On Appeal from the United States District Court for the District of New Jersey District Court No.: 02-CV-06127 District Judge: The Honorable Joseph R. Rodriguez.
The opinion of the court was delivered by: Smith, Circuit Judge.
Before: SMITH, ALDISERT, and ROTH, Circuit Judges.
Appellant Lloyds of London ("Lloyds") provided a "claims made" professional liability insurance policy*fn1 to appellee Colliers, Lanard & Axilbund ("CL&A"), a real estate brokerage. The policy provided retroactive coverage for claims "provided that the insured had no knowledge of any 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." CL&A brought a breach of contract action in the District Court after Lloyds denied coverage for a claim arising from a mistake that CL&A had committed prior to obtaining the policy. Following a bench trial, the District Court concluded that the policy did not exclude the disputed claim and entered judgment in favor of CL&A.
On appeal, the key issue in this diversity case governed by New Jersey law is the proper construction of the policy exclusion. We hold that the plain language of the policy exclusion mandates a subjective test for the first part of the necessary inquiry--whether the insured had knowledge of a suit, act, error, or omission--and an objective test for the second part of the necessary inquiry--whether the suit, act, error, or omission might reasonably be expected to result in a claim or suit. We further predict that the New Jersey Supreme Court would hold that this clear and unambiguous policy exclusion should be applied according to its plain language.
Consequently, we conclude that the District Court erred as matter of law by applying an objective test to the first part of its inquiry and a subjective test to the second part of its inquiry. Because the District Court's conclusion that the policy did not exclude the disputed claim depended on its application of this erroneous test, we will vacate the District Court's judgment and remand for further proceedings.*fn2
West Jersey Medical and Professional Plaza ("West Jersey") hired CL&A to be their real estate leasing broker for the West Jersey Medical and Professional Plaza in Voorhees, New Jersey. CL&A marketed the Plaza and also drafted the lease agreements between West Jersey and any tenants that CL&A obtained. CL&A in turn received commissions for each tenant that it obtained.
West Jersey dealt solely with Jason Wolf, a salesman for CL&A who has a bachelor's degree in Business Administration with a concentration in Real Estate and Business Law and additional training in commercial real estate leases. Wolf obtained as tenants Schaffer Medical Associates ("Dr. Schaffer") and Albert R. Franciscan, M.D. ("Dr. Franciscan"). Wolf prepared leases for these tenants, but essential terms were entered incorrectly--an operating expense term that should have read $8.84 per square foot was entered at $0.00. Wolf reviewed the leases but did not notice the errors. CL&A's General Counsel, George Gordon, also reviewed the leases but did not notice the errors. Finally, Steven Shapiro, the managing member of West Jersey, also did not notice the errors when he reviewed and signed the leases.
At some point prior to July of 2000, Shapiro became aware of these errors. He discussed the situation with Wolf, who acknowledged the errors. On July 14, 2000, Wolf drafted letters to the two tenants, informing them that a "mutual mistake" had been made in their leases and proposing remedies. In letters dated July 24, 2000, and August 25, 2000, respectively, Dr. Schaffer and Dr. Franciscan denied that there was a mutual mistake in their leases and rejected Wolf's proposed remedies. Dr. Schaffer's letter also stated: "Any further discussions regarding this matter should be directed to our attorney." At trial, the parties stipulated that "Mr. Gordon, who's the in-house counsel, knew about those letters, and he knew about the response to those letters, and in essence he knew everything that Mr. Wolf knew."
On August 29, 2000, Gordon signed a "Real Estate Errors and Omissions Liability Application" for a "claims made" policy to be issued by Lloyds, effective for one year as of November 4, 2000, with a retroactive date of November 4, 1992. CL&A received the policy from Lloyds on December 18, 2000. The policy stated that it would provide coverage for claims "prior to the effective date of this insurance and subsequent to the retroactive date . . . provided that the insured had no knowledge of any 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."
On January 10, 2001, West Jersey's counsel sent a letter to CL&A stating that West Jersey was going to seek legal relief against all parties related to the leases, including CL&A. On January 24, 2001, CL&A was served with a complaint from West Jersey, and Gordon informed CL&A's insurance broker about the lawsuit. On February 14, 2001, Lloyds denied CL&A's claim for defense and indemnification in this litigation, claiming 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.'"
CL&A answered West Jersey's complaint and also filed a counterclaim for lost commissions.*fn3 CL&A and West Jersey eventually settled. The loss to West Jersey resulting from the mistake was estimated at $214,528.00, and CL&A assumed $135,290.80 of this liability.*fn4 CL&A also incurred $112,062.09 in attorneys' fees.
On December 30, 2002, CL&A filed a complaint against Lloyds in the District Court, seeking to recover the costs that it had incurred in defending and settling the West Jersey litigation. On April 18, 2005, the District Court conducted a bench trial. During the bench trial, Gordon testified that "[m]ost landlords and tenants most always settle their disputes." He also testified that he believed that letters of Dr. Schaffer's kind were "typically an invitation to negotiate." Gordon acknowledged that if the tenants maintained their position, "ultimately the landlord would be suing the tenant." Nonetheless, he maintained that he did not have the "slightest inkling" that if and when litigation ensued, CL&A would be pulled in as a party.
In its Memorandum and Order of June 8, 2005, the District Court relied on a New Jersey Superior Court case, Liebling v. Garden State Indemnity, 767 A.2d 515 (N.J. Super. 2001), in its construction of the policy exclusion.*fn5 The District Court concluded that "[t]he first part of the question--whether Gordon had information of any act, error, or omission within his knowledge--is objective." The District Court further concluded that "[t]he 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." Accordingly, the District Court held that "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 experience." The District Court then held that the exclusion was not applicable because "the weight of the evidence at trial indicates that Gordon honestly believed that a legal claim was unlikely."
Consequently, the District Court concluded that Lloyds' denial of coverage was a breach of contract. The District Court further found that CL&A's settlement with West Jersey was reasonable and entered into in good faith, and that Lloyds had accepted the amount of CL&A's attorneys' fees. Accordingly, on June 8, 2005, the District Court entered judgment for CL&A and in accordance with the terms of the insurance policy ordered Lloyds to pay $247,352.89 (the liability CL&A had assumed for West Jersey's loss plus CL&A's attorneys' fees), less applicable deductibles, to CL&A. Lloyds appealed.*fn6
In an appeal of a final judgment following a bench trial, we exercise plenary review over the District Court's conclusions of law. Kosiba v. Merck and Co., 384 F.3d 58, 64 (3d Cir. 2004). Findings of fact shall not be set aside unless clearly erroneous and due regard must be given to the trial court's judgment as to the credibility of the witnesses. Fed. R. Civ. P. 52(a). The construction of an unambiguous contract is a matter of law and subject to plenary review. U & W Indus. Supply, Inc. v. Martin Marietta Alumina, Inc., 34 F.3d 180, 185 (3d Cir. 1994).
With respect to an issue of state law in a diversity case, when there is no decision from the state's highest court directly on point, we are charged with predicting how that court would resolve the question at issue. See Canal Ins. Co. v. Underwriters at Lloyd's London, 435 F.3d 431, 436 (3d Cir. 2006). When predicting how the state's highest court would resolve the issue, we must take into consideration: (1) what that court has said in related areas; (2) the decisional law of the state intermediate courts; (3) federal cases interpreting state law; and (4) decisions from other jurisdictions that have discussed the issue. See id. "Although lower state court decisions are not controlling on an issue on which the highest court of the state has not spoken, federal courts must ...