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National Premium Budget Plan Corp. v. National Fire Insurance Co.

Decided: September 13, 1967.

NATIONAL PREMIUM BUDGET PLAN CORPORATION, A CORPORATION OF THE STATE OF MICHIGAN, PLAINTIFF,
v.
NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, A CORPORATION OF THE STATE OF CONNECTICUT, LOUIS J. MARTONE, EDWIN M. ROTHBERG AND PRICE AGENCY A PARTNERSHIP COMPOSED OF LOUIS J. MARTONE AND EDWIN M. ROTHBERG AS COPARTNERS, DEFENDANTS



Stamler, J.s.c.

Stamler

Is an insurance company liable to a finance company under theories of fraud and deceit or negligence for the acts of an insurance agent who submits fraudulent loan applications falsely evidencing the issuance of insurance policies and who thereafter forges verifications of their existence upon which the finance company relies when making loans to fictitious assureds, the proceeds being then converted by the insurance agent to his own use?

In considering similar schemes with minor variations Louisiana and Florida courts have answered in the affirmative. The New York courts and the Court of Appeals for the 8th Circuit deny recovery. New Jersey courts are faced with this question for the first time in the case sub judice.

Subsidiary questions as to defendants other than the insurance company are readily answered when the basic liability as above set forth is determined.

Charging fraud and deceit, or in the alternative negligence, a complaint containing 42 counts was filed by plaintiff National Premium Budget Plan Corporation (hereinafter National Premium), a corporation of the State of Michigan. Sifted to eliminate the excess verbiage in the 76-page complaint, there remain ten transactions upon which recovery is sought amounting to a claimed loss by plaintiff of $177,758.07 and interest if the "benefit of the bargain" measure is applied, or $156,967.07 and interest if calculated by "out-of-pocket" standards. Defendant National Fire Insurance Company of Hartford (hereinafter National Fire) is charged with fraud and deceit or with negligence for the full amount on all ten transactions. Defendant Edwin M. Rothberg, individually and as an alleged partner of Price Agency, stands accused only of fraud and deceit in two of the ten transactions with a claimed loss to plaintiff of $54,114.30. From defendant Louis J. Martone, charged in fraud and deceit, full recovery is sought on each of the ten transactions. Martone pleaded guilty to criminal acts arising out of a number of the transactions, is presently confined in New Jersey State Prison and has not filed any answering pleading. The other defendants deny liability. Plaintiff's demand for a jury trial was waived.

Installment buying has become a way of life for the consuming public. In some cases such transactions are made directly with the seller of a commodity or service and the seller remains the lender throughout. In others money is borrowed directly from a bank or finance company, the borrower using the proceeds of the loan to pay the seller in full and repaying the loan in periodic installments. In such case the seller has nothing more to do with the transaction. Most frequently a third method is utilized: the seller of the commodity or service accepts evidence of the debt from the purchaser and then sells and assigns the documents to a lending institution, the seller remaining secondarily liable in most transactions. This latter method was used in the case at bar. The seller was insurance agent Martone; the

purchaser-borrower the assured; the finance company plaintiff National Premium; the commodities were insurance policies of defendant National Fire.

Briefly defined, insurance premium financing is a form of installment lending designed to permit an insured to space the payment of his insurance premium over the major portion of the life of the policy contract. Its principal benefit is to eliminate the advance cash outlay which frequently occurs at an inopportune or financially stringent time. An additional benefit lies in the ability of the assured to make a single payment to the insurance company for multiple years of coverage with substantial reduction in premium charge. For example, the purchase of a five-year policy requires only four times the annual premium; a three-year policy costs but 2 1/2 times.

The insurance company relies preponderantly upon insurance agents or brokers for the business it writes. The insurance premium finance company is dependent exclusively upon the insurance agent or broker for its source of customers. In initiating a loan transaction it does not deal directly with insurance companies or insureds. This is true not only on new business but also on repeat business. In the greater percentage of legitimate transactions, the only direct communications between the insured and the finance company are late notices or notices of payments overdue sent by the finance company to the insured, copy to the agent (but not the insurance company), and payments made by the insured directly to the finance company. The finance company also sends a "welcome letter" and a coupon payment book directly to the insured at the beginning of each transaction.

The insurance agent is the salesman for the finance company and on behalf of the insured applies for the loan directly to the finance company. (One may be critical of the use of the word "loan" instead of "sale," but for reasons hereinafter set forth the sale is a fiction -- the "sale" is clearly a loan approved by the finance company in advance

of the initial operation.) After the loan is made subsequent contact between finance company and insurance agent is limited to copies of late notices, but the agent remains liable to the finance company that has received the assignment of the contract and debt with recourse or repurchase. In the event of default the finance company makes a demand upon both insurance agent and insurance company for its collateral, the return of the unearned premium.

Some lending institutions operate in a broad spectrum of financing, relying for collateral on anything from automobiles to zithers. Others specialize. Plaintiff was and is a specialist in the field of "Insurance Premium Financing."

In 1939 in Detroit, Michigan, Green Investment Company was formed by two brothers, Leonard and Robert Green. It operated as a finance company in diversified fields, mostly automobile. In 1958 Green Investment changed its name to National Premium Budget Plan Corporation and restricted its operations to insurance premium financing.

From a very small office in Detroit, with the brothers Green as the only principal officers and about five in clerical staff, a very substantial dollar business was conducted. National Premium placed advertisements in periodicals which would come to the attention of insurance agents and brokers inviting them to make use of its speedy service in financing premiums for insureds on an installment budget plan. Although National Premium remained in small quarters, its business grew to where nationally it was second only to AFCO Incorporated, a New York Company.

In legitimate transactions the operation of the "budget plan" pleased everyone: (1) the insured avoided an advance cash payment or secured a longer term policy at a reduced rate; (2) the insurance agent or broker sold a policy and in most cases a longer term policy, the entire premium was paid at once and his commission was immediately available; (3) the insurance company received its net premium on a policy for a longer term; and (4) the finance company, fully secured by the insured's promise to pay the installments

as they became due, supported by the secondary liability or guaranty of the agent or broker and the "return premium" collateral called for by the "premium budget plan" contract, put its money out at interest rates called "service charges" averaging 14.78%.

Prior to May 1957 defendant Martone, as the Louis J. Martone Agency, whose office was located at 516 Park Avenue, Plainfield, New Jersey, was acting as insurance agent for a number of companies. On May 6, 1957 he entered into an insurance agency agreement with National Fire. This agreement granted authority to Martone to receive and accept proposals for contracts of insurance covering risks located in Plainfield and vicinity, limited to such certain classes of risks as National Fire would authorize from time to time; to collect, receive and receipt for premiums "on insurance tendered by the Agent to and accepted by the Company," and to retain commissions out of premiums collected.

The principal office of National Fire was located in Hartford, Connecticut. In a number of cities National Fire had service offices the primary functions of which were to supply appointed insurance agents with stationery and forms, assist them with regard to risks, suggest methods of selling more insurance, and advise on how to assist the prospective assured, including where appropriate a discussion of premium financing. A representative of National Fire told Martone that many banks engaged in such financing, as did AFCO, the largest finance company in the United States specializing in this field. Thereafter Martone placed financing for his clients through AFCO and Passaic-Clifton National Bank. Such financing included but was not restricted to National Fire policies.

In 1959 Martone came across the advertisement of National Premium. The unusual and interesting feature was the emphasis on speed in remitting -- seven to ten days. AFCO had required longer periods, sometimes up to 30 days, before it would remit on a financing request. The

National Premium advertisement was addressed to "Fire and Casualty Agents" and spoke of "Premium Budgeting for Your Clients," "no signature required" and "budget by phone." The most attractive feature was " fastest payment to agent -- 7 to 10 days." (Emphasis supplied). Admittedly it was by this appeal that National Premium hoped to make inroads upon its competitors, especially AFCO, number one in the field. Martone wrote for the proffered "kit" of material. Without making any investigation of the stability or repute of Martone or any inquiry as to what and how many insurance companies he served, National Premium promptly dispatched its kit. It contained a sample of a completed form and a number of blank forms of "Premium Budget Request" of two types, one called the "Non-Signature Program" and the other the "Signature Program." The kit also contained an introductory letter, rate charts, and "Silent Salesman" form 123. After stating that the program could be used to budget premiums from $40 to $100,000, the letter went on to say:

"National offers two Premium Budget Programs. Our most popular program is the Signature Program. It is available where the agent prefers a signature arrangement for his insureds. In addition, National offers the Non-Signature Program. Such an arrangement enables the agent to set up the budgeting transaction in a quick and friendly manner -- over the telephone if he desires -- without going to the trouble of getting the insured to sign the contract. Use the sample copy of the completed Installment Contract and the Rate Chart as a guide to fill in the Contract. Fill in the Contract, enclose in an envelope, and drop in the mail-box. Our check will be on its way to you within 7 to 10 days."

The emphasis appears in the exhibit. The rate chart contained the "Budgeting Procedure":

"WHAT THE AGENT DOES:

1. Agent prepares contract, filling in complete information as outlined in the caption on the columns on the contract.

2. Agent records total premiums, budget charge, down payment, and amount of each payment in the appropriate boxes on the contract from the Rate Chart of the appropriate payment plan.

3. Agent dates and signs contract and mails the original to National Premium Budget Plan, 20120 Livernois, Detroit 21, Michigan.

4. Down payment is to be collected and retained by Agent."

"WHAT NATIONAL PREMIUM BUDGET PLAN DOES:

1. Mails coupon book to insured.

2. National mails proceeds of contract (Box A minus Box D) to the agent within 7 to 10 days of receipt of contract.

3. Agent and insured are kept fully informed at all times of the status of the account. When an installment is not paid on time, reminder notices are sent to the insured and a copy to the agent."

The "Silent Salesman" was a form of advertising which National Premium suggested should be affixed to all invoices sent by the agent to his client, who might not be aware of the advantage of a "pay as you go basis" for insurance costs "just as you do other important purchases."

The "Non-Signature Program" is initiated with the execution and mailing by the insurance agent of a "premium budget request form." As its name describes, no signature of the assured is required, although he remains liable on the promises to pay and other covenants. This form carries the following information: total premiums, budget charge, total premiums plus budget charge, down-payment, amount budgeted plus budget charge, amount of each monthly installment, number of months, and due date of first installment. The agent is instructed to collect and retain the down-payment. The names and addresses of the agent and of the assured are to be filled in, together with the identifying code prefix and number of each policy together with the inception date; the full name and address of each insurance company or the name and address of the general agent to whom policy premium is paid; the type of coverage (i.e., fire, casualty, marine, internal marine, auto); the term of the policy, and the separate premium charge for each policy. In the body of the form the following language appears:

"To National Premium Budget Plan Corporation:

The undersigned, on behalf of the insured named above requests National Premium Budget Plan Corporation (hereinafter referred to as National) to advance the premiums on the policies described herein to the insurance companies in accordance with the terms set

forth on the reverse side, which are made a part hereof. It is understood that this request, if accepted by National, shall constitute the budgeting agreement between National and the insured." (Emphasis supplied)

The "undersigned" refers to "agent or broker."

The reverse side sets forth the detailed terms of the assured's obligation, abstracted as follows:

In consideration of the premiums to be advanced by National, the named insured: (a) promises to pay National the monthly installment; (b) assigns to National as security all return premiums and loss payments up to amount of unpaid balance due on installment contract; (c) default, such as a failure to pay each separate payment on due date or filing a petition in bankruptcy, accelerates the time periods and the entire unpaid balance is due and all unearned premiums "shall be payable by the insurance companies to National upon National's request"; (d) the insured remains liable for any excess, but National may collect and enforce payment of the indebtedness evidenced thereby without recourse to any security underlying this agreement; (e) warrants that each of the policies listed has been issued to the insured and is in full force and effect, and (f) appoints National as attorney-in-fact in its own name or in the name of the agent or broker to cancel and surrender the policy, collect all unearned premiums or losses payable, and execute lost policy receipts necessary to effect cancellation.

The non-signature form then concluded with "The policy data and the statements made herein are true and correct and a copy of this request has been given to the insured." There then is a space for the signature of the "agent or broker." The insured does not sign, notwithstanding the promises and covenants.

The "Signature Program" form is essentially the same on the face page of the budget request with but one important exception -- the dollar amount of coverage is required to be set forth for each policy. The reverse side has important differences. In this procedure the assured must sign the "premium

installment contract" and " Signatures must correspond with the language of the policy/policies and in case more than one person or party is named in the policy/policies, all should sign. In case of signature by an agent or fiduciary, evidence of the authority of the agent or fiduciary must accompany the contract." (Emphasis supplied). Above the signature of the assured the terms are set forth at length and are here abstracted: the assured acknowledges receipt of the policies listed "to which a rider has been attached showing that the premiums thereon have been financed"; the assured promises to pay to the order of the agent or its assigns, at the office of National Premium Budget in Detroit the payments as they become due; the assured assigns to the agent, its successors and assigns, as collateral security, all unearned premiums or loss payments and agrees that the agent or assigns are entitled to possession of the policies until payment is made in full, but the assured may have "temporary possession" until demand by agent or assignee of agent. The remaining provisions are similar to those set forth in the "non-signature" contract.

Immediately below the installment contract there appears the "AGENT OR BROKER'S ASSIGNMENT AND CERTIFICATION," which is signed by the agent or broker:

"For Value Received, the undersigned hereby sells, assigns and transfers all his right, title and interest in and to the foregoing contract and in and to all sums payable thereon and collateral security covered thereby to NATIONAL PREMIUM BUDGET PLAN CORPORATION, Detroit, Michigan, its successors and assigns, and warrants that said instrument is genuine and in all things what it purports to be; that the undersigned has good title to said contract and the right to transfer said title, that the undersigned has no knowledge of any fact which might impair the validity of said instrument or render it less valuable or valueless; that the amount stated in Box E on the reverse side hereof is correct; and that there is no defense to it. If any of said insurance companies shall become insolvent, suspend business or cease to be qualified to do business, the unpaid balance due hereunder shall be immediately due and payable. In such event National may immediately terminate the agreement and the unearned premiums on the policies listed above shall be payable by the insurance companies or the undersigned agent to National upon

National's request. If the policies listed on the reverse side hereof are either audit or reporting form policies or policies subject to retrospective rating that the deposit or provisional premiums are not less than the anticipated premiums to be earned for the full term of the policies. These warranties and representations are made to induce the assignee to purchase this instrument, and should any difference or dispute arise as to the truth of any statement made in connection with this transaction, the undersigned agrees to repurchase this instrument for the amount owing thereon, plus costs and expenses incurred by the holder in attempting to collect the same.

The undersigned certifies: (1) that all of the assureds named in the policy/policies covered hereunder are fully described on the reverse side hereof, and (2) that all of the policy/policies listed on the reverse side have been issued or signed by the undersigned, except as follows:

Policy Prefix and Number Insurance Company Name of Agent Address of Agent

Agent or Broker -- Sign here

By . . .

Title"

Although none of the transactions here sued upon were in the "Non-Signature Program", the earlier "non-signature" loans were necessary stalking horses for the subsequent swindle.

Nine of the ten transactions on which recovery is sought were in the "Signature Program." The tenth was in a procedure called "Signature Program -- Profit Sharing Plan." This was initiated by plaintiff in January 1963 and gave the agent the right to share in the profits of the transaction. The profit sharing form, first used in January 1963, is almost identical to the "Signature Program" contract except that for the first time the following language appears above the signature of the assured: " The insurance agent or broker through whom the above policies were issued is not the agent of National." (Emphasis supplied).

In October 1959 Martone, having received his kit, placed his first request on the "Non-Signature Program" form. It sought financing of premiums on a number of policies issued by more than one insurance company, including a National Fire policy. When more than two weeks had gone by without a remittance from National Premium, Martone, remembering the promise of "fastest payment" and "speed -- 7 to 10 days," called Detroit to find out why the delay had occurred. National Premium advised, and Martone learned for the first time, that no remittance would be forthcoming until each of the insurance companies named in the request for financing had verified directly to National Premium the existence of an authentic issued policy conforming precisely to the term, coverage and premiums listed in the loan application. Martone was told that National Premium sends a "Notice of Premium Financed" and a "Verification Acknowledgement Postcard" to each company; that no check issues until all cards are received by National Premium, and that the delay was due to the fact that National Fire had not yet responded, although the other listed companies had.

Martone immediately went to William A. Bray at the local service office of National Fire, then at Room 1813 of the National Newark Building in Newark, New Jersey. Bray was the manager of this office and Martin Bross was assistant manager. The greater percentage of their work was in the field, outside of the office, visiting the approximately 150 insurance agents of National Fire in New Jersey. One function of Bray and Bross was to encourage the insurance agents to push National Fire policies over the policies of other competing companies. Their duties were to assist in the opening and closing of agencies; supply published material, stationery and policy forms, and advise on how to sell longer term policies; review of risks proposed, and this service included all types of helpful suggestions, including how premium financing operates. In the office at the time of Martone's visit there were employed two girls, one of whom was Eileen Schurr. She was serving as Bray's secretary

and file clerk, and as the general overseer of incoming mail.

Martone told Bray of his conversation with National Premium. Bray stated that no verification or acknowledgement could be made by the Newark office; that all such verifications were required to be made in the Hartford home office of National, for it was there that the "dailies" were maintained. "Dailies" are in common use by insurance companies and contain information on a daily basis of the policy number, the assured's name and address and the agency selling the policy. This information is transmitted to Hartford daily and no record of its contents was maintained in Newark. This applied to all service offices on the eastern seaboard. (In the mid-West the various local service agencies transmitted dailies to the National Fire office in Chicago.)

Martone was informed that Bray had no authority to sign the verification acknowledgement card. Bray, in Martone's presence, called Hartford and spoke to an officer of National Fire, who authenticated the existence of the policy in question. The card was thereafter forwarded to National Premium in Detroit from Hartford bearing the signature of an underwriter.

After a few legitimate transactions for minimal borrowings of less than a thousand dollars on the "Non-Signature Program," Martone suggested to Green at National Premium that the "Notice of Premium Financed" and form of verification postcard be sent directly to Hartford from Detroit, and remittance to him could then be expedited. Green testified that to prevent collusion and fraud and also to have the latest timely information on whether an agent did or did not exist, National Premium had an unrelenting requirement that the verification forms must be sent to the local office of the insurance company nearest to the agent, and it mattered not whether it was a branch or service office. Green further stated that all requests for financing came to his personal attention and that whenever Martone on an application used the Hartford address, Green personally

deleted that address and inserted the Newark address. Green refused to adopt Martone's suggestion.

It was at about this point that Martone first realized that a swindle could be perpetrated very easily on National Premium and that the opportunity to do so was handed to him by National Premium. Realizing that Bray and Bross spent considerable time on the road, his scheme would work if there were a way to intercept the mail addressed by National Premium to National Fire at Newark before it was forwarded to Hartford. Martone had many blank forms for requests for financing supplied to him by National Premium. All that was required to make the scheme work was for him to secure the "Notice of Premium Financed" and the "Verification Acknowledgement Card" without the knowledge of National Fire. Had National Premium complied with Martone's suggestion and sent the notices and verification cards to Hartford, Martone's plan could not have succeeded.

With all the charm and sincerity characteristic of a successful confidence man, Martone induced Miss Schurr to turn over to him envelopes bearing the return address of National Premium, persuading her that the letters were simply "cancellation of business." Miss Schurr and the other Newark employees either knew nothing or little about premium financing. Miss Schurr either personally handed these envelopes to Martone, who timed his visits to the Newark office, or placed them in an outer envelope addressed to Martone at his Plainfield office. This was done without the knowledge of Bray or Bross.

Having succeeded thus far, Martone decided to put through a few "legitimate" transactions, to be followed by "illegitimate" transactions and then by the "fraudulent" transactions. A few truly legitimate transactions were put through. Leonard Green sent the "Notice of Premium Financed" form to National Fire at Newark and the acknowledgement card was returned to Detroit bearing the postmark "Hartford, Connecticut." Green testified that on all transactions of National Premium with any insurance company he paid special

attention to the postmark and the signature on the verification postcard to make certain that the agent and the assured were not in collusion. He noticed that cards sent to Newark at the beginning came back to National Premium bearing the Hartford postmark and a signature by someone from Hartford whose title was "Underwriter." A "legitimate" transaction was one where a policy did actually issue and Hartford had a record of its issuance. A few legitimate transactions took place before Martone induced Miss Schurr to turn over the mail to him.

Now that he had Miss Schurr as the intercept, Martone decided to make a test run or two. These are referred to as the "illegitimate" transactions. Martone would actually prepare but not deliver a National Fire policy for a named assured, who never knew that his property was insured against fire loss. Using the "Non-Signature Program," Martone requested financing from National Premium. A "Welcome Letter" and a coupon payment book were sent by National Premium to the assured named in the budget request, to a postoffice box or to Martone's own address. At the same time National Premium sent the "Notice of Premium Financed" and the acknowledgement card to Newark. Miss Schurr intercepted the mail and turned it over to Martone. Martone completed the form and forged the signature of William A. Bray, writing the title "Manager" in the place designated. Martone then mailed the postcard from Newark. The card was received, inspected at National Premium by Leonard Green, who issued a check payable to "Louis J. Martone Agency." In no case was the check made payable to the primary obligor, the insured, or jointly to both the insured and Martone.

Each month Martone faithfully sent National Premium a coupon from the coupon payment book, accompanied by a Martone Agency check. In none of the Martone transactions was payment ever made by check of the insured. The premiums financed in the illegitimate transactions were very small and served as an investment by Martone in research to

learn if his scheme would work or if it needed additional research and development. During the installment term of the first illegitimate transaction Martone started another, and then another, using the proceeds received from National Premium on the subsequent transactions to pay National Premium each installment as it became due on the earlier contracts still outstanding. The plan was working smoothly and regularly.

The time was now ripe for the full treatment. The first fraudulent transaction was undertaken. Using fictitious names or names of living persons who were unaware of his plan, Martone filled in both non-signature requests and signature request forms, and designated prefixes and policy numbers (chosen at random) for a variety of types of coverage in ever-increasing amounts, naming National Fire as the carrier. These were sent to National Premium from time to time, who obligingly struck the Hartford address and inked in the Newark (later, the East Orange) address of the National Fire service office. On later requests Martone happily complied with National Premium's directive and inserted the local address of National Fire. The "Notices of Premium Financed" and the "Verification Acknowledgement Cards" found their way into Martone's hands through Miss Schurr and later Miss West, another National Fire local employee. Martone completed the verification card with the forged signature of "William A. Bray, Manager" and mailed it from either Newark or East Orange, wherever the local office was then located. Like clockwork, and with the expedited speed as originally promised by National Premium in its advertisement, the checks payable to the Louis J. Martone Agency were received by Martone from National Premium and deposited to his account.

There was no need of a remittance or credit to National Fire, for no policy whatsoever had ever issued or for that matter ever been prepared by Martone. Martone did not find it necessary to go through the mechanics of typing up a fictitious insurance policy. He continued to repay on older

contracts, steadily increasing the amount of the new borrowings, using part of the new loans to repay the older obligations.

In 1961 National Premium notified its "producers," as it called its business getters like Martone, that all requests for amounts over $500 thereafter would have to be submitted using the "Signature Program." The "Non-Signature Program" could only be used for borrowings of less than $500. This did not for even one moment put Martone off his stride. Following instructions, since all amounts now requested were considerably in excess of $500, Martone now used and forged the names of unknowing living persons to the contracts, or used and signed fictitious names. With apparent unconcern, vacant lots or imaginary buildings or nonexistent locations were listed. Martone's early and easy success made him careless. In listing policy numbers he abandoned sequential numbering; his fictitious corporate assured had new and different fictitious names of individual officers; the premium rates differed substantially for the same amount and type of coverage, and the "type of risk" were risks which Martone was never authorized to write and were not handled by National Fire. With growing abandon Martone forged Bray's name in a number of different ways: "W. A. Bray" or "Wm. A. Bray" or "William A. Bray," and on one occasion forgot that Bray's middle initial was "A". Perhaps the use of the word "forge" gives too much credit to Martone, if forge is taken to mean to imitate or copy falsely. Martone may have been an adept swindler, but he was a very poor forger. Martone's penmanship differed from signature to signature, and this is apparent to even the untrained eye. Martone continued to forge Bray's name long after Bray had left the East Orange office of National Fire for a position in another state.

All but the last two transactions were made in the name of Louis J. Martone Agency as "agent or broker." Martone testified that in January 1963 he became concerned that National Premium might become suspicious because of the [97 NJSuper Page 170] frequency and ever-increasing amounts of business originating in the Martone office. In the last two transactions the agent was named as "Price Agency," and to these applications Martone forged the name of "C. Blandek," a 17-year-old girl working in his Plainfield office. Martone did not want his name to appear anywhere on these two borrowings, which totaled over $50,000 and he found what he considered a safe vehicle. In 1961 Martone suggested to defendant Edwin M. Rothberg, a business neighbor, that they create a business for two young men in their respective offices which would engage in the writing of "bastard" insurance. This type of insurance was substandard and less acceptable to the consumer, and involved insurance at reduced cost with direct billing and limited coverage. Rothberg had had an insurance broker's and agent's license for 25 years. The choice of "Price" in the trade name was to suggest to the consuming public a cut-price or cheap insurance. A trade name certificate was filed by Rothberg and Martone in the Union County Clerk's office on July 17, 1961. It stated that Martone and Rothberg were about to engage in a partnership for real estate and insurance under the name of Price Agency. One newspaper advertisement was inserted by Price Agency and no business resulted. In fact, Price Agency did not write a single policy, had no bank account, and never engaged in a business transaction involving real estate or insurance or any other business. The name lay dormant until 1963, when Martone personally found need for it. Martone had opened a bank account in the name of Price Agency with the Plainfield Trust State National Bank to be used as a depository for the remittances. It was not until after the account had been put to its use in the fraudulent scheme for the deposit of National Premium checks payable to Price Agency in the last two transactions that the bank required a certified copy of the trade name certificate, which by this late date had had Rothberg's name removed. Rothberg did not participate in any National Premium activity, and the first communication from National

Premium to Rothberg was the service of the summons and complaint in the instant case.

Martone's bubble burst when he issued a check to National Premium in payment of one of the transactions and it was returned on February 8, 1963 marked "insufficient funds." Plaintiff's suspicion was now aroused for the first time. Green immediately called the East Orange office of National Fire and the shock came. Bray was not there, having left in March 1962; Bross, now manager, knew nothing about any of the financed transactions. National Premium investigated. The New Jersey Department of Banking and Insurance and the county prosecutor explored. Martone was subsequently indicted on many counts for defrauding National Premium, pleaded guilty and is now serving his sentence.

After the telephone call from Green to Bross, National Fire cancelled the Martone Agency agreement and so notified the Department of Banking and Insurance.

Thereafter, on January 15, 1964 National Premium filed its complaint seeking to recover on the last ten transactions upon which installments remained unpaid. Plaintiff does not offer to return or give credit for the profits made on the illegitimate transactions upon which payments were received in full and substantial profits realized.

National Fire denies responsibility for the fraud or deceit, denies negligence and asserts contributory negligence. Rothberg denies liability for fraud and deceit, (He is not charged with negligence.) Martone has failed to answer the complaint.

THE TEN TRANSACTIONS

All ten transactions involved in the litigation were initiated by Martone and financed by National Premium within a one-year period; the earliest contract was dated January 20, 1962, the last January 10, 1963. The nonexistent policies purportedly insured property in excess of $7,000,000. The premiums necessary to pay for such coverage exceeded

$260,000. The total repayments anticipated, including "Budget charges," amounted to $280,423.72. The monies remitted to Martone by plaintiff totalled $259,632.12. National Fire received not one dollar from Martone on National Premium advances on the illegitimate or fraudulent transactions. The amount repaid to National Premium by Martone on these then contracts was $102,665.05. The balance remaining due on the contracts is $177,758.67. This figure includes National Premium's profits, and plaintiff seeks this amount plus interest under the "benefit of the bargain" rule. In the alternative, the amount of loss claimed as "out-of-pocket" is $156,967.07. Each of the ten transactions upon which suit is brought is considered hereinafter in detail.

TRANSACTION NO. 1

This "Signature Program" contract is dated January 20, 1962. It was received by Leonard Green in Detroit on January 22, 1962. The agent or broker is Martone, whose address is shown as 516 Park Avenue, Plainfield, New Jersey. The assured is Price Associates, Inc., P.O. Box 701, Plainfield, New Jersey. In the appropriate place for the signature the typed name of the assured corporation appears followed by the purported signatures of two fictitious individuals, George McVail and Walter E. Price. Although the contract required it, no evidence of their authority by or relationship to the corporate assured was noted. Three policies for use as security were listed, all National Fire. One was a casualty policy and the other two were fire. The total coverage was $230,000, for which the total premiums amounted to $21,235.12, with a budget total charge of $1,529.30. The down payment "to be collected and retained by agent" was $2,123.50. The total budget charge plus amount budgeted was $20,640.80, to be paid in 12 monthly installments of $1,720.06. The remittance on this contract to Martone from National Premium was to be $19,111.62. The check to Martone, however, was in the sum of $22,391.62.

The reason for the higher amount became clear when an additional transaction (not included in plaintiff's claim) processed the very same day is examined. This too was a "Signature Program" contract created by Martone, dated January 20, 1962 and received in Detroit by Green on January 22. The agent and the assured are the same as that in the accompanying transaction. Examined and approved by Green at the same time, the check to Martone covers remittance for both transactions. Green's handwriting admittedly appears on both contracts. Received and processed the very same day, Green ignored the warning which should have caused him great alarm. In the separate requests the same numbered policy, National Fire policy 671441, was listed as collateral. One request on policy 671441 had a policy date of 1/18/62 covering casualty in the amount of 100/300 and expiring 1/18/65, with a premium charge of $8,344.72. The other request on policy 671441 had the same policy date covering casualty in unspecified amount, described as " auto fleet coll." and expiring 1/18/63, with a premium charge of $1,924.75. Since only eight monthly payments were scheduled for the one-year policy, this latter transaction was fully paid off by Martone to plaintiff before the frauds were uncovered. Since the check included amounts advanced on both contracts (with notation on the reverse side of the check), it is inconceivable that a finance company president using ordinary care in processing the transaction would not have been alerted. The inconsistent terms and coverage for the very same policy used as separate collateral sounds a clarion call. The perfidy of Martone could have been discovered then and there.

The next step was the mailing by National Premium of "Notice of Premium Financed" and the "Acknowledgement-Verification Card" forms to the East Orange service office of National Fire. This was done for both contracts on the same day. On the notice for one transaction the policy number was 671441, with an inception date of 1/18/62 for a term of 3 years and a premium of $8,344.72. On the second,

the policy number was 671441, with an inception date of 1/18/62 for a term of one year and a premium of $1,924.75. The "Notice of Premium Financed" in each case contained the following language: "We will finance the premium if you assure us the policy is issued in accordance with the description shown above * * *," (Emphasis supplied)

Each return card carried the forged signature of Bray, the same policy number and a postmark on each showing a mailing from East Orange on January 24, 1962 at 3:30 P.M. Green repeatedly testified that he personally examined each verification card upon receipt to eliminate the possibilities of fraud by agent or assured. On the face of the contracts, the notices and the returned postcards there appeared sufficient inconsistencies to have set in motion some inquiry. No investigation whatsoever was conducted by anyone from National Premium on these transactions or any others.

The ledger card on this account shows clearly that no installment was ever paid on its due date, and that late notices, cancellation notices and releases of cancellation notices were sent to the fictional assured and to Martone.

From the proceeds of later borrowings all but one installment had been paid in February 1963, the time of the discovery of the fraud. Plaintiff claims only $1,720.07 on this item. Since this was the first of the ten transactions upon which suit is brought, had plaintiff noted any one of the patent inconsistencies, discrepancies and noncompliance by Martone, the remaining nine transactions could never have come into existence.

TRANSACTION NO. 2

This signature program contract is dated March 20, 1962 and was received in the National Premium office a day earlier. The agent or broker is again Louis J. Martone Agency, 516 Park Avenue, Plainfield, New Jersey, and the assured is designated as:

"Property Management of N.J.

c/o Louis J. Martone Agency

516 Park Avenue

Plainfield, N.J." (Emphasis supplied)

In an earlier fictitious "Non-Signature Program" contract dated February 1, 1961 with Martone as agent, the assured is designated as:

"Property Management of N.J.

Louis J. Martone, Agent

516 Park Avenue

Plainfield, New Jersey." (Emphasis supplied)

The total coverage was $432,000.

That exploration was warranted is clear when this contract is examined, for Louis J. Martone appears both as insurance agent and as agent of the assured. Green processed this contract personally, as he did all others. He should have also noted that the requirements of National Premium had not been observed. The signature of Martone and the fictional Joseph Auster as representatives of the assured were not accompanied by the requisite evidence of authority.

The testimony of Green was specific: on the day a contract is received, the "Notice of Premium Financed" and the acknowledgment form are mailed to the insurance company. This contract, dated March 20, was received in Detroit on March 19. The notice and card were mailed from Detroit to East Orange on March 19. The verification with the forged signature of Bray which should have carried a Hartford postmark, carried a postmark of East Orange at 3:30 P.M. on March 21. The check, which does not issue until the verification is received, is dated March 23. The remittance was received by Martone in the sum of $25,198.20, and not one installment on this contract was paid on its due date. At the time of the discovery of the fraud $20,413.80 had been repaid by Martone by way of late payments and there remains claimed $6,804.54.

This transaction took place almost two months to the day after Transaction No. 1 was initiated.

TRANSACTION NO. 3

Again almost two months to the day, another request came through. This contract asked for a remittance of $23,066.10 based upon total premiums of $25,629.35 for $465,000 coverage. The policy numbers for fire coverage differed substantially from the series on the two prior contracts.

For $75,000 coverage on a three-year fire policy a premium cost of $3,640.20 is used. For a lesser coverage ($65,000) for the same term in transaction No. 1, a premium cost of $6,445.20 is set forth.

For a casualty 100/300 policy, transaction No. 3 shows a premium charge of $48,343.60, whereas for the same coverage transaction No. 2 exhibits a charge of $11,471.20.

This contract was received May 14, and the verification card is postmarked May 16 and the remittance check May 18. The payments under this contract were never kept current and many late notices were mailed to the assured and Martone.

At the time the frauds were discovered, Martone had returned $16,607.76 and there remains claimed $8,303.66.

TRANSACTION NO. 4

Martone apparently was doing so well and so easily that on this occasion he did not let two months elapse. A little more than one month later he submitted a new request for a remittance of $24,228.00 on coverage amounting to $207,000, with premiums of $26,920.44.

Here the assured was a living person, a friend of Martone's, who agreed that upon receipt of any mail from National Premium addressed to the assured, he would turn it over to Martone. Like the prior accounts, this, too, became delinquent in the first month. The policy numbers for fire now carried a prefix "F," unlike many of the prior transactions.

Martone, out of the proceeds of later contracts, reduced the indebtedness by $15,263.36, and there remains claimed $10,902.24.

TRANSACTION NO. 5

Almost one month to the day later, July 9, a new request was submitted. The total premiums were $23,357.88 and sought remittance of $21,021.30. The agency was Martone and the assured was designated as "Benmar Holding Company" at 512 Park Avenue, Plainfield. After the typed name of Benmar appears the forged signature of Nicholas P. Martone with no evidence of authority. (On June 8, 1961, 11 months before, Martone had submitted a budget request contract for the same Benmar Holding and this was purportedly signed by Nicholas B. Martone.) The covered risk was $1,346,000. The forged signature of Bray on the two Benmar account verification cards are utterly different. One is signed "Wm. A. Bray" and the other "William A. Bray" and again the style of writing is different.

Martone paid $11,359.80 to National Premium, which now claims a balance of under $11,347.56 under the contract.

TRANSACTION NO. 6

Two months later, September 27, Martone again requested financing for Benmar Holding Company. The nine policies listed were fire, all National Fire, totaling $300,000 coverage based upon premiums of $26,250.48, for which remittance was sought in $23,625. Purportedly signing for Benmar this time was Louis A. Benucci, with no evidence of authority. All policies designated terms of five years, and a comparison of the similar coverage on prior transactions reveals a substantial discrepancy in rates. Anyone remotely familiar with the insurance business would have asked some questions. Only three installments were paid by Martone, all late payments, and there remains claimed on this contract $19,135.25. The forgery of the name of Bray again

was very inartistic. It took only from September 28 (the Detroit mailing) to October 2 (the East Orange mailing) for the verification to be executed and mailed, notwithstanding that nine separate and distinct policies required verification.

TRANSACTION NO. 7

One month later, October 29, National Premium received another request from Martone. The coverage amounted to $600,000, based on premiums totaling $46,208.40, upon which a remittance of $41,587.20 was paid to Martone. The assured on this occasion was "D.G. Associates, Inc." Purportedly signed by a David Goldberg for the corporation, no evidence of authority accompanied the request. No alarm was created by the speedy return of the verification card from East Orange, although nine policies had to be checked and verified. Again the apparent difference in the Bray signature from the one just a month earlier raised no question in Green's mind, although he personally examined each and every verification card.

Only three installments were paid, each delinquent. Although each monthly payment was $3,742.87, on Martone, using the proceeds from Transaction Nos. 9 and 10, sent his check January 29, 1963 to National Premium for $7,485.74. There remains claimed $33,685.73.

TRANSACTION NO. 8

This request was received by National Premium on December 10. The coverage amounted to $800,000, the total premiums $30,756.21, the amount remitted to Martone $27,680.40. The purported signature of Bray is a very poor copy of the prior signature and differs in the use of initials. The verification card bears no postmark, but the speed on this occasion broke all prior records. The request was received December 10, the "Notice of Premium Financed" December 10; the check issued December 14. The only

installment paid, $2,491.20, was received by National Premium on January 29, 1963. On this transaction $27,403.18 is claimed.

TRANSACTION NO. 9

A departure from the usual is here exhibited. Martone testified that he was now concerned that National Premium would become suspicious, and to throw them off the track he decided to submit this and the next request for financing without his name appearing anywhere. He decided to use the name of "Price Agency" as agent. The address was 516 Park Avenue, Plainfield, the same as that of the Louis J. Martone Agency which had been used in all prior transactions. He departs from sequential numbering and reverts to lower policy numeration. Using the "Signature Program" forms which had been sent to him in his kit, Martone now makes the agent or broker "Price Agency" at Martone's address. When the blank forms had been sent by National Premium to Martone there was no coding for forms sent him. The use by "Price Agency" of a Martone-coded form would have opened the entire web. There was no such cross-check procedure. The coverage was for $1,445,000, with total premiums of $30,202.95, upon which National remitted to Martone in the name of the Price Agency $27,181.80. The form was received in Detroit on January 9, 1963, and the "Notice of Premium Financed" together with verification cards were sent the same day. The card is postmarked East Orange, January 12. The assured was Bon-Anno Holding Corp., with the forged or fictitious "Joseph Bonanno, Pres." appearing. Signing for "Price Agency" was C. Blandek. Unknown to Green, she was a 17-year-old clerk in Martone's office.

Green admits that Price Agency was new to him; that he made no check to see if any such agency was listed in any field directory; that he knows now that Price Agency had no such listing. Green also made no inquiry of the New Jersey Department of Banking and Insurance to determine

whether Price Agency was an authorized agent for National Fire. For a statutory fee of one dollar Green would have been told by the Department that Price Agency was not authorized to write for National Fire. Since the first installment on this contract did not become due until February 8 (the day the fraud was discovered) the entire amount is claimed by National Premium, $29,356.48.

TRANSACTION NO. 10

National Premium had now initiated its profit-sharing plan and invited Martone to use it. Martone in this last transaction made use of the "Signature Program-Profit Sharing Plan." He wanted to share in National Premium's profits. This request was received one day after transaction No. 9 by National Premium. It was again in the name of "Price Agency" as agent or broker, with the same Martone address. The coverage was $900,000, with premiums at $29,925.06 and a requested remittance of $26,932.50. The assured was:

"M. M. Trautwein

Colonnades Inc.

25 Clifton ...


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