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First Insurance Funding Corp. v. J. Spinelli & Sons


November 16, 2007


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-522-06.

Per curiam.


Submitted October 29, 2007

Before Judges Parrillo and Alvarez.

Third-party defendant American Reliance Insurance (ARI) appeals from an order of the Law Division assessing it a statutory penalty pursuant to N.J.S.A. 17:29C-4.1 for its failure to return to its insured the unearned premium at the pro rata rate due to the involuntary nature of the policy's cancellation. Significantly, ARI does not appeal from that feature of the summary judgment awarding its insured, defendant-third-party plaintiff J. Spinelli & Sons, Inc. (Spinelli), the compensatory sum of $56,970.46 -- representing the difference between the pro rata refund owed to the insured ($417,600) and the short rate refund actually returned ($373,731) -- plus interest. We affirm.

The facts are not in dispute. On May 16, 2005, ARI issued a commercial auto insurance policy to Spinelli for liability coverage for Spinelli's fleet of heavy trucks. The total premium was $501,000, of which Spinelli paid $83,400, and financed the remaining $417,600 through plaintiff First Insurance Funding Corp. (First Insurance), a finance company. The terms of the Commercial Premium Finance Agreement and Disclosure Statement between Spinelli and First Insurance provided that Spinelli pay First Insurance the $417,600 over nine monthly payments of $48,354.72, to begin on June 16, 2005.

First Insurance issued a notice of intent to cancel the policy when Spinelli did not pay the first financed premium payment due on June 16,2005, as permitted by its financing agreement with Spinelli. When First Insurance did not receive payment in response to its notice of intent to cancel, it exercised the power of attorney it had been granted by Spinelli and issued a notice of cancellation of insurance coverage, again in accordance with the financing agreement. Consequently, ARI cancelled the policy effective July 15, 2005 and issued a cancellation acknowledgment dated November 3, 2005 to Spinelli.

The insurance contract between ARI and Spinelli states the return premium cancellation policy:

A. Cancellation . . . .

5. If this policy is cancelled, we will send the first Named Insured [Spinelli] any premium refund due. If we cancel, the refund will be pro rata. If the first Named Insured cancels, the refund may be less than pro rata. The cancellation will be effective even if we have not made or offered a refund.

Section 7c states:

In the notice of cancellation which is sent to the first Named Insured, we will state the reason for cancellation. For cancellation due to the nonpayment of premium, the notice will state the effect of nonpayment by the due date. Cancellation for nonpayment of premium will not be effective if payment of the amount due is made before the effective date set forth in the notice.

The "Reason for Cancellation" in the November 3, 2005 acknowledgment letter from ARI to Spinelli was "Non-Payment."

On February 2, 2006, ARI returned Spinelli's unearned premium to First Insurance, in the amount of $373,731, based upon a calculation of the "short rate" of return. Since the rate of return was based on the short rate, ARI retained a portion of the unearned premium. First Insurance, seeking return of its remaining monies, filed a complaint against Spinelli in the Law Division, alleging breach of the Premium Finance Agreement. Spinelli, in turn, answered the complaint and filed a third-party complaint against ARI, alleging ARI should have returned the unearned premium at the "pro rata" rate, not the "short rate." First Insurance settled its dispute against Spinelli before litigation between the two commenced. Thereafter, ARI and Spinelli both filed cross-motions for summary judgment.

The Law Division judge denied ARI's motion and granted Spinelli's cross-motion for summary judgment. In doing so, the judge found that ARI breached its contract with Spinelli and violated New Jersey insurance regulations, N.J.A.C. 13:18-6.1, and statutes, N.J.S.A. 17:29C-6(F), by applying a short rate return of unearned premium to Spinelli's insurance policy, when the policy was cancelled for failure to make installment payments on the premium finance agreement with First Insurance. Accordingly, the court awarded Spinelli compensatory damages of $56,970.46, the difference between the pro rata refund owed ($417,600) and the short rate refund actually made by ARI ($373,731), plus interest. The judge also found ARI liable to Spinelli for statutory penalties under N.J.S.A. 17:29C-4.1 for failure to return the full amount of the unearned premium which was returnable to Spinelli within sixty days of July 15, 2005:

The penalties applicable to this failure to return the $417,600 [the pro rata rate] of unearned premium payable from September 15, 2005 through the date of judgment at the rate of 5% per month or any portion thereof. As of November 17, 2006, the accumulated penalty under N.J.S.A. [17:] 29C-4.1 is $293,985.00.

This penalty was assessed against ARI based on the total amount of unearned premium owed on the policy, the pro rata rate of $417,600 and no adjustment was made for the amount that had previously been returned. Thus, judgment against ARI was entered in the total amount of $350,955.35.

ARI filed a motion to reconsider the punitive damages assessment under N.J.S.A. 17:29C-4.1. The judge denied the motion, stating in relevant part:

This statute -- the statutes [and] the reg that are referred to and relied on, 11:2-2.1 tells the defendant how to calculate the gross unearned premium. 17:16d-14a tells ARI that they had to return the premium pro rata and therefore, the penalty, the Court finds, is proper. And not only does that regulation tell ARI that it has to return it pro rata, the language in one of the contracts involved here says that the unearned premium would be returned on a pro rata basis.

And it was the intent of the legislator to penalize those who do not comply with these regulations. And the penalty is not limited as argued or suggested by the movant [ARI] in this case.

ARI appeals from the portion of the order assessing a statutory penalty against it pursuant to N.J.S.A. 17:29C-4.1. ARI argues that the trial court should not have assessed the penalty because 1) Spinelli voluntarily canceled the contract so ARI was allowed to apply the short rate return; and 2) in any event, the circumstances do not warrant such a severe sanction. We disagree with both of these contentions.

As to the former, ARI relies on language in the insurance contract to the effect: "[i]f the first Named Insured cancels, the refund may be less than pro rata." ARI also relies on N.J.S.A. 17:16D-13(c), which provides that if the default to the finance company is not cured within ten days following the notice of intent to cancel, " the premium finance company may thereafter request in the name of the insured, cancellation of such insurance contract or contracts by mailing to the insurer a notice of cancellation, and the insurance contract shall be canceled as if such notice of cancellation had been submitted by the insured himself . . . ." ARI thus reasons that since the first named insured, Spinelli, effectively canceled the contract through its designee, ARI, "the refund may be less than pro rata."

ARI's argument fails for two reasons. First, the argument was not raised in the court below and therefore is not properly before this court on appeal. Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973). Indeed, ARI has not appealed from that portion of the court's order awarding Spinelli the difference between the pro rata rate and the short rate based on its finding that cancellation of the insurance policy was not voluntary.

But more significant, ARI's reliance on N.J.S.A. 17:16D-13(c) is misplaced. That provision is part of the Insurance Premium Finance Company Act, N.J.S.A. 17:16D-1 to -16, and regulates the conduct of finance companies such as First Insurance, and not insurers such as ARI. This provision, therefore, may not be read to conflict with those statutory provisions that govern and control ARI. See Carreon v. Hospitality Linen Servs., 386 N.J. Super. 504, 511 (App. Div. 2006) (concluding that the provisions of N.J.S.A. 17:16D-13 control how notice of intent to cancel should be given, but other applicable statutes should be read harmoniously with this provision). Further, although "the premium finance company steps in the shoes of the insured for all payments and setoffs[,]" it "[leaves] the insured-insurer relationship intact." Sheeran v. Sitren, 168 N.J. Super. 402, 411 (Law Div. 1979).

The relevant statute and regulation that control the insurance company, ARI, on the other hand, are N.J.S.A. 17:29C-6(F) and N.J.A.C. 13:18-6.1, respectively. They use nearly identical language in defining the circumstance of cancellation for nonpayment of premium. Thus, N.J.A.C. 13:18-6.1 provides:

"Cancellation for nonpayment of premium" means the termination of a policy during the policy term due to the failure of the named insured to discharge when due any of his or her obligations in connection with the payment of premiums on a policy, or any installment of such premium, whether the premium is payable directly to the insurer or its agent or indirectly under any premium finance plan or extension of credit.*fn1

Notably, ARI's insurance policy provides that "[i]f this policy has been in effect for 60 days or more . . . we [ARI] may cancel this policy only for one or more of the following reasons: (1) Nonpayment of premium." As the statute, regulation and policy make clear, termination for nonpayment is either automatic or at the behest of the insurance company. Either way, the insurer is, in effect, canceling the policy. And, as stated in the insurance policy, "[i]f [ARI] cancel[s], the refund will be pro rata."

Thus, N.J.S.A. 17:29C-6(F) and N.J.A.C. 13:18-6.1, in conjunction with the actual insurance policy, warrant a pro rata rate for return of the unearned premium in instances where the policy is canceled for nonpayment. N.J.S.A. 17:16D-13(c), governing finance companies, simply has no application in determining the rate at which the unearned premium is returned, and to interpret that provision otherwise is to place it in direct conflict with N.J.S.A. 17:29C-6(F) and N.J.A.C. 13:18-6.1.

ARI's interpretation is also directly contrary to N.J.S.A. 17:16D-14 and N.J.A.C. 11:2-2.1, which in this case require a pro rata return of premium. Thus, N.J.S.A. 17:16D-14 (emphasis added) provides, in relevant part:

Application of Unearned Premiums

(a) Whenever a financed insurance contract is canceled, the insurer on notice of such financing shall return whatever gross unearned premiums are due under the insurance contract to the premium finance company for the account of the insured or insureds within a reasonable time, not to exceed 60 days after the effective date of cancellation, or 60 days after the completion of any payroll audit necessary to determine the amount of premium earned while the policy was in force. Such audit shall be performed within 30 days after the effective date of cancellation.

Correspondingly, N.J.A.C. 11:2-2.1 (emphasis added) provides:

Return of Unearned Premiums

(a) N.J.S.A. 17:16D-14(a) requires that whenever a financial insurance contract is cancelled, the insurer on notice of such financing shall return whatever gross unearned premiums are due under the insurance contract to the premium finance company for the account of the insured or insureds.

The plain meaning of these provisions is clear and unambiguous, Nat'l Waste Recycling, Inc. v. Middlesex County Improvement Auth., 150 N.J. 209, 223 (1997); County of Camden v. S. Jersey Port Corp., 312 N.J. Super. 387, 396 (App. Div.), certif. denied, 157 N.J. 542 (1998), and expressly provides that the gross unearned premium is to be calculated and returned in accordance with the terms of the insurance contract (that "due under the insurance contract"), which in this case required ARI to apply the pro rata rate to the calculation.

Nothing in N.J.S.A. 17:29C-4.1 suggests the contrary. The mention therein of a "short rate return of premium" simply refers to when it may be permissible. However, as its heading clearly indicates, N.J.S.A. 17:29C-4.1 is a penalty provision, applicable when an insurance company fails to return the "gross unearned premium":

Return of unearned premiums; penalty Whenever an insurance policy or contract is canceled, the insurer on notice thereof shall return to the insured, within a reasonable time not to exceed 60 days of cancellation or notice, whichever occurs last, or 60 days after the completion of any payroll audit necessary to determine the amount of premium earned while the policy was in force, on a short rate basis the amount of gross unearned premiums paid; except for a policy or contract for private passenger automobile insurance, which amount of gross unearned premium shall be determined on a pro rata basis. In the event that the insurer fails to return the gross unearned premiums to the insured within the period provided for herein, the insurer shall, as a penalty, in addition to the gross unearned premium, return to the insured an additional amount equal to 5% of the gross unearned premium computed on a monthly basis for each month or part thereof past the final date on which the refund was due. [N.J.S.A. 17:29C-4.1 (emphasis added).]

Thus, in finding that ARI did not return the gross unearned premium due under the contract, the Law Division judge then assessed a penalty against ARI under N.J.S.A. 17:29C-4.1.

In this regard, ARI challenges the penalty assessed on several grounds, all of which we deem devoid of merit. R. 2:11-3(e)(1)(E), not warranting extended discussion. Suffice it to say, when the gross unearned premium is not returned within the time period provided, the penalty "shall" be assessed against the insurer. Indeed, N.J.S.A. 17:29C-4.1 expressly states that the penalty is to be assessed on the amount of gross unearned premium, which is calculated in accordance with N.J.S.A. 17:16D-14(a) and N.J.A.C. 11:2-2.1. There is no provision therein for adjusting the penalty where part of the premium has been returned within the sixty-day time period, and no allowance for the calculation to be based only on the portion of the unearned premium that ARI withheld. Simply put, the penalty is not for returning the "short rate" premium, but for failing to return the "gross unearned premium." N.J.S.A. 17:29C-4.1.

In sum, we are satisfied the trial court properly found that cancellation for nonpayment of an installment on the premium finance agreement is an involuntary termination, N.J.S.A. 17:29C-6(F), for which the insurance contract and applicable law require the return of the gross unearned premium at the pro rata rate, N.J.S.A. 17:16D-14(a); N.J.A.C. 11:2-2.1(a), and that ARI's failure to do so constituted a violation thereof, warranting imposition of the penalty imposed. N.J.S.A. 17:29C-4.1.


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