and Borden-Perlman (the initial complaint). Orchestrate was in the business of providing insurance-related services and products in the sports-medicine industry. Trombetta worked for Orchestrate and acquired confidential information about Orchestrate's business operations.

Trombetta agreed not to disclose the confidential information he acquired, and entered into a non-compete agreement which prohibited him from pursuing Orchestrate's clients for three years following termination of his employment relationship with Orchestrate. Orchestrate alleged Trombetta voluntarily terminated his employment, joined Borden-Perlman, and less than one month later, used Orchestrate's confidential information and pursued Orchestrate's clients.

In its initial complaint, Orchestrate alleged Trombetta breached the confidentiality agreement and non-compete agreement. Orchestrate also asserted causes of action against Trombetta and Borden-Perlman alleging tortious interference with its contracts, tortious interference with its prospective business relations, and defamation. Orchestrate alleged Trombetta and Borden-Perlman communicated false and misleading statements to Orchestrate's clients involving insurance-related services, including

[Borden-Perlman] and Trombetta defame Orchestrate to its most important clients, attacking Orchestrate's integrity and credibility[.]

34. Specifically, [Borden-Perlman], and upon information and belief, Trombetta, have communicated a variety of false and misleading statements to numerous universities Orchestrate services, including Texas Christian University.

35. These false and misleading statements include the following: (1) Orchestrate is not timely processing insurance claims; (2) Orchestrate is not providing the discounts it is promising; (3) Orchestrate is using incorrect insurance forms; and (4) insurers are not "allowed" to use Orchestrate.

Utica had issued Borden-Perlman an Agents and Brokers Errors and Omissions Insurance Policy (the policy), No. 3735507. Borden-Perlman forwarded the initial complaint to Utica.

Utica declined to defend Borden-Perlman, contending it had no duty to defend the allegations in the initial complaint because Orchestrate alleged defamation resulting from knowing and intentional conduct, rather than from "negligent act[s], error[s], or negligent omission[s]." Borden-Perlman responded to Utica's declination letter emphasizing the allegations in the initial complaint arose out of Borden-Perlman's business, and that to establish defamation under Texas law a plaintiff need only demonstrate negligent conduct. Borden-Perlman also emphasized that it denied making knowingly false statements. Utica's refusal to defend Borden-Perlman prompted Borden-Perlman to file this DJ lawsuit in New Jersey.

Orchestrate filed a first amended complaint (Orchestrate's first amended complaint) alleging Trombetta: breached the confidentiality agreement; breached the non-compete agreement; tortiously interfered with Orchestrate's contracts and prospective business relations; defamed Orchestrate; and breached his fiduciary duty. Orchestrate also alleged the following causes of action against Borden-Perlman: tortious interference with contracts and prospective business relations; defamation; breach of contract; unfair competition; fraud; negligent misrepresentation; unjust enrichment; and aiding and abetting breach of fiduciary duty. Utica refused to defend against those allegations. Orchestrate filed a second amended complaint (Orchestrate's second amended complaint) asserting an additional claim of negligence against both Borden-Perlman and Trombetta.

Utica acknowledged its obligation to defend the defamation claim contained in the second amended complaint, but refused to defend against the allegations of negligence and breach of fiduciary duty. When Utica then failed to defend Borden-Perlman as to the defamation claim despite its previous agreement to do so, Borden-Perlman moved for leave to file an amended complaint in the DJ lawsuit to assert a cause of action for failure to defend it against the allegations contained in the second amended complaint.

The parties in the DJ lawsuit remained unable to resolve their dispute. They proceeded to trial and agreed resolution of the DJ dispute should be on the papers without testimony. The judge adjudicated whether Utica had a duty to defend Borden-Perlman against the allegations in the Texas litigation and, if so, the scope of that duty. The judge conducted oral argument, rendered oral opinions, and entered the orders under review.


On appeal, Utica argues the judge improperly performed the choice of law analysis; Utica's duty to defend was not triggered until Orchestrate filed its second amended complaint; its duty to defend was limited solely to the allegations of defamation; and that the judge erred in awarding Borden-Perlman legal fees and costs.

We are guided by the well-settled principle that a court's interpretation of an insurance contract is a determination of law. Cypress Point v. Adria Towers, 441 N.J. Super. 369, 375 (App. Div.), certif. granted, 223 N.J. 355 (2015). We afford no special deference to "[a] trial court's interpretation of the law and the legal consequences that flow from the established facts." Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). Accordingly, we review a trial court's interpretation of an insurance policy de novo. Sealed Air Corp. v. Royal Indem. Co., 404 N.J. Super. 363, 375 (App. Div.), certif. denied, 196 N.J. 601 (2008).


In determining whether Utica is under an obligation to defend Borden-Perlman against Orchestrate's allegations in the Texas litigation, we acknowledge the law in New Jersey and Texas is not in conflict.

In New Jersey, "the determination of an insurer's duty to defend requires review of the complaint with liberality to ascertain whether the insurer will be obligated to indemnify the insured 'if the allegations are sustained.'" Abouzaid v. Mansard Gardens Assocs., L.L.C., 207 N.J. 67, 79 (2011). "An insurer is contractually obliged to provide the insured with a defense against all actions covered by the insurance policy." Ibid. The court must compare the allegations in the underlying complaint against the language of the insurance policy. Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 173 (1992). If the two correspond, "the duty to defend arises, irrespective of the claim's actual merit." Ibid.

When interpreting the language of an insurance policy, a court should give the words "their plain, ordinary meaning." Zacarias v. Allstate Ins. Co., 168 N.J. 590, 595 (2001). A court "should not write for the insured a better policy of insurance than the one purchased." Ibid. (citations omitted). If ambiguity is present, the policy should be construed in favor of the insured and in line with the insured's objectively-reasonable expectations. Voorhees, supra, 128 N.J. at 175. "[I]f an insured's 'reasonable expectations' contravene the plain meaning of a policy, even its plain meaning can be overcome." Ibid. (quoting Werner Indus. v. First State Ins. Co., 112 N.J. 30, 35-36 (1988)).

In Texas, courts also determine the duty to defend based upon the allegations in the underlying pleadings and the language of the insurance policy. Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965). In Texas, this is sometimes referred to as the "eight[-]corners" rule. Cluett v. Medical Protective Co., 829 S.W.2d 822, 829 (Tex. App. Dallas 1992, writ denied). In applying the eight-corners rule, Texas courts generally give the allegations in the pleadings of the underlying lawsuit a liberal interpretation. Heyden Newport Chem., supra, 387 S.W.2d at 26.

Accordingly, when construing the allegations of the underlying suit, Texas courts strictly construe the pleadings against the insurer and resolve any doubt in favor of coverage. Ibid. However, in determining the duty to defend, courts may not read facts into the pleadings, look outside the pleadings, or imagine factual scenarios that might trigger coverage. Nat'l Union Fire Ins. Co. of Pittsburgh v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 142 (Tex. 1997). If the pleadings do not state facts sufficient to show that the cause of action is clearly covered or not covered, "the general rule [in Texas] is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy." Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008) (quoting Heyden Newport Chem., supra, 387 S.W. 2d at 26).


Pursuant to the policy, Utica is obligated to defend Borden-Perlman against any "suit." The policy defines "suit" as "a civil proceeding in which damages because of a 'loss' are alleged." A "loss" under the policy

means any amount which an insured becomes legally obligated to pay as damages for any "claim" arising out of a "wrongful act" to which this insurance applies and shall include judgments and settlements. To the extent allowed by law, "loss" shall include punitive or exemplary damages. "Loss" shall not include

. . . .

c. Matters which may be deemed uninsurable under the law pursuant to which the policy shall be construed.

"The 'loss' must arise out of 'wrongful acts' committed in the conduct of the insured's business, wherever committed or alleged to have been committed, by the insured or any person for whose 'wrongful acts' the insured is legally liable in rendering or failing to render professional services . . . ." The policy specifically covers against claims for defamation

"'Personal injury'" means injury arising out of one or more of the following offenses

. . . .

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

e. Oral or written publication of material that violates a person's right of privacy.

[Emphasis added.]

While the policy excludes indemnification for an oral or written publication "done by or at the direction of the insured with knowledge of its falsity[,]" the policy directed Utica to defend Borden-Perlman against such allegations until proved true at trial

This insurance does not apply to

1. Any active and deliberate, dishonest, criminal, fraudulent, malicious, or knowing conduct committed or alleged to have been committed by or at the direction of the insured. If a "suit" is brought against the insured alleging both "wrongful acts" within the coverage of the policy and dishonest, fraudulent, malicious, or criminal conduct, then we will defend the insured in the trial court, but we shall not have any liability for any judgment for dishonest, fraudulent, malicious, or criminal conduct nor shall we have any further obligation to defend after judgment in the trial court.

[Emphasis added.]


Viewing Orchestrate's pleadings with liberality, as we must when determining an insurer's duty to defend, we have determined that the defamation, tortious interference, and negligent misrepresentation allegations may potentially arise out of negligent misleading and false statements made during the course of rendering services to various clients. The policy recognizes that insureds may be sued for defamation, and in such suits, insureds may generally be accused of engaging in dishonest, fraudulent, or malicious conduct. Although dishonest, malicious, or criminal conduct may be excluded under the policy as a covered loss, the clear language of the policy requires Utica to defend Borden-Perlman for covered losses, such as defamation and tortious interference, which allegedly was caused by the defamation. That is especially so because under Texas law, Orchestrate need only establish, on its defamation claim, that Borden-Perlman acted negligently in publishing false and defamatory statements. Brown v. Swett & Crawford of Texas, Inc., 178 S.W.3d 373, 382 (Tex. App. 2005).


Although no conflict exists between the law in Texas and New Jersey as to an insurer's duty to defend, the substantive law in these two states is different, thereby effecting the scope of that duty. We agree with the judge that Texas law applies. Applying the law of the State of Texas, we reject Utica's assertion that it is entitled to reimbursement of legal fees incurred by Borden-Perlman in the Texas litigation, purportedly defending uncovered claims under the policy.


In New Jersey, we permit reimbursement of costs incurred in defending claims that are later determined not to be covered, if they can be apportioned. In cases involving covered and uncovered claims,

the general rule is 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.

[Hebela v Healthcare Ins. Co., 370 N.J. Super. 260, 275 (App. Div. 2004) (quoting SL Indus., Inc. v. Am. Motorists Ins. Co., 128 N.J. 188, 214-15 (1992)).]

In Texas, applying the eight-corners rule, "[i]f the underlying complaint pleads facts sufficient to create the potential of covered liability, the insurer has a duty to defend the entire case, even if the allegations are demonstrably false, fraudulent, or groundless, and even if some of the injuries alleged are not covered or fall within the scope of an exclusion." City of College Station, Tex. v. Star Ins. Co., 735 F.3d 332, 336 (5th Cir. 2013).


The judge acknowledged these legal differences and correctly resolved the conflict by applying Texas law.

In the context of liability insurance contracts, New Jersey courts reject the "mechanical and inflexible lex loci contractus rule in resolving conflict-of-law issues in liability-insurance contracts" and consider factors relating to and enumerated in 6, 188, and 193 of the Restatement (Second) of Conflicts of Laws(Restatement). Gilbert Spruance Co. v. Pa. Mfrs. Ass'n Ins. Co., 134 N.J.96, 102-04 (1993). The Supreme Court set forth a specific choice-of-law framework for interpreting liability insurance contracts.

The framework provides that "a court look[] first to Restatement[ ] 193, which provides that the place that 'the parties understood . . . to be the principal location of the insured risk governs unless some other state has a more significant relationship under the principles stated in [ ] 6 to the transaction and the parties." Pfizer, Inc. v. Emp'rs Ins. of Wausau, 154 N.J.187, 194-95 (1998) (second alteration in original) (quoting Spruance, supra, 134 112).

The choice of law issue can be straightforward when the policy covers risks located primarily in a single state. Id. at 195. Yet, in cases like this one, where "the subject matter of the insurance is an operation or activity and when that operation or activity is predictably multistate, the significance of the principal location of the insured risk diminishes." Spruance, supra, 134 N.J. at 112 (citation omitted). In such situations, the governing law is that of the state with the dominant significant relationship according to the principles set forth in Restatement 6. Ibid. "The site-specific approach of [ ] 193 inevitably means that more than one state's law may govern coverage questions arising under a casualty insurance policy." Pfizer, supra, 154 N.J. at 195.

The Restatement 193's comment f addresses the special considerations that arise when multiple risk policies insure against risks located in several states; acknowledging

A single policy may, for example, insure dwelling houses located in states X, Y and Z. These states may require that any fire insurance policy on buildings situated within their territory shall be in a special statutory form. If so, the single policy will usually incorporate the special statutory forms of the several states involved. Presumably, the cou[r]ts would be inclined to treat such a case, at least with respect to most issues, as if it involved three policies, each insuring an individual risk. So, if the house located in state X were damaged by fire, it is thought that the court would determine the rights and obligations of the parties under the policy, at least with respect to most issues, in accordance with the local law of X. In any event, that part of a policy which incorporates the special statutory form of a state would be construed in accordance with the rules of construction of that state.

The choice of law determination "must reflect a careful site-specific determination, made upon a complete record, of the factors set forth in either [ ] 193 (principal location of the insured risk) or [ ] 6 (identification of state with dominant significant relationship) of the Restatement (Second) of Conflict of Laws." Pfizer, supra, 154 N.J. at 193-94 (citation omitted).

Utica maintains the judge erred in concluding New Jersey was not the principal location of risk and that the judge failed to analyze the required factors to determine which jurisdiction has the most significant interest. Utica contends the court placed "undue weight on the fact that the [policy] did not contain a choice of law provision." This contention is without support in the record. During oral argument on the motion for reconsideration, the judge stated in part

Your previous motion was thoroughly briefed and the [c]ourt read and considered all of the papers filed, listened to extensive oral argument and granted plaintiff's motion articulating its reasons on August 22, and that was memorialized then later . . . in an order in early September. And the first issue addressed concerned the [c]ourt finding that the substantive law of Texas applies and this was because the policy covered disclosed risk in many states, including New Jersey, Texas, Indiana and others. And it was a multi-state policy in that . . . Borden-Perlman and relying liability arose in Texas and Utica which wrote the policy could have put a New Jersey choice of law provision into the policy if it had wanted to, but it did not.

Specifically under the Pfizer case argued in [c]ourt, it is clear that when dealing with a multi-state insurance policy the principal location of the insured is not dispositive; rather it is the state with the dominant significant relationship and that was the part that was discussed during our oral argument. And the [c]ourt in Pfizer kn[e]w that important choice of law cont[r]acts

. . . can also include where the risk covered by the policy exists and where the liability arises.

Here though it was no surprise to Utica and no dispute that Utica knew that Borden-Perlman was a multi-state operation with employees in Texas and it cannot be disputed that there were many places of performance under the contract including Texas, New Jersey and any other state that Borden-Perlman operated in. And notwithstanding the choice of law determination, the policy in question here contains a provision that requires Utica to defend covered and uncovered claims.

The[] [Re]statement [(Se]cond[)] of [C]onflicts of [L]aws in its comments states that there can be numerous principal locations of the risk. Indeed it makes specific reference to situations where the policy covers a group of risk that are scattered throughout two or more states. So the [R]estatement . . . [ ] 193 does, in fact, confirm the [c]ourt's ruling that Texas law applies.

The judge explained, and the facts in the record support, the policy was a multistate liability policy, covering disclosed risks in New Jersey, Texas, and Pennsylvania; Borden-Perlman's underlying liability arose in Texas; and Utica did not otherwise include a choice of law provision in the policy.


Finally, we conclude the judge correctly awarded legal fees to Borden-Perlman pursuant to Rule 4:42-9(a)(6), which states legal fees are allowable "[i]n an action upon a liability or indemnity policy of insurance, in favor of a successful claimant." Such is the case here.

We conclude that Utica's remaining arguments are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).


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