On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-4751-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges S. L. Reisner, Gilroy and Baxter.
This is an insurance broker malpractice action. Defendant Ralph Parnes Associates, Inc., a licensed insurance broker, appeals from the April 18, 2006, order, which awarded plaintiff Arc Family, LLC: 1) $1,610,000 for defendant's negligence in securing adequate replacement cost property insurance, together with prejudgment interest in the amount of $178,953.22; and 2) $37,641.88 for defendant's negligence in setting the policy limits for business interruption insurance, together with prejudgment interest in the amount of $4,155.09. Defendant also appeals from the order of May 30, 2006, which denied its motion for judgment notwithstanding the verdict (JNOV); or in the alternative, for a new trial on damages or for a remittitur. Plaintiff cross-appeals, and we affirm in all respects.
Plaintiff, a limited liability company, owned by Alex and Susan Cocoziello, purchased the Radburn Plaza Building, Fairlawn (the Building), in 1999. The Building was partially destroyed by fire in 2002. On June 2, 2003, plaintiff filed an insurance broker malpractice action, alleging that defendant was negligent in securing adequate replacement cost property insurance and business interruption insurance on the Building.
The matter was tried to a jury. During the trial, defendant stipulated to its negligence in determining the amount of business interruption insurance, but did not stipulate as to the amount of damages; instead defendant agreed to submit the issue of damages to the court. At the conclusion of the trial, the jury awarded plaintiff $5,000,000 in damages, determining that defendant was negligent in procuring sufficient replacement cost insurance. The jury also found that plaintiff was comparatively negligent, assessing 70% fault to defendant and 30% to plaintiff.
On April 11, 2006, the court conducted oral argument regarding molding the verdict. On April 18, 2006, Judge Merkelbach entered an order, supported by a written opinion, determining that plaintiff was entitled to $1,610,000 in replacement cost damages ($5,000,000 (verdict) - $2,700,000 (insurance proceeds previously received) - $690,000 (30% of $2,300,000)). The trial judge also found plaintiff was entitled to $37,641.88 in business interruption damages. On May 30, 2006, defendant's motion for JNOV, or in the alternative, for a new trial on damages or for a remittitur, was denied.
In 1999, plaintiff purchased the Building for $3,800,000. The 32,000 square-foot Building was built in 1929 as part of the Radburn Association (the Association), a planned community. The Association is empowered to, among other things, compel property owners to perform restorations or repairs in conformance with certain aesthetic standards of the planned community.
The Building consisted of a north and south wing, separated in the center by an illuminated clock tower. The Building's exterior was comprised primarily of brick and stone, with decorative arches and concrete markings at the corners of the Building. The three-story Building had a deeply pitched Vermont slate roof, and the clock tower had both a slate and copper roof. In 1999, the first level of the Building was occupied by various retail establishments, including a bank, restaurant, barbershop, and a pharmacy. The second and third floors were occupied by commercial offices, and the basement was unoccupied.
In early 1999, Alex Cocoziello contacted Cary Smollen, a licensed insurance broker employed by defendant, to obtain insurance for the Building. Alex told Smollen that he wanted to secure a policy covering the full replacement cost of the Building and any potential loss of rental income. During the conversation Smollen wrote down certain information, including, the address of the Building, the purchase price, and the square footage of the commercial space. Alex's real estate broker provided Smollen with information indicating that the Building's 1999 rental income was $614,504. Alex told Smollen to contact Crew Shielke, the Cocoziellos' real estate attorney, if he needed any additional information to procure the insurance policies.
Smollen conducted a site inspection of the Building shortly after his conversation with Alex. Smollen took notes during the inspection, listing the names of the various commercial tenants, the number of offices, and the condition of the Building. Smollen testified that, generally, in procuring replacement cost insurance on a commercial building, he considers the square footage, type of construction, the age, condition, and location of the building, and "any particulars of the building that may be different from your average run[-]of[-]the[-]mill building." He then determines a square footage cost, with input from the insurance carrier. Finally, Smollen "ballpark[s]" the replacement cost of the building based on his experience with other similar properties.
Smollen procured a one-year, renewable, comprehensive general liability insurance policy, which included fire insurance, from Greater New York Mutual Insurance Company, effective May 27, 1999. The policy, which was not submitted into evidence, provided $2,600,000 in replacement cost property coverage, with a $100,000 code upgrade, and $613,504 in lost rental or business interruption coverage.
With regard to the business interruption coverage, Smollen informed Alex that it was company policy to adjust the lost rental coverage every five years. Nonetheless, although the insurance policy was annually renewed from 1999 to 2001, the amounts of coverages remained the same, even though the yearly rental income had increased from $614,504 to $791,496, and improvements had been made to the Building.
At trial, Smollen conceded that Alex had told him to purchase as much insurance as possible for the Building. However, the parties disputed how the replacement cost insurance value had been determined. Alex denied expressing any opinion as to the replacement cost for the Building, asserting he had no experience in that area, and relied on Smollen's expertise. Smollen denied that Alex had asked him to formulate the replacement cost for the Building, testifying that he was unaware who had formulated the replacement cost; although he believed that $2,600,000, the amount of replacement cost insurance procured, was the actual replacement value of the Building. Nonetheless, during cross-examination, Smollen was confronted with his pretrial deposition testimony in which he testified that:
Question: How did you arrive at $2.6 million as a replacement value of the [B]uilding?
Answer: Judging by the size and condition of the building, less the value for property, because if the building [was] totally destroyed the land itself would have some value, we came up . . . with $2.6 million.
Answer: And Dr. Cocoziello.
Question: When you say and Dr. Cocoziello, do you recall any discussions with him, with him saying insure for 2.6 or 2.6 sounds right?
Answer: I recall him saying 2.6 sounds like an accurate number.
When confronted with his deposition testimony, Smollen asserted that he had been "caught off-guard" at the deposition and, for the first time, implied that he may have been provided the replacement cost value by Shielke, the Cocoziellos' attorney, who had died prior to trial. In response, Alex testified that Shielke never expressed an expertise in determining commercial real estate value and had not provided him with a replacement value for the Building.
On October 1, 2002, a fire started in the basement of the south wing of the Building. The firefighters attempted to extinguish the blaze by cutting a large vent hole in the roof and using aerial equipment to direct streams of water into the south wing of the Building, while simultaneously spraying water on the clock tower to prevent the fire from spreading. Eventually the fire spread to the roof of the south wing, causing it to collapse. The south wing of the Building was completely destroyed by the fire. However, the amount of damage to the north wing and clock tower was subject to dispute.
During the night of the fire, Shielke contacted the Cocoziellos, who were on vacation. Alex directed Shielke to do "whatever was necessary in order to get things going," including hiring an adjuster to address the insurance claim and a structural engineer to begin rebuilding. Alex then contacted Joel Ives, an architect whose office had been located in the Building, and asked him to "start drawing up plans right away."
Shortly after the fire, Thomas Metzler, the Director of Emergency Services for the Borough of Fair Lawn, and Thomas Van Hook, the construction and zoning officer for the Borough, conducted independent inspections of the Building and concluded that the clock tower and north wing, although intact, had sustained extensive smoke and water damage. Both officials found that the majority of the damage had occurred on the first and second floors, although the third floor of the north wing, as well as the clock tower, had also sustained smoke and water damage.
Specifically, Metzler found that a significant amount of water had flowed through those portions of the Building as a result of the firefighting efforts and that the Building had sustained smoke damage throughout. Van Hook also found that: many of the ceilings in the commercial spaces located in the remaining sections of the Building had collapsed; some floors had caved in; some floors and walls had buckled; light fixtures and air-conditioning ducts were hanging from the ceiling; water had pooled on the floors; most of the walls were streaked with smoke, soot, and water; and several feet of water had accumulated in the basement. Additionally, Van Hook found that the slate roofs on the north wing and clock tower had sustained significant damage in that many tiles "were loose or appeared to have been moved." Van Hook noted that some of the tiles had lifted up or cracked as a result of the high pressure of the water that had been sprayed onto the roof.
Ultimately, the Borough directed plaintiff to replace the elevator, boiler, and electrical system, all having sustained significant damage; and to remove and replace all of the wet ceilings, walls, and floors, and the storefronts in the clock tower and north wing. In contrast, as discussed infra, defendant's experts found that the north wing and clock tower had sustained only minimal damage.
Immediately after the fire, Alex hired Michael Lagrotteria, a contractor, to oversee the project. Demolition of the south wing began within days. Shortly thereafter, Alex hired contractors to remove the walls, wiring, ceiling, and floors in the north wing and the clock tower, to enable the Borough's engineer to ascertain whether the Building was structurally sound. Alex maintained that the remaining sections of the Building were extensively damaged, claiming that smoke had been absorbed into the plaster walls, and the acrid smell could only be remedied by removing the walls. Nonetheless, Alex tried to salvage as much of the north wing as possible because he wanted to get his tenants back into the Building quickly.
Ives completed the architectural plans for the Building in May or June 2003. The plans initially called for installation of a synthetic roof, but the Association did not approve that part of the plan, requiring plaintiff to replace the roof with slate tiles. The Association did, however, permit plaintiff to use less expensive aluminum windows and store fronts, rather than the original wood windows and store fronts. The north wing and the clock tower were completed in April 2004, and the south wing was completed in March 2005. According to Alex, as of January 16, 2005, the cost of the repairs totaled $6,299,203.06.
E. THE INSURANCE PROCEEDS
Meanwhile, Greater New York engaged independent adjusters for the purpose of assessing the covered loss under the policy. Greater New York retained Viking Adjustment, who in turn, hired Tom Rubino, an appraiser employed by C.J. Rubino and Sons. Alex engaged a public adjuster, Gillespie and Gibson, to represent plaintiff's interest, who in turn, hired Carl Rodriguez,*fn1 an appraiser employed by C.M.R. Construction. Rubino and Rodriguez coordinated their work at the site and agreed for the most part on the extent of the physical damage to the Building; however, each independently determined the monetary loss. Rubino reported to Viking that the estimated losses incurred as a result of the fire totaled $2,908,464.12.*fn2 In April or May 2003, based on Viking's report, Greater New York paid plaintiff the full policy limits of $2,600,000 for replacement costs, $100,000 for code upgrades, and $613,504 for business interruption or lost rental income.
Plaintiff's liability expert, John Klagholz, testified that plaintiff had hired defendant to procure a policy on the Building that would provide coverage on a replacement cost basis. Generally, an insurance producer has no duty to establish the replacement value of property. Instead, the replacement cost of a commercial building is usually determined by an experienced appraiser, accountant, or contractor. However, once an insurance producer undertakes to determine replacement cost, as in this case, the producer then owes the insured a duty to exercise reasonable skill, care, and diligence in not only making an accurate determination, but also in procuring adequate coverage. Klagholz opined that defendant breached that duty because Smollen had applied a flawed methodology in calculating the replacement cost.
Klagholz found that Smollen had calculated the $2,600,000 replacement value by simply "considering the square footage of the [B]uilding and the condition of the [B]uilding minus some value that he assigned for the value of land." It appeared to Klagholz that Smollen had arrived at the replacement cost by simply subtracting an estimated value of the land from the purchase price ($3,800,000 (purchase price) - $1,200,000 (estimated value of land) = $2,600,000 (replacement cost)). Klagholz opined that this methodology was "not consistent with the fiduciary relationship and the obligation of the producer to be knowingly accurate in these representations. You can't just take a guess at it. You have to be correct." Klagholz stated that Smollen should have considered the structural components of the Building, such as the slate roof and brick exterior, in calculating replacement costs.
According to Klagholz, if the insurance producer did not procure sufficient coverage, it would be liable for the actual replacement cost of the Building as of the time the coverage was placed. In responding to a hypothetical question, Klagholz testified:
Q: I want you to assume that the actual replacement cost of the Radburn Plaza as of the time that [defendant] . . . placed the April, 2002 policy of insurance was seven million dollars. Do you have an opinion as to what amount of insurance should have been placed by [defendant] in connection with that April, 2002 policy on the [B]uilding?
A: Seven million dollars.
On redirect, Klagholz further testified that:
Q: Now, you were asked . . . what if the replacement cost for the [B]uilding was 3.4 million dollars or 3.2 million dollars . . . . Is there any reason why[,] had the value of the [B]uilding been 3.4 million dollars[,] coverage wouldn't have been placed in that amount?
A: There's . . . no reason . . . . [In] my opinion, it could not have been placed.
Conversely, Franklin Seigel, defendant's liability expert, opined that defendant had not breached the applicable standard of care because a broker has no obligation to calculate replacement cost for an insured, and he found no indication in the record that defendant had undertaken such a duty. However, on the assumption that he was being asked a hypothetical question, Seigel admitted that "to the extent that a broker undertakes the duty for its client who's relying upon that broker to determine the replacement value of a building . . . and that broker ballparks or guesstimates a number and plugs it in as the replacement cost[,] that broker breached a duty if he's wrong . . . ."
Seigel also concluded that plaintiff, through Alex, had breached its duty to provide Smollen with all information necessary to properly insure the Building. Seigel determined that Alex had failed to inform defendant of the existence of the Association, whose regulatory power should have been a material consideration in the determination of replacement costs and in the formation of the policy. "So if an insured has superior knowledge and knows something about a particular structure or a particular item, [the insured has] an obligation to communicate that to us as brokers, in order to obtain the proper value."
Ives, plaintiff's architect, was hired to design plans to rebuild the Building as closely as possible to its prior appearance and in the most cost effective manner. Ives explained that his design utilized more cost effective modern materials, for instance, sheet rock instead of plaster as utilized in the original construction.
Ives determined that extensive repair to the north wing and clock tower was necessary because of the amount of water, smoke, and firefighting-related damage to those sections. For example, Ives stated that plaintiff had properly replaced the slate roof because the tiles on the north wing and the clock tower, although still intact, had sustained significant damage when the firefighters directed high pressure water onto them. He observed that many of the tiles were damaged, and thus a contractor would have had to remove and examine each tile to assess whether it could be reused. Moreover, a contractor would not have been able to match the new slate tiles installed on the south wing roof with the older tiles on the remainder of the Building.
George Stekovich, plaintiff's expert in the field of construction estimations, opined that the replacement cost for the Building as of 2002, was $6,800,000. In deriving that figure, Stekovich reviewed the architectural plans prepared by Ives for rebuilding the south wing; calculated the amount of materials needed for construction by doubling the materials required for rebuilding the south wing; and estimated the materials needed to rebuild the clock tower based on perimeter dimensions and interior layouts.
Once Stekovich had determined what materials were required, he inputted that information, along with other data such as the size of the Building and the type of construction, into the "Means Guide" computer program, a program that provides average construction costs for various materials in a particular region. The program estimated the costs of various aspects of the project, for a total replacement cost of $5,987,296.63.
Stekovich added to that amount a 10% overhead profit and a 10% contingency, for a total of $7,173,955.95, and then adjusted that amount downward for inflation, concluding that the replacement cost for the Building in 2002 was approximately $6,800,000.
Regarding the actual cost of the replacement, Don Erwin, plaintiff's expert in the field of restoring buildings, opined that the work performed on the Building was necessary "to bring the Building back to its pre-fire condition," and that the $6,400,000*fn3 spent by plaintiff to restore the Building was reasonable. In support of that conclusion, Erwin reviewed photographs depicting the Building before and after the fire; visited the site and examined the architectural plans; interviewed Alex, the architect, the construction manager, and several of the vendors to determine what repairs were done and why; and also reviewed the deposition testimony of the Building inspector and read the experts' reports. Based on this information, Erwin concluded that the south wing had been completely destroyed by the fire, and that the remainder of the Building had suffered extensive smoke, water, and firefighting-related damage.
Erwin next examined boxes of invoices and cancelled checks, separating the documents into categories of repairs, and then traced those amounts back to specific repairs to ensure that they represented reasonable rebuilding expenses. Erwin explained that he rejected any expenses that appeared questionable, or could not be traced to a specific repair.
Erwin testified in detail as to the scope of the reconstruction work conducted and why the work was necessary. Erwin admitted, however, that he did not separate the expenses incurred in phase one - the repairs to the north wing and clock tower, from phase two - the rebuilding of the south wing.
Erwin indicated that he had received from plaintiff the type of information typically used by architects in investigating the cost to restore a building. However, Erwin acknowledged that he would have liked to have had received a comprehensive survey of the damage to each room, including photographs, but he had been told that such a survey did not exist. Erwin could not recall if he had received ...