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North Plainfield Board of Education v. Zurich American Insurance Co.

May 15, 2008

NORTH PLAINFIELD BOARD OF EDUCATION, PLAINTIFF,
v.
ZURICH AMERICAN INSURANCE COMPANY, ET AL., DEFENDANTS.
ZURICH AMERICAN INSURANCE COMPANY, THIRD-PARTY PLAINTIFF,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Cooper, District Judge

MEMORANDUM OPINION

Plaintiff, North Plainfield Board of Education (the "Board"), commenced this action on August 8, 2005 in New Jersey Superior Court, against Zurich American Insurance Company ("Zurich") alleging (1) that it is entitled to specific performance of a certain insurance contract, (2) breach of contract, and (3) breach of the duty of good faith and fair dealing. (Dkt. entry no. 1-3, Compl.) Zurich removed this action on September 8, 2005. (Dkt. entry no. 1, Not. of Removal.) Thereafter, on December 8, 2005, this Court issued an Order for Temporary Restraints, which directed Zurich to fund the Board's defense in D & D Associates, Inc. v. Board of Education of North Plainfield, No. 03-1026 (MLC) (the "D&D Action") in accordance with the terms of that order. (Dkt. entry no. 18, 12-8-05 Ord.)

Zurich, on March 6, 2006, filed a third-party complaint against National Union Fire Insurance Company of Pittsburgh, PA. ("National Union") seeking "a declaratory judgment and ancillary monetary relief relative to the rights and obligations of the parties pertaining to insurance coverage including a duty to defend" the Board in connection with the D&D Action. (Dkt. entry no. 27, 3d Party Compl., at ¶ 1.) The Board, in turn, amended the complaint on May 15, 2006 to include the following claims against National Union: (1) breach of contract; (2) declaratory judgment; and (3) breach of the duty of good fath and fair dealing. (Dkt. entry no. 42, Amend. to Compl.) Thus, National Union is named as both a defendant and third-party defendant in this action.

The Board moves for summary judgment against National Union seeking certain relief relating to two state court actions pending against the Board. (Dkt. entry no. 48.) Specifically, the Board seeks a judgment declaring that National Union must (1) indemnify it against the non--breach of contract claims asserted in the two state court actions, (2) pay unlimited defense costs with respect to the non-breach of contract claims asserted in the two state court actions, and (3) pay defense costs for the breach of contract claims asserted in the two state court actions up to an aggregate limit of $100,000 for each separate breach of contract claim. (1st Board Br., at 2-3.)*fn1 The Board separately moves for summary judgment against National Union seeking certain relief relating to the D&D Action. (Dkt. entry no. 53.) Specifically, the Board seeks a judgment declaring that National Union (1) must indemnify the Board against, and pay unlimited defense costs with respect to, certain counts contained in the amended complaint in the D&D Action, (2) must pay defense costs for the breach of contract claims asserted against the Board in the D&D Action up to an aggregate limit of $100,000 for each separate breach of contract claim, and (3) acted in bad faith when it insisted that the Board release its rights under the relevant insurance policy before it would pay the Board's defense costs with respect to the D&D Action. (2d Board Br., at 2-3.) Moreover, Zurich moves for summary judgment against the Board pursuant to Federal Rule of Civil Procedure 56. (Dkt. entry no. 55.) The Court held oral argument on these motions on February 21, 2007. (Dkt. entry no. 74.)*fn2 For the reasons stated herein, the Court will (1) deny the Board's first motion for summary judgment against National Union, (2) deny the Board's second motion for summary judgment against National Union, and (3) grant Zurich's motion for summary judgment against the Board.

BACKGROUND

I. The Parties

The Board is a public body with its principal offices in North Plainfield, New Jersey. (Dkt. entry no. 1-3, Compl., at ¶ 4.) National Union is a Pennsylvania corporation licensed to conduct business in New Jersey. (Dkt. entry no. 27, 3d Party Compl., at ¶ 4.) National Union issued three consecutive "School Leaders Errors and Omissions" Policies to the Board covering the periods of July 1, 2002 to July 1, 2003 (policy number 511-96-96), July 1, 2003 to July 1, 2004 (policy number 299-50-31), and July 1, 2004 to July 1, 2005 (policy number 985-78-55) (hereinafter collectively referred to as, the "Policy"). (Dkt. entry no. 53-2, Greenberg Decl., at ¶ 3; id., Ex. 2, Policy; see 1st Board Br., at 1; 1st National Union Stmt. of Mat. Facts, at ¶ 6; 2d National Union Stmt. of Mat. Facts, at ¶ 6.) In general, the Policy requires National Union to pay all sums the Board becomes obligated to pay as damages resulting from any "Claim" asserted against the Board and reported to National Union during the relevant policy period "for any Wrongful Act of the [Board] in performance of duties for the School Entity." (Dkt. entry no. 53-2, Greenberg Decl., Ex. 2, Policy, at Insuring Agreements ¶ 1 ("Errors and Omissions").)

Zurich is an insurance company incorporated under the laws of New York, but licensed to conduct business in New Jersey. (Dkt. entry no. 27, 3d Party Compl., at ¶ 2.) Zurich issued a Commercial Insurance Policy (Top II Package Policy) CPO 214 6634 06 to "Fleet Insurance Services, LLC New Jersey School Board Insurance Program and the Entities Listed on Named Insured Endt." for the policy period of July 1, 2002 to July 1, 2003 ("Zurich Policy"). (Zurich Stmt. of Undisp. Mat. Facts, at ¶ 39.) The Zurich Policy identifies the Board as a Named Insured, and provides general liability coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate. (Id.) The Zurich Policy is governed by ISO form # CG 00 01 10 01, which provides insuring agreement language, exclusions, and definitions pertaining to liability coverage. (Id. at ¶ 40.)

II. General Overview of the D&D Action

The Board, in 2001, requested bids for a $30 million project to renovate and expand five of its schools (the "Project"). (1st Board Br., at 3; 1st National Union Stmt. of Mat. Facts, at ¶ 1; 2d National Union Stmt. of Mat. Facts, at ¶ 1; Zurich Stmt. of Undisp. Mat. Facts, at ¶ 1.)*fn3 D & D Associates, Inc. ("D&D"), the lowest bidder for the general construction work, entered into three separate contracts with the Board in connection with the Project: (1) Contract 1A, which covered the East and West End Schools; (2) Contract 1B, which covered Middle High School and the Stoney Brook School; and (3) Contract 1C, which covered Somerset School. (1st Board Br., at 3; 1st National Union Stmt. of Mat. Facts, at ¶ 1; 2d National Union Stmt. of Mat. Facts, at ¶ 1; Zurich Stmt. of Undisp. Mat. Facts, at ¶ 2.) The contracts between D&D and the Board required D&D to post performance and payment bonds, which D&D obtained from American Motorists Insurance Company (the "Surety"). (1st Board Br., at 3; 1st National Union Stmt. of Mat. Facts, at ¶ 2; 2d National Union Stmt. of Mat. Facts, at ¶ 2; Zurich Stmt. of Undisp. Mat. Facts, at ¶ 2.)

Over the next several years, the relationship between D&D and the Board broke down and became adversarial. (See Zurich Stmt. of Undisp. Mat. Facts, at ¶¶ 4-7.) On March 4, 2003, the Board terminated D&D with respect to Contract 1C, effective immediately. (Id. at ¶ 6; 1st Board Br., at 3.) On March 10, 2003, D&D commenced the D&D Action in this Court, asserting various claims against the Board and others involved with the Project. D & D Associates, Inc., No. 03-1026 (MLC), dkt. entry no. 1. Several months later, on July 23, 2003, the Board terminated D&D with respect to the two remaining Project contracts, Contract 1A and Contract 1B, effective immediately. (Zurich Stmt. of Undisp. Mat. Facts, at ¶ 7; 1st Board Br., at 3.) Thereafter, D&D filed an amended complaint in the D&D Action alleging additional claims against the Board and others, including (1) federal civil rights violations, (2) violations of the New Jersey Trust Fund Law, N.J.S.A. § 2A:44-148, (3) breach of contract, (4) "errors and omissions", (5) tortious interference with prospective economic advantage, (6) defamation, (7) conversion, (8) fraudulent inducement, (9) civil conspiracy, and (10) malicious abuse of process ("Amended Complaint"). D & D Associates, Inc., No. 03-1026 (MLC), dkt. entry no. 58, Am. Compl.

After various defendants filed motions for summary judgment in the D&D Action, this Court issued the 12-21-07 Memorandum Opinion & Order, which, inter alia, granted in part and denied in part the separate motions and entered judgment in favor of the Board and against D&D as to count 1, count 5, count 6, count 7, count 9, count 11, count 15, and count 16 of the Amended Complaint. Id., dkt. entry nos. 264 & 265, 12-21-07 Mem. Op. & Ord. Thus, at this stage in the litigation, only the following of D&D's sixteen claims remain, insofar as asserted against the Board: (1) count 2 (civil rights-liberty interest, destruction of prequalification for public works contracts without due process); (2) count 3 (retaliatory termination for exercise of First Amendment rights); (3) count 4 (First Amendment retaliation for seeking redress in federal court); (4) count 8 (breach of contract); (5) count 10 (tortious interference); (6) count 12 (conversion); (7) count 13 (fraudulent inducement); and (8) count 14 (fraudulent inducement-rescission of performance bonds). Id., dkt. entry no. 264, 12-21-07 Mem. Op., at 82.

III. General Overview of the P.J. Smith Action

P.J. Smith Electrical Contractors, Inc. ("P.J. Smith") was the electrical contractor for the Project. (1st Board Br., at 4; 1st National Union Stmt. of Mat. Facts, at ¶ 5; 2d National Union Stmt. of Mat. Facts, at ¶ 5.) P.J. Smith commenced an action against the Board in New Jersey Superior Court on January 5, 2005, P.J. Smith Electrical Contractors, Inc. v. North Plainfield Board of Education, No. SOM-L-23-05 (N.J. Super. Ct. Jan. 5, 2005) (the "P.J. Smith Action"). (Dkt. entry no. 48-2, Greenberg Decl., Ex. B, Compl. in P.J. Smith Action.) There, P.J. Smith alleges that, inter alia, the Board (1) breached its contract with P.J. Smith by interfering with its work and "consistently placing [it] in the position of having to work around, work inefficiently or work under congested conditions", (2) breached the implied covenant of good faith and fair dealing, and (3) was unjustly enriched to the detriment of P.J. Smith, and thus, P.J. Smith is entitled to quantum meruit compensation. (Id.; see 1st Board Br., at 4; 1st National Union Stmt. of Mat. Facts, at ¶ 5; 2d National Union Stmt. of Mat. Facts, at ¶ 5.)

IV. General Overview of the Surety Action

The Surety and the Board entered into a Takeover Agreement on May 15, 2003 with respect to Contract 1C. (1st Board Br., at 4; see 1st National Union Stmt. of Mat. Facts, at ¶ 2; 2d National Union Stmt. of Mat. Facts, at ¶ 2.) The Surety and the Board entered into two additional Takeover Agreements in connection with Contract 1A and Contract 1B on June 2, 2004. (1st Board Br., at 4; see 1st National Union Stmt. of Mat. Facts, at ¶ 2; 2d National Union Stmt. of Mat. Facts, at ¶ 2.) Pursuant to each Takeover Agreement, the Surety agreed that, inter alia, it would take over the work to be performed under the Project contracts and arrange for the substantial completion of construction. (See 1st Board Br., at 4.)

The Surety commenced an action against the Board in New Jersey Superior Court on April 12, 2005, American Motorists Insurance Co. v. North Plainfield Board of Education, No. L-543-05 (N.J. Super. Ct. April 12, 2005) (the "Surety Action"). (Dkt. entry no. 48-2, Greenberg Decl., Ex. C, Compl. in Surety Action.) There, the Surety alleges that, inter alia, the Board breached (1) the Takeover Agreements by failing and refusing to pay the Surety for approved requisitions earned by the Surety for completing the remaining work on the Project contracts, (2) the Takeover Agreements by failing to grant time extensions to the Surety and compensate it for additional costs incurred in completing the Project contracts, and (3) the covenants of good faith and fair dealing implied in the Takeover Agreements. (Id.; 1st Board Br., at 5 (explaining that the Surety alleges that the Board breached the three Takeover Agreements because (1) "since December 2003, it has submitted requisitions in connection with the work performed on Contract 1C totaling $1,544,481.74, all of which has not been paid", (2) it is owed $253,044.33 for work performed under Contract 1A and the corresponding Takeover Agreement, and (3) it is owed $409,852.08 for work performed under Contract 1B and the corresponding Takeover Agreement); see 1st National Union Stmt. of Mat. Facts, at ¶ 4; 2d National Union Stmt. of Mat. Facts, at ¶ 4.)

V. Events Preceding this Action

A. Events Related to the D&D Action

The Board, through its insurance broker, notified National Union about the D&D Action on March 19, 2003. (2d Board Br., at 6.)*fn4 The Board also sent a letter to Zurich on March 19, 2003 informing it about the D&D Action. (See Zurich Stmt. of Undisp. Mat. Facts, at ¶ 42.) National Union acknowledged receipt of the complaint in the D&D Action in a letter dated April 2, 2003, and agreed to defend the Board under a reservation of rights in a subsequent letter dated April 16, 2003. (2d Board Br., at 6.) Similarly, in a letter dated May 14, 2003, Zurich advised the Board that it would defend it in the D&D action "subject to a partial disclaimer of coverage". (Zurich Stmt. of Undisp. Mat. Facts, at ¶ 42.)

When D&D filed the Amended Complaint in August 2003, the Board promptly forwarded a copy to both National Union and Zurich. (2d Board Br., at 6.) Additionally, the Board notified National Union that Zurich had agreed to pay a portion of its defense costs in connection with the D&D Action, and stated that National Union should pay the difference between the total amount of legal fees Zurich pays and the amount of fees the Board actually incurs. (Id.) National Union did not respond to this letter. (See id.) Thus, in a letter dated October 19, 2004, the Board again requested that National Union defend and indemnify it with respect to D&D's claims asserted in the Amended Complaint. (Id. at 7.) National Union responded in a letter dated December 16, 2004, in which it disclaimed all indemnity coverage under the Policy, but agreed to pay the Board's defense costs incurred in connection with D&D's breach of contract claims up to the aggregate limit of $100,000 "in exchange for the appropriate release". (Id.) Further, National Union asserted that certain Policy exclusions applied with respect to the D&D Action. (Id. at 8.) The parties exchanged additional correspondence detailing their respective coverage positions regarding the D&D Action, but were unable to reach any agreement. (See id.)

Zurich also acknowledged receipt of the Amended Complaint in a letter to the Board dated March 2, 2005. (Zurich Stmt. of Undisp. Mat. Facts, at ¶ 43.) Zurich noted that it had a duty to defend the Board with respect to D&D's defamation claim (count 11), subject to a reservation of rights, but denied that it had any duty to defend the Board with respect to D&D's other claims. (Id.) Zurich also noted that certain Zurich Policy exclusions may apply to preclude coverage with respect to any damages incurred in connection with D&D's defamation claim. (Id. at ¶ 45.) The Board disagrees with Zurich's coverage position.

B. Events Related to the P.J. Smith Action & Surety Action

The Board, after being served with the complaints in the P.J. Smith Action and the Surety Action, "tendered defense and indemnity" of the claims asserted in those actions to National Union. (1st Board Br., at 5.) In an Acknowledgment Letter dated January 20, 2005, AIG Technical Services ("AIG"), on behalf of National Union, advised the Board that a claim number had been assigned to the P.J. Smith Action and promised a coverage position. (1st National Union Stmt. of Mat. Facts, at ¶ 12; 2d National Union Stmt. of Mat. Facts, at ¶ 12.) Timothy M. Stys ("Stys"), the Board's secretary and school business administrator, wrote to Lisa Porcaro ("Porcaro"), the AIG claims analyst assigned to the P.J. Smith Action. (1st National Union Stmt. of Mat. Facts, at ¶ 14; 2d National Union Stmt. of Mat. Facts, at ¶ 14.) Stys explained to Porcaro that the P.J. Smith Action arose out of the Project, and requested that Robert C. Epstein be appointed as the Board's defense counsel in that action due to his law firm's familiarity with the Project and its related legal proceedings. (1st National Union Stmt. of Mat. Facts, at ¶ 14; 2d National Union Stmt. of Mat. Facts, at ¶ 14.)

Porcaro responded to Stys in a letter dated March 7, 2005, in which she (1) further acknowledged receiving the complaint in the P.J. Smith Action, (2) advised the Board that the Policy would serve as excess over any other insurance, and (3) noted that National Union was not amenable to "assignment of non-panel counsel". (1st National Union Stmt. of Mat. Facts, at ¶ 15; 2d National Union Stmt. of Mat. Facts, at ¶ 15.) Further, she referred the Board to a Policy endorsement, which excludes breach of contract claims but provides an aggregate limit of $100,000 for defense of breach of contract claims. (1st National Union Stmt. of Mat. Facts, at ¶ 15; 2d National Union Stmt. of Mat. Facts, at ¶ 15; 1st Board Br., at 5.) National Union later agreed that Robert C. Epstein and his law firm, Greenberg Traurig, could defend the Board in connection with the P.J. Smith Action and the Surety Action. (See 1st National Union Stmt. of Mat. Facts, at ¶ 16; 2d National Union Stmt. of Mat. Facts, at ¶ 16; 1st Board Br., at 5.)

Porcaro, on behalf of National Union, sent a letter to the Board acknowledging receipt of the complaint in the Surety Action on May 16, 2005. (1st National Union Stmt. of Mat. Facts, at ¶ 16; 2d National Union Stmt. of Mat. Facts, at ¶ 16.) In this letter, Porcaro again referenced the Policy endorsement excluding claims arising out of breach of contract from coverage. (1st National Union Stmt. of Mat. Facts, at ¶ 16; 2d National Union Stmt. of Mat. Facts, at ¶ 16.) Additionally, she advised the Board that because the P.J. Smith Action and Surety Action arose "out of the same Wrongful Act" both would be under one deductible and subject to the $100,000 aggregate limit for defense of breach of contract claims. (1st National Union Stmt. of Mat. ...


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