June 19, 2008
LAKELAND BANK, A BANKING CORPORATION OF THE STATE OF NEW JERSEY, PLAINTIFF,
WHOLESALE OUTLET, INC., DEFENDANT/THIRD PARTY PLAINTIFF-APPELLANT,
O'NEILL & ASSOCIATES, INC., THIRD PARTY DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Camden County, Docket No. L-10065-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 27, 2008
Before Judges Lintner, Sabatino and Alvarez.
This appeal concerns a professional liability claim against an insurance broker. Appellant, Wholesale Outlet, Inc. ("Wholesale Outlet"), is a used car dealership that conducts business in Waterford and in several other New Jersey locations. From at least 1997 through 2003, Wholesale Outlet procured insurance coverage for its dealership through the efforts of an insurance broker, respondent O'Neill & Associates, Inc. ("O'Neill").
Each year when the coverages with the dealership's insurance carriers were renewed, O'Neill invoiced Wholesale Outlet for most of the associated premiums that the carriers assessed. O'Neill also charged Wholesale Outlet at times*fn1 what is variously described in the record as a "service fee" or a "risk management fee." According to a written agreement between those two parties dated March 16, 1999, O'Neill promised Wholesale Outlet, in exchange for the service fee, that it would:
1) Obtain competitive insurance pricing quotes on [Wholesale Outlet's] behalf through financially stable insurance companies.
2) Prepare specifications for the renewal of [Wholesale Outlet's] insurance program.
3) Prepare underwriting specifications for insurance coverages.
4) Assist [Wholesale Outlet] with it's [sic] risk management responsibilities relating to their [sic] Property and Casualty Insurance Program.
a. Identify property/casualty risks of loss;
b. Assist in claim handling; suggest techniques for controlling property/casualty risks;
c. Provide inspection service of all domestic locations and operations, and suggest techniques for controlling property/casualty risks.
This service fee charged by O'Neill was in addition to policy commissions that it received.
In 2001-02, O'Neill arranged for Wholesale Outlet's business to be insured by Lloyd's of London, for a premium of $12,000. Among other things, the Lloyd's policy*fn2 contained an exclusion for losses arising out of certain fraudulent acts.
According to Wholesale Outlet's pleadings, that exclusion read, in relevant part:
This insurance does not cover . . . a loss resulting from or occurring after the Assured's [Wholesale Outlet's] voluntary parting with title to or possession of any unit if induced to do so by a fraudulent scheme, tricks, device or false pretense or from embezzlement, conversion, secretion, theft, larceny, robbery or pilferage committed by any person entrusted by the Assured [Wholesale Outlet] with custody or possession of the unit.
Wholesale Outlet contends that during the 2001-02 policy period, it sold nine vehicles to customers who used false identities in connection with those purchases. The identities were allegedly "stolen" by the dishonest customers from other persons. In those transactions, the dishonest customer apparently forged the signature of the actual person, and took possession of the vehicle. The transactions were financed by outside lenders, who had recourse on the loans against both the customers and Wholesale Outlet. After taking possession of the vehicles, the customers failed to pay on the loans.
One of those fraudulent transactions occurred on April 24, 2002, when a Wholesale Outlet customer purporting to be "Christopher Loveland" bought a 1999 Lincoln Navigator. To purchase the Lincoln, the buyer agreed to borrow $30,330.51, payable over sixty months, with annual interest of 13.49%. The financing was extended through plaintiff, Lakeland Bank ("the Bank"), which took an assignment of the customer's loan from Wholesale Outlet.
Subsequently, the Bank discovered that Loveland's identity had been stolen and that his signature on the purchase documents was not genuine. Upon learning this, the Bank sued Wholesale Outlet in the Law Division on various theories, seeking to have Wholesale Outlet repurchase the loan agreement and assume responsibility for the customer's non-payment.*fn3
Wholesale Outlet, meanwhile, was unable to obtain indemnity from Lloyd's of London, due to the false pretense exclusion in its insurance policy. Consequently, Wholesale Outlet brought a third-party complaint against O'Neill for broker malpractice. Among other things, Wholesale Outlet claimed that O'Neill acted improperly, in procuring an insurance policy with an exclusion that eliminated the dealership's protection against losses arising out of a customer's fraudulent acts.
O'Neill, while admitting that it placed coverage for Wholesale Outlet, contends that it did not breach any obligations to Wholesale Outlet, and that it adhered to all standards of care within its profession. O'Neill maintains that any losses sustained by Wholesale Outlet were its own fault.
Eventually, the Bank and Wholesale Outlet settled their differences.*fn4 Wholesale Outlet continued to press its claims for reimbursement from O'Neill. Toward that end, Wholesale Outlet retained an insurance expert, Robert Sears, to establish that O'Neill deviated from the applicable standards of care.
Sears issued an initial expert report in November 2005, opining that O'Neill breached its professional duties to Wholesale Outlet in several respects, including failures to (1) "accurately identify all the exposures to which Wholesale Outlet, Inc.[,] was exposed," (2) "diligently research the availability of coverages among the [insurers] . . . to the dealership marketplace," (3) "fulfill their promise to provide written reports of all exposures to financial loss," and (4) "identify the limitations of coverages that were sold to Wholesale Outlet." Sears also criticized O'Neill for withholding "promised services and expertise for which a substantial fee was charged."
Citing to the deposition testimony of Brian O'Neill, the owner of the O'Neill firm, Sears further noted in his report that "Mr. O'Neill admitted to a substantial lack of knowledge with respect to the daily operations of his former client, Wholesale Outlet . . . and of the operations of used car dealerships in general and of the very coverage form that he had sold, the Lloyds Open Lot Policy." Sears maintained that rather than analyzing Wholesale Outlet's risks and procuring suitable coverage to guard against these risks, O'Neill "instead replicated coverage that was already in force [and] put in place by [O'Neill's] predecessor." Thus, contended Sears, O'Neill breached a duty to apply its insurance expertise and see to it that Wholesale Outlet obtained appropriate coverage.
With respect to the losses involved here, arising from customer identity thefts, Sears noted that the so-called "false pretense" exclusion in the Lloyd's policy can be nullified with additional policy terms. According to Sears, policy endorsements with such nullifying language have been available since the mid to late 1990s, and have been marketed "aggressively" to used car dealerships by several insurance carriers.
O'Neill retained its own standard of care expert, Michael F. Boures of Total Automotive Solutions, LLC. In his initial expert report of August 2006, Boures opined that "the motor vehicle sales by Wholesale Outlet to individuals using false identification which were financed by [a lending institution] would not be covered under any policy of insurance issued to a used car dealership." Boures contended that false pretense coverage, as suggested by Sears, would not cover Wholesale Outlet. That is so because the dealership "did not have the proper business procedures in place to make sure its paper work was correct before the transactions were sent on to [the financing company]."
Among other things, Boures noted that in two of the alleged false-identity sales, the sales order forms were not signed by the buyer, while in five other sales, no one at the dealership could identify the signatures. According to Boures, the person in charge at Wholesale Outlet's main office "either failed to catch the mistakes or was not properly trained." Consequently, Boures stated that, in his experience, an insurer would regard these deficiencies as poor business practices by the insured, and would not be responsible to pay out on claims resulting from such practices.
After Boures's report was tendered in August 2006, Sears provided a supplemental expert report later that same month. In his supplemental report, Sears reaffirmed his view that O'Neill had failed to act with due diligence in procuring coverage for Wholesale Outlet. Sears disagreed with Boures that Wholesale Outlet's supposed poor business practices would have defeated coverage for the losses caused by these fraudulent customers. He also noted that O'Neill had failed to establish that it had actually submitted any requests for premium quotations on Wholesale Outlet's behalf with at least two carriers that, according to Sears, provided coverage broad enough to encompass "false pretense" claims.
To buttress his contentions about the availability of policies with suitable coverage, Sears enclosed with his supplemental report sample policy endorsement forms from the Peerless Insurance Company ("Peerless") and the Providence Washington Insurance Company ("Providence Washington"). These exemplars related to actual policies that Peerless issued to another automotive business in May 2002, and that Providence Washington issued to a vehicle leasing company in April 2004. The exemplars contain identical operative language. The language has the effect of substantially nullifying the False Pretense exclusion in the underlying policy and thereby broadening coverage. In subsection B(1), the endorsement*fn5 specifically provides:
B. Physical Damage Coverage is changed as follows:
1. The following is added: We will pay for "loss" to a covered "auto" under: False Pretense Coverage caused by:
a. Someone causing you to voluntarily part with the covered "auto" by trick, scheme or under false pretenses.
b. Your acquiring an "auto" from a seller who did not have legal title.
Additionally, subsection B(2) of the endorsement nullifies the underlying policy's exclusion for losses resulting from acts of false pretense, adding instead a less restrictive limitation:
2. Exclusions is changed as follows:
a. The False Pretense Exclusion does not apply.
b. The following exclusion is added:
(1) The insurance under Paragraph B.1.a. of this endorsement does not apply unless:
(a) You had legal title to, or consignment papers for, the covered "auto" prior to "loss"; and
(b) You make every effort to recover the covered "auto" when it is located.
(2) False Pretense Coverage does not apply to a loss in which for any reason a bank or any other drawee fails to pay.
The policy endorsement also imposes certain reporting obligations upon the insured:
C. The following is added to the Duties In The Event Of Accident, Claim, Suit Or Loss Garage Condition:
You, or someone on your behalf, must take all reasonable steps to cause a warrant to be issued, as soon as practicable, for the arrest of anyone causing a "loss" defined within the False Pretense Coverage. Failure to cause such warrant to be issued as required by this Condition shall not invalidate any claim made by you, if it is shown that reasonable efforts were made.
Sears was deposed twice. His second deposition session took place on June 29, 2007, after he submitted his supplemental report with the exemplars. During the course of that session, opposing counsel asked Sears several questions about the exemplar policy endorsements that he had included with his latest report. In particular, O'Neill's counsel honed in on the language in subsection B(2)(b)(2):
Q: Can you tell me what the next exclusion means which is exclusion [B(2)(b)(2)]? It says false pretense coverage does not apply to a loss in which for any reason a bank or any other drawee fails to pay.
A: That means if the loss is generated purely by the lack of payment for the vehicle under a finance agreement, there is no coverage for that.
Q: Lack of payment by whom?
A: By the purchaser.
O'Neill's counsel pressed Sears further on this subject:
Q: Would you agree all of the sales to individuals with false identification were financed by a bank or lending institution?
Q: And that those banks or finance institutions allegedly did not receive full payment for the various vehicles?
Q: Therefore [as a result of] the purchaser itself not making payments these claims were made? The individuals who allegedly purchased the vehicle [--] because they did not make the payments [--] these claims against Wholesale Outlet were asserted?
A: By virtue of the failure of the payment the crime was discovered.
Q: Would you agree failure by the purchaser caused these claims?
A: Absolutely not.
Q: If these individuals had made payments would there have been a claim against Wholesale Outlet?
Q: It was a failure of these purchasers to make a payment that [led] to these claims?
A: The point is a crime was committed and whether they salted the mine to gain the product is the point in hand. They put some money forth to get something.
Q: But if those individuals even though they were not who they seemed to be made complete full payments under the agreement, there would have been no claim against Wholesale Outlet?
Through this colloquy, O'Neill's attorney ultimately got Sears to acknowledge that the dishonest purchasers, not the banks or lending institutions, were the source of the losses sustained by Wholesale Outlet as a consequence of their thievery.
After Sears's admission at his second deposition, O'Neill moved for summary judgment. O'Neill argued that, for various reasons, it was not liable to Wholesale Outlet for professional malpractice. One of the main arguments advanced by O'Neill was that Sears's deposition responses construed the exemplar insurance policies in a manner signifying that they would not have covered Wholesale Outlet's circumstances in this case, even if they had been procured, because the losses in question arose from lack of payment by the purchasers.
At oral argument on O'Neill's motion, the Law Division judge adopted that contention. Quoting from the same deposition answers by Sears that we have presented above, the motion judge concluded that "a plain reading of the deposition [signifies] that [the exemplar policies] do not provide the type of coverage for the claim here." In the course of his reasoning, the judge appears to have equated Wholesale Outlet's dishonest customers who committed identity theft to "a bank or other drawee" who "fails to pay," and thus within the coverage exclusion of subsection B(2)(b)(2).
The judge found it unimportant that the reason for the non-payment was the customer's fraud. As the judge elaborated:
[T]he reason why you can't -- you don't make the payment is irrelevant [under the subsection B(2)(b)(2) exclusion]. The fact is that you don't make the payment, whether it's because you can't afford it, or because you're a thief and never meant to make it, or because the person who purchased the Rolls-Royce wasn't really you, so he had no intention of making it. The fact of the matter is that there's no payment made. The whys and wherefores of why the payment wasn't made are not relevant to the exclusion.
The motion judge also found that Sears's expert reports contained improper net opinions. In that regard, the judge ruled that the two exemplar policies supplied by Sears did not correct the perceived deficiency of his written reports, because Sears apparently had conceded at his second deposition that the literal terms of those exemplar policies would not have covered Wholesale Outlet for the transactions in question.
Based upon these findings, the motion judge signed an order on August 3, 2007, granting summary judgment to O'Neill and dismissing Wholesale Outlet's third-party complaint with prejudice. On September 20, 2007, the judge issued a further order denying Wholesale Outlet's motion for reconsideration. This appeal ensued.
On appeal, Wholesale Outlet argues that the motion judge granted summary judgment to O'Neill improvidently. In particular, Wholesale Outlet contends that the judge misapplied the term "drawee" in subsection B(2)(b)(2) of the exemplar endorsement, extending it to the dishonest purchasers who drew funds from the banks that had financed the automobile purchases. To the contrary, Wholesale Outlet maintains that the purchasers were "drawers," not "drawees," as those terms are customarily defined in the law.
Wholesale Outlet further argues that the judge treated Sears's deposition responses on these legal issues with undue significance. Wholesale Outlet also contests the judge's finding that Sears's written and oral critiques of O'Neill are defective net opinions.
We review the judge's issuance of summary judgment pursuant to the familiar standards of Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995); see also R. 4:46-2(c). Generally, the court must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill, supra, 142 N.J. at 540. On appeal, we apply the same standard governing the trial court under Rule 4:46-2(c). Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007). Because the errors claimed to have been committed by the motion judge essentially involve issues of law, we review those legal rulings de novo, according no special deference to the trial court. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
False pretense insurance coverage exists to protect an insured against fraudulent acts or other similar criminal conduct. See, e.g., Mitchell Buick & Oldsmobile Sales, Inc. v. Nat'l Dealer Servs., Inc., 485 N.E.2d 1281, 1285 (Ill. App. Ct. 1985); see also Farmers & Merchs. Sav. Bank v. Vandenberg Chevrolet-Buick, Ltd., 523 N.W.2d 211, 214 (Iowa 1994). As the illustrative policies Sears presented both indicate, false pretense coverage protects those who "voluntarily part with the covered auto by trick, scheme, or under false pretenses."
In Mitchell Buick, an Illinois appellate court held that a plaintiff had established a prima facie case that false pretense coverage should cover a car dealership that had sold a car to a customer who kept writing bad checks and who did not follow through on a promise to send certified funds to the dealership. Mitchell Buick, supra, 485 N.E.2d at 1285. The court held that the customer's conduct was evidence of an intent to defraud, and was thus arguably covered by the policy. Ibid. By contrast, in Farmers & Merchs. Sav. Bank, the Iowa Supreme Court held that false pretense coverage did not cover an insured auto dealership in circumstances where several dealership employees had watched a customer forge his girlfriend's name on a sales agreement. Farmers & Merchs. Sav. Bank, supra, 523 N.W.2d at 214.
Here, in reading the exclusion in subsection B(2)(b)(2) of the exemplar policy to nullify the benefits of false pretense coverage, the motion judge erroneously treated Wholesale Outlet's dishonest customers akin to "banks or other drawees." The judge also read too much significance into Sears's deposition responses concerning that exclusion.
By well-settled statutory definitions and case law, a "drawee" is not the person who causes a bank or financial institution to draw down funds from an account. For example, under the Uniform Commercial Code's definitional section, a "drawee" is "a person ordered in a draft to make payment," while a "drawer" is a "person who signs or is identified in a draft as a person ordering payment." See N.J.S.A. 12A:3-103(a)(1) and (2).
Additionally, Black's Law Dictionary defines a "drawee" as "[t]he person or entity that a draft is directed to and that is requested to pay the amount stated on it." The drawee is usually "a bank that is directed to pay a sum of money on an instrument." Black's Law Dictionary 532 (8th ed. 2004). A "drawer" is "[o]ne who directs a person or entity, [usually] a bank, to pay a sum of money stated in an instrument -- for example, a person who writes a check; the maker of a note or draft. Ibid. See also Hibernia Nat'l Bank v. Commerce Bank, 368 N.J. Super. 144, 146-47 (App. Div. 2004) (treating as a "drawee" a bank that is designated to make payment on a check that is presented by a depository bank); see also Trump Plaza Assocs. v. Haas, 300 N.J. Super. 113, 119 (App. Div.), certif. denied, 151 N.J. 75 (1997).
O'Neill's attorney conceded to us at oral argument that the motion judge mistakenly considered the dishonest customers in this case as equivalent to "drawees" rather than "drawers." Given that pivotal legal error, the motion judge's reasoning cannot be sustained.
It is inconsequential that Wholesale Outlet's own expert, Sears, apparently misspoke when he responded to opposing counsel's deposition questions regarding the identity of the "drawees" in the instant situation. The expert's view does not control the court's legal analysis. "The determination of whether an individual is an insured under an insurance policy is a matter of law to be decided by the court." Atl. Mut. Ins. Co. v. Palisades Safety and Ins. Ass'n, 364 N.J. Super. 599, 604 (App. Div. 2003); see also Nat'l Union Fire Ins. Co. of Pittsburgh v. Transp. Ins. Co., 336 N.J. Super. 437, 443 (App. Div. 2001).
Further, we agree with Wholesale Outlet that the motion judge ascribed too much legal import to Sears's deposition answers. In responding to counsel's first question about the meaning of the Subsection B(2)(b)(2) exclusion, Sears stated that "if the loss [to the insured] is generated purely by the lack of payment for the vehicle under a finance agreement, there is no coverage for that." (Emphasis added.) Later on in his deposition, however, Sears alluded to the customers "salt[ing] the mine to gain the product." Fairly construing his responses as a whole, we believe that Sears was trying to say, albeit inartfully, that while false pretense coverage might not exist in a case of non-payment ensuing from a borrower's ordinary financial difficulties, it should apply where, as is alleged here, the non-payment flows from acts of dishonesty. Indeed, to read the policy endorsement otherwise would vitiate the manifest objective of the endorsement, in guarding against losses caused by fraudulent acts.
We also respectfully disagree with the motion judge's finding that Sears's expert reports and deposition responses constitute inadmissible net opinions. Sears sufficiently explained the "whys and wherefores" behind his conclusions to have them presented to a factfinder. Beadling v. William Bowman Assocs., 355 N.J. Super. 70, 87 (App. Div. 2002).
We decline to address at this time O'Neill's separate assertion that it is entitled to judgment because the exemplar policies allegedly do not cover "third-party" claims and that the claims at issue here are "third party" rather than "first party" in nature. We have considerable doubt as to whether the exemplar policy endorsement's language in Subsection B(3), covering "all 'loss' caused by any one person within any one year of the policy period," (emphasis added), is confined to first-party claims. In any event, this was an issue not reached by the motion judge in his ruling, and we decline to resolve the issue here for the first time on appeal. Ins. Co. of N. Am. v. Gov't Employees Ins. Co., 162 N.J. Super. 528, 537 (App. Div. 1978).*fn6
Summary judgment in favor of O'Neill is vacated, and the matter is remanded for further proceedings consistent with this opinion. Jurisdiction is not retained.