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Fireman's Fund Insurance Company v. Imbesi

July 1, 2003

FIREMAN'S FUND INSURANCE COMPANY AND FIREMAN'S FUND INDEMNITY CORPORATION, PLAINTIFFS,
v.
JOHN C. IMBESI, AMERICAN MOTORISTS INSURANCE COMPANY, LUMBERMENS MUTUAL CASUALTY COMPANY, NORTH AMERICAN BEVERAGE COMPANY, CLICK CORPORATION OF AMERICA, INC., DEFENDANTS-RESPONDENTS, SALLY JAMES,*FN1 DEFENDANT-APPELLANT/ CROSS-RESPONDENT, HARLEYSVILLE MUTUAL INSURANCE COMPANY, DEFENDANT-RESPONDENT/ CROSS-APPELLANT.



On appeal from the Superior Court of New Jersey, Law Division, Ocean County, OCN-L-3798-98.

Before Judges King, Wefing and Lisa.

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

As amended July 3, 2003.

FIREMAN'S FUND INSURANCE COMPANY AND FIREMAN'S FUND INDEMNITY CORPORATION, PLAINTIFFS,
v.
JOHN C. IMBESI, AMERICAN MOTORISTS INSURANCE COMPANY, LUMBERMENS MUTUAL CASUALTY COMPANY, NORTH AMERICAN BEVERAGE COMPANY, CLICK CORPORATION OF AMERICA, INC., DEFENDANTS-RESPONDENTS, SALLY JAMES,*FN1 DEFENDANT-APPELLANT/ CROSS-RESPONDENT, HARLEYSVILLE MUTUAL INSURANCE COMPANY, DEFENDANT-RESPONDENT/ CROSS-APPELLANT.

On appeal from the Superior Court of New Jersey, Law Division, Ocean County, OCN-L-3798-98.

Mark S. Stewart argued the cause for appellant/cross-respondent James (Ballard Spahr Andrews & Ingersoll, attorneys; Arthur Makadon, admitted pro hac vice, and Anne C. Gillespie, admitted pro hac vice, of counsel; Dean C. Waldt and Mr. Stewart, on the brief).

Joseph A. Venuti, Jr. (Swartz, Campbell & Detweiler) and Lance J. Kalik (Riker, Danzig, Scherer, Hyland & Perretti) argued the cause for respondent/cross-appellant Harleysville Mutual Insurance Company (Mr. Venuti and Mr. Kalik, on the brief).

Before Judges King, Wefing and Lisa.

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

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: May 7, 2003

This is an insurance coverage dispute involving the employers' liability aspect of workers' compensation and employers' liability policies. In the underlying litigation, Sally James sued her former employers, Click Corporation of America, Inc. (Click) and North American Beverage Company (North American), and their principal and her former supervisor, John C. Imbesi (Imbesi). (None of the parties have sought to pursue this litigation anonymously. In view of the subject matter, we use a pseudonym, Sally James, for the claimant-appellant only.) She alleged, among other things, sexual harassment in violation of the New Jersey Law Against Discrimination (LAD), N.J.S.A. 10:5-12. She claimed both compensatory and punitive damages. The case settled before trial.

Under the terms of the settlement, a sum of money, $1 million, was paid and a consent judgment was entered in James's favor on her LAD claims, and her claims for negligent transmission of venereal herpes and negligent infliction of emotional distress. The remaining claims were dismissed with prejudice. The entire settlement, $4.15 million, ostensibly represented James's compensatory damages. No portion was attributed to punitive damages.

Imbesi, Click, and North American paid James $700,000, and assigned to her their rights to prosecute and recover from the non settling insurers. An additional $300,000 was paid by American Motorists Insurance Company (American Motorists), which had provided Click and North American with commercial general liability and excess liability insurance, and Lumbermens Mutual Casualty Insurance Company (Lumbermens), which had provided Click and North American with workers' compensation and employers' liability insurance during fourteen months of James's term of employment. American Motorists and Lumbermens are part of the Kemper group of insurance companies. The parties sometimes collectively refer to American Motorists and Lumbermens as"Kemper." We refer separately to the companies because their interests are somewhat different.

The non-settling insurance companies were: (1) Fireman's Fund Insurance Company and Fireman's Fund Indemnity Corporation (Fireman's), which had provided homeowners' insurance to Imbesi; and (2) Harleysville Mutual Insurance Company (Harleysville), which had provided commercial general liability, excess liability, and workers' compensation and employers' liability insurance to Click and North American during a five-month portion of James's employment. Both Fireman's and Harleysville denied coverage for James's claims. They did not participate in negotiating the settlement.

This lawsuit which focused on coverage for the $4.15 million judgment ensued. The action was for declaratory relief to determine the various insurance companies' rights and responsibilities and to allocate the settlement amount and defense costs in the underlying litigation.

The Law Division judge held that, under the employers' liability policy, Harleysville had been obligated to indemnify and provide a defense to Click and North American with respect to James's LAD claims. However, the judge also found that the overall settlement was unreasonable, collusive and unenforceable against Harleysville. In her final judgment, the judge dismissed all claims against Harleysville, with one exception; Harleysville was held to a duty to reimburse Lumbermens for twenty-five percent of the defense costs ($11,500) it incurred in the underlying litigation in which James claimed damages.

James appeals, claiming the judge erred in refusing to enforce the settlement against Harleysville. Harleysville cross-appeals, claiming the judge erred in holding it was obligated to indemnify and provide a defense to Click and North American with respect to James's LAD claims. We affirm on the appeal and dismiss the cross appeal.

I.

For about nineteen months, between July 1995 and February 1997, James worked as an office manager for Click and North American, in a two-room office located in Ocean City, Cape May County, New Jersey. Imbesi, who for many years had run his family's soft-drink business (the Imbesi Bottling Group), founded and ran both Click and North American, which engaged in the business of manufacturing, marketing, and distributing soft-drink beverages.

Click and North American were small, closely-held corporations. During the period of James's employment, Imbesi was the president, sole shareholder, and sole director of Click. He was the president, majority shareholder, and sole director of North American. In various documents, Imbesi's wife, Patricia, was identified as secretary and treasurer of Click and Imbesi's three brothers were identified as officers and directors of Click. Imbesi admitted that his wife played only a limited role at Click, and his brothers played no role at all.

Imbesi had no superiors at either Click or North American. His subordinate employees consisted of James, Dennis King, and James Burns. While James worked in Ocean City, King and Burns were located in Pittsburgh, Pennsylvania.

The record reflects substantial overlap in the operations of the two corporations. For example, although James, King, and Burns performed services for both Click and North American, they were paid only by Click. The companies shared office space, but only Click paid rent, in the amount of $1 per year, to another of Imbesi's companies. Funds from one company were used to finance the operations of the other. There is also some indication that Imbesi may have commingled his personal and business accounts, using funds from personal accounts to pay corporate expenses and vice versa.

I-A. James's Allegations of Sexual Harassment

During the course of James's employment, neither Click nor North American had a written policy against sexual harassment. Nor did they maintain written employment manuals or guidelines relating to the treatment of sexual harassment claims.

James alleged that during the entire period of her employment at Click and North American, Imbesi made sexual comments to her, exposed his genitalia to her, touched her in a sexual manner, and demanded sexual favors from her. When she rejected his advances, Imbesi became verbally abusive, but he continued to sexually harass and proposition her.

James also alleged that, in about September 1995, two months after her hiring date, she began a sexual relationship with Imbesi. Their sexual activities occurred both in the office and elsewhere. James claimed this relationship was actually coercive; she participated in it only out of fear of losing her job and of Imbesi's potential violence towards her. She alleged that, on occasions when she temporarily ended the relationship, Imbesi became verbally abusive, and his demands for sexual favors were imposed in an increasingly threatening manner. Most significantly, James alleged that one day in December 1996, after driving her home, Imbesi forced his way into her home and raped her.

James also alleged that Imbesi directly tied her participation in their sexual relationship to her compensation and continued employment at Click and North American. For example, James alleged that: (1) in May or June 1996, when she threatened to end the relationship, Imbesi threatened her with the loss of employment and stock options; (2) in July 1996, Imbesi refused to give her the paycheck until she performed sexually; (3) in October 1996, when she told Imbesi she was leaving the company because she"could not take it anymore," Imbesi told her she could not leave; and (4) in October or November 1996, when she refused Imbesi's sexual demands, he withheld her paycheck and said he would have to review her salary.

Finally, James alleged that in February 1997 she was diagnosed with genital herpes, contracting the disease from Imbesi in the fall of 1996. According to James, Imbesi knew he had herpes but never told her. Except on one occasion, he did not wear a condom when they had sex.

James did not receive health insurance through her employment with Click and North American. She claimed that, when she asked Imbesi to pay her medical bills, he demanded that she perform sexual favors in return, which she did out of desperation.

Finally, James alleged that, as a result of Imbesi's abuse, she suffered from severe anxiety, panic attacks, and herpes outbreaks which were painful, humiliating, disruptive of her present marriage, and created risks for complications during any future pregnancy or childbirth. James admitted, however, that she had suffered from emotional problems before meeting Imbesi.

For his part, Imbesi admitted having a sexual relationship with James; he claimed it was entirely consensual. Imbesi specifically denied demanding sex in exchange for compensation. However, he admitted making personal loans to James. Supporting Imbesi's claim of a consensual relationship are several personal cards and notes James gave to him during the course of her employment with Click and North American.

As to the issue of venereal disease, Imbesi admitted: he contracted genital herpes in the 1980's; he was aware of his infection during his relationship with James; and he did not advise James that he had the disease. However, Imbesi claimed: he did not believe he was contagious when he was asymptomatic; he was unaware he had subjected James to the possibility of contracting herpes, presumably because he did not have a herpes outbreak during the period of her employment; and he never intended to infect her with the disease.

Imbesi also admitted using company funds to pay James's medical bills. However, he claimed he did so to fulfill a promise he made to her when she began working with the companies. Imbesi denied demanding sex in exchange for these medical payments.

I-B. Imbesi's History of Workplace Sexual Harassment

Between November 1981 and May 1995, Imbesi was employed as president of the 7-Up Bottling Company of Philadelphia, the parent company of his family's soft-drink bottling business. During that period, Imbesi was twice accused of sexual harassment.

First, in 1986, Kimberly Flavin, a receptionist at the 7-Up Bottling Company in Virginia Beach, Virginia, filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC). Flavin complained that she had been sexually harassed by Imbesi, and fired from her job because she refused Imbesi's sexual advances. That case was settled before any litigation.

Second, in 1995, Deborah Goodwin, an account manager with the 7-Up Bottling Company of Philadelphia, filed a sexual harassment complaint against Imbesi in the Pennsylvania Human Relations Commission followed by a complaint in the United States District Court for the Eastern District of Pennsylvania. Goodwin claimed Imbesi continually made comments of a sexual nature to her, propositioned her, touched her in a sexually offensive manner, and punished her for refusing his sexual demands. She claimed the harassment resulted in her constructive discharge, when she resigned because she could no longer withstand Imbesi's abuse. Imbesi denied Goodwin's allegations of wrongdoing. However, a jury returned a verdict in Goodwin's favor for more than $2 million. In unreported decisions, the court reduced Goodwin's award to $425,041, representing $325,041 in compensatory damages, and $100,000 in punitive damages, the applicable punitive damages cap under Title VII. Goodwin v. Seven-Up Bottling Co. of Philadelphia, 1998 WL 438488 (E.D. Pa. July 31, 1998); Goodwin v. Seven-Up Bottling Co. of Philadelphia, 1998 U.S. Dist. LEXIS 11853 (E.D. Pa. Aug. 3, 1998). The case eventually settled for $1 million.

Over the years, Imbesi also had sexual affairs with other female subordinates. One of those affairs resulted in the birth of a son, as well as a 1995 restraining order against Imbesi in Vermont, based upon an allegation that he had been physically abusive towards the woman and child.

I-C. James's Sexual Harassment Litigation

1. Causes of Action

In April 1997, about two months after she resigned, James filed a complaint against Click, North American, Imbesi, and Imbesi's three brothers, in the United States District Court for the Eastern District of Pennsylvania (Federal Action). James alleged the following causes of action:

Counts One and Two: quid pro quo and hostile work environment sexual harassment, contrary to the LAD, N.J.S.A. 10:5-12;

Count Three: gender-motivated violence, contrary to the Violence Against Women Act (VAWA), 42 U.S.C.A. § 13981;

Count Four: assault and battery;

Counts Five and Six: negligent and intentional transmission of a venereal disease;

Counts Seven and Eight: negligent and intentional infliction of emotional distress; Count Nine: negligent supervision and retention of Imbesi;

Count Ten: unlawful retaliation for James's refusal to testify falsely on Imbesi's behalf in the Goodwin litigation, ultimately resulting in her constructive discharge, contrary to the Conscientious Employee Protection Act, N.J.S.A. 34:19-3;

Count Eleven: wrongful discharge; Counts Twelve and Thirteen: conspiracy to deprive James of her civil rights as a prospective witness in the Goodwin litigation, contrary to 42 U.S.C.A. § 1985(2) and 42 U.S.C.A. § 1986.

James alleged that Click and North American were the"alter egos" of Imbesi and his brothers, and that each defendant should be held jointly and severally liable. She also claimed that defendants were directly liable for their own misconduct, and vicariously liable for Imbesi's misdeeds. James sought compensatory damages for lost earnings, physical and psychological injuries, and punitive damages.

Imbesi retained Dilworth Paxson (Dilworth) to defend him in the Federal Action. All defendants filed motions to dismiss. By memorandum decision and order dated January 27, 1998, the court: (1) dismissed with prejudice the claims under 42 U.S.C.A. § 1985(2) and § 1986 as against all defendants; and (2) dismissed without prejudice the majority of state law claims against Click, North American, Imbesi, and Imbesi's three brothers, declining to exercise supplemental jurisdiction over those claims. After this decision and order, the only remaining claims in the Federal Action were against Imbesi for: (1) gender-motivated violence contrary to the VAWA (Count Three); and (2) assault and battery (Count Four).

About six months later, on August 5, 1998 James commenced an action in the Court of Common Pleas of Philadelphia County, by filing a civil summons and jury demand (Philadelphia Action). The named defendants were the same as in the Federal Action: Click, North American, Imbesi, and Imbesi's three brothers. James later provided Imbesi, Click, and North American with a draft copy of a complaint she intended to file in the Philadelphia Action, in which she asserted those claims over which the federal court declined to exercise supplemental jurisdiction. James, however, never actually filed a complaint in the Philadelphia Action.

2. The Settlement

Throughout the course of this litigation and even before this litigation began, the parties engaged in settlement discussions. On August 25, 1998 a settlement conference was held before federal Magistrate Judge Peter B. Scuderi.

On November 9, 1998 the parties agreed to a tentative settlement, contingent upon their obtaining permission for the Philadelphia Action to proceed under seal and using pseudonyms. The parties filed a joint petition requesting this relief. Also pursuant to the tentative settlement, the defendants filed a writ of summons in the Court of Common Pleas, Philadelphia County, against Fireman's, American Motorists, Lumbermens, and Harleysville, seeking a declaration that the insurance carriers were obligated to defend and indemnify them with respect to any costs, attorneys' fees, settlements, judgments, or monetary awards arising from or relating to the Philadelphia Action. Finally, also pursuant to this tentative settlement, on November 30, 1998 the federal court dismissed the remaining claims against Imbesi, those for assault and battery and violation of VAWA.

On December 16, 1998 James declared the tentative settlement null and void, because the parties had been unable to obtain an order permitting the Philadelphia Action to proceed under seal. James then filed a motion in federal court, seeking to vacate the dismissal of her claims, which the court granted.

Despite the collapse of the tentative settlement, the parties continued to engage in settlement discussions in which American Motorists and Lumbermens participated. Although advised of these discussions, Harleysville chose not to participate. Settlement conferences were held before Judge Scuderi on January 19 and 25, 1999 at which Harleysville did not appear. Pursuant to these discussions, and with the federal court's approval, on January 25, 1999 James filed an amended complaint in the Federal Action, in which she reasserted all the claims from her original complaint, except the claims under 42 U.S.C.A. §§ 1985(2) and 1986, which had been dismissed with prejudice.

After considering the submissions of James's counsel and representations made by counsel at the January 25, 1999 settlement conference, Judge Scuderi stated in terse, conclusory letters dated February 8 and 9, 1999 (Appendices B and C) that $4.15 million constituted a reasonable settlement figure for the case, in exchange for a consent judgment in plaintiff's favor on Counts I (LAD), II (LAD), V (negligent transmission of a venereal disease), and VII (negligent infliction of emotional distress) of the amended complaint, and dismissal, with prejudice, of the remaining counts.

In February 1999, James entered into a confidential settlement agreement (Settlement or Settlement Agreement) with: (1) defendants Imbesi, Click, and North American; (2) insurers, American Motorists and Lumbermens; and (3) Patricia Imbesi (Imbesi's wife). Imbesi executed the agreement on behalf of himself, Click, and North American. Imbesi's three brothers entered into a separate settlement agreement with James, Click, North American, American Motorists, and Lumbermens.

The Settlement Agreement provided, in pertinent part:

(1) A Consent Judgment would be entered in the Federal Action, in favor of James, against Imbesi, Click, and North American, jointly and severally, in the amount of $4.15 million, on the LAD sexual harassment claims (Counts One and Two), the claim of negligent transmission of a venereal disease (Count Five), and the claim of negligent infliction of emotional distress (Count VII). No part of the $4.15 million would be deemed attributable to James's claim for punitive damages. Payment of the $4.15 million would be structured as follows:

(a) Imbesi, Click, and North American agreed to pay James $550,000. They also agreed to assign to James their rights to prosecute and recover from the"Non-Settling Insurers," Fireman's and Harleysville, any amounts attributable to the Federal and Philadelphia Actions. Finally, they guaranteed James payment of an additional $150,000, payable in full within two years of the Settlement, if, as of that date, James had received no money from the Non-Settling Insurers. However, James agreed to reimburse Imbesi, Click, and North American for this"guarantee payment," depending upon the amount she eventually received from the Non-Settling Insurers.

(b) American Motorists and Lumbermens agreed to pay James $200,000. They also guaranteed payment of an additional $100,000, payable in full within two years, if, as of that date, James had received no money from the Non-Settling insurers, Fireman's and Harleysville. However, James agreed to reimburse American Motorists and Lumbermens for this"guarantee payment," depending upon the amount she eventually received from the Non-Settling Insurers; and

(c) Dilworth was retained to represent Imbesi, Click, North American, and James in an action against the Non-Settling Insurers, seeking, among other things: (1) attorneys' fees and costs incurred in connection with the Federal Action, the Philadelphia Action, and the declaratory judgment action; ...


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