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Harrow Stores Inc. v. Hanover Insurance Co.

October 30, 1998

HARROW STORES, INC., PLAINTIFF-APPELLANT/CROSS-RESPONDENT,
v.
THE HANOVER INSURANCE COMPANY AND MASSACHUSETTS BAY INSURANCE COMPANY, DEFENDANTS-RESPONDENTS/CROSS-APPELLANTS, AND TROJAN METAL FABRICATION, INC., RUDY REINO, DONATO REINO, NEWPORT TROJAN AND LISA D'ACHILLE, DEFENDANTS-RESPONDENTS, AND THE HANOVER INSURANCE COMPANY AND MASSACHUSETTS BAY INSURANCE COMPANY, DEFENDANTS/THIRD-PARTY PLAINTIFFS,
v.
UNITED COMMUNITY INSURANCE CO., THIRD-PARTY DEFENDANT.



Before Judges Pressler, Kleiner and Steinberg.

The opinion of the court was delivered by: The opinion of the court was delivered by Pressler, P.j.a.d.

[9]    Argued October 14, 1998

On appeal from the Superior Court of New Jersey, Law Division, Union County.

This appeal requires us to construe N.J.S.A. 17:30A-12b, added to the New Jersey Property-Liability Insurance Guaranty Act, N.J.S.A. 17:30A-1 to -20, by L. 1996, c. 156, § 2. The question is whether that amendment requires the exhaustion by the claimant of all other available insurance before resort may be had to the Property-Liability Insurance Guaranty Association as the "deemed" insurer in the place of an insolvent insurer. We hold that it does, and accordingly reverse that portion of the summary judgment entered by the trial court adjudicating otherwise.

The facts are simple and undisputed. Plaintiff Harrow Stores, Inc., is a New York corporation doing business in New Jersey and operating two retail stores in this state. Donato Reino, a resident of Springfield, New Jersey, bought patio furniture from Harrow's Union store in early summer 1990. The furniture was manufactured by Trojan Metal Fabrication, Inc., doing business as Newport Trojan. In August 1990, a cousin of Reino's, Lisa D'Achille, also a Springfield resident, was injured when the Trojan chair on which she was sitting at Reino's home collapsed. D'Achille wrote to Trojan in December 1990 advising it of the mishap. Her attorney sent claim letters to both Trojan and Harrow the following month. By this time, apparently, Trojan was in bankruptcy and did not advise its products liability insurer, defendant Hanover Insurance Company, *fn1 of the claim. D'Achille started suit in New Jersey against Reino, Trojan and Harrow in December 1991. Harrow cross-claimed against Trojan for indemnity. Trojan never answered, and Hanover still had not been noticed. Harrow was afforded a defense and indemnity by its products liability insurer, United Community Insurance Company (UCIC). However, during the pendency of the D'Achille action, United Community became insolvent, and the Property-Liability Insurance Guaranty Association took over the defense and the obligation of indemnity.

In 1994, during the course of discovery in the D'Achille action, Harrow first learned that it was a named insured under Hanover's coverage of Trojan by reason of a vendor's endorsement in the Trojan policy. The Hanover coverage had a one million dollar per claim limit. Accordingly, Harrow demanded a defense and indemnity from Hanover, and instituted this declaratory coverage action when Hanover disclaimed on the ground of late notice. The Association is effectively prosecuting the coverage action as well as defending the underlying D'Achille action. *fn2

As initially framed, the principal issue in the coverage action was choice of law, Hanover claiming that New York law applied to the interpretation of its policy and Harrow claiming that New Jersey law applied. The choice of law issue was critical since, under New York law, timely notice to the insurer of the claim is required while, under New Jersey law, the insurer must show prejudice resulting from late notice in order to defeat coverage on that ground. See, e.g., Polarome Mfg. Co. v. CIIC, 310 N.J. Super. 168, 175 (App. Div.), certif. denied, 155 N.J. 590 (1998). Relying on the late notice, Hanover moved for summary judgment dismissing the coverage action, and Harrow filed a cross-motion for summary judgment adjudicating coverage. By letter opinion, the motion Judge concluded that on the basis of the undisputed facts, application of the governmental interest test pointed to New Jersey as the state with the dominant interest and, therefore, as the state whose insurance law on the issue of notice controlled. While the Judge consequently denied Hanover's motion, he also denied Harrow's since the question of actual prejudice to Hanover resulting from the late notice remained in dispute.

While the action was in that posture, the Legislature amended the Property-Liability Insurance Guaranty Act by the adoption of N.J.S.A. 17:30A-12b, effective January 8, 1997, providing in full as follows:

"Any person having a claim against an insurer, whether or not the insurer is a member insurer, under any provision in an insurance policy other than a policy of an insolvent insurer which is also a covered claim, shall be required to exhaust first his right under that other policy. An amount payable on a covered claim under P.L. 1974, c. 17 (C. 17:30A-1 et seq.) shall be reduced by the amount of recovery under any such insurance policy."

That provision was made expressly applicable to all pending unpaid claims. L. 1996, c. 156, § 5, and Hanover, accordingly, concedes that it applies to Harrow's coverage claim against it. Harrow then, in reliance on the amendment, sought a declaration that Hanover's coverage for the D'Achille claim would first have to be exhausted before the Association could be called upon to meet the coverage obligations of its insolvent insurer in respect of that claim.

The matter was then fully briefed and reargued. With respect to Hanover's coverage, the Judge was now satisfied that Hanover had failed to demonstrate substantial undue prejudice as a result of Harrow's late notice of the D'Achille claim, and consequently Harrow was deemed entitled to summary judgment in its favor on the coverage issue. With respect, however, to N.J.S.A. 17:30A-12b, the Judge rejected Harrow's interpretation. The Judge read the statute to mean that if there is more than one policy covering a victim's loss or damage, all those policies constitute "other insurance" even if the issuer of one of those policies is insolvent. Consequently, he concluded that the policy issued by the now insolvent UCIC constituted viable other insurance also subject to exhaustion and, since UCIC was insolvent, the Association was required to stand in its place, at least up to the $300,000 maximum payment limitation prescribed for the Fund by N.J.S.A. 17:30A-8a(1). The Judge thus held that the UCIC policy and the Hanover policy were both primary, imposing upon Hanover the obligation to pay one-half of D'Achille's damages and imposing upon the Association, as "standing in" for UCIC, the obligation to pay the other half. A conforming judgment was entered. *fn3

Harrow- - - -actually the Association, which is prosecuting the coverage action- - - -appeals from that portion of the judgment requiring contribution to payment of the D'Achille claim on the basis of the UCIC policy. Hanover cross-appeals from that portion of the judgment adjudicating its liability for coverage, urging, as it did in the trial court, that New York law applies to the timeliness of notice issue.

We consider first the issue raised by the cross-appeal. We affirm that portion of the judgment substantially for the reasons stated by the motion Judge in his letter opinion. We add only the following. New Jersey follows the Restatement (Second) of Conflicts (1971) in respect of insurance-contract choice of law disputes. See, e.g., Pfizer v. Emp. Ins. of Wausau, 154 N.J. 187, 194-198 (1998); Gilbert Spruance v. Pennsylvania Mfrs., 134 N.J. 96, 100 (1993). The starting point of the Restatement analysis is § 193, stating that:

"The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in ยง 6 ...


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