December 28, 2007
STATE OF NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, PLAINTIFF,
DOMINICK DIFLORIO, CAROL MIGLIACCIO, C&M CONSTRUCTION OF NEW JERSEY, INC., AND THOMPSON REALTY CO. OF PRINCETON, INC., DEFENDANTS.
THOMPSON REALTY CO. OF PRINCETON, INC., THIRD-PARTY PLAINTIFFAPPELLANT/CROSS-RESPONDENT,
DOMINICK DIFLORIO, CAROL MIGLIACCIO, C&M CONSTRUCTION COMPANY OF NEW JERSEY, INC., VINCENT VARELLA, JOSE VARELLA, JR., INDIVIDUALLY AND AS SOLE HEIRS OF THE ESTATE OF HILDA VARELLA, DECEASED AND THE ESTATE OF HILDA VARELLA, THIRD-PARTY DEFENDANTS, AND FIRST AMERICAN TITLE INSURANCE COMPANY, THIRD-PARTY DEFENDANT-RESPONDENT/CROSS-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Somerset County, L-2070-02.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 30, 2007
Before Judges Skillman, Winkelstein and Yannotti.
Thompson Realty Company of Princeton purchased a parcel of property, Block 5.02, Lot 24, in Franklin Township, Somerset County (the property), on December 27, 1999, from the Estate of Hilda Varella and Varella's heirs (collectively, Varella). Thompson hired General Land Abstract Company to perform a title search and procure a title insurance policy from First American Title Insurance Company.
The search failed to disclose a New Jersey Department of Environmental Protection (NJDEP) Notice of Violation (NOV) of the Freshwater Wetlands Protection Act, N.J.S.A. 13:9B-1 to -13:9B-30, which had been recorded in Somerset County on December 9, 1999. The NOV had been issued after the NJDEP discovered that wetlands on the property had been subject to illegal dumping, allegedly by defendant Dominic DiFlorio, the owner of an adjacent lot, and his girlfriend, defendant Carol Migliaccio, who operated defendant C & M Construction from DiFlorio's property. Because the NOV did not name the property owner, and was not attached to or noted on the deed to the property, the title search did not discover it and Thompson purchased the property without notice of the NOV.
The NJDEP subsequently sued Thompson and others in the Chancery Division to remediate the wetlands violations subject to the NOV. Before notifying First American of the lawsuit, Thompson settled the NJDEP's claim, agreeing to clean the property. Thompson then sought coverage from First American to the extent of its $300,000 policy limit. First American denied coverage.
In a subsequent lawsuit in the Law Division, the NJDEP sued Thompson and the other defendants for penalties for the wetlands violations. Thompson brought a third-party complaint against First American in that action, seeking a declaration of coverage and damages. Thompson now appeals from the April 13, 2006 order of the Law Division dismissing its claim against First American.*fn1
The NJDEP's involvement in the events that culminated in Thompson's coverage claim began in April 1990, when Barbara Baus, an NJDEP employee whose duties included enforcement under the Freshwater Wetlands Protection Act, responded to a complaint that wetlands violations were occurring on the property. At the site, she observed "a large area of fresh fill that had been placed and graded" on the property. When questioned about the extent of the area affected by the fill, Baus testified that the illegally-filled area constituted approximately three of the 65.66 acres of lot 24; and that the fill was located on freshwater wetlands in the area designated as Area A on lot 24, as depicted on the map in evidence at trial.
Following the issuance of the NOV, DiFlorio, who had apparently been dumping construction debris on the property and was named in the NOV, took no action to remove the fill. Consequently, in 1995, the NJDEP sought relief in the Superior Court. The court ordered DiFlorio to present a remediation plan and to remediate the site for Freshwater Wetlands and Flood Hazard Area Control Act violations.*fn2 DiFlorio did not comply with the order. As a result, in 1999 the NJDEP sent the NOV to the Somerset County Clerk for recording.
In June 2001, the NJDEP filed suit in the Chancery Division seeking injunctive relief against Thompson, DiFlorio, C & M, and Migliaccio. Thompson did not notify First American of the NJDEP's lawsuit. Instead, in August 2001, Thompson contacted David Grodnick, a Vice President of General Land, with whom Thompson verbally consulted about how to defend the lawsuit.
On October 9, 2002, Thompson, DiFlorio, C & M, and Migliaccio entered into a partial settlement with the NJDEP that provided a remediation plan for the property. The settlement did not preclude defendants from pursuing claims against each other or other responsible parties. Thompson did not notify First American of its intention to enter into the settlement. Rather, it was not until December 20, 2002, more than two months after it agreed to the settlement, that Thompson filed a claim with First American for coverage.
Meanwhile, as a result of defendants' failure to comply with the 1995 Superior Court order, the NJDEP had filed suit in the Law Division seeking penalties against DiFlorio, Migliaccio, C & M and Thompson for violations of the Freshwater Wetlands Protection Act and the Flood Hazard Area Control Act.*fn3 The claims were limited to the illegal dumping that had taken place on lot 24. Thompson filed cross-claims against the other defendants and a third-party complaint against First American for coverage and damages.
First American and Thompson cross-moved for summary judgment on the coverage issue. The judge initially denied First American's motion and granted Thompson's motion, finding that the recorded NOV constituted a public record and none of the exclusions to coverage applied. After First American moved for reconsideration, arguing that Thompson's failure to notify it of the NJDEP action and of its settlement with the NJDEP precluded coverage under the policy, the court, in a July 14, 2005 order, modified its previous order. The court reaffirmed its decision that the NOV was a public record, but, as to coverage, it concluded that "disputed issues of material fact pertaining to notice, prejudice and waiver" existed with regard to whether Thompson was entitled to coverage for its obligations under the stipulation of settlement.*fn4
In March and April 2006, the Law Division conducted a bench trial encompassing the NJDEP's complaint for penalties; and Thompson's claims against DiFlorio, Migliaccio, C & M, and First American. As to its claim against First American, Thompson's position was that "the cost of the clean-up at an absolute minimum, bare bones clean-up will easily exceed the amount of the policy which is $300,000." Thompson's counsel asked that the judgment reflect that "when various phases of the clean-up are undertaken and these amounts are expended, if we have a proof hearing or however the [c]court wants to handle that," Thompson should be entitled to present additional proofs at a later time.
At the core of the coverage question was whether First American could establish that it was prejudiced by Thompson's failure to provide timely notice, first, of the claim itself, and second, of Thompson's settlement with the NJDEP. As part of the NJDEP's case for penalties, as well as Thompson's case for coverage, was the question of what portion of the property constituted wetlands. Because Thompson's claim against First American could arise only out of the NOV, which was limited to violations of the Freshwater Wetlands Act, only the illegal dumping that affected freshwater wetlands on the property was actionable by Thompson against First American. Any illegal dumping that did not implicate those wetlands was not subject to coverage under the First American policy.
At trial, both the NJDEP and Thompson intended to rely on the testimony of George Klepp, a hydrogeologist, who had undertaken excavations of the property at the behest of Thompson to determine the extent of illegal dumping on freshwater wetlands. Klepp testified that 40,000 cubic yards of freshwater wetlands were implicated by the illegal dumping, and that it would cost between $2.3 and $2.7 million to clean the property. But, the judge barred Klepp's testimony as it applied to Thompson's claim against First American because Thompson had failed to provide First American with a copy of Klepp's report in discovery. Thompson has not appealed from that decision. Thus, Thompson did not present an expert to testify as to the total costs to clean the property, or the exact amount of acreage of freshwater wetlands that were affected by the illegal dumping.
In addition to Klepp, Thompson offered two other witnesses on the issue of the extent of the illegal fill on wetlands. As previously indicated, Baus testified about her observations of fresh fill when she first visited the site in 1990. She also testified that in 1996 she took photographs that showed vegetation growing on the slopes of old fill that had not been removed. She observed, in Area A, that fresh fill had been graded into freshwater wetlands, extending beyond the limits of the old fill. She explained:
I observed fresh dirt, loose, not compacted, no vegetation growing there that had been pushed over . . . on top of the previously existing illegal fill and down over the embankment further down into the wetlands so that the vegetation that I saw in 1996 or '97 on the slopes of the old fill, the vegetation that had started to grow because it hadn't been disturbed for quite some time had been buried essentially by this new fresh fill.
In an October 2000 visit to the site with Alan Stearne, another NJDEP employee, Baus observed fresh fill. She testified:
The pictures that Alan took in 2000 . . . showed our area of unauthorized fill to be completely devoid of vegetation, whereas three, four years ago the banks were heavily vegetated herbaceous species coming up. So clearly there had been recent disturbance and recent fill in that all of that vegetation is now buried by fresh dirt.
The slopes as you can see from Alan's photographs in 2000 are very steep compared to the photographs in 1990 and 1991. In addition, Alan's photographs show several trees that have been buried very deeply with fill, whereas in 1990, '91, those trees were hardly buried at all. There [are] two shown in photograph number 2 in 1991 that had been buried up to maybe three or four feet of fill. Today, and in 2000 when I walked around the back of this fill, these trees are buried up to eight or 10 feet with fill.
Also when I had walked around the back of the fill, there were spots where some of the silt fence was buried and a few inches of the silt fence were sticking out of the fill, indicating that [DiFlorio] had filled up to the silt fence shown in the earlier photographs and in many cases beyond it.
Baus testified that the majority of the fill had been placed in Area A between 1990 and May 1999; though she was unable to determine the quantity of fill that was placed on the property, she was able to observe the height of the fill and the steepness of the bank. On cross-examination, she conceded that she could not say exactly how much of the property was covered by wetlands, but she did say that the "majority" of the area, "if not entirely," contained wetlands.
Prior to trial, Stearne, who visited the site with Baus in October 2000, had moved from the area. According to the appendix on appeal, his deposition of May 20, 2005, was marked into evidence. Stearne was responsible for responding to complaints of violations of the Flood Hazard Area Control Act and Freshwater Wetlands Protection Act. In March 2000, he responded to a complaint by a Franklin Township official of possible wetlands violations on lot 24. On March 14, 2000, Stearne met with Township officials, as well as DiFlorio and Migliaccio, at the property, where he found substantial debris, including: "recently placed fill imbedded with solid waste such as construction debris, tanks, including [a] large fiberglass tank, rebar, household trash, manure, deteriorated pieces of a 55-gallon drum, tires and car and truck parts. . . . [T]he fill averaged approximately ten feet above the wetlands."
Stearne performed soil borings in four locations on lot 24 to determine if wetlands were present. He testified that "[t]he purpose of the soil borings is to determine whether there is hydric soil as one of the three parameters of proof for the existence of a freshwater wetland. . . . There has to be also hydrophytic vegetation and evidence of hydrology or water at the site . . . ." He determined that the four locations, all situated in what was referred to at trial as Area A, contained hydrophytic vegetation, wetland hydrology and hydric soils. In other words, each of the four sampling points contained freshwater wetlands.
A key question at trial was whether if First American had received timely notice of the lawsuit and the settlement, it would have been able to successfully challenge the NJDEP's conclusion that freshwater wetlands had been violated by illegal dumping. First American argued that the clean-up of the property was required by violations of the Solid Waste Management Act, not the Freshwater Wetlands Act. First American claimed that if it had an opportunity to obtain counsel and experts before Thompson settled the case, it could have proved that the illegal dumping did not occur on wetlands and consequently it could have achieved a better settlement with the NJDEP. First American did not, however, present expert testimony at trial to support its argument, but instead relied on cross-examination of Baus and Klepp.
Following the trial, the court rendered an oral decision with regard to the claim of the NJDEP, Thompson's claim against the co-defendants, and Thompson's claim for coverage against First American. The court memorialized its decision in the April 13, 2006 order.
With respect to Thompson's claim for coverage against First American, the judge made the following findings:
The Notice of Claim provision . . . says, [t]he insured shall notify the company promptly in writing in case of any litigation. Here the litigation was filed in June of 2001 against Thompson Realty, and Thompson Realty certainly knew about it within a month but did not notify First American until [it] wrote a claim letter on December 20, 2002 . . . So there was no written notice. There was oral notice to Mr. Grodnick as an agent[;] however, that oral notice doesn't comply with the requirements of paragraph 3.
The State's lawsuit against Thompson Realty was settled by partial stipulation of settlement in October of 2002. The date of that settlement is October 9th, 2002. At that time, First American Title Insurance Company had not been notified of the lawsuit or [of] the claim under the notice provisions of the title policy, and it certainly did not give its consent in writing to the settlement entered into by Thompson Realty. So the settlement was in violation of [the title insurance policy].
The issue that I've considered for trial and heard argument about is whether First American was prejudiced by Thompson Realty's settlement of the State's case without written consent. Here the argument of Thompson Realty is that there was no prejudice to First American because no one could have avoided at least $300,000 in remediation costs under the best of circumstances and, therefore, First American did not suffer any prejudice because it was not notified and not included in settlement discussions and negotiations. On the other hand, First American argues that it was prejudiced because it would have hired its own attorney, it would have negotiated with the DEP, it would have contested whether or not there was adequate evidence of violations of the Freshwater Wetlands Protection Act.
While there are reasonable arguments on both sides with respect to whether or not there was prejudice and whether or not they could have avoided at least $300,000 of liability by Thompson Realty as a result of freshwater wetlands filling and remediation costs, the deviation from the terms of the policy . . . by Thompson Realty is so significant that I cannot conclude that First American was not prejudiced.
One thing that is particularly important to note is that the DEP did not pursue Hilda Varella, the prior owner of the property, when a very vague or minimal explanation or excuse was provided by Hilda Varella's attorney through a letter back in 1991 indicating that she had no knowledge of the illegal dumping operation. . . .
While there is no reason whatsoever to fault Thompson Realty here or its attorney for entering into the partial stipulation of settlement, there is no telling what might have happened with an attorney pursuing the same kind of argument that Thompson Realty was an innocent purchaser, didn't have any fault for the dumping or filling activities, and would cooperate fully with the DEP. Under those circumstances there may have been room to negotiate some kind of a more favorable settlement.
Because the violation of the no settlement without written consent or participation is so significant a violation from the express terms of the title insurance policy, I conclude that First American's liability in this case is excluded by that limitation provision which Thompson Realty didn't adhere to.
In its memorializing order, the court also entered judgment for $106,859.22 in favor of Thompson against DiFlorio, C & M, Migliaccio, and Varella, reflecting the amount Thompson had spent to the date of the trial to clean the property. The judge also ordered that DiFlorio, C & M, Migliaccio and Varella would be responsible for additional damages Thompson would incur in connection with the remediation of lot 24 pursuant to the terms of the stipulation of settlement. The court thus gave Thompson the opportunity to seek additional damages by amending the judgment for subsequent remediation costs, with the issue being the "validity of said damages, but not the liability of defendants."
On appeal from the court's order, Thompson raises two points. First it asserts that First American was not appreciably prejudiced by Thompson's failure to notify it of the lawsuit and the settlement; and second, that Thompson's contacts with Grodnick satisfied the policy's notice requirements. We begin with Thompson's second point, that First American received adequate notice under the policy. That argument is without merit and requires little discussion.
A notice requirement in an insurance policy is used to "aid the insurance carrier in investigating, settling, and defending claims," not to define coverage, so the conditions of the provision should be "liberally and practically construed." Zuckerman v. Nat'l Union Fire Ins. Co., 100 N.J. 304, 323-24 (1985). A notice provision is not breached where an insured acts reasonably and in good faith. Cooper v. Gov't Employees Ins. Co., 51 N.J. 86, 94 (1968). Nevertheless, where a policy requires written notice, oral notification does not fulfill the notice requirement. Miller v. Zurich Gen. Accident & Liab. Ins. Co., 36 N.J. Super. 288, 296 (App. Div. 1955).
Thompson contends that it did not breach the notice provision of its insurance policy because it notified General Land of the lawsuit in August 2001, by verbally telling Grodnick, and having him complete a written certification to assist Thompson in court. The policy provides, however, for written notice, to be sent to a specific address:
The insured shall notify the Company promptly in writing (i) in case of any litigation . . . .
All notices required to be given the Company and any statement in writing required to be furnished the Company shall include the number of this policy and shall be addressed to Company at 114 East Fifth Street, Santa Ana, California 92701, or to the office which issued this policy.
Thompson, through its attorney, verbally contacted Grodnick on several occasions to discuss the NJDEP lawsuit. At no time, however, did Thompson provide First American, either at its address in Santa Ana, California, or at the office "which issued this policy," which would have been General Land's office as stated on the first page of the policy,*fn5 with written notice. The oral notice to Grodnick, and the certification Thompson asked him to sign for Thompson's use in the lawsuit, do not satisfy the written notice requirement as contemplated by the policy terms.
More significant, however, is that regardless of whether Thompson notified First American of the institution of the lawsuit, it is undisputed that Thompson never notified First American of its intention to enter into the settlement. It was not until after Thompson executed the stipulation of settlement that it sought coverage from First American. Consequently, Thompson did not comply with the policy requirement that it notify the insurance carrier before it agreed to a settlement.
That brings us to Thompson's second argument, that even if it failed to comply with the notice provisions of the policy, First American was not appreciably prejudiced by Thompson's failure. This argument has merit.
An insurer may avoid payment for breach of a notice provision only where the insurer has suffered "appreciable prejudice" as a result. Baen v. Farmers Mut. Fire Ins. Co., 318 N.J. Super. 260, 271 (App. Div. 1999). A two-part inquiry is used to determine whether appreciable prejudice exists: "(1) whether substantial rights have been irretrievably lost and (2) the likelihood of success of the insurer in defending against the victim's claim." Ibid. The burden is on the insurer to prove the breach and the resulting prejudice. Gazis v. Miller, 186 N.J. 224, 228 (2006).
Thompson concedes that First American irretrievably lost substantial rights when Thompson settled with the NJDEP, preventing First American from participating in the litigation. The focus of the prejudice issue is therefore on the second prong of the test, whether First American proved a likelihood that it could have successfully defended the claim. The trial court found that First American "might" have negotiated a more favorable settlement. The judge said, "there is no telling what might have happened with an attorney pursuing the same kind of argument that [Thompson] was an innocent purchaser, didn't have any fault for the dumping or filling activities, and would cooperate fully with the DEP." Those findings do not reflect a likelihood of success. To conclude that had First American hired an attorney to represent it in negotiations with the NJDEP, it might have affected Thompson's obligations to clean the property, is pure speculation.
Nor does the trial evidence support First American's argument that it could have successfully challenged the NJDEP's wetlands determination. Baus, a long-time NJDEP employee, observed illegal fill on wetlands. While she did not say exactly how much of the property contained wetlands, a fair reading of her testimony is that wetlands were present at her visit to the property in 1990 and those wetlands were covered with illegal fill. When she returned to the property in 1996 and 2000, the fill she initially observed covering wetlands remained. Thus, even though additional fill had been added after the issuance of the NOV, the illegal fill that served as the basis for the issuance of the November in 1990 was still present. That evidence was not contradicted. Baus's testimony was sufficient to trigger coverage under the title insurance policy.
In addition, in 2000, Stearne made additional borings at the site, all of which satisfied the three criteria necessary to establish wetlands: the presence of hydrophytic vegetation, wetland hydrology, and hydric soil. Stearne's testimony is also essentially unrebutted. A fair inference from his testimony is that wetlands extended beneath the illegally dumped solid waste, and the property had not been cleaned up since the NOV was issued in 1990.
Though the extent of the wetlands on the property has not been definitively established, substantial evidence shows that at least some wetlands have been illegally filled. Notably, though First American claims it could have hired experts to challenge the wetlands determination had it been given prior notice, it did not present any such expert testimony at trial to contradict either Baus's or Stearne's conclusions.
A carrier's burden of proof is not satisfied "by the showing of a mere possibility of prejudice." Morales v. Nat'l Grange Mut. Ins. Co., 176 N.J. Super. 347, 354 (Law Div. 1980). Prejudice is more than the mere inability to perform its normal investigative procedures. Id. at 355. In determining whether a carrier would have had a likelihood of success in defending had the carrier received appropriate notice, the carrier must demonstrate a "likelihood that it would have had a meritorious defense had it been informed of the [incident] in a timely fashion." Id. at 356.
Here, the evidence at trial was insufficient to demonstrate a likelihood that First American would have been able to establish that the fill was not on wetlands. Though First American has pointed out that no wetlands delineation was performed, it did not offer expert testimony at trial to explain why the lack of a wetlands delineation, in light of the evidence found at the site, would prove that wetlands were not present. Nor did First American present the trial court with tests or studies that would undermine the conclusions expressed by Baus and Stearne. Put simply, "defendant has pointed to no expert or other evidence - beyond speculation - linking [Thompson's] failure to give it earlier notice with any resultant prejudice." Sagendorf v. Selective Ins. Co. of Am., 293 N.J. Super. 81, 96 (App. Div. 1996). Accordingly, we conclude that Thompson is entitled to coverage for wetlands violations as reflected in the 1990 NOV.
That said, the question becomes what are Thompson's damages under the policy. In Thompson's complaint against First American, it sought not only an order for coverage, but also damages, plus counsel fees. At trial, evidence was presented to establish that Thompson had expended $106,859 to date for cleanup. The trial court, having dismissed Thompson's complaint as to First American on coverage grounds, never reached the damages issue. Questions remain as to whether the entire $106,859 constituted costs to clean wetlands, or whether the costs were expended to clean other portions of the property where wetlands were not implicated. In addition, because Klepp's testimony was barred as to Thompson's claim against First American by virtue of Thompson's discovery violation, the issue remains as to what testimony as to damages, if any, Thompson presented during the trial that would entitle Thompson to a monetary judgment. Finally, although the judgment permitted Thompson to move to amend the judgment should Thompson incur additional damages in the future, that portion of the judgment applied only to Thompson's claim against the co-defendants, not to First American.
Accordingly, because the issue of current and future damages has not been addressed by the trial court, we make no determination as to what, if any, damages Thompson has proved to date, or what damages, if any, Thompson may be entitled to in the future. We therefore remand to the trial court to address the damages issues.
We reverse the order denying Thompson coverage for wetlands violations on the property. We remand for further proceedings consistent with this opinion. We do not retain jurisdiction.