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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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 ...