On appeal from the Superior Court Appellate Division.
For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler, Pollock, O'Hern and Garibaldi. For affirmance -- None.
This appeal requires us to interpret and apply a provision in an Insurance Agents and Brokers Errors and Omissions (E & O) policy. The policy was designed to protect The Burrus Agency, Inc. (Burrus), an East Orange insurance agent and broker, in the event of liability for breach of duty in its business of selling and servicing all types of insurance coverage. Fireman's Fund Insurance Company (Fireman's) furnished the E & O coverage from 1972 to August 24, 1979, through a series of one-year policies. These policies were all of the "reporting" form, providing coverage only for those claims that are reported during the policy period, irrespective of when the underlying act giving rise to liability occurred. The last in this series of Fireman's contracts ran from August 24, 1978 to August 24, 1979.
About one month before the end of the policy period Fireman's informed Burrus that because of "underwriting considerations" it would not renew Burrus's coverage when it expired on August 24, 1979. Burrus then obtained E & O coverage from plaintiff, Employers Reinsurance Corporation (Employers), effective August 24, 1979 to August 24, 1980. Employers' policy was also of the "reporting" type.
In July 1980 Burrus was sued by 843 North Sixth Street Associates, a partnership (Associates). The suit charged Burrus
with negligence in failing to have secured adequate insurance on a building owned by Associates. In July 1975 Burrus had agreed to provide fire insurance on the property in an amount sufficient to cover replacement costs in the event of a total loss. When the building was destroyed by fire in 1976, it was revealed that Burrus had insured it for only its actual cash value. The difference between the building's replacement value and the actual cash value was about $400,000. The claim was eventually settled for $137,500, in addition to which there were legal costs of about $7,000.
Burrus notified both Fireman's and Employers of the receipt of the complaint and the proposed settlement. Fireman's took the position that inasmuch as its policy was of the "reporting" type, it did not provide coverage for Burrus's failure in 1975 to have issued a "replacement cost" policy because Associates' claim had not been reported to Fireman's before August 24, 1979, the expiration date of its coverage. Employers likewise denied the coverage of its policy, also of the "reporting" type, claiming that Fireman's was still Burrus's insurer by operation of clause 9(b) in the Fireman's policy, the disputed clause giving rise to this litigation. Clause 9(b) reads as follows:
Extended Discovery Period. In the event this Company cancels or refuses to renew this insurance, any claim made against the insured by reason of any negligent act, error or omission committed or alleged to have been committed (and which would have been insured by this policy), before the termination of this insurance, shall be deemed for the purpose of this insurance to have been made during the policy period.
Employers' contention was that given Fireman's refusal to renew Burrus's coverage, clause 9(b) operated to convert Fireman's "reporting" form policy into an "occurrence" policy -- one that provides coverage for liability-producing acts committed by an insured during the policy period, without reference to when the claim is reported. Under this interpretation clause 9(b)'s function was to extend coverage to a claim made, as here, after the expiration of the Fireman's policy as long as that claim arose out of acts taking place during the policy period. Employers argued that Associates' claim was the responsibility of
Fireman's because Fireman's was the insurer on the risk when Burrus failed to provide Associates with insurance for "replacement costs" -- a contention that ignores the fact that the policy whose coverage is sought to be extended covered only the period August 24, 1978 to August 24, 1979.
To resolve the question of coverage caused by the carriers' differing interpretations of clause 9(b), Employers demanded a declaratory judgment that the Fireman's policy was applicable to Associates' claim and that the Employers' policy, if involved at all, merely furnished excess coverage. Employers also sought recovery of the expenses it had incurred in defending Burrus. Fireman's answered, admitting the terms and conditions of its policy, denying coverage, and requesting a declaration of the rights of each carrier under the respective policies. On cross-motions for summary judgment the trial court denied Employers' motion and entered ...