United States District Court, D. New Jersey
June 8, 2005.
COLLIERS LANARD & AXILBUND, Plaintiff,
LLOYDS OF LONDON, Defendant.
The opinion of the court was delivered by: JOSEPH RODRIGUEZ, Senior District Judge
MEMORANDUM AND ORDER
After holding a one day bench trial, the Court requested
counsel to submit proposed findings of fact/conclusions of law,
or similar memoranda once counsel received the transcript of the
proceedings. In order to arrive at a decision, the Court was
required to review numerous documents and in-court testimony. As
a result, the Court had to carefully consider the credibility of
the witnesses, all of the evidence and legitimate inferences
therefrom, and the arguments of counsel for the parties.
Presently, before the court are the post-trial submissions of the
parties. This Memorandum and Order shall constitute the Court's
findings of fact and conclusions of law in accordance with
Fed.R.Civ.P. 52(a). For the reasons that follow, judgment shall be
entered against Lloyds of London in favor of Colliers Lanard &
Axilbund in the total amount of $247,352.89, less the applicable
deductibles under Professional Liability Insurance Policy No.
A2000MP00001930, apportioned as follows: $112,062.09 for legal
fees and 135,290.80 in settlement fees. FINDINGS OF FACT
These findings incorporate those facts stated in the Court's
Summary Judgment Opinion dated March 10, 2004.
1. West Jersey Medical and Professional Plaza, LLC, ("West
Jersey") owner of West Jersey Medical and Professional Plaza
located in Voorhees, New Jersey ("Plaza"), hired Plaintiff
Colliers Lanard & Axilbund ("CL&A") to act as West Jersey's real
estate leasing broker. (Trial Transcript at 20, 75).*fn1
2. CL&A's primary duty was to market the Plaza to obtain
tenants for the space. (TT at 20.)
3. CL&A received a commission for each tenant it obtained, and,
as an additional no-charge service CL&A drafted lease agreements
between West Jersey and the tenants it secured on West Jersey's
behalf. (TT at 51, 165-167.)
4. At all relevant times, West Jersey dealt solely with Jason
Wolf ("Wolf"), a salesman for CL&A, in drafting these lease
agreements. (TT at 19-20.)
5. Wolf has a Bachelor of Business Administration degree with a
concentration in real estate and business law. (TT at 19.) Wolf
had training in commercial real estate leases. (Id.)
6. On December 7, 1998 and September 14, 1999, Wolf obtained
Schaffer Medical Associates ("Dr. Schaffer") and Albert R.
Franciscan, M.D. ("Dr. Franciscan") as tenants for the Plaza. (TT at 75.)
7. CL&A prepared the leases on forms provided by West Jersey,
but unknown to all parties, essential financial terms were
entered incorrectly. (TT at 23.)
8. Wolf prepared a "request sheet" that contained the improper
terms, and these improper terms. Specifically, the lease term was
intended to be a triple net lease, which meant that the tenant
was responsible for paying the operating expenses, or $8.84 per
square foot. The request sheet, however, listed the operating
expense at $0.00. (TT at 21-22.)
9. Wolf reviewed the leases after they were completed, but did
not notice the mistakes. George Gordon ("Gordon"), vice-president
and general counsel of CL&A, also reviewed the leases without
noticing the mistakes. (TT at 22.)
10. Steven Shapiro ("Shapiro"), the managing member of West
Jersey, did not notice mistakes when he reviewed and signed the
leases. (TT at 22-23.)
11. At some point prior to July, 2000, Shapiro became aware
that incorrect terms had been entered into the two leases and
discussed the situation with Wolf. Wolf acknowledged the
mistakes. (TT at 23-24.)
12. On July 14, 2000, and after consulting with Gordon, Wolf
drafted a letter to both tenants to inform them that a "mutual
mistake" had been made in the drafting of the leases and to
propose a possible remedy. (TT at 24.)
13. On July 24, 2000 and August 25, 2000, Dr. Shafer and Dr.
Franciscan, respectively, both denied that there was a mutual mistake and
rejected the remedy proposed by CL&A. (TT at 24-25.)
14. Upon reviewing Dr. Shafer's July 14, 2000 letter, Gordon
stated, "I see [letters] that all the time, it's typically an
invitation to negotiate." (TT at 53-54).
15. Gordon stated that he "didn't calculate the numbers out
[loss rents to West Jersey]" and that litigation was a rare
occurrence. (TT at 53.) Gordon testified that, "Most landlords
and tenants most always settle their disputes." (Id.)
16. Gordon testified that he believed that the landlord [West
Jersey] would be suing the tenants. (TT at 56.) Gordon testified
that he "didn't think there was any claims against our company."
(TT at 58.)
17. On August 29, 2000, Gordon signed a "Real Estate Errors and
Omissions Liability Application" for a professional liability
insurance policy to be issued by Defendant Lloyds of London
("Lloyds"). It was a "claims made" policy with an effective date
of November 4, 2000 and a retroactive date of November 4, 1992.
(See Pl. Exh. 6.)
18. The claims made application, Question 20 asked, "Is the
applicant aware of any act, error, omission or other circumstance
which might reasonably be expected to be the basis of a claim or
suit against the applicant or anyone indicated in question 9
[CL&A staff] or 10 [CL&A's principal, partner, director and
officers]?" Gordon marked the box for "No." (Pl. Exh. 6; TT at
43-44.) 19. Mr. Gordon, was CL&A's in house counsel since 1981, and has
been a real estate attorney since 1973. (TT at 37-38.)
20. Gordon testified that as of the time he answered "no" he
did not expect a claim to be made by West Jersey. (TT at 43-44.)
21. Wolf testified that he and Mr. Shapiro [West Jersey] were
"clearly on one side . . . almost acting as a `team' to handle
this issue." (TT at 25-26.) 22. Gordon testified that he did not
believe that CL&A had legal responsibility for the mistake in the
lease. (TT at 43-44.)
23. When Gordon answered "no," he was aware of at least one
tenant who refused to amend its lease. (TT at 41, 43-44.)
24. CL&A received a copy of a Professional Liability Insurance
Policy, No. A2000MP00001930 on December 18, 2000. (Pl. Exh. 6.)
The policy covered a one year term beginning on November 4, 2000,
with a retroactive date of November 4, 1992. (Id.)
25. The policy stated, in relevant part, that coverage would be
provided for "claims made against the insured and reported to the
company during the policy period arising from services rendered . . .
prior to the effective date of this insurance and subsequent
to the retroactive date . . . provided that the insured had no
knowledge of any claim or suit, or any act or error or omission,
which might reasonably be expected to result in a claim or suit
as of the date of signing the application for this insurance."
(Def.'s Exh. 5.) (emphasis added) 26. The insurance policy defined "claim" as: (a) a demand
received by an Insured for money or services; or (b) a notice
received by an Insured alleging a breach of duty by an Insured;
or (c) service of suit, or notice received of the initiation of
arbitration or other proceedings against and Insured. (Def.'s
27. West Jersey's counsel sent CL&A a letter dated January 10,
2001, indicating that West Jersey decided to pursue legal relief
against all the parties related to the leases, including CL&A.
(TT at 46.)
28. Gordon testified that up until that point, no one from West
Jersey, including Mr. Shapiro, had any conversations with CL&A
that sought compensation from CL&A. (TT at 46.)
29. On January 24, 2001, CL&A was served with a complaint from
West Jersey, and on the same day, Gordon informed CL&A's
insurance broker of the lawsuit. (Stipulation.)
30. On February 14, 2001, Lloyds of London, through its claims
administrator CD Managers, Inc., denied CL&A's claim for defense
and indemnification for the West Jersey litigation. (Pl. Exh. 8.)
31. Lloyds claimed that CL&A was "aware of issues or
circumstances which `might reasonably be expected to result in a
claim or suit as of the date of signing the application for this
insurance.'" (Pl. Exh. 8.) 32. After Lloyds denial of coverage, CL&A answered West
Jersey's Complaint and filed a Counterclaim for commissions.
33. CL&A and West Jersey reached a settlement in which CL&A
agreed to offset $135,290.80 owed to it by West Jersey. (TT at
164.) CL&A incurred legal fees of $112,062.09. (TT at 130.)
Therefore, CL&A has incurred costs and expenses of $247,352.89 as
a result of the West Jersey litigation.
34. In 2002, Lloyds refused to renew the E&O Insurance Policy
issued to CL&A. (TT at 64-65.)
35. CL&A applied for E&O coverage though The Travelers, and on
August 8, 2002, Murray H. Feldman, of CL&A, signed an Application
for Insurance. (Def.'s Exh. at 2.)
36. Feldman answered "no" to the following questions: "Have any
claims been made during the past five (5) years against the
applicant or anyone indicated in Question 9 or 10?" and, "During
the past five (5) years, has any insurance company declined,
cancelled or refused to renew for the applicant or anyone named
in Question 10 a policy of real estates agents errors and
omissions liability insurance? (Def.'s Exh. 2;TT 65-66.)
37. Gordon admits that this declaration was false as it relates
to the 2002 Application for Insurance Coverage because it did not
correctly reference the West Jersey Complaint filed in January
2001. (TT at 65-66.)
38. Gordon did not fill out the 2002 Application for Insurance
Coverage. (TT at 66-67.)
39. On October 10, 2002, Gordon personally prepared a
"Supplemental Claim Information, which stated, "In January of
2000 a claim was made. It was not covered by the E&O carrier. The
matter was settled between the parties before trial. (Def.'s Exh.
3, TT at 68."
40. Gordon admits this statement should have said "January
2001" instead of "January 2000." (TT at 69.) Two months later, a
corrected page two was sent to the insurance carrier with the
corrected date. (TT at 71-72.)
41. On December 30, 2002, CL&A filed a Complaint against Lloyds
of London to recover for the damages it incurred because of
Lloyds's denial of its claim for defense and indemnification.
CONCLUSIONS OF LAW
1. With respect to contract disputes such as this, the New
Jersey Supreme Court has held that "the law of the place of the
contract will govern the determination of the rights and
liabilities of the parties." State Farm Mut. Auto. Ins. Co. v.
Simmons Estate, 417 A.2d 488 (N.J. 1980). Therefore, New Jersey
2. In New Jersey, insurance contracts are subject to special
rules of interpretation because they are contracts of adhesion.
Zacarias v. Allstate Ins. Co., 775 A.2d 1262, 1264 (N.J. 2001)
(citations omitted). When there is ambiguity, the insurance
policy should be interpreted to "comport with the reasonable
expectations of the insured, even if a close reading of the written text reveals a contrary meaning."
Id. (citations omitted). Even in the absence of ambiguity,
however, "[u]nder certain circumstances, . . . the plain meaning
of policy language may be overcome if it conflicts with the
reasonable expectations of the insured." Am. Motorists Ins. Co.
v. L-C-A Sales Co., 713 A.2d 1007, 1013 (N.J. 1998) (citation
3. With regard to insurance policy exclusions, the New Jersey
courts have held that they must be narrowly construed and that
the burden is on the insurer to bring the case within the
exclusion. Am. Motorists Ins. Co., 713 A.2d at 1013 (citation
omitted). "Nevertheless, [New Jersey courts] adhere to the
principle that an insurance policy should generally be
interpreted `according to its plain and ordinary meaning,' so as
not to disregard the `clear import and intent' of a policy
exclusion." Id. (citations omitted).
4. Therefore, exclusions in claims made professional liability
insurance policies do not violate public policy and are uniformly
upheld. See generally Zuckerman v. Nat'l Union Fire Ins. Co.,
495 A.2d 395 (N.J. 1985). The Zuckerman court explained the
reasoning and purpose of claims made policies:
The reasonableness of excluding claims based on prior
conduct that the insured could reasonably have
foreseen might serve as the basis for a future claim
is apparent. The insurance company is entitled to
protect itself against the professional who,
recognizing his past error or omission, rushes to
purchase a "claims made" policy before the error is
discovered and a claim asserted against him.
Id. at 404 n. 3. 5. As was stated in Am. Motorists, the burden is on Lloyds of
London to prove that CL&A's claim falls within the insurance
policy exclusion. To do this, it must be determined whether the
application question and policy exclusion are subjective or
objective. The distinction between subjective and objective
insurance policy application questions has been discussed in
cases involving rescission of insurance policies based upon the
doctrine of equitable fraud.
6. Application of this principle under New Jersey law is the
case First American Title Ins. Co. v. Lawson, 827 A.2d 230, 233
(N.J. 2003), where a professional liability insurance application
asked, "After inquiry, is any attorney in your firm aware of: . . .
Any acts, error or omissions in professional services that may
reasonably be expected to be the basis of a professional
liability claim?" The insured answered "no" and subsequently
reaffirmed that answer a year later. Id. at 233, 234. Prior to
re-affirming its answer to the policy question, however, the
insured received notice from the Office of Attorney Ethics that
the OAE would be conducting an audit of the insured-firm's books
because it had received three grievances concerning the firm's
handling of certain real estate transactions. Id. at 234. As a
result of the firm's "numerous defalcations," the title company
for those real estate transactions had to pay claims to various
individuals, and sought recovery from the firm. Id. The firm,
in turn, then sought coverage from its professional liability
insurance carrier. Id. The insurance company denied the firm's
claim and filed a declaratory judgment action alleging that the
insured's policy was void because of the insured's material misrepresentation on the
insurance application. Id. at 235. To decide whether the policy
was void based on equitable fraud principles, the court
considered that the application question called for subjective
information. Id. at 237. The court explained, "Examples of
subjective information include when an insurer asks an insured to
indicate a belief about the status of his or her health, or when,
as here, an insurer asks whether an applicant `is aware of any
circumstances which may result in a claim being made against the
firm.'" Id. at 237 (citations omitted). The court found that
the insured falsely represented that the firm was unaware of "any
acts, error or omissions in professional services that may
reasonably be expected to be the basis of a professional
liability claim," because it was notified of the OAE
investigation prior to its reaffirmation of the application
question. Id. at 239. The court upheld the appellate court's
determination "that no reasonable factfinder could conclude
anything other than that [the insured] knew his [answers and
statements] to be false." Id. (citation omitted).
7. Similarly, in Liebling v. Garden State Indemnity,
767 A.2d 515, 517 (N.J.Super.Ct. App. Div. 2001), an insured answered
"no" to the question, "Is the firm aware of any circumstances, or
any allegations or contentions as to any incident which may
result in a claim being made against the firm?" The claims made
malpractice insurance policy also included an exclusion that
stated, "We do not insure here any claim . . . of which: . . .
Any insured, at the inception date of this contract, knew or
reasonably could have foreseen that any such act, error, or
omission might be expected to give rise to a claim otherwise insured here." Id. at 522. The insured was sued
by a former client because the client's case was dismissed for
the insured's failure to sue the proper parties. Id. at 518.
The insured sought coverage under his professional liability
insurance, but the insurance company denied his claim for
coverage. Id. The insured then filed an action for declaratory
judgment. Id. The insurance company asserted equitable fraud as
an affirmative defense and demanded rescission of the policy
because it determined that the insured's answer on the insurance
application was a material misrepresentation. Id. The insurance
company also argued that it was not required to provide coverage
under the policy's exclusion. Id. at 522. Under an equitable
fraud analysis, the court first explained the difference between
subjective and objective questions. "An objective question [is]
one calling `for information within the applicant's knowledge'
and a subjective question [is] one that `seek[s] to probe the
applicant's state of mind.'" Id. at 518 (citing Ledley v.
William Penn Life Ins. Co., 651 A.2d 92, 96 (N.J. 1995)) (other
8. The Liebling court then determined that the application
question and policy exclusion were both subjective, and stated
that if the insured "honestly believed that a malpractice claim
was unlikely, his negative answer to the question posed in this
case is not a misrepresentation." Id. at 522. Concerning the
policy exclusion, the court stated that "the issue is not what a
reasonable attorney would have believed but what he in fact
believed." Id. at 524. The court determined that "not only
would no reasonable attorney have felt secure from a claim but
that [the insured] did not honestly believe that he was secure." Id. at 525. Consequently, the court held that the
insured's answer to the application question was knowingly false,
and the insurance company was entitled to rescind the policy
based on equitable fraud. Id. For the same reasons, the
insurance policy exclusion also justified the insurance company's
denial of coverage. Id.
9. Similar to the insurance policy in First American and
Liebling, the application question, as well as the policy
exclusion asked Gordon to reveal whether he had "knowledge of any
claim or suit, or any act or error or omission, which might
reasonably be expected to result in a claim or suit as of the
date of signing the application for this insurance."
10. The first part of the question whether Gordon had
information of any act, error, or omission within his knowledge
11. The second part whether Gordon reasonably expected this
information to result in a lawsuit is a subjective question
that sought to probe his state of mind. According to the dictates
of Liebling, whether the policy exclusion applies here depends
on what Gordon "in fact" believed, and not on the fact that he is
an attorney or that he has significant real estate lease
12. It bears repeating that New Jersey courts have held that
insurance policy exclusions must be narrowly construed and that
the burden is on the insurer to bring the case within the
exclusion. Am. Motorists Ins. Co., 713 A.2d at 1013 (citation
13. Lloyds has failed to satisfy its burden because the weight
of the evidence at trial indicates that Gordon honestly believed
that a legal claim was unlikely; as such his negative answer to question posed in this case is not a
misrepresentation. See Liebling, 337 N.J. Super. at 459.
14. As of August 29, 2000, Gordon can only be charged as
knowing that one of the tenants did not agree with West Jersey's
interpretation of the contract.
15. Lloyds has not proffered evidence that Gordon's knowledge
changed up until the point he received the policy application of
December 18, 2000.
16. Gordon's knowledge, therefore, could not "reasonably be
expected to result in a claim or suit as of the date of signing
the application for this insurance."
17. The record does not indicate that Mr. Shapiro or West
Jersey told Gordon, Wolf, or anyone at CL&A of its intention to
file a Complaint, or pursue any legal remedy against CL&A, until
nearly six (6) months after Gordon answered "no" to Question 20.
18. The record supports an opposite conclusion; namely, that
when Gordon answered Question 20, West Jersey and CL&A were
working together "as a team" to fix the error in the leases. (TT
19. The record at trial does not demonstrate that Gordon's
answer to the application question was knowingly false.
20. As such, Lloyds was not entitled to rescind the policy, and
its denial of coverage constitutes a breach of contract under New
21. In Griggs v. Bertram, 443 A.2d 163, 172-73 (N.J. 1982),
the New Jersey Supreme Court held that an insurer that wrongfully
refuses to defend is liable for a "reasonable settlement entered
into in good faith by its insured." Id. The insured has the burden of producing evidence showing that the settlement was
prima facie reasonable, but the insurance carrier has the
ultimate burden of demonstrating that the settlement was neither
reasonable nor reached in good faith. See id.; Battista v.
Western World Ins. Co., 545 A.2d 841, 848 (N.J.Super.Ct. Law
22. In New Jersey, there exists a strong public policy in favor
of settlements. Zuccarelli v. State Dept. of Envtl. Prot.,
741 A.2d 599 (N.J.Super.Ct. App. Div. 1999), cert. denied,
749 A.2d 368 (2000).
23. Pursuant to Griggs, it is the Court's obligation to
conduct an independent review of the settlement in order to
determine whether it is reasonable and made in good faith. See
Fireman's Fund Ins. Co. v. Imbesi, 826 A.2d 735, 750 (N.J.
Super. Ct. App. Div. 2003).
24. In deciding whether a settlement is prudent and reasonable,
a court must consider the risk to the settling parties. Vargas
v. Hudson County Bd. of Elections, 949 F.2d 665, 674 (3d Cir.
1991). It is the extent of the insured's exposure to liability
and not mere allegations in the injured party's complaint that
govern the appraisal of reasonableness. See id. In Vargas,
the district judge reviewed the settlement negotiations, and
found that they were fair and reasonable. Thus, on appeal, the
insurer had "a particularly difficult task" in demonstrating
unreasonableness, and ultimately failed in his attempt. See
25. Like Vargas, the Court reviewed the settlement between
West Jersey and CL&A, two sophisticated business entities, who
through their attorneys, were able to consider the risks and liabilities and settle the matter without
proceeding to trial.
26. The testimony at trial convincingly proved that it was
"reasonable settlement entered into in good faith by its
insured." See Griggs, 443 A.2d at 172-73.
27. Gordon testified that the settlement negotiations took
eight to ten months. (TT at 163.) The parties sought a "global
settlement," whereby West Jersey would pay CL&A for future
commissions owed and CL&A would pay West Jersey for lost rents.
28. Gordon testified that he and the West Jersey attorneys went
over the terms "item-by-item" and based the dollar amounts on
"firm terms." (See TT at 165-166.)
29. Lloyds accepted the attorney fees of $112,062.09 as
reasonable at trial. (TT. at 130.) Undeniably, CL&A's attorney
fees would have been considerably more had it not settled with
West Jersey, and proceeded to trial.
30. It is undisputed that CL&A drafted leases for two tenants
that contained incorrect financial terms resulting in financial
loss for West Jersey.
31. The "mistake" to West Jersey was estimated at $214,528.00.
CL&A calculated that it was due $247,398.00 from West Jersey in
lost commissions. CLA assumed $135,290.80 of the liability, thus
CL&A recovered $112,107.20.
32. The risk for liability as against CL&A was high as it was
responsible for the drafting error. Further, it is likely that a
trial jury would have concluded that CL&A's drafting error was
the cause of the negligence damages sought by West Jersey.
33. The size of potential recovery (approximately $350,000
sought by West Jersey in the underlying suit), as compared to the
amount that CL&A was actually out of pocket $349,818, coupled with the degree of probability of West Jersey's
success on its claim, points to the conclusion that the
settlement appears to be reasonable.
34. Lloyds has not proffered allegations of collusion, nor
could any inference of collusion be drawn from the record.
35. In consideration of the risk, exposure of liability, the
amount in controversy, the extent and duration of the
negotiations, and the lack of collusion, the Court finds the
settlement was made in good faith and was reasonable.
For the reasons expressed above,
IT IS HEREBY ORDERED this 8th day of June 2005, in
accordance with the findings of fact and conclusions of law
attached in the form of a Memorandum, that Final Judgment be and
the same is hereby entered in favor of the Plaintiff and against
IT IS FURTHER ORDERED that Defendant's Motion in Limine 
is DENIED AS MOOT.
IT IS FURTHER ORDERED that Lloyds of London will pay the
amount of $247,352.89, less the applicable deductibles under
Professional Liability Insurance Policy No. A2000MP00001930, to
Colliers Lanard & Axilbund within twenty (20) days of the entry
of this Order.