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

November 16, 2007

FIRST INSURANCE FUNDING CORP., PLAINTIFF,
v.
J. SPINELLI & SONS, INC., DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT,
v.
ARI INSURANCE, THIRD-PARTY DEFENDANT-APPELLANT.



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

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

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 ...


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