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Franklin Mutual Insurance Co. v. Jersey Central Power & Light Co.

SUPREME COURT OF NEW JERSEY


July 27, 2006

FRANKLIN MUTUAL INSURANCE COMPANY, AS SUBROGEE OF BELCHER'S VILLAGE MARKET, PLAINTIFF-APPELLANT,
v.
JERSEY CENTRAL POWER & LIGHT COMPANY, D/B/A GPU ENERGY, DEFENDANT-RESPONDENT, AND JOHN DOES, 1 THROUGH 100 (FICTITIOUS NAMES), DEFENDANTS.

On certification to the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(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 its decision in Weinberg v. Dinger, 106 N.J. 469 (1987), applies to all regulated utilities and whether Weinberg's bar against insurance companies' subrogation claims should be altered.

In September 1999, Hurricane Floyd struck New Jersey, bringing with it widespread interruptions in electricity service from September 15 to 21, including interruptions to customers of Jersey Central Power & Light Company. As a result of the power interruption, Belcher's Village Market in Branchville, New Jersey, submitted a claim to its insurer, Franklin Mutual Insurance Company, for the cost of spoiled food. Under its policy, Franklin Mutual paid Belcher's $6,255.78 for its losses and filed a subrogation action (asserting the rights of the insured) against JCP&L.

The trial court and the Appellate Division held that Weinberg's bar against insurers' subrogation claims is not limited to water companies and dismissed Franklin Mutual's subrogation claim against JCP&L. The Supreme Court granted certification and invited the Insurance Council of New Jersey, the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies to participate as amici curiae.

HELD: Weinberg's bar against insurance companies' subrogation claims against utility companies is not altered and applies to all regulated utilities in service interruption cases.

1. In Weinberg, the Court held that a utility has a duty to act with reasonable care in the provision of services to foreseeable users. However, the Court allowed only uninsured and underinsured property owners to sue a water company for damages resulting from service interruptions. The Court barred subrogation claims by insurers. The Court reasoned that allowing subrogation claims against a water company would be contrary to public policy because it would result in shifting the risk of loss from the insurance company to the water company and, ultimately, to the consumer in the form of increased water rates. The result would be that the consumer would pay twice--first for property insurance premiums and then in the form of the higher water rates. In Weinberg, the Court left open the possibility of reconsidering the subrogation carve-out rule if a case were presented in which it was proven that any increase in water rates resulting from the water company's liability for subrogation claims would be substantially offset by reductions in property insurance premiums. (pp. 1-4)

2. Weinberg's subrogation carve-out applies to all regulated utilities in service interruption cases. The carve-out was based on the status of the water company as a regulated utility and is rooted in the protection of the members of the rate-paying public who would ultimately bear the burden of subrogation recoveries through the payment of increased water rates. Those considerations apply equally where other regulated utilities are concerned. (pp. 5-6)

3. The Court declines to alter the subrogation carve-out rule at this time for several reasons. First, under the Weinberg rule, the innocent victim is made whole through insurance or in a direct action against the utility, thus satisfying the compensatory principle of tort law. In the case of a utility that can pass losses on through rate increases, the classic "just deserts" purpose of tort law loses some of its currency. Second, the Weinberg rule has been in effect for almost 20 years and the Legislature has not acted to change the rule. Third, in this case the Court has not been offered proof that any increase in utility rates resulting from liability for subrogation claims would be substantially offset by reductions in insurance premiums. The Court continues to be concerned over the public paying twice, through insurance premiums and increased utility rates. The Court will not alter the subrogation rule until it is satisfied that the public will not suffer that disadvantage. (pp. 6-8)

The judgment of the Appellate Division is AFFIRMED.

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN, WALLACE and RIVERA-SOTO join in the PER CURIAM opinion.

Per curiam.

Argued March 7, 2006

In Weinberg v. Dinger, 106 N.J. 469, 495 (1987), we held, in accordance with modern principles of tort liability, that a utility has a duty to act with reasonable care in the provision of service to foreseeable users, rejecting a line of cases that was based solely on the then-current tort law notion that a defendant owed no duty of care to a third party with whom no privity of contract existed. See, e.g., Reimann v. Monmouth Consol. Water Co., 9 N.J. 134, 137-38 (1952) (water company not liable to third parties for negligent provision of service); Cochran v. Public Serv. Elec. Co., 97 N.J.L. 480, 481 (E. & A. 1922) (electric company not liable to third parties for negligent provision of service); Baum v. Somerville Water Co., 84 N.J.L. 611, 614-15 (E. & A. 1913) (water company not liable to third parties for negligent provision of service).

However, in Weinberg, because we were concerned about the effect of our decision on the public utility ratepayers on whom the burden of costly subrogation recoveries ultimately would fall, we allowed only uninsured or underinsured property owners to sue errant utilities and barred insurers' subrogation claims*fn1 for damages resulting from service interruptions. Weinberg, supra, 106 N.J. at 489-95. In ruling, we compared utilities to public entities, which the Legislature has insulated from subrogation claims by way of the Tort Claims Act. Id. at 492 (citing N.J.S.A. 59:9-2). We concluded that the imposition on a water company of liability for subrogation claims of carriers who pay fire losses caused by the company's negligent failure to maintain adequate water pressure would inevitably result in higher water rates paid by the class of consumers that paid for the fire insurance. The result of imposing subrogation-claim liability on water companies in such cases would be to shift the risk from the fire-insurance company to the water company, and, ultimately, to the consumer in the form of increased water rates. Thus, the consumer would pay twice--first for property insurance premiums, and then in the form of higher water rates to fund the cost of the water company's liability insurance. We find this result contrary to public policy.

[Ibid.]

Nevertheless, we expressly left open the possibility that we would reconsider that rule:

This determination is made without prejudice to the right of a subrogation claimant, either in this or other litigation, to offer proof tending to demonstrate that any increase in water rates resulting from liability for subrogation claims would be substantially offset by reductions in fire-insurance premiums . . . . [O]ne would expect a high correlation between the increase in water company liability rates and the decrease in fire-insurance rates occasioned by the abrogation of water company immunity in cases like this. If that correlation were to be proven in subsequent litigation, we would be prepared to reconsider our denial of the carrier's right to subrogation against a water company. [Id. at 493.]

Justices Handler and Garibaldi filed separate opinions in which they questioned, among other things, whether such an initiative should come from the Legislature. Id. at 497-98 (Handler, J., concurring in part and dissenting in part); id. at 507-08 (Garibaldi, J., dissenting). The opinion in Weinberg is at the heart of this case.

On this appeal, involving the dismissal of an insurer's subrogation claim against an electric company,*fn2 we have been asked to determine whether the so-called "subrogation carve-out" of Weinberg was limited to water companies or whether it insulates other utilities from subrogation actions for service interruptions. In addition, we have been asked to reconsider the subrogation carve-out. We hold that Weinberg applies to all regulated utilities in service interruption cases and that there is no warrant to alter the subrogation carve-out at this point.

We begin with the determination of the trial judge and Appellate Division that Weinberg's subrogation carve-out is not limited to water companies, a holding with which we are in full agreement. Although Weinberg happened to arise in the context of a water company case, it cannot fairly be read as so limited. Indeed, the subrogation carve-out in Weinberg was specifically based on the status of the water company as a regulated utility and was rooted in the protection of members of the rate-paying public who would ultimately bear the burden of subrogation recoveries through increased water rates. Those considerations are identical where other utilities are concerned, and neither Hurricane Floyd struck New Jersey, bringing with it widespread interruptions in electricity service from September 15 to 21, 1999, including interruptions to customers of defendant Jersey Central Power & Light Company (JCP&L). Among those customers was Belcher's. As a result of the power interruption, Belcher's submitted a claim for the cost of spoiled food to Franklin Mutual. Pursuant to the terms of its policy, Franklin Mutual paid Belcher's $6,255.78 for its losses and instituted a subrogation action against JCP&L. Franklin Mutual nor the amici insurance associations*fn3 have suggested any distinction between water companies and other utilities that would justify disparate treatment. Thus, we affirm the Appellate Division's entirely logical conclusion that "the same rationale" that motivated the Weinberg Court to bar subrogation suits against water companies in service interruption cases is equally present in the case at bar.

That brings us to the question of whether the subrogation carve-out of Weinberg should be maintained. We find the carve-out troubling insofar as it insulates utilities from paying for the damages they cause to property owners whose service is negligently interrupted. That is contrary to our tort law, which has always recognized that the burden of loss should fall, as a matter of justice, on the party at fault. See, e.g., People Express Airlines, Inc. v. Consol. Rail Corp., 100 N.J. 246, 255 (1985).

However, we are loath to interfere with the application of the rule at this juncture for several reasons. First, in the case of a utility that can pass losses on through rate increases, the classic "just deserts" operation of tort law loses some of its currency. At the same time, under the Weinberg rule, the innocent victim is made whole through insurance or in a direct action against the utility, thus satisfying the compensatory principle underlying our tort law.

Second, the Weinberg rule has now been in effect for almost twenty years. Thus, the concerns of the dissenters in that case to the effect that the Legislature is the proper forum to decide the subrogation carve-out, to some extent, have been mitigated. Indeed, the Legislature is presumed to be aware of Weinberg and to have acquiesced in its ruling. See Taneian v. Meghrigian, 15 N.J. 267, 279 (1954).

Third, and most important, the necessary prerequisite to an informed re-examination of Weinberg is absent: we have not been offered proof tending to demonstrate that any increase in utility rates resulting from liability for subrogation claims would be substantially offset by reductions in insurance premiums. Weinberg, supra, 106 N.J. at 493. Indeed, we note that at least one scholar points out that "no decision reports that insurers have even attempted to demonstrate a relationship between subrogation rights and premium rates." James M. Fischer, Why are Insurance Contracts Subject to Special Rules of Interpretation?: Text Versus Context, 24 Ariz. St. L.J. 995, 1024 n.95 (1992). Thus, we continue to be concerned over the public "paying twice," first through insurance premiums and then through increased utility rates reflecting subrogation losses.

Until we are satisfied that the public will not suffer that disadvantage, we decline to alter the subrogation rule of Weinberg.

The judgment of the Appellate Division is affirmed.


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