July 31, 2009
GEORGE CHEN, PLAINTIFF-APPELLANT,
VIGILANT INSURANCE COMPANY, DEFENDANT/THIRD PARTY PLAINTIFF-RESPONDENT,
NEW JERSEY NATURAL GAS COMPANY, THIRD-PARTY DEFENDANT.
On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-460-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 11, 2009
Before Judges Carchman and Sabatino.
Plaintiff George Chen appeals from a final judgment of the Law Division: 1) dismissing his declaratory judgment complaint seeking coverage under a homeowner's policy issued by defendant Vigilant Insurance Company (defendant or Vigilant); and 2) and entering judgment on defendant's counterclaim resulting in rescission of the policy. Following a bench trial, Judge David Rand found by clear and convincing evidence that plaintiff made material misrepresentations to defendant in obtaining his homeowner's policy and that those misrepresentations constituted equitable fraud warranting rescission. We affirm.
These are the facts adduced at trial. Plaintiff, a homebuilder, purchased property on Old Timber Trail, Boonton Township with the intention of constructing a home for sale. At the time, plaintiff resided with his wife and family on McCaffrey Lane in Boonton. Plaintiff secured construction mortgage financing and as a condition of the financing, plaintiff was required to secure insurance on the property. He secured a "builder's risk" policy, but after entering into a contract for the sale of the property, litigation ensued between plaintiff and the contract purchasers, Azad V. Khubani and his wife*fn1. As a result, the lender called the loan, and plaintiff was required to secure new financing. Plaintiff did so.
In addition to financing, plaintiff sought to secure new insurance on the property and contacted Ronald Obuch at Weichert Insurance Agency (Weichert) for that purpose. Weichert produced a policy written by Vigilant, a member of the Chubb Insurance Group. The insurance policy was a private homeowner's policy at a premium cost of $4,754, which included a two-month vacancy surcharge. As Sharon Alexander, a underwriter for defendant, explained, "[t]he vacancy surcharge is an additional 25 percent that's added to the policy premium for the time that the insureds are not actually living in the home." Alexander noted that the expected vacancy period would be "somewhere in the neighborhood of 30 to 60 days" "[which was] based on the expectation of how long it would take someone to move into a brand new house." A commercial policy insuring the property would have generated a premium twice as costly.
The critical fact in contention at trial was whether plaintiff misrepresented to defendant that he and his family were intending to occupy the Timber Trail property. According to Obuch, plaintiff made that representation to him. A similar representation was made to defendant's appraiser, Amanda Glazer, who was concerned that the property was underinsured. At trial, plaintiff continuously indicated that he could not remember whether he told Obuch that he and his family intended on moving into the home within the next month or so. Plaintiff later conceded that, due to the pending litigation with Khubani, he could not sell the property to anyone nor could he move in himself. When the trial judge questioned plaintiff regarding the inconsistencies in his testimony, plaintiff responded, "I don't know what I said that time. I just say, in my mind I just think about that, after C.O. [certificate of occupancy] some -- maybe Cubani (sic) will move in."
The fact became significant as Obuch asserted that the policy would not have been written if the true facts were known. As Obuch explained: "if the home is owner-occupied, it's eligible for standard insurance.... If the home is not going to be owner occupied, it may require investment property, a dwelling fire policy, so it's very germane." A property that is owner occupied, or a rental, is eligible for a "personal lines" policy. A property that is being built for a third party, however, would require a commercial policy.
While the policy was in force and plaintiff was out of the country, the Timber Trail property sustained water damage from frozen pipes that burst. The freezing pipes resulted from plaintiff's failure to pay the gas bill causing the gas company to terminate service and remove the meter. In January 2005, plaintiff filed a claim with defendant. During an interview with James Alvino, a private claims investigator retained by defendant, plaintiff disclosed that he intended to live in the house and that his furniture was in the house when the water damage occurred. At trial, defendant indicated that he bought the furniture and was simply storing it at the Timber Trail house. As the judge noted: "[t]he point is [that] it wasn't purchased for [plaintiff and his family] to use in Old Timber Trail[.]"
Ultimately, Vigilant issued a "Non-renewal" of plaintiff's policy on March 31, 2005, effective May 5, 2005, citing the following reasons: "increased hazard due to home is not [sic] owner occupied; lack of cooperation on loss control matters that affect the insurability of the risk; failure to install central station alarms." Alexander explained why the policy was not renewed, rather than canceled mid-term: when I wrote the policy originally, it was with the understanding that plaintiff would be moving in. We only have 60 days*fn2 to make that decision on whether or not we're going to cancel it mid-term based on the insured not complying with our requirement.
Generally, we, you know, give them the benefit of the doubt, that they're going to follow through. I -- I like to see the results of the appraisal, and in some cases I don't have that early enough to be able to actually take action.
So we give the insured the benefit of the doubt and if they don't follow through, then we go to non-renewal instead of a mid-term cancellation.
Alexander explained that on February 7, 2005 she set the policy for non-renewal because she had not received confirmation that the house had been occupied, nor had she received proof of installation of an alarm, as required under the initial policy terms. As such, Chubb would keep the premium, including the vacancy surcharge, and the policy would remain in effect through its natural termination date. Further, Alexander indicated that she was unaware that a claim had been reported in late January 2005.
Following trial, Judge Rand found by clear and convincing evidence that plaintiff had made a material misrepresentation that his family intended to move into the house when there was never any such intent to do so. The judge concluded that the misrepresentation was material to the underwriting process. Accordingly, the judge ordered rescission, voided the policy and required that defendant refund plaintiff the premium. The judge denied defendant affirmative relief under the New Jersey Insurance Fraud Prevention Act (IFPA), N.J.S.A. 17:33A-1 to -30.
On appeal, plaintiff asserts that the judge erred in finding that defendant sustained its burden of proof on the equitable fraud claim. We disagree.
Critical to our analysis of a trial judge's decision incorporating factual findings and conclusions of law is the applicable standard of review. When addressing findings of fact, we will give deference to a trial judge's ability to assess credibility, and we will determine whether the findings made could reasonably have been reached on "sufficient" or "substantial" credible evidence present in the record, considering the proofs a whole. Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974). See also State v. Adams, 194 N.J. 186, 203 (2008) (holding that the trial court's findings "should not be disturbed if there is sufficient credible evidence in the record to support the findings").
When the issue on appeal involves the trial judge's interpretation of the law, we engage in a de novo review. See Finderne Mgmt. Co. v. Barrett, 402 N.J. Super. 546, 573 (App. Div. 2008) (noting that an appellate court does not "owe any special deference to a trial court's legal conclusion"). See also Shaler v. Toms River Obstetrics & Gynecology Assocs., 383 N.J. Super. 650, 657 (App. Div.), certif. denied, 187 N.J. 82 (2006). Ultimately, "[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." 612 Assocs., L.L.C. v. North Bergen Mun. Utils. Auth., 404 N.J. Super. 531, 536 (App. Div. 2009) (quotations and citation omitted).
The issue we must address is whether there was a material misrepresentation, and if so, whether it supports rescission under the facts presented here. A misrepresentation is material if, had it been revealed, the insurer would either not have insured the policy or would have insured only at a higher premium. Palisades Safety & Ins. Ass'n v. Bastien, 175 N.J. 144, 148-49 (2003). Rescission of an insurance policy is appropriate if the insured's application for coverage included a misrepresentation of fact that materially affects the insurer's decision to enter the contract, the estimation of the risk or the rate of the premium. First Am. Title Ins. Co. v. Lawson, 177 N.J. 125, 135 (2003); Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 637-39 (1995).
The elements of a claim of equitable fraud must be established by clear and convincing evidence. "The law is well settled that equitable fraud provides a basis for a party to rescind a contract." First Am., supra, 177 N.J. at 136 (citing Jewish Ctr. of Sussex Cty. v. Whale, 86 N.J. 619 (1981)).
In contrast to legal fraud, equitable fraud does not require knowledge of the falsity of the misrepresentation nor does it require an attempt to induce reliance. "In an action for equitable fraud, the only relief that may be obtained is equitable relief, such as rescission or reformation of an agreement and not monetary damages." Daibo v. Kirsch, 316 N.J. Super. 580, 591-92 (App. Div. 1998) (quotations and citation omitted).
A misrepresentation amounting to actual legal fraud consists of a material representation of a presently existing or past fact, made with knowledge of its falsity and with the intention that the other party rely thereon, resulting in reliance by that party to his detriment. The elements of scienter, that is, knowledge of the falsity and an intention to obtain an undue advantage therefrom, are not essential if plaintiff seeks to prove that a misrepresentation constituted only equitable fraud. [Jewish Center, supra, 86 N.J. at 624-25 (citations omitted.]
As such, a finding of equitable fraud requires proof of three elements: "(1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; (3) detrimental reliance by the other party." First Am., supra, 177 N.J. at 136-37 (quoting Liebling v. Garden State Indem., 337 N.J. Super. 447, 453 (App. Div.), certif. denied, 169 N.J. 606 (2001)). "Rescission voids the contract ab initio, meaning that it is considered 'null from the beginning' and treated as if it does not exist for any purpose." First Am., supra, 177 N.J. at 136-37 (quoting Black's Law Dictionary 1568 (7th ed. 1999)).
The materiality of a fact is made from the perspective of the insurer. A misrepresentation is considered material if "'a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action. In effect, materiality [is] judged according to a test of prospective reasonable relevancy.'" Palisades, supra, 175 N.J. at 148 (quoting Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 542 (1990)). Iterating the logical import of assessing the materiality of the facts as they were at the time of the misrepresentation, the Supreme Court observed that:
[t]he right rule of law, we believe, is one that provides insureds with an incentive to tell the truth. It would dilute that incentive to allow an insured to gamble that a lie will turn out to be unimportant. The focus, therefore, should be on the time when the insured is about to let loose the lie.
[Longobardi, supra, 121 N.J. at 541-42.]
A subjective misrepresentation can constitute equitable fraud only if it was knowingly false. See Liebling, supra, 337 N.J. Super. at 454-55. A promise to do something in the future is fraudulent unless the promisor has the present intent to follow through. Stochastic Decisions, Inc. v. DiDomenico, 236 N.J. Super. 388, 395 (1989). Cf. Van Dam Egg Co. v. Allendale Farms, Inc., 199 N.J. Super. 452, 457 (noting that "[a] promise to pay in the future is fraudulent if there is no present intent to ever do so").
[The promisor's] intention may be derived from circumstantial evidence such as: the recklessness or implausibility of the statement in light of later events; showing that the promisor's intentions were dependent upon contingencies known only to the promisor; or simply from evidence indicating that the promisor would not or could not fulfill the promise. [Stochastic, supra, 236 N.J. Super. at 396.] Rescission of an insurance policy is only appropriate if the insurer reasonably relied on the misrepresentation. The elements of equitable fraud are satisfied if "the misrepresented facts influence [an insurer's] judgment when estimating the degree and character of the risk and when fixing the premium." Mass. Mut. Life Ins. v. Manzo, 122 N.J. 104, 110-11 (1991). "An insurer is entitled to relief when it relies on incorrect information provided by an insured in an insurance application if the information was material either to the insurer's decision to insure or to the terms of the contract." Id. at 118. Further, the applicant cannot use the insurer's failure to adequately investigate the representation as a defense. One engaged in acts of fraudulent concealment may not successfully urge that "[the] victim should have been more circumspect or astute." Pioneer Nat'l Title Ins. Co. v. Lucas, 155 N.J. Super. 332, 342 (App. Div.), aff'd, 78 N.J. 320 (1978).
Judge Rand found that Vigilant met its burden of proof in establishing the element of material fraud. He found that "there was clear and convincing evidence here that there was in fact the necessary proof to allow rescission." Plaintiff made a material misrepresentation; Judge Rand determined that "[plaintiff] lied" and that "he lied in a material manner." Plaintiff intended that Vigilant rely on his misrepresentation; "[a]s a result of that representation... an application was made to the Chubb group to secure the insurance. And the policy was issued." Vigilant's reliance on plaintiff's statement constituted detrimental reliance; had Vigilant known the truth "[it] would not have issued the policy as it was issued."
Vigilant issued a policy to plaintiff based on plaintiff's representations that he would be moving into the home within the next few months. Judge Rand, after hearing testimony from several witnesses on this issue, determined that plaintiff represented to Vigilant that he would be moving into the home. Judge Rand further determined that plaintiff never had any intention of occupying the residence. As part of the policy agreement, plaintiff was to contact Vigilant to confirm that he had indeed moved into the home. Several months later, after Vigilant received no such notification from plaintiff, Vigilant issued a non-renewal for the policy.
Plaintiff argues that Vigilant did not consider his misrepresentations material, because it did not cancel the policy. Plaintiff's mischaracterizes Vigilant's assertions. At the time of non-renewal, Vigilant was not aware that plaintiff had misrepresented his intentions. Vigilant issued the non-renewal because plaintiff did not submit the requisite notification that he and his family were occupying the residence. According to Vigilant, had it known that plaintiff was not living in the house, or that plaintiff had misrepresented his intention to move into the house, Vigilant would have maintained the option to issue a cancellation of the policy, rather than a non-renewal. Judge Rand determined that plaintiff intentionally made knowing material misrepresentations in obtaining the homeowner's insurance policy for the Timber Trail residence. We conclude that Judge Rand's findings were supported by the record and his application of the law appropriate to support a finding of rescission.
We reject plaintiff's argument that Vigilant waived its fraud defense. To support a claim of waiver, the waiver must be voluntary, intentional and knowing. Knorr v. Smeal, 178 N.J. 169, 177 (2003). See also, Warren v. Employers' Fire Ins. Co., 100 N.J. Super. 464 (App. Div. 1968) (noting that "[t]he voluntary, intentional relinquishment of a known right constitutes a waiver"), rev'd on other grounds, 53 N.J. 308 (1969). Circumstantial evidence can be sufficient to prove a waiver, so long as "[t]he party waiving a known right... [does] so clearly, unequivocally, and decisively." Knorr, supra, 178 N.J. at 177 (citing Country Chevrolet, Inc. v. Twp of N. Brunswick Planning Bd., 190 N.J. Super. 376, 380 (App. Div. 1983)). "The intent to waive need not be stated expressly, provided the circumstances clearly show that the party knew of the right and then abandoned it, either by design or indifference." Ibid.
Vigilant was unaware of plaintiff's misrepresentation until it investigated the January 2005 loss. As such, Vigilant could not have knowingly surrendered its right to raise the issue of misrepresentation under its fraud defense. we reject plaintiff's claim of waiver.
We likewise reject plaintiff's argument that Vigilant was estopped from seeking equitable relief. The doctrine of equitable estoppel "is designed to prevent injustice by not permitting a party to repudiate a course of action on which another party has relied to his detriment." Knorr, supra, 178 N.J. at 178. "In short, to establish equitable estoppel, plaintiffs must show that defendant engaged in conduct, either intentionally or under circumstances that induced reliance, and that plaintiffs acted or changed their position to their detriment." Ibid.
Plaintiff's estoppel argument relies on Vigilant's failure to cancel the policy or declare it void, and Vigilant's retention of the premiums paid. Vigilant's non-renewal was prompted by plaintiff's failure to contact Vigilant to confirm he had actually moved into the home. Subsequently, Vigilant investigated plaintiff's claim resulting from water-damage in January 2005. Plaintiff cannot assert equitable estoppel as Vigilant did not engage in any conduct that induced his reliance; accordingly, plaintiff did not alter his position to his detriment. Judge Rand succinctly explained: "The loss occurred. The only prejudice that plaintiff can claim is that he's not being paid under the policy. Certainly he wasn't in any way deprived of an ability to investigate the claim. He owned the property." Judge Rand properly concluded that there was no basis for finding estoppel. Lastly, as to plaintiff's other claim, we concur that rescission, rather than reformation, was the appropriate remedy.
Finally, since by order of March 5, 2009, we denied Vigilant's motion to file a cross-appeal as within time, we need not address the judge's determination that Vigilant was not entitled to relief under the IFPA. N.J.S.A. 17:33A-1 to -30.