On appeal from the Superior Court, Appellate Division, whose opinion is reported at 358 N.J. Super. 28 (2003).
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
In this appeal, the Court must determine whether losses sustained as a result of an employee's conduct are covered under an insurance policy's employee-dishonesty provision and whether the employee's conduct constitutes a single occurrence under the policy for determining the insurance company's potential liability.
Gentilini Ford, Inc. (Gentilini) is an automobile dealership located in Woodbine, New Jersey. PNC Bank, N.A. (PNC Bank) provided financing for installment sales contracts that Gentilini executed with its customers. Auto Lenders Acceptance Corporation (Auto Lenders) had the option to finance any contract rejected by PNC Bank. Customers seeking financing for automobile purchases submitted credit applications to Gentilini, which then forwarded the applications to PNC Bank or Lenders for approval. PNC tended to accept lower-risk applicants, leaving for Auto Lenders the higher-risk, though still creditworthy, applicants.
In early 1998, Auto Lenders investigated numerous credit applications that it had accepted through its arrangement with Gentilini. It discovered that Randy Carpenter, a Gentilini employee involved in automobile financing, had engaged in a number of credit-application frauds between February and December 1997 to secure loans for customers who otherwise were not creditworthy. Auto Lenders concluded that, in total, twenty-seven of the credit applications it had approved contained falsified information, including fictitious licenses and falsified pay stubs. Many of the fraudulent submissions appeared to be alterations of Carpenter's own pay stubs.
In July 1998, after several of the loans under investigation went into default, Auto Lenders filed suit against Gentilini for fraud and breach of contract. Auto Lenders sought to exercise its right to have Gentilini repurchase all outstanding installment contracts that had not been paid in full and demanded judgment in the amount of $831,932.90. Gentilini filed its answer and a third-party complaint in October 1999. In June 1999, Gentilini amended its answer and third-party complaint, naming the Ohio Casualty Group of Insurance Companies, American West Fire & Casualty Company, and West American Insurance Company (collectively Ohio Casualty) as additional third-party defendants. Gentilini alleged that Ohio Casualty had an obligation to defend Gentilini and indemnify it for its losses under an existing insurance policy, but Ohio Casualty denied any such duty. With the exception of Gentilini's claims against Ohio Casualty, the claims against all other parties were voluntarily dismissed.
Gentilini based its claims against Ohio Casualty on a "Commercial Package" insurance policy with a "Master Pak for Property" endorsement containing an "Employee Dishonesty" provision. Interpretation of that provision is at the heart of this matter.
Ohio Casualty moved for summary judgment and Gentilini filed a cross-motion for summary judgment. The Law Division granted summary judgment in favor of Gentilini on the issue of coverage under the employee dishonesty provision of the policy. In its decision, the court concluded that Carpenter's conduct constituted "dishonest acts" as defined by the policy and that his actions resulted in a "direct loss" to Gentilini. In addition, the court concluded that Carpenter defrauded Auto Lenders on twenty-seven different occasions. Accordingly, the court determined that Ohio Casualty's policy provided coverage to Gentilini Ford for $135,000, or $5,000 for twenty-seven separate occurrences. Subsequently, Gentilini moved for final judgment and attorneys' fees. The trial court granted the motion and awarded interest and fees as requested by Gentilini. A final judgment of $191,206.83, encompassing damages, attorneys' fees, expenses, and prejudgment interest was entered in November 2001. Ohio Casualty appealed.
On appeal, a divided panel of the Appellate Division reversed summary judgment in favor of Gentilini and remanded the matter to the Law Division for entry of judgment in favor of Ohio Casualty. The majority determined that Carpenter's actions were not covered by the policy's terms because his "manifest intent" was not "to cause loss or damage" to Gentilini, but to defraud Auto Lenders. In addition, with regard to the question of whether Gentilini had suffered a "direct loss" as required by the policy, the majority held that no such loss had occurred because "the facts involve fraudulent conduct by the employee directed against a third-party." Having determined that Gentilini's claim was not covered by the policy, the majority also vacated the trial court's award of attorneys' fees. Judge Wecker dissented, concluding that Carpenter's conduct involved the "manifest intent" to harm Gentilini and that Gentilini suffered a "direct loss" within the meaning of the policy. In addition, Judge Wecker concluded that there were twenty-seven separate occurrences each subject to a separate $5,000 limit, but agreed with the majority that Gentilini was not entitled to attorneys' fees.
Gentilini filed an appeal as of right based on Judge Wecker's dissent.
HELD: Gentilini sustained a direct loss as the result of Carpenter's conduct when it was induced by his fraudulent acts to hand over automobiles in exchange for installment sales contracts signed by non-creditworthy customers. Moreover, the twenty-seven automobile sales were twenty-seven separate occurrences under the policy. Summary judgment, however, should not have been granted for either party. The actual losses sustained by Gentilini as a result of Carpenter's conduct require further proof. And several additional issues of material fact, including that of manifest intent, remain for jury determination.
1. We first must address whether Gentilini suffered a "direct loss." New Jersey courts have not considered whether the use of a proximate-cause test for evaluating the nature of a loss is appropriate under an employee-dishonesty policy that requires a direct loss. However, the majority of federal courts that have addressed this question have concluded that the term "direct loss" or its equivalent does, in fact, call for the application of a proximate-causation standard. In view of the prevailing approach taken by courts in New Jersey and elsewhere to defining direct loss, in whatever type of policy that term arose, we adopt the conventional proximate-cause test as the correct standard to apply when determining whether a loss resulted from the dishonest acts of an employee. (Pp. 11-17)
2. We conclude that Gentilini sustained a direct loss of Business Personal Property as the result of Carpenter's conduct when it was induced by his fraudulent acts to hand over automobiles in exchange for installment sales contracts signed by non-creditworthy customers, thereby exposing Gentilini to a risk of default it would not have been willing to accept in the absence of fraud. When Carpenter falsified the credit applications of twenty-seven individuals, he effectively rendered the resulting contracts unassignable to Auto Lenders, ultimately depriving Gentilini of possession of twenty-seven automobiles and the profit to be made on those vehicles. (Pp. 17-20)
3. We then turn to the question of "manifest intent." The term manifest intent has been in use in employee fidelity bonds for over a quarter of a century. Three tests have emerged to determine whether an employee acted with the manifest intent necessary to have his or her actions fall within the coverage of an insurance agreement - the objective approach, the subjective or specific intent approach, and the substantial-certainty test. Of the three approaches, a purely objective approach appears to be the least utilized by courts. Like other courts that have rejected this approach, we believe that the internal, subjective intent of the actor is relevant, if not critical, to a manifest-intent analysis. Thus, a purely objective approach is not the appropriate way to determine an individual's manifest intent. The two remaining approaches have divided the federal circuits. (Pp. 20-29)
4. We conclude that the substantial-certainty test best comports with our understanding of manifest intent. Thus, we hold that the manifest-intent standard is satisfied either by proof that it was an employee's purpose or desire to cause the insured to sustain a loss and to obtain a financial benefit at the insured's expense, or by proof that the employee knew the aforesaid loss and benefit were substantially certain to result from his or her conduct. The substantialcertainty test is consistent with our general approach to questions of intent and best comports with the insured's reasonable expectations. (Pp. 29-34)
5. Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4: 46-2 (c). In this case, summary judgment should not have been granted to either party. Construing the evidence in favor of the non-moving party on the motion and cross-motion for summary judgment, we conclude that the materials presented would permit a rational fact-finder to resolve the alleged disputed issue in favor of the non-moving party in each instance. With respect to Carpenter's manifest intent to harm Gentilini, neither side has offered more than sheer conjecture regarding Carpenter's intent when he falsified credit applications on behalf of the individual borrowers. Carpenter's conduct ultimately burdened Gentilini with the risk of default on twenty-seven installment sales contracts and deprived it of possession of those automobiles. On the other hand, a jury looking at the facts in light most favorable to Ohio Casualty might well conclude that Carpenter did not act with the conscious purpose to harm Gentilini and that Gentilini's losses were not substantially certain to follow from his conduct. Therefore, on the proofs presented, neither party was entitled to summary judgment on the issue of intent to harm Gentilini. Lastly, the proofs with respect to Carpenter's intent to benefit himself or a third party are also insufficient to warrant summary judgment. (Pp. 34-40)
6. After considering the record and the definition contained in the policy, we conclude that the twenty-seven automobile sales were twenty-seven separate occurrences under the policy. Gentilini was required to relinquish possession of twenty-seven cars on twenty-seven separate occasions to twenty-seven distinct customers. In these circumstances, in which each purchaser and the terms of each sale are unique, the similarity of the acts do not transform them into one continuous event subject to a single recovery under the policy. Accordingly, Gentilini is entitled to recover up to $5,000 for each fraudulently induced sale, subject to any applicable deductibles under the policy. (Pp. 40-44)
7. The measure of direct loss caused by Carpenter's fraudulent acts, which deprived Gentilini of twenty-seven automobiles, is the loss Gentilini suffered for having undertaken installment sales contracts at higher-than-acceptable levels of risk. The losses it incurred as a result of each fraudulent act, however, depend on whether Gentilini still has an interest in those contracts, the amount outstanding on those contracts that have entered default, and Gentilini's ability to mitigate its losses through repossession. Gentilini will have the burden of proving its loss on each contract through further proceedings. (Pp. 45-48)
8. On the issue of attorneys' fees, had the issue been properly preserved for our review, we would hold that attorneys' fees for Gentilini's claim against Ohio Casualty are not warranted. (Pp. 48-50)
The judgment of the Appellate Division is AFFIRMED in part and REVERSED in part. The matter is REMANDED to the Law Division for further proceedings consistent with this opinion.
CHIEF JUSTICE PORITZ and JUSTICES VERNIERO, LAVECCHIA, ALBIN and WALLACE join in JUSTICE ZAZZALI's opinion. JUSTICE LONG did not participate.
The opinion of the court was delivered by: Justice Zazzali
Randy Carpenter, an employee of Gentilini Ford, Inc., engaged in numerous credit-application frauds over the course of an eleven-month period, leading to the sale of twenty-seven automobiles to customers who otherwise would not have qualified for credit. In this appeal, we must determine whether losses sustained as a result of Carpenter's conduct are covered under an employee-dishonesty provision of Gentilini Ford's insurance policy. We must also decide whether Carpenter's conduct constitutes a single occurrence under the policy for the purpose of determining the insurance company's potential liability.
The following facts are not in dispute. Appellant Gentilini Ford, Inc. (Gentilini) is an automobile dealership located in Woodbine, New Jersey. To facilitate the sale of automobiles to its customers, Gentilini entered into a retail paper "Dealer Agreement" with PNC Bank, N.A. (PNC Bank). Under the terms of the agreement, PNC Bank provided financing for installment sales contracts that Gentilini executed with its customers. By a separate agreement between PNC Bank and Auto Lenders Acceptance Corporation (Auto Lenders), Auto Lenders had the option to finance any contract rejected by PNC Bank.
Gentilini's standard sales arrangement worked as follows. Customers seeking financing for automobile purchases submitted credit applications to Gentilini, which then forwarded the applications to PNC Bank or Auto Lenders for approval. PNC Bank had the first option to approve financing and tended to accept lower-risk applicants, leaving for Auto Lenders the higher-risk, though still creditworthy, applicants whom PNC Bank had refused. For each approved application, Gentilini would enter into an installment sales contract with the purchaser, taking a cash deposit after accepting the customer's note. Under the terms of Gentilini's Dealer Agreement with PNC Bank and Auto Lenders, the accepting lender advanced cash in the face amount of the customer's note to Gentilini. The lending institution would then take an assignment of Gentilini's rights under the customer's installment contract, including a security interest in the financed vehicle, any service contracts for the vehicle, and the right to any insurance proceeds subsequently paid for damage to the vehicle.
In early 1998, Auto Lenders investigated numerous credit applications that it had accepted through its arrangement with Gentilini. It discovered that Randy Carpenter, a Gentilini employee involved in automobile financing, had engaged in a number of credit-application frauds between February and December 1997 to secure loans for customers who otherwise were not creditworthy. Specifically, Auto Lenders learned that several customers without driver's licenses had fictitious licenses submitted on their behalf. Other customers, whose salaries were inadequate to qualify for credit, had falsified pay stubs submitted by facsimile to Auto Lenders. Indeed, a subsequent investigation revealed that many of the fraudulent submissions appeared to be alterations of Carpenter's own pay stubs. Auto Lenders concluded that, in total, twenty-seven of the credit applications it had approved contained falsified information.
In July 1998, after several of the loans under investigation went into default, Auto Lenders filed suit against Gentilini for fraud and breach of contract. In its complaint, Auto Lenders sought to enforce a portion of the Dealer Agreement that gave it an absolute right of recourse against Gentilini if any of the information conveyed by Gentilini during the finance approval process proved to be untrue. Pursuant to the agreement, Auto Lenders sought to exercise its right to have Gentilini repurchase all outstanding installment contracts that had not been paid in full, regardless of whether any individual contract contained fraudulent information. It, therefore, demanded judgment in the amount of $831,932.90.
Gentilini filed its answer and a third-party complaint in October 1998, denying liability to Auto Lenders and asserting claims against PNC Bank, Randy Carpenter, and the customers identified by Auto Lenders who allegedly submitted fraudulent credit applications. Later, in June 1999, Gentilini amended its answer and third-party complaint, naming the Ohio Casualty Group of Insurance Companies, American West Fire & Casualty Company, and West American Insurance Company (collectively Ohio Casualty) as additional third-party defendants. Gentilini alleged that Ohio Casualty had an obligation to defend Gentilini and indemnify it for its losses under an existing insurance policy, but Ohio Casualty denied any such duty.
Auto Lenders and Gentilini entered a stipulation in December 2000 whereby Gentilini agreed to pay Auto Lenders $215,000 in full settlement of Auto Lenders' claims against Gentilini. With the exception of Gentilini's claims against Ohio Casualty, all claims against all remaining parties were voluntarily dismissed.
Gentilini based its claims against Ohio Casualty on a "Commercial Package" insurance policy. The "Building and Personal Property Coverage Form" of the policy defined Ohio Casualty's basic commitments with respect to "Covered Property," which included "Business Personal Property" such as "Stock" (defined as "merchandise held in storage or for sale"), but specifically excluded "[a]utomobiles held for sale" and all "[a]ccounts, bills, currency, deeds, food stamps or other evidences of debt, money, notes or securities." However, an endorsement attached to the policy, designated as the "Master Pak for Property," modified the terms of the property coverage form. Relevant to the present appeal is the endorsement's "Employee Dishonesty" provision, which provides in pertinent part:
(1) You may extend the insurance provided by this Coverage Form to apply to direct loss of or damage to Business Personal Property and "money" and "securities" resulting from dishonest acts committed by any of your employees acting alone or in collusion with other persons (except you or your partner) with the manifest intent to:
(a) Cause you to sustain loss or damage; and also
(b) Obtain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment) for:
(ii) Any other person or organization.....
(3) The most we will pay under this Extension for loss or damage in any one ...