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Chubb Custom Insurance Co. v. Prudential Insurance Co. of America

June 20, 2007

CHUBB CUSTOM INSURANCE COMPANY, FEDERAL INSURANCE COMPANY AND EXECUTIVE RISK INDEMNITY, INC., PLAINTIFFS-APPELLANTS,
v.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, PRUDENTIAL FINANCIAL, INC., AND PRUDENTIAL EQUITY GROUP, LLC, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Somerset County, Docket No. SOM-L-1330-04.

The opinion of the court was delivered by: Parker, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued March 14, 2007

Before Judges Wefing, Parker and Yannotti.

Plaintiffs Chubb Custom Insurance Company, Federal Insurance Company (Federal) and Executive Risk Indemnity, Inc. (Executive) (collectively referred to as Chubb) appeal from an order entered on April 6, 2006 dismissing the complaint as to all defendants to allow the parties to proceed with litigation commenced by defendants in Delaware almost a year after the complaint was filed in New Jersey.

I.

This matter arises out of an insurance policy issued by Chubb to defendant Prudential Insurance Company of America (Prudential Insurance).*fn1 On April 21, 2003, judgment was entered in Ohio against Prudential Securities, Inc.,*fn2 for in excess of $400 million, including $250 million in punitive damages. Chubb's primary policy provided coverage from August 31, 1997 through August 31, 2002, up to $50 million with a $25 million deductible for each loss and a $50 million annual aggregate deductible. Excess policies, subject to the same conditions as the primary policy, provided coverage above the first $150 million layer as follows: Executive issued a policy for $10 million -- for the $50 million layer above the first $150 million; Federal issued a policy for $10 million -- for the $100 million layer above the first $200 million. All three of the Chubb plaintiffs are incorporated outside of New Jersey but maintain their principal places of business in New Jersey. Prudential Insurance and Prudential Financial are both incorporated in New Jersey and maintain their principal places of business here. Prudential Securities is incorporated in Delaware but has its principal place of business in New York.

The Ohio action, entitled Burns v. Prudential Securities, Inc., resulted in a judgment awarding the plaintiff $11,740,994 in compensatory damages, $539,483 in annuity damages, $4,078,800.62 in pre-judgment interest, $250 million in punitive damages, and $2,835,424.81 in counsel fees against Prudential Securities. The Burns judgment implicates the second and third layers of Prudential Securities's insurance coverage under a quota share program. The quota share program holds "carriers in the program . . . severally liable for their individual percentage share."

Chubb denied coverage for the Burns judgment pursuant to Exclusion 4b of its policy which excludes coverage of damages "based upon, arising from or in consequence of deliberate conflicts of interest, any dishonest, deliberately criminal or deliberately fraudulent act or omission, gaining any profit or advantage to which one is not legally entitled, or deliberate non-compliance with any statute or regulation. . . ."

On September 3, 2004, Chubb, Federal and Executive filed a complaint against Prudential Insurance in the Superior Court of New Jersey, seeking a declaratory judgment that the policies issued by Chubb to Prudential do not afford coverage for the Burns judgment. The complaint did not include Prudential Securities, the named defendant in the Burns action. An amended complaint, filed on October 4, 2004, also omitted Prudential Securities as a party. On January 21, 2005, the trial court entered "consent orders to stay the proceedings" until the Burns appeal was complete. Another consent order, entered on June 9, 2005, stayed the proceedings, but lifted the stay of discovery.

On August 3, 2005, Prudential Insurance moved to dismiss Chubb's first amended complaint because it was not a party to the Burns action; it was merely a disinterested party to the coverage dispute. Chubb cross-moved for leave to amend the complaint and ultimately the parties consented to the amendment. Prudential Insurance then withdrew its motion to dismiss. On October 25, 2005, Chubb filed a second amended complaint to add Prudential Equity Group (f/k/a Prudential Securities) and Prudential Financial as defendants in the New Jersey action. All of the defendants in the New Jersey action are collectively referred to as Prudential.

On August 3, 2005, the same date on which Prudential Insurance moved to dismiss the New Jersey complaint, Prudential Securities filed its own action for declaratory relief in the Delaware Chancery Court in which it named every interested primary and excess insurer. The complaint also included the Delaware Insurance Guaranty Association (DIGA) because Reliance Insurance Company (Reliance) -- one of the excess carriers and a Delaware Corporation -- was insolvent and DIGA could be responsible for part of Reliance's portion of coverage.

On August 15, 2005, Chubb moved to dismiss and/or stay the Delaware proceeding in favor of the New Jersey litigation. Chubb argued that (1) the Delaware Chancery Court lacked subject matter jurisdiction because no equitable claims were raised in the Delaware complaint; and (2) the New Jersey litigation should proceed because it was filed first. During a hearing on August 26, 2005, the Delaware Chancery Court characterized the Service of Suit clause in the policy as a forum selection clause and stated that Prudential Securities had a "strong, plain, contractual right to choose the forum" for litigation under the Service of Suit clause. The Delaware court indicated that the New Jersey court "should address the forum selection clause before the Delaware Court would decide whether to enjoin the parties from litigating in New Jersey."

On December 20, 2005, the Delaware Chancery Court (1) "granted Chubb's motion to dismiss for lack of subject matter jurisdiction, but invited" Prudential to re-file in the Delaware Superior Court; and (2) granted Chubb's motion to stay the Delaware proceeding while Chubb's action was pending in New Jersey. The Delaware Chancery Court indicated, however, that ...


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