On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-5758-01.
The opinion of the court was delivered by: Winkelstein, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Skillman, Winkelstein and Yannotti.
Plaintiffs operated commuter ferry routes across New York Harbor. Intending to commence service from Great Kills, Staten Island, to Manhattan, they purchased a high speed ship from a Louisiana shipyard for $650,000. They financed the purchase with a $4.2 million loan secured by a mortgage on their entire fleet of vessels. Plaintiffs subsequently defaulted under the terms of the mortgage.
This lawsuit involves plaintiffs' claim against three insurance brokers, defendants Frankel & Co., McCue Captains Agency, and AON Risk Services (previously known as Alexander & Alexander). Plaintiffs claim that defendants breached their fiduciary duties by failing to inform plaintiffs that they were not covered by the lender's breach of warranty insurance, and by not otherwise obtaining breach of warranty coverage for plaintiffs.
The trial court denied defendants' motions for summary judgment, and concluded that defendants owed a duty to plaintiffs, breached that duty, and the breach of duty proximately caused plaintiffs' damages. Following a damages trial, the jury returned a $6.45 million verdict for plaintiffs. After increasing the damages award based on the offer of judgment rule, Rule 4:58, the court entered a judgment against defendants, jointly and severally, in the sum of $9,111,705.74.
Defendants have appealed from that judgment and we reverse. Because we conclude that defendants were entitled to summary judgment, we do not address the issues defendants have raised related to the trial.
Plaintiffs Harbor Commuter Service and Harbor Shuttle (collectively, Harbor), New Jersey corporations, were engaged in commuter ferry operations. Plaintiff Walter Mihm was the principal and sole shareholder of each company.
Harbor Commuter was incorporated in 1986, and Harbor Shuttle was incorporated in 1990. By 1994, Harbor's fleet consisted of five 150-passenger vessels. In 1996, Mihm planned to initiate a new ferry route between Great Kills, Staten Island and Pier 11 in Manhattan, using a 109-foot high-speed "surface effective ship," known as the SES 109, which had a 350-passenger capacity. Harbor intended to purchase the vessel from Avondale Industries in Louisiana for $650,000 on an "as is where is" basis. Harbor sought to finance the purchase through Debis*fn1 Financial Service. In 1995, Debis had provided financing for two of Harbor's 150-passenger ferries. In acquiring the new vessel, Harbor sought to refinance its existing $479,931 debt with Debis and increase it to $4.2 million. Harbor used its entire fleet, valued at $7,470,000, as collateral.
In connection with Harbor's refinancing application, it presented Debis with a $4.5 million sales invoice for the SES 109. According to Pamela Ivey, a Debis employee, Harbor represented the purchase price to be $4.5 million, not $650,000. Mihm claimed, however, that in a letter dated September 6, 1996, he advised Debis that he had been negotiating the purchase price of the SES 109, and "the purchase price for the vessel will drop to $650,000."
The loan apparently closed on October 16, 1996. Mihm, on behalf of Harbor, executed a $4.2 million mortgage in favor of Debis. The provisions of the mortgage that are pertinent to plaintiffs' claims here are sections II.4 and II.5, "WARRANTIES; AGREEMENTS." Those sections include an insurance provision, which, as pertains to this lawsuit, required Harbor to obtain hull insurance and breach of warranty insurance. Hull insurance insures both the mortgagor and the mortgagee against the specific risks enumerated in the policy. In re Atcorp I, Inc., 25 B.R. 340, 342 (B.A.P. 1st Cir. 1982). Breach of warranty insurance "is a separate contract between the insurer and the mortgagee. . . . The breach of warranty coverage protects the interests of the [mortgagee] from policy defenses that the insurance company may have against the mortgagor." Ibid. (citing 5A Appleman, Insurance Law & Practice § 3401 at 282 (1970)). In other words, hull insurance protects the interests of both the borrower and the lender, and breach of warranty insurance protects only the lender's interests.
The mortgage specifically provided as follows:
II.4 Insurance on Vessels. Owner shall procure and maintain . . . the following insurance:
(a) Full Form Hull and Machinery Insurance in an amount not less than the true market value of each Vessel, . . . Mortgagee shall be named as an additional insured and any loss shall be payable to Owner and Mortgagee as their interests may appear. This insurance must include a breach of warranty endorsement or a separate mortgagee's interest insurance policy so that the interests of Mortgagee shall not be impaired by any act, omission, neglect, or breach of warranty of the Owner.
(d) Breach of Warranty Insurance for the full amount of the Note, in favor of Mortgagee.
The insurance specified in (a) . . . and (d) of this paragraph shall also be subject to the following terms:
(f) In the event of [a loss] of a Vessel . . . the underwriters shall pay the insurance funds directly to Mortgagee . . . provided, however, that if no event has occurred that would constitute an Event of Default . . . , such proceeds shall be provided to Owner for the sole purpose of purchasing a vessel of similar function and value to the damaged Vessel . . . .
(g) All such insurance provided for herein (except for Workers' Compensation) shall name Mortgagee as a co-insured and shall expressly waive subrogation against Mortgagee.
II.5 Compliance With Insurance and Legal Restrictions. Owner will not do any act, nor voluntarily suffer or permit any act to be done, whereby any insurance is or may be suspended, impaired, or defeated . . . .
The mortgage includes the following events of default:
III.1 Default in the timely payment of any amount due on ...