December 9, 2008
SELECTIVE INSURANCE COMPANY, A LICENSED INSURANCE COMPANY OF THE STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT,
LAUREL A. FOX, DEFENDANT-THIRD PARTY PLAINTIFF-APPELLANT,
CRUM-GENOVA INSURANCE AGENCY, INC., THIRD PARTY DEFENDANT-RESPONDENT.
MICHAEL STASAK, INTERVENING PLAINTIFF,
CRUM-GENOVA INSURANCE AGENCY, INC., DEFENDANT.
On appeal from Superior Court of New Jersey, Law Division, Sussex County, L-328-02.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 10, 2008
Before Judges A. A. Rodríguez, Payne and Waugh.
Plaintiff, Selective Insurance Company, filed a declaratory judgment action seeking to void or rescind homeowners' insurance coverage issued to defendant, Laurel Fox, as the result of alleged material misrepresentations that no business was being conducted on the premises, contained in the policy application and a later policy renewal questionnaire, and alleged fraud by Fox in her submission of a claim for damage to a barn on the premises and its contents as the result of a fire. Fox counterclaimed, alleging in counts one and two of her counterclaim that Selective had improperly refused to pay Fox's claims and in count three that it had violated the Consumer Fraud Act, N.J.S.A. 56:8-1 to -166. Both compensatory and punitive damages were sought. Additionally, Fox brought a third-party action against insurance agent, Crum-Genova Insurance Agency, and Fox's fiancé, Michael Stasak, intervened as a plaintiff and joined in Fox's suit against Crum-Genova. Claims against Crum-Genova were later settled under terms that have not been disclosed.
Following cross-motions for summary judgment by Selective and Fox, the motion judge dismissed the punitive damage aspect of Fox's action as well as her claim under the Consumer Fraud Act, but otherwise denied relief. Upon cross-motions for reconsideration, the judge granted summary judgment in Selective's favor, determining that Fox's activity of growing and selling rhododendrons constituted a "business" that she failed to disclose in the policy and renewal applications, thereby materially misrepresenting the activities conducted on the premises and voiding coverage for the fire. Although evidence suggested a basis for finding that Stasak conducted an antiques business from the premises and that Fox was involved in internet sales of antiques, the judge declined to determine whether those sales by Fox and Stasak constituted sufficient continuous activity to constitute a "business" under principles established in Carroll v. Boyce, 272 N.J. Super. 384 (App. Div. 1994).
Fox has appealed; Selective has not filed a cross-appeal. We thus focus solely on the issue of misrepresentation that was determined as a matter of law by the judge. We decline to consider evidence of Fox's and Stasak's sale of antiques in determining issues on appeal.
The facts relevant to this matter follow. In May 1992, Fox purchased property at 376 River Road in Carpentersville, Sussex County, New Jersey. Since that time, Fox has continued to live there with Stasak. The property encompasses thirteen acres and includes a residence, a smokehouse, a small barn and a large barn. In 1995,*fn1 Fox obtained homeowners' insurance coverage for the property from Selective through the Crum-Genova Insurance Agency. Renewals of coverage occurred, and at the time of the fire at issue, renewal coverage was in place, effective from May 28, 2001 to May 28, 2002.
The policy at issue provided, in Section I, coverage for fire loss to Fox's dwelling and "other structures on the 'residence premises' set apart from the dwelling by clear space." However, the policy provided:
We do not cover other structures:
1. Used in whole or in part for "business" purposes.
Business was defined by the policy to "include trade, profession or occupation."*fn2 Additionally, the policy provided in a section titled "Sections I and II - Conditions":
The entire policy will be void if, whether before or after a loss, an "insured" has:
a. Intentionally concealed or misrepresented any material fact or circumstance;
b. Engaged in fraudulent conduct; or
c. Made false statements; relating to this insurance.
An application, completed in 1995 in connection with the issuance of coverage by Selective, gave the answer "no" to the question: "Any business conducted on premises?" Additionally, the application indicated that the insurance coverage had been transferred within the agency and that prior insurance coverage had been declined, cancelled or non-renewed. A notation appearing on the second page of the application indicates that a prior Franklin policy was non-renewed because "the property was on a farm premises." However, the notation stated further that "a farm operation has not been in use since the insured . . . purchased the property." The author of that statement and the source of the representations regarding the use of the property have not been identified. As a final matter, the application contained an "applicant's statement" that "I have read the above application and I declare that to the best of my knowledge and belief all of the foregoing statements are true." However, the application was unsigned. Fox has claimed that she never saw this application; she has not denied that she provided relevant information leading to its submission. Fox admits that, in February 2000, she filled out a renewal questionnaire, answering "none" to the question: "Details of any business run out of the home."
During the time that Selective's coverage was in effect, Fox was employed as a paralegal in an attorney's office in Flemington. In order to meet the requirements for a farmland assessment for tax purposes on her property, namely, that she grow an agricultural product on the land and make minimum sales of the product of $500 per annum,*fn3 she also raised and sold rhododendrons, utilizing five and one-half acres of land for that purpose and selling the bushes on a yearly basis to her father and brother for re-sale in connection with their nursery business. In addition to receiving favorable tax treatment as the result of this activity, Fox earned modest income of between $2,000 and $3,752 annually. A review of Schedule F (Profit or Loss from Farming), appended to Fox's income tax returns for the years 1998 to 2001, also discloses that she depreciated various farm equipment including a weed whip, tractor and water tank, as well as driveway improvements, and she deducted various farm-related expenses, thereby reducing her federal tax burden. In one year, she also claimed a modest advertising expense on that Schedule. It is noteworthy that the 1999, 2000 and 2001 Instructions for Form 4562 Depreciation and Amortization, required if depreciation is claimed on Schedule F, define depreciation as follows:
Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year. However, land is not depreciable.
Depreciation starts when you first use the property in your business or for the production of income. It ends when you take the property out of service, deduct all your depreciable cost or other basis, or no longer use the property in your business or for the production of income.
Fox claims that she did not make a profit on the sale of the bushes. She never formed a corporation or other business entity to conduct the activity, and she had no employees. Fox stated in discovery that income received from the sales to the nursery was used to offset her mortgage expense.
On August 8, 2001, the large barn and its contents, including American antiques, collectibles, and farm machinery and equipment utilized in growing the rhododendrons, were destroyed by fire. Thereafter, Fox submitted a claim to Selective for approximately $260,000. Additionally, Fox claimed a casualty loss in connection with her 2001 income tax returns. In that regard, she described the barn as utilized equally as "personal use property" and as "business and income-producing property." As to the latter, she claimed one-half of the barn itself as a casualty loss, as well as a "Mod 3400 Ford Tractor" and a "Susquvarna Weed Trimmer."
Following investigation, Selective declined to cover Fox's claim and declared the policy void or rescinded, stating, in a letter dated May 10, 2002, that Fox had committed fraud in connection with her proof of loss, thereby voiding the policy, because her claim included loss of property in which Stasak had an interest, yet she stated under oath that her interest in that property was "absolute." Alternatively, Selective claimed that the policy was rescinded, relying in that regard upon the misrepresentations in the renewal questionnaire that we have previously discussed and upon Fox's failure to bring to Selective's attention the fact that a representation in the policy that no business pursuits were being conducted on the residence premises was incorrect. Thereafter, Selective instituted its declaratory judgment action against Fox to establish its right to void the policy for intentional concealment or fraud or to rescind the policy as the result of Fox's material misrepresentations. As we have stated, following discovery, cross-motions for summary judgment, and cross-motions for reconsideration, Selective was granted summary judgment on its claim for rescission based upon material misrepresentations by Fox in the policy renewal application. The judge did not address Selective's alternative theory that the policy was void as the result of fraud by Fox committed in connection with her proofs of loss.
On appeal Fox first argues that the motion judge failed to address the definition of "business" set forth in Selective's policy, and she claims that her activities in growing rhododendrons did not constitute a business as defined in that policy. Alternatively, Fox characterizes the term "business" as ambiguous, and she seeks a construction of that term that would afford coverage.
As the motion judge and the parties recognized, our decision in Carroll provides precedent applicable to the matter in issue. In that case, plaintiffs sued defendant, Barbara Boyce, for injuries sustained by the plaintiffs' minor son while Boyce was baby-sitting for the child in her home. Boyce tendered the defense of the matter to her homeowners' carrier, Prudential, which declined coverage on the ground that Boyce's regular baby-sitting arrangement with plaintiffs constituted a business pursuit to which a policy exclusion applied. On appeal from an order of summary judgment in Prudential's favor, we affirmed.
The policy issued to Boyce excluded liability coverage "arising out of business pursuits of any insured." "Business" was defined in the policy, as in the present case, "to include 'trade, profession or occupation.'" We held:
To determine whether baby-sitting is encompassed within the "business pursuits" exclusion, two factors must be considered. The first is whether the pursuit involves "continuity, or customary engagement [by the insured] in the activity." The second involves whether the activity involves a "profit motive" or whether the insured engages in the pursuit "as a means of livelihood, a means of earning a living, [or] procuring subsistence or profit. . . ."
[Carroll, supra, 272 N.J. Super. at 386.]
Following a review of the evidence, we determined that Boyce's baby-sitting activities, which were conducted for compensation that averaged eighty-five dollars per week during scheduled hours on Mondays through Fridays over an extended period, met the requirements of continuity and profit motivation and thus constituted a business pursuit to which the policy exclusion was applicable.*fn4 Id. at 387-88.
On appeal, Fox claims that Carroll is inapplicable to her case because (1) the loss did not arise out of Fox's alleged business pursuit of growing rhododendrons; (2) her activities lacked the continuity and profit motive required in Carroll; and (3) they fell outside of the policy's definition of business. We disagree with Fox's position, finding no precedent that would suggest that the loss must arise from the business activity in the first-party context of homeowners' coverage, whereas such a requirement obviously applies in a liability context such as that presented in Carroll. Additionally, we note again that the definition of business found in Carroll is identical to that found in Selective's policy, and that it merely "includes" a trade, profession or occupation within its scope. Further, we find no precedent that would establish that farming was not an "occupation," even when performed on a part-time basis, as conducted by Fox.
We also are satisfied that Fox's farming activities, although coming to fruition only on a yearly basis, like many crops, exhibited a year-to-year continuity that fell within Carroll's definition,*fn5 and that unrebutted evidence of a profit motivation was established by Fox's receipt of cash for the sale of her plant stock, as well as the receipt of the tax advantages resulting from her farmland assessment and ability to depreciate her farm equipment and driveway improvements and deduct farm expenses, thereby maximizing Fox's income.*fn6
We find Shelter Ins. Co. v. Hudson, 720 S.W.2d 326 (Ark. App. 1986), upon which Fox relies, to be factually distinguishable. In that case, the insureds sought coverage for a cattle barn that was damaged in a windstorm. Their insurer disclaimed, arguing that the barn was being utilized for a business. Although the court rejected the insurer's position, evidence in that case indicated that the cattle were kept only for grass control, and that a one-time-only sale of cattle had occurred when overgrazing occurred.*fn7
As the result of this analysis, we are satisfied that if Selective had denied Fox's claim of fire loss to the barn and its contents on the basis of its exclusion from coverage of "other structures" that are "[u]sed in whole or in part for 'business' purposes," Selective's use of that exclusion would have been upheld. Fox "used" her barn to store her farm equipment and, in fact, deducted one-half of the value of the barn, as well as the value of enumerated pieces of farm equipment as a business casualty loss on her federal income tax return for the 2001 year. However, Selective did not decline coverage on that basis, and did not seek to assert the applicability of that provision in any proceeding before the trial court or on appeal. We thus decline to decide Fox's appeal on this basis.
Fox argues in her second point on appeal that Selective failed to demonstrate that she had intentionally misrepresented a material fact in connection with the policy or renewal applications. We agree that the evidence was insufficient to establish a intentional, material misrepresentation in the unsigned policy application itself. While it appears likely that the responses on the application with respect to the lack of business activity, including farming, at the premises were supplied by Fox, the circumstances surrounding the completion of the application are insufficiently developed to permit us to determine this appeal on the basis of that document.
We thus focus on the questionnaire admittedly completed by Fox in connection with her renewal application, wherein she answered "none" to the request for "detains of any business run out of the home." Fox claims, without citation to any relevant authority, that this query was subjective in nature and that her response, subjectively considered, was accurate. However, this claim is belied by Fox's consistent utilization of her rhododendron business to obtain tax advantages provided by New Jersey's Farmland Assessment Act, to depreciate farming equipment and to deduct farm expenses on her federal tax returns, and to obtain a federal tax deduction as the result of the casualty loss attributed to the business use of the barn and the farming equipment destroyed in the fire.*fn8
In this regard we, like the motion judge, find to be apt the observations of the Louisiana Court of Appeals in Melder v. Louisiana Farm Bureau Mutual Ins. Co., 906 So.2d 513 (La. Ct. App.), writ denied, 901 So.2d 1098 (La. 2005). In Melder, the plaintiffs sought coverage for fire damage to a barn on their property. Their carrier denied that coverage on the basis of a policy exclusion of coverage for "structures used in whole or in part for business," a term that included farming. The Melders admitted to farming, but claimed it was a hobby, not a business. On appeal from a decision in the Melders' favor, the Louisiana Court of Appeals reversed, stating in language relevant here:
The Melders had a farming operation and were free to itemize and deduct the business expenses, "write-off" the losses, and depreciate the tools and equipment used in the business, as long as that was done in accordance with IRS regulations. What they were not free to do is to call the farming operation a business when it was a convenient tax shelter and call it a hobby when claiming damages against their insurer. [Id. at 516 n.1.]
Whether the question on the insurance renewal questionnaire was subjective or objective, Fox's response, like that of the Melders, when viewed in light of her treatment of the property in other contexts, was unquestionably intentionally false. See Formosa v. Equitable Life Assurance Soc. of the U.S., 166 N.J. Super. 8, 15 (App. Div.), certif. denied, 81 N.J. 53 (1979).
We are likewise satisfied that the misrepresentation was material. A misrepresentation is material when it "naturally and reasonably influences the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium." Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 638 (1995) (citations omitted). The record contains an unchallenged certification from Selective Underwriting Team Leader, Carol Ann Curtis, explaining that had Selective known that the property was being used for business purposes, the appropriate policy would have been a commercial, rather than a homeowners' policy, issued by a different department at a higher premium. The certification establishes the materiality of Fox's misrepresentation. Id. at 634.