May 6, 2008
MEDIA SCIENCES INTERNATIONAL, INC., FORMERLY KNOWN AS CADAPULT GRAPHIC SYSTEMS, INC., AND MEDIA SCIENCES, INC., PLAINTIFFS-APPELLANTS,
BECKERMAN & COMPANY, DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT,
ROYAL & SUNALLIANCE, THIRD-PARTY DEFENDANT.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-3728-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 15, 2008
Before Judges Coburn, Fuentes and Chambers.
The question to be resolved on this appeal is whether the trial court erred in dismissing plaintiffs' action pursuant to the entire controversy doctrine.
The business of plaintiff Media Sciences, Inc. ("Media") included selling solid ink sticks used for color printing by computer printers. After discovering that many of the solid ink sticks were defective, it reimbursed its customers for the losses they incurred as a result of the defects. Those losses exceeded $4 million.
Media was a subsidiary of plaintiff Media Sciences International, Inc., formerly known as Cadapult Graphic Systems, Inc. ("Cadapult"). Cadapult and Media requested coverage for the losses incurred from Royal Insurance Company of America, the third-party defendant in this action, improperly pleaded as Royal & SunAlliance ("Royal"). Royal denied coverage and responded by filing a declaratory judgment action for rescission of the insurance policy in a New Jersey federal court.
Beckerman & Company ("Beckerman"), plaintiffs' insurance broker, had arranged for the insurance provided by Royal. Although plaintiffs knew that they had a potential malpractice action against Beckerman for its conduct in obtaining the Royal insurance policy, plaintiffs chose not to implead Beckerman as a third-party defendant in the federal action.
Plaintiffs settled the federal action by agreeing to accept $500,000 from Royal, and thereafter filed the insurance malpractice action against Beckerman, which is the subject of this appeal. On Beckerman's motion for summary judgment, the trial court dismissed the complaint, ruling that it was barred by the entire controversy doctrine. Plaintiffs appeal, and we reverse because Beckerman did not prove that the failure to join it in the federal action caused it prejudice.
Cadapult was founded in 1987 and sold office copiers, computer graphic equipment, and related supplies. In 1999, it hired Beckerman as its insurance broker. Beckerman purchased for Cadapult directors and officers ("D & O") insurance, employment practices liability insurance ("EPLI"), and commercial insurance from Royal in mid-1999.
In December 1999, Cadapult formed Media as a wholly owned subsidiary for the purpose of acquiring Ultra Hue, Inc., a supplier of color printer supplies. Media was in the business of manufacturing printer supplies, including ink sticks, that were incorporated into a component of color printers known as printheads, that were in turn sold to third parties.
At some point in late 1999 or early 2000, Cadapult informed Beckerman of its formation of Media and the nature of Media's business. After Cadapult formed Media, it decided to purchase products liability insurance. In April and May 2000, Beckerman submitted applications for general commercial insurance and for umbrella coverage on Cadapult's behalf to Royal for July 2000 to July 2001. The question on the applications regarding whether Cadapult had any subsidiaries was marked "no." Louis Beckerman, the broker's principal, admitted that checking off the "no" box was a mistake. The purpose of the subsidiary question was for Royal to be able to assess whether the subsidiary should be underwritten.
In May 2001, Beckerman submitted an application to Royal to renew the commercial and umbrella coverage of the previous year. Once again, Beckerman answered "no" to the question of whether Cadapult had any subsidiaries.
The amount of liability coverage purchased from Royal for both July 2000 to July 2001, and July 2001 to July 2002, was $1 million/$2 million. The commercial umbrella policies each had a $3 million limit. The umbrella policies' definition of who was an insured included "[a]ny organization over which [Cadapult] maintain[s] ownership interest of more than 50%." Thus, under Royal's "big shield" umbrella policy, there was automatic coverage for any business more than fifty percent owned by the insured. The applications were neither signed nor reviewed by plaintiffs prior to submission. Specifically, Royal did not request that Cadapult sign the applications. While Royal's D & O and EPLI policy applications required a signature, its applications for commercial general liability and umbrella coverage did not.
Media also had general liability coverage in the maximum amount of $1 million from the Kemper Group of Insurance Companies ("Kemper"), which it had purchased through another agent. Royal did not become aware of Media's Kemper coverage until 2003.
In April 2001, Media's customers began experiencing problems with the printheads, resulting from the ink sticks' causing malfunctions. Specifically, the complaints involved claims that the ink sticks were clogging or leaking, thereby damaging the printheads of the printers. A laboratory report indicated that the presence of stearic acid in the ink sticks may have caused the failure. Media continued to receive complaints for several months, and began reimbursing its customers based on these complaints beginning in the spring of 2001. As a result of these complaints, Media stopped shipments of the defective ink sticks and issued a recall of its ink sticks in September 2001 and January 2002. In total, Media paid out approximately $4,220,000 in claims. The payments were made without notice to or the consent of Royal.
Media placed its general liability insurer, Kemper, on notice in October 2001, and was reimbursed by Kemper in the amount of $1 million in February 2002. Kemper examined and photographed the damaged print heads, but plaintiffs did not retain the ink sticks.
In March 2003, after an outside review of their insurance policies was conducted, plaintiffs advised Beckerman of the payments Media had made. Beckerman, in turn, provided notice to Royal of a claim arising under the two umbrella policies. On January 19, 2004, Royal sent a letter to plaintiffs denying coverage under the umbrella policies because Cadapult had misrepresented that it had no subsidiary when it applied for coverage. In addition, late notice and voluntary payment of claims were also cited as grounds for the denial.
On January 20, 2004, Royal brought a declaratory judgment action in New Jersey federal district court seeking rescission of the policies or, in the alternative, a declaration that plaintiffs were not entitled to coverage. In March 2004, plaintiffs notified Beckerman of the action filed by Royal and requested that Beckerman supply copies of its entire file relating to the policies in question. The letter noted that Royal was alleging that "in its initial and renewal applications for insurance submitted to Royal, Cadapult misrepresented facts that were material to the risk Royal was to assume, including facts about Cadapult's subsidiaries and the nature and type of business to be insured." On March 25, 2004, plaintiffs filed an answer which included affirmative defenses and two counterclaims.
On April 7, 2004, plaintiffs received several documents from Beckerman including the application for commercial coverage for the July 2001 to July 2002 time period, in which Beckerman checked the "no" box when asked whether Cadapult had any subsidiaries.
On June 9, 2004, the federal magistrate ordered that all proceedings be stayed until at least August 25, 2004, pending mediation, with the exception of certain interrogatories.
Plaintiffs served a subpoena on Beckerman on June 16, 2004, because of what plaintiffs claimed was Beckerman's refusal to provide copies of its files. The requested documents included the primary and umbrella policies for the two years in question. Beckerman produced the files in question on June 28, 2004.
Mediation, based on plaintiffs' and Royal's separate submissions, took place in early September 2004. A settlement was reached on September 10, 2004, whereby Royal agreed to pay plaintiffs $500,000. A stipulation of dismissal with prejudice was submitted to the federal court on September 22, 2004, and the order was entered by the federal court on September 28, 2004.
On September 24, 2004, plaintiffs sent Beckerman a letter seeking indemnification in the amount of $2.5 million. This was the amount Media claimed it was unable to recover due to the errors committed by Beckerman in the preparation and submission of the policy applications. The letter stated that "it is clear that Beckerman is at fault for the error." Plaintiffs then filed this malpractice action against Beckerman.
According to Michael Levin, Cadapult's founder, Cadapult always believed that Media was covered by the Royal policy. Julian Forrest, a broker with Beckerman, stated that he did not recall learning that Cadapult had formed Media in December 1999. However, by April 2000, Forrest understood that Cadapult and Media had common ownership, but did not "realize" that Media was a subsidiary.
According to Joseph Racioppi, an underwriter for Royal, if Royal was not the underlying carrier, it generally would not write an umbrella policy for the insured. Despite the "big shield" coverage, Racioppi maintained that Cadapult was still obligated to inform Royal of its subsidiaries. Racioppi claimed that had Royal known Media was a subsidiary of Cadapult, it would not have issued the renewal policy.
Robert Norton, Royal's claims supervisor, stated that plaintiffs' delay in filing the claim was a "red flag." He claimed that Royal was prejudiced by the late notice because it lost the ability to inspect the ink sticks. Plaintiffs claimed that Media did not file the claim earlier because it was not aware of the coverage available to it until Cadapult's umbrella policy came up for annual review.
Beckerman submitted an expert report concluding that it did not breach any duty to plaintiffs and that Royal's policies did provide coverage to Media.
The entire controversy doctrine does not preclude a claim against a party not joined in the initial action unless the failure to join the party is inexcusable and causes clear prejudice. K-Land Corp. No. 28 v. Landis Sewerage Auth., 173 N.J. 59, 69-70 (2002). The party invoking the doctrine has the burden of establishing both inexcusable conduct and substantial prejudice. Hobart Bros. Co. v. Nat'l Union Fire Ins. Co., 354 N.J. Super. 229, 242 (App. Div.), certif. denied, 175 N.J. 170 (2002).
In this case, the trial judge found that plaintiffs' failure to join Beckerman in the federal action was inexcusable and that substantial prejudice had resulted. Although we agree that Beckerman should have been joined in the federal action for the reasons expressed by the trial judge, we disagree with his finding of prejudice.
The question we must resolve is whether the dismissal was an abuse of discretion. Crispin v. Volkswagenwerk, A.G., 96 N.J. 336, 346 (1984); In re Estate of Gabrellian, 372 N.J. Super. 432, 446 (App. Div. 2004), certif. denied, 182 N.J. 430 (2005).
The trial court made the following observations respecting it conclusion of substantial prejudice:
Th[e] . . . substantial prejudice is that witnesses are lost, memories fade. Beckerman lost the ability to conduct meaningful discovery. In fact, Beckerman has been precluded from obtaining relevant discovery of the settlement and the reasons in the federal action for the settlement because of the confidentiality provisions. And even the mediation that took place in September of 2004 was confidential.
In addition, . . . Beckerman sustained substantial prejudice because they lost the ability to participate in the federal action and litigate its claims, and Beckerman could have brought a cross claim in the federal action, but now cannot do so and thus is unduly prejudiced.
In addition, substantial prejudice inures to Beckerman and Company by virtue of the fact that the ink stick cartridges are not [sic] longer available. And Beckerman's ability to defend with regard to the nature of the failure of the ink stick cartridges is nonexistent.
With respect to the finding of prejudice resulting from failures of memory on the part of some witnesses, we note that the trial court did not provide any factual analysis to support this finding.
Beckerman's brief attempts to support the finding by noting some memory lapses by employees or former employees of Royal who were involved in processing the insurance applications, citing portions of the testimony of Racioppi, who was an underwriter; Norton, a claims supervisor; Lani Duffy, Royal's senior package underwriter; and Sean Rancourt, Royal's underwriter for the 2001 umbrella policy.
Although these witnesses were unable to recall some evidence about their knowledge, or lack thereof, of Media being a subsidiary of Cadapult or the decision on which Royal denied coverage, there was no evidence that their memories would have been clearer had they been deposed earlier during the federal action. Moreover, Beckerman fails to show how the memory lapses caused it substantial prejudice. That is not surprising since Duffy testified that she never knew that Media was a subsidiary of Cadapult before she left Royal in 2001; Racioppi testified that had Royal known Media was Cadapult's subsidiary, it would not have issued the policy; Norton testified that the failure to inform Royal about Media deprived Royal of the ability to inspect the ink sticks; and although Rancourt could not recall the proposal for the 2001 umbrella policy, that is quite irrelevant since the actual proposal speaks for itself. Also, Beckerman's assertion that it was unable to determine the "intent" behind the coverage denial as a result of memory lapses is misplaced since the letter denying coverage states the reasons for the denial.
The trial court next found, and Beckerman argues, that it was prejudiced by its loss of the opportunity to discovery regarding why Royal settled. But neither the trial court nor Beckerman explain why Beckerman was entitled to know the reasons that impelled Royal to settle or why knowing those reasons would help its defense against plaintiffs' action.
The trial court next found that Beckerman was prejudiced because it could have brought a cross-claim in the federal action but can no longer pursue that course. But Beckerman has asserted as a defense in this action that Royal wrongly denied coverage, and the settlement between plaintiffs and Royal does not bar that defense. Neither the trial court nor Beckerman have cited any authority indicating that this defense cannot be pursued in this action, whether Royal is present or not, and we are not aware of any ruling to that effect.
Finally, the trial court found, and Beckerman argues, that prejudice resulted from the destruction of the ink sticks. But the ink sticks were destroyed by Kemper before Royal filed its declaratory judgment action in federal court. Thus, plaintiffs' failure to join Beckerman in the federal action caused no prejudice on this score.
Delay alone does not create substantial prejudice; rather, it is the lack of access to relevant information resulting from delay that is, for the most part, determinative. Mitchell v. Charles P. Procini, D.D.S., P.A., 331 N.J. Super. 445, 454 (App. Div. 2000). Here, Beckerman has incurred no substantial prejudice since it has access to the relevant witnesses and information and is fully capable of defending itself. Consequently, we are obliged to reverse the dismissal and remand the case for trial.
Reversed and remanded.
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