June 12, 2007
RICHARD H. KAPLAN, ESQ., AND FRANK J. RUBIN, ESQ., PLAINTIFFS-RESPONDENTS,
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY, A CORPORATION OF THE STATE OF NEW JERSEY; AND THE HARLEYSVILLE COMPANIES, A CORPORATION OF THE COMMONWEALTH OF PENNSYLVANIA, DEFENDANTS-RESPONDENTS/ CROSS-APPELLANTS, AND TRACEY SCOTTO, ADMINISTRATRIX AD PROSEQUENDUM OF THE ESTATE OF MICHAEL SCOTTO; TRACEY SCOTTO, INDIVIDUALLY; AND FELICIA SCOTTO, BY HER GUARDIAN AD LITEM, TRACEY SCOTTO, DEFENDANTS-APPELLANTS/ CROSS-RESPONDENTS, AND THE WALNUT ADVISORY CORPORATION; ARIEL HESSING; CLIFFORD N. KUHN, JR.; RUBIN, RUBIN, MALGRAN, KAPLAN & KUHN; DAVID B. RUBIN, INDIVIDUALLY; RICHARD G. MALGRAN, INDIVIDUALLY; LEE A. EMMER, INDIVIDUALLY; EICHEN, KUHN & CAHN; BARRY R. EICHEN, INDIVIDUALLY; AND STEVEN D. CAHN, INDIVIDUALLY, DEFENDANTS.
WILLIAM W. VOORHEES, JR., ESQ., PLAINTIFF,
RICHARD H. KAPLAN, ESQ.; FRANK J. RUBIN, ESQ.; AND RUBIN, KAPLAN & ASSOCIATES, DEFENDANTS, AND RICHARD H. KAPLAN, ESQ.; AND FRANK J. RUBIN, ESQ., DEFENDANTS/THIRD-PARTY PLAINTIFFS,
HARLEYSVILLE INSURANCE CO., THIRD-PARTY DEFENDANT.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, L-8117-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 22, 2007
Before Judges Coburn, R.B. Coleman and Gilroy.
This action for declaratory judgment concerns claims for coverage under a legal malpractice insurance policy. Defendant Harleysville Insurance Company of New Jersey ("Harleysville") issued the policy to Rubin, Kaplan & Associates, P.C., providing coverage for the law firm and for its partners, plaintiffs Frank J. Rubin and Richard H. Kaplan. The claims arose when a former partner of Rubin and Kaplan allegedly mishandled a wrongful death case, resulting in its dismissal. After receiving the malpractice complaint, Harleysville promptly offered to defend Rubin and Kaplan, subject to a reservation of rights. About three years later, Harleysville denied coverage entirely and withdrew from the case.
Rubin and Kaplan retained their own counsel and incurred about $35,000 in legal fees and costs. Ultimately, they settled the malpractice claim by assigning any rights they might have under the Harleysville policy to the plaintiffs in the underlying wrongful death action: Tracey Scotto; the estate of her husband Michael; and their daughter, Felicia (the "Scottos"). Although the settlement amount was $750,000, Rubin and Kaplan gave the Scottos no consideration other than the assignment, for which they received a full release of any claims against them.
The declaratory judgment action was resolved in summary judgment proceedings before two judges. The first judge ruled that Harleysville was estopped from denying coverage and entered orders granting Rubin and Kaplan reimbursement of their counsel fees and costs in the amount $35,189.38. Accepting the coverage determination as the law of the case, the second judge nevertheless ruled that the $750,000 settlement was unenforceable against Harleysville because it was unreasonable and had not been negotiated in good faith. We agree with the second judge substantially for the reasons he expressed, but we will not comment further on his decision because we are satisfied that the first judge erred in finding coverage. Therefore, we reverse the orders granting reimbursement for legal fees and costs and affirm the judgment denying enforcement of the settlement obtained by the Scottos as against Harleysville.
The underlying wrongful death action arose from a motor vehicle accident. On July 16, 1992, Michael Scotto, a twenty- five year old truck driver died when his tanker truck overturned in Vernon Township. His wife, Tracy Scotto, retained Clifford N. Kuhn, Jr., who was then a partner in Rubin, Rubin, Malgran, Kaplan & Kuhn ("RRMKK"). Kuhn filed suit in July 1994. In March 1995, Frank J. Rubin left RRMKK, and in June 1995, that firm was dissolved. On August 24, 1995, Rubin and Kaplan formed Rubin, Kaplan & Associates.
Kuhn, who had done little to prosecute the wrongful death case while a partner in RRMKK, continued his representation of the Scottos while associated with other law firms. In January 1996, the time for discovery was extended and a case management conference was ordered for April 23, 1996. In February 1997, the wrongful death case was dismissed on summary judgment. Kuhn did not advise the Scottos of the dismissal and failed to appeal. Consequently, in January 2001, the Scottos filed the legal malpractice case against Kuhn, his partners, and Rubin and Kaplan, who never had any direct involvement in the wrongful death case.
Rubin and Kaplan were insured under a "claims made" legal malpractice policy issued by Harleysville to Rubin, Kaplan & Associates, P.C., in August 2000, with a retroactive date of August 24, 1995, the day of the law firm's formation. Rubin and Kaplan promptly advised Harleysville of the claim. In a letter dated February 23, 2001, Harleysville agreed to defend the case subject to a reservation of rights:
This acknowledges receipt of a new claim brought by Tracey Scotto. This claim is being submitted under Harleysville Insurance Company of New Jersey ("HIC-NJ") policy LP001064, effective 08/24/00 to 08/24/01 ("the policy"). The policy was issued to your present firm, Rubin, Kaplan & Associates (hereinafter "the insured firm"). This also follows our telephone conversation on January 31st.
The Complaint does not name the insured firm as defendant. Rather it names you and Frank Rubin as individual defendants. It also names your prior firm, Rubin, Rubin, Malgran, Kaplan & Kuhn (hereinafter "the prior firm"), its principals*fn1 and a former associate, Lee A. Emmer. You indicated that you are only seeking a defense for yourself and Frank Rubin. You also indicated that the prior firm is not a predecessor firm as that term is defined in the policy.
The crux of plaintiff's claim is that Clifford N. Kuhn, Jr. failed to properly prosecute a wrongful death claim while he was with the prior firm and afterwards. The Complaint indicates that Mr. Kuhn and Mr. Emmer began their representation of the plaintiff on or before October 31, 1994. See Plaintiffs' complaint at paragraph 6.
The Complaint does not specifically allege when Mr. Kuhn and Mr. Emmer left the prior firm. You indicated that Mr. Kuhn's professional association with you and Mr. Frank Rubin ended in 1995.
We are prepared to provide you and Mr. Rubin with a defense under a reservation of rights, which will be discussed more fully below. If you and Mr. Rubin accept this reservation we will assign the defense of this matter to Riker, Danzig.
The policy's Insuring Agreement provides in pertinent part:
I. Coverage - Professional Liability
The Company shall pay on behalf of the INSURED all sums in excess of the deductible which the INSURED shall become legally obligated to pay as DAMAGES as a result of CLAIMS first made against the INSURED and reported to the Company in writing during the POLICY period, or within sixty (60) days thereafter by reason of any act, error or omission OR PERSONAL INJURY, occurring after the RETROACTIVE DATE, if any, and arising out of Professional Services rendered or which should have been rendered by the INSURED or by any person for whose acts, errors, omissions, or personal injuries the INSURED is legally liable and arising out of the conduct of the INSURED's profession as a Lawyer of [sic] Notary Public.
This policy sets forth the following definitions:
I. "INSURED" whenever used in this policy shall mean:
A) The Named Insured as stated in the Declarations and any PREDECESSOR FIRM thereof;
B) Any lawyer or professional corporation who was or is a partner, officer, director or employee of the Named Insured, but, only as respects professional services rendered on behalf of the Named Insured or ANY PREDECESSOR FIRM thereof;
C) Any lawyer who was or is acting "of counsel" to the Named Insured, but only in as respects professional services rendered on behalf of the Named Insured or any PREDECESSOR FIRM thereof;
D) Any other present or former employee of the Named Insured or any PREDECESSOR FIRM thereof solely while acting on behalf of the Named Insured or any PREDECESSOR FIRM thereof;
VII. "PREDECESSOR FIRM" whenever used in this policy shall mean any legal entity which was engaged in the practice of law to whose financial assets and liability the firm is the majority successor in interest.
VII. "RETROACTIVE DATE" whenever used in this policy shall mean the date on or after which any act, omission or PERSONAL INJURY must have occurred in order for CLAIMS arising therefrom to be covered under this policy. CLAIMS arising from any act, error, omission or PERSONAL INJURY prior to this date are not covered in this policy.
As indicated above, the named insured on the policy is Rubin, Kaplan & Associates. Furthermore, the policy contains a retroactive date of August 24, 1995. As you know, the Complaint refers to the filing of the Complaint on October 31, 1994. See Plaintiffs' Complaint at paragraph 6. The Complaint does not appear to allege any malpractice arising from filing of the Complaint. However, we specifically disclaim coverage for any an alleged act, error, or omission that occurred prior to the policy's retroactive date. We reserve the right to withdraw from the defense should it be ascertained that the plaintiff's only theory of liability against you and Mr. Rubin arises established for [sic] any an alleged act, error, or omission that occurred prior to the policy's retroactive date. We also specifically disclaim coverage and a defense to the prior firm, its principals and its employees on the basis that they are not insureds under the policy.
You may wish to retain personal counsel to protect your uninsured interests.
If we learn of additional reasons for disclaimer, you will be promptly notified. Conversely, if you come into possession of any information that may cause HIC-NJ to alter its coverage position, please forward it to me as soon as possible, and due consideration will be given.
If you have any questions or wish to discuss this, please feel free to call me.
Very truly yours,
Andrea M. Gennetti Professional Liability Negotiator
Rubin and Kaplan did not respond to the letter, and Harleysville retained Riker, Danzig, Scherer, Hyland & Perretti ("Riker Danzig"), which filed an answer to the complaint in March 2001. Summary judgment was granted to all of the defendants in the malpractice action in November 2002. The Scottos appealed, and we reversed for the most part and remanded the case for trial on April 2, 2004.
The Scottos settled with Kuhn and his subsequent partners for $825,000, and continued to press their claims against Rubin and Kaplan.
On April 21, 2004, Harleysville wrote to Rubin and Kaplan, noting the initial reservation of rights and the policy's retroactive date of August 24, 1995, and asking for proof that Kuhn was employed by Rubin, Kaplan & Associates "on or after August 24, 1995." On May 3, 2004, Harleysville again wrote to Rubin and Kaplan, advising that it was "considering disclaiming coverage and withdrawing its defense" because there were no allegations against the named insured and because of the policy's retroactive date, which precluded coverage for any malpractice committed by Kuhn while he was their partner. Finally, on June 25, 2004, Harleysville disclaimed coverage because there were no claims against Rubin, Kaplan & Associates, the firm had no predecessor firm, and all the allegations against Rubin and Kaplan individually arose from their partnership with Kuhn, which ended in June 1995, which was before the policy's retroactive date.
In April 2005, Rubin and Kaplan settled with the Scottos for $750,000. In pertinent part, the agreement reads as follows:
1. SETTLEMENT TERMS: The parties hereby agree that the settlement amount is $750,000 in full satisfaction of all her claims against defendants. Plaintiff hereby releases any and all [of] her claims against defendants in the pending malpractice action in exchange for defendants' assignment of their right to pursue Harleysville in the amount of the settlement. Plaintiff shall not docket a judgment or execute against the assets of either defendant in an effort to enforce same in consideration of defendants' assignment of its legal right to indemnity presently possessed by defendants, against Harleysville Insurance Company ("Harleysville") or its assigns. Nothing contained herein shall prevent defendants from pursuing Harleysville for reimbursement of counsel fees, expenses and costs of litigation, or of any other claims it may have against Harleysville.
If the reservation of rights letter was effective, Rubin and Kaplan, having obtained releases without giving any consideration to the Scottos, other than an assignment of their rights, if any, against Harleysville, suffered no prejudice from Harleysville's withdrawal from the case. Therefore, the dispositive issue is whether the initial reservation of rights letter was effective. There are no issues of fact on this point, and we review the judge's ruling de novo under the Brill standard. See Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 539-41 (1995); Toll Bros., Inc. v. Bd. of Chosen Freeholders, 388 N.J. Super. 103, 110 (App. Div. 2006). The governing legal principles are firmly established. An insurance company may respond to a claim against its insured by advising the insured that it is willing to defend under a reservation of rights or "non-waiver agreement." Merchants Indem. Corp. of N.Y. v. Eggleston, 37 N.J. 114, 126 (1962); Griggs v. Bertram, 88 N.J. 347, 357 (1982). Under such an agreement, the insurance company cannot be held ultimately responsible for payments otherwise required by the insurance policy. The agreement may be "inferred from the insured's failure to reject the carrier's offer to defend with a reservation of rights." Merchants, supra, 37 N.J. at 126. But "to spell out acquiescence by silence," the reservation of rights letter "must fairly inform the insured that the offer may be accepted or rejected." Id. at 127-28.
The first judge held that the letter in question failed the test set out in Merchants because it did not literally say you may "accept or reject" the offered defense. But the case does not stand for the proposition that its exact words have to be employed. Here, the letter "specifically disclaimed[ed] coverage for any . . . alleged act, error, or omission that occurred prior to the policy's retroactive date" and for any member of RRMKK. The letter did not in any way reflect or even suggest a unilateral decision by Harleysville. Rather, it said that Harleysville was prepared to provide you and Mr. Rubin with a defense under a reservation of rights, which will be discussed more fully below. If you and Mr. Rubin accept this reservation, we will assign the defense of this matter to Riker, Danzig.
You may wish to retain personal counsel to protect your uninsured interests.
The judge's analysis failed to address the precise language used in the letter and failed to consider that Rubin and Kaplan are attorneys, and thus sufficiently sophisticated to understand the meaning and legal effect of Harleysville's reservation of rights.
An example of an improper unilateral declaration by an insurance company of its intention to defend while reserving the right to disclaim appears in Sneed v. Concord Insurance Co., 98 N.J. Super. 306, 314 (App. Div. 1967)(the company "'will continue to investigate this matter, but reserves any and all of its rights under the policy contract and may at any time, disclaim liability thereunder'"). By contrast, the language used by Harleysville comports with the reservation of rights letters sustained in Neilson v. American Mutual Liability Insurance Co. of Boston, 111 N. J. L. 345, 349 (E.& A. 1933)("'If this is not agreeable to you, we will return the summons and complaint for such action as you think advisable.'"). We perceive no difference between that statement and Harleysville's statement that it was "prepared" to defend "if" the insureds were willing "to accept the reservation," particularly when the letter expressly declined coverage for the only period of time during which the insureds could have had responsibility for Kuhn's actions and suggested that they might want "to retain personal counsel to protect their uninsured interests." In short, because Rubin and Kaplan had been properly notified of the reservation of rights and had not suffered any prejudice from the timing of Harleysville's withdrawal, they had no enforceable claim to the benefits of the malpractice insurance policy.
Relying primarily on Merchants and Griggs, the Scottos and Rubin and Kaplan argue that even if the reservation of rights letter effectively preserved Harleysville's rights, there is liability nevertheless because Harleysville did not disclaim for over three years and finally disclaimed while the malpractice case was still pending. Both of those cases are distinguishable because they involve untimely reservation of rights letters, which is not the case here. While those cases would be pertinent by inference if Rubin and Kaplan had suffered prejudice because of the timing of Harleysville's withdrawal, there was no prejudice here since the "settlement" required nothing of Rubin and Kaplan other than an assignment of rights. The Scottos also argue that the retroactive date contained in the Harleysville policy violates public policy. Since this issue was not raised below, the Scottos are not entitled to press it on appeal. See County of Essex v. First Union Nat'l Bank, 186 N.J. 46, 51 (2006). In any case, the argument appears to be without merit. See Sparks v. St. Paul Ins. Co., 100 N.J. 325, 339-343 (1985). Furthermore, the Scottos would lose even if we accepted their contention because the policy's definition of the terms "insured" and "predecessor firm" exclude coverage for Rubin's and Kaplan's former partnership with Kuhn, which would be the only basis for their responsiblity for Kuhn's actions.
The Scottos' further argument that Rubin and Kaplan were responsible for Kuhn's malpractice committed after the dissolution of RRMKK, which would implicate coverage, is without merit because Tracy Scotto admitted that she knew about the firm's dissolution and chose to have Kuhn continue as her lawyer. See Staron v. Weinstein, 305 N.J. Super. 236, 242-43 (App. Div. 1997)(firm principal's vicarious liability generally does not extend to acts or omissions occurring after lawyer ceased to be firm principal except when there was no proper notice to client of dissolution or withdrawal).
We also reject the Scottos' argument that if we affirm the judgment rejecting the settlement as against Harleysville, they are entitled to vacation of the settlement with Rubin and Kaplan and the accompanying right to a trial on their malpractice claims. To the contrary, since an assignment of rights is sufficient consideration to support enforcement of a settlement agreement, Griggs, supra, 88 N.J. at 369-70, and since there is no allegation that Rubin and Kaplan committed fraud or made any misrepresentations in the negotiations for the settlement, the Scottos are bound by their agreement. See Zuccarelli v. State of N.J., Dep't of Envtl. Prot., 326 N.J. Super. 372, 380-81 (App. Div. 1999), certif. denied, 163 N.J. 394 (2000).
Affirmed as to the Scottos' judgment; reversed and remanded for entry of judgment in favor of Harleysville on the claim for legal fees.