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Culver v. Insurance Co.

Decided: December 1, 1987.


On appeal from the Superior Court, Law Division, Middlesex County.

Pressler, Muir, Jr. and Conley. The opinion of the court was delivered by Pressler, P.J.A.D.


[221 NJSuper Page 495] Plaintiffs-insureds, who suffered an underinsured fire loss caused by the negligence of others, entered into an agreement with their casualty insurer respecting the division between them of the proceeds of the insurer's subrogation action against the tortfeasors. They claim that the agreement, procured by the insurer's fraud and misrepresentation, was unreasonable and inequitable. The question on appeal is whether, under the circumstances here, they are barred by any preclusionary doctrine from obtaining relief from that agreement and from an order enforcing it which was entered in the subrogation

action. We hold that they are not, and accordingly, we reverse the summary judgment which dismissed the complaint of plaintiffs James and Loretta Culver against their insurer, defendant Insurance Company of North America (INA).

The facts, as we are able to glean them from the regrettably sparse record, are as follows. In November 1981 plaintiffs' home was destroyed by a fire which was apparently caused by a malfunction in a gas stove manufactured by General Electric Company. They had purchased the stove shortly before the fire from Better Living Department Stores, Inc., which had also installed it. It is not clear whether there was a defect in the stove or in its installation or both. In any event, plaintiffs submitted a proof of loss to their fire insurance carrier, INA, making claim for damages in the amount of some $185,000. It appears that plaintiffs were underinsured. The limit of their coverage was $82,373.12, which INA paid plaintiffs, taking back from them an assignment of their rights against the two alleged tortfeasors. INA then commenced its subrogation action against both in plaintiffs' name. INA controlled that litigation in all respects although plaintiffs had their own counsel with whom they and INA appear to have consulted from time to time.

Insofar as we can determine from certifications filed both in that action and this one, the parties conducted "extensive discussions" relatively early on in the course of the subrogation litigation "to resolve how any settlement or judgment would be divided between the parties." As the certification of INA's attorney explains, following a meeting participated in by him, plaintiffs and plaintiffs' personal attorney, "a preliminary agreement was established whereby the insurance carrier would first be satisfied from any proceeds. INA would be responsible for all costs and expenses of the litigation, and the Culvers would receive a reduced attorney's fee of 25%." This agreement was thereafter modified just prior to trial of the subrogation action. The terms of the modification agreement

provided, astonishingly, that INA would receive 80% of the proceeds of the action and the insureds 20%. In his certification, INA's attorney explained the reason for this change as follows:

Subsequent to that date, problems with liability developed and it became apparent that the initial $82,373.12 paid by INA might never be reached. The Culvers could not be expected to agree to any settlement that would not pay them any money and as an accommodation substantial effort was made by myself and Steven Kropf to reach a new agreement that would split any recovery on a pro rata basis. The Culvers insisted that they bear no risk for litigation expenses in the event the case was lost and wanted to maintain minimal attorneys' fees on their portion of any recovery.

The issues of liability and damages in the subrogation action were bifurcated, and during the liability trial, INA reached a settlement with General Electric, releasing it for the sum of $25,000. That sum was forthwith disbursed to INA and plaintiffs in accordance with the 80/20 agreement. The liability verdict reached by the jury at the conclusion of trial assessed zero percent against General Electric. The matter was then set down for trial of the damages issue. On the trial date, INA negotiated a settlement with Better Living Department Store in the amount of $135,000 and obtained the consent of plaintiff Loretta Culver to its acceptance.*fn1 INA's attorney in fact called Mrs. Culver to the stand to state her understanding and agreement on the record. In a perfunctory proceeding consuming two pages of transcript, she was asked if she agreed to the settlement of $135,000 and if the arrangement she had reached with INA "how that money is to be divided between yourself and the insurance carrier" was satisfactory. She indicated her assent to both questions. The terms of the "arrangement" with INA, unlike the terms of the settlement with Better

Living, were not, however, placed on the record, and it does not appear that at that time the trial judge had any idea, nor did he inquire, as to what they were.

Some time after the February 1986 date of the settlement and plaintiff's record concurrence therein, INA's attorney apparently proffered plaintiff her share of the settlement proceeds. It appears that the proffer, predicated on the 80/20 agreement and calculated on the basis of the total settlement of $160,000 (which included General Electric's $25,000 payment), allocated $23,583.33 to plaintiffs, $92,000 to INA, and $44,416.67 for legal fees and costs. Realizing that by this calculation INA would receive from the proceeds of the settlement more than it had paid out to her on the policy coverage and that her total recovery, ...

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