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American Reliance Insurance Company v. K. Hovnanian at Mahwah IV

February 02, 2001


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-10072-98.

Before Judges Pressler, Kestin and Ciancia.

The opinion of the court was delivered by: Pressler, P.J.A.D.


Argued January 17, 2001

Plaintiff American Reliance Insurance Company, the casualty insurer of Paddington Square at Mahwah Condominium Association, Inc. (Association), appeals from a summary judgment dismissing its subrogation action against defendant K. Hovnanian at Mahwah IV, Inc. (Hovnanian), the sponsor and developer of the condominium project.(*fn1) We affirm. We are satisfied that nothing in this record presents a factual dispute whose resolution would deprive Hovnanian of the benefit of the releases given it by the Association.

These are the undisputed facts. The condominium project consists of 39 separate frame buildings containing a total of 510 residential condominium units. In January 1994, prior to Hovnanian's complete turnover of the project to the Association and the termination of its responsibility, a severe snow and ice storm caused substantial roof and interior damage. The Association, without notice to or advice by Hovnanian, contracted with Brennan Building Services Company to repair the damage. Brennan apparently diagnosed the problem as involving the gutters and leaders, which it removed and replaced as well as removing ice and snow from the roofs.

At some point thereafter, the Association made a claim under its American Reliance policy for the cost of Brennan's work. In the meantime, Hovnanian assessed the damage and concluded that the roof damage and resulting interior damage left by the storm were not attributable to the gutters and leaders but rather to initial defective roof construction.

Hovnanian so advised the Association. Hovnanian elected, however, to undertake the necessary roof and interior repairs at substantial cost to it, reserving its rights against its contractors, subcontractors, architect and engineer, as well as Brennan, who, it claimed, had exacerbated the damage to the roof by its workmen's use of the tools they had employed to remove the ice and snow. Hovnanian's litigation against these parties ensued.

In any event, after receiving the Association's "Brennan" claim, the insurer referred the claim for adjustment to Decker Associates. A letter dated November 2, 1994, to American Reliance from Decker's adjustor assigned to the claim, appears in the record. The letter first refers to the fact that both Decker and American Reliance had closed their respective files on the Association's claim the preceding August. There is no further reference to why that was done but it is at least clear that as of that time no payment had been made by American Reliance to the Association. The letter then goes on to repeat Hovnanian's position as aforestated, that is, its undertaking of roof and interior repairs at its expense and its declination of any responsibility for the gutter and leader work for which it disclaimed responsibility on the ground that it had been unnecessary. Although the adjustor made clear to American Reliance that the gutter and leader removal and replacement had really been, insofar as it was able to determine, not repair work but rather "preventative work," it nevertheless recommended compromise of the claim and payment to the Association of the sum of some $113,000, representing covered reimbursement to the Association of its payments to Brennan. The Association was willing to accept this sum with some stated reservation and in December 1994 submitted a proof of loss to that extent giving back to American Reliance a subrogation receipt by which it subrogated American Reliance to "all of the rights, claims and interest which the undersigned may have against any person ... liable for the loss...." It is undisputed that American Reliance did not advise Hovnanian of the payment it had made at that time and, indeed, did not do so until nearly four years later.

The only other event of 1994 warranting mention was a letter written by Hovnanian to American Reliance in March 1994, in support of the Association's request that the insurance be renewed. The letter advised that it, Hovnanian, was undertaking the necessary remedial work.

In 1996, the bulk of Hovnanian's consolidated litigation arising out of the 1994 storm damage, to which the Association had apparently been made a party and of which American Reliance claims to have had no knowledge, was settled. In connection with that settlement, the Association and its then insurer, Merrimack Fire Insurance Company, gave Hovnanian a general release executed in October 1996 releasing Hovnanian, without any specificity, from all claims and rights it might have in the litigated transactions. In February 1998, the Association and Hovnanian entered into a Condominium Transition Agreement and Release by which, among other provisions, Hovnanian agreed to undertake specified further roof and dryer vent repairs, and the Association released Hovnanian from all claims arising out of Hovnanian's development and sponsorship of the project. As in the case of the 1996 litigation release, there was no mention of the gutter and leader removal and replacement undertaken by Brennan.

There matters stood until September 1998, when American Reliance's attorney wrote to Hovnanian asserting its subrogation rights stemming from its December 1994 payment to the Association of the compromised cost of Brennan's gutter and leader work. American Reliance based its claim on the contention that that work had been necessitated by Hovnanian's negligence.

Hovnanian's refusal to pay the claim resulted in the filing of this action by American Reliance in November 1998. Among its other affirmative defenses, Hovnanian asserted that the releases given it by the Association immunized it from American Reliance's subrogation claim. It successfully moved for summary judgment dismissing the complaint on that ground, and American Reliance appeals.

The rule is well settled that although a release of the tortfeasor by the victim-insured will ordinarily bar the insurer's subsequent assertion of a subrogation claim against the tortfeasor, the tortfeasor is not entitled to that immunization if he was on notice, at the time of the release, that the insurer had already paid the claim and hence had a subrogation right against him. As stated by Melick v. Stanley, 174 N.J. Super. 271, 282 (Law Div. 1980), aff'd o.b., 181 N.J. Super. 128 (App. Div. 1981), "[a] release procured by a tortfeasor, knowing that the insured has already received payment from the insurer, has generally been held not to constitute a defense to the insurer's action against the wrongdoer to enforce its right of subrogation." The application of this rule requires the insurer's actual payment of the insured's claim since it is not, of course, until the insurer has made payment of the insured's claim that its right of subrogation against the tortfeasor arises. Providence Washington Ins. Co. v. Hogges, 67 N.J. Super. 475, 478-479 (App. Div. 1961); 6A Appleman, supra, ยง 4051 at 103. Hence, it is not until the tortfeasor knows or is chargeable with knowledge that a claim has been paid that he can be charged with having knowingly impaired the insurer's subrogation right since the insurer has no subrogation right until that time. The policy underlying ...

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