September 3, 2009
ROSA RODRIGUEZ AND DIOMEDES GONZALEZ, PLAINTIFFS-RESPONDENTS/ CROSS-APPELLANTS,
NEW JERSEY INSURANCE UNDERWRITING ASSOCIATION, DEFENDANT-APPELLANT/CROSS-RESPONDENT, AND CITYWIDE INSURANCE AGENCY, INC. AND WEST JERSEY INSURANCE AGENCY, INC., INDIVIDUALLY AND AS SUCCESSOR IN INTEREST TO CITYWIDE INSURANCE AGENCY, DEFENDANTS.
On appeal from the Superior Court of New Jersey, Law Division, Camden County, Docket No. L-10212-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted December 3, 2008
Before Judges Rodriguez and Waugh.
Defendant New Jersey Insurance Underwriting Association (NJIUA) appeals from a judgment reforming an insurance policy in favor of coverage for Rosa Rodriguez and Diomedes Gonzalez (collectively, "plaintiffs") based on accidental fire loss to a home located in Camden. We affirm.
These are the salient facts. Gonzalez purchased a home in Camden in 1986. He and Rodriguez resided there together until 1999, when their romantic relationship ended and Gonzalez moved out. Rodriguez retained possession of the house. She made all payments incident to the house, including mortgage, taxes, utilities and insurance premiums.
Both Gonzalez and Rodriguez subsequently married other people. Rodriguez requested that the house be deeded to her to ensure her ownership interest would not be jeopardized by Gonzalez's subsequent marriage. On February 9, 2000, Gonzalez deeded the house to Rodriguez for consideration of $1. The deed was recorded on March 10, 2000. Plaintiffs did not intend to record the deed until after the mortgage was paid off; the attorney who drafted the transfer documents unilaterally recorded the deed without the consent of either Rodriguez or Gonzalez.
In 1990 Gonzalez had taken out a $50,000 mortgage on the property. The mortgagee was not informed that Gonzalez had deeded the house to Rodriguez in 2000. The mortgage agreement provided that transfer of the house without consent of the mortgagee gave the mortgagee the right to call the note immediately.
The house was insured through NJIUA, which provides property insurance coverage to risks otherwise unacceptable to private insurers. NJIUA policies all have a one-year term and policyholders must reapply annually.
Gonzalez applied for and maintained NJIUA coverage on the house in his name every year from the time he purchased the house through the time of the fire. In September 2000, after the house was deeded to Rodriguez, the plaintiffs attempted to obtain an insurance policy in Rodriguez's name through a private insurer. They were erroneously told that, because Gonzalez was the mortgagor, Rodriguez could not obtain coverage. Gonzalez then submitted a continuation application for the house with NJIUA. Nothing in the record suggests Rodriguez would not have been insured had she requested NJIUA issue a policy in her name.
The house was damaged by an accidental fire on September 26, 2004. Because the claim involved a fire loss in excess of $2,500, NJIUA was statutorily required to determine if there were any outstanding municipal liens to be satisfied out of the claim proceeds. This investigation revealed the 2000 transfer from Gonzalez to Rodriguez. NJIUA declined coverage based on Gonzalez's lack of insurable interest in the property. NJIUA never refunded any of the premiums it had received on the policy.
In the course of processing the fire loss claim, NJIUA contacted the mortgagee so it could pursue an independent claim under the policy. NJIUA continued to process the mortgagee's claim for payment after sending Gonzalez the declination letter. NJIUA was aware of Gonzalez's mortgage on the house when it denied coverage to plaintiffs.
The mortgagee then discovered the 2000 transfer of title to the house, to which it had not consented. On October 3, 2005, the mortgagee called the loan and threatened foreclosure. Rodriguez borrowed money from her mother and paid off the mortgage. The mortgagee did not further pursue a claim under the NJIUA policy.
Plaintiffs filed suit, seeking to compel coverage from NJIUA. Trial was held before the Honorable Michael J. Kassel, who granted the plaintiffs partial summary judgment in the amount of $41,019.90, the amount Rodriguez paid to satisfy the mortgage and avoid foreclosure. At the close of evidence, plaintiffs moved to amend their pleadings to include a count of bad faith, pursuant to Rule 4:9-2. The judge denied this motion.
A jury was impaneled on the issue of damages only. The jury awarded plaintiffs $251,222 for damages to the house, its contents, and lost use and rental value. The judge issued findings of fact on coverage issues at the close of testimony and entered judgment in favor of plaintiffs, reforming the policy to include Rodriguez and molding the jury's damages verdict to conform with the actual policy limits: $80,000 for damage to the house and $30,000 for damage to the contents of the house, along with $6,688 in prejudgment interest and $255 in costs.
NJIUA appealed and plaintiffs cross-appealed. NJIUA contends:
THE TRIAL COURT ERRED WHEN IT RELIED ON FACTORS UNRELATED TO ISSUANCE OF THE INSURANCE POLICY TO JUSTIFY REFORMATION.
Equitable remedies are reviewed on an abuse of discretion standard. Sears Mortgage Corp. v. Rose, 134 N.J. 326, 354 (1993). We defer to discretionary rulings unless the ruling is "made without a rational explanation, inexplicably departs from established policies or rests on an impermissible basis." Flagg v. Essex Cty. Prosec., 171 N.J. 561, 571 (2002) (citation omitted).
In granting equitable relief, the judge found there was no mutual mistake and NJIUA had not engaged in fraudulent or unconscionable conduct: "my decision isn't based upon a finding of any type of wrongdoing. It's simple equity." He found instead that NJIUA's act of collecting premiums year after year on a policy under which it claimed Gonzalez had no insurable interest, coupled with NJIUA's failure to refund the premiums after declining the claim, made this "a perfect case for equitable reformation" on the basis of "inequitable conduct" on NJIUA's part. He suggested NJIUA's actions constituted unjust enrichment and underscored the absence of "gamesmanship" or fraud on the plaintiffs' part.
In his decision, the judge relied on the Supreme Court holding in Heake v. Atl. Cas. Ins. Co., 15 N.J. 475, 481 (1954) (holding reformation is available "only where there is mutual mistake, or where a mistake on the part of one party is accompanied by fraud or other unconscionable conduct of the other party"), and on our holding in Millhurst Milling & Drying Co. v. Automobile Ins. Co., 31 N.J. Super. 424, 433 (App. Div. 1954) ("Equity will reform a contract in the case of a mistake of one party, accompanied by fraud or other inequitable conduct by the other party") (citations omitted). See also Martinez v. John Hancock Mut. Life Ins. Co., 145 N.J. Super. 301, 312 (App. Div. 1976), certif. denied, 74 N.J. 253 (1977).
In arguing the judge erred in granting equitable relief to plaintiffs, NJIUA invokes a semantic distinction, disputes the language of the insurance policy and the NJIUA enabling statute, N.J.S.A. 17:37A-8, and challenges the sufficiency of the judge's factual findings. We reject these arguments and affirm substantially for the reasons given by the trial court. We find the judge did not abuse his discretion in reforming the terms of the insurance policy.
In the cross-appeal plaintiffs contend:
THE TRIAL COURT ERRED IN DENYING THE [PLAINTIFFS'] MOTIONS TO ALLEGE A CROSS-ACTION FOR BAD FAITH AGAINST [NJIUA].
Insurance contracts, like all contracts, include a covenant of good faith and fair dealing. Pickett v. Lloyd's, 131 N.J. 457, 467 (1993). A fiduciary relationship exists between the insurer and the insured. Ibid. Bad faith may be found where no "fairly debatable" reasons exist for denial of a claim or where the insurer "unreasonably" delayed in processing a claim. Id. at 473-74.
Here, we find no evidence in the record supporting a bad faith claim against NJIUA. NJIUA diligently maintained communication with both the mortgagee and with plaintiffs, and we find no unreasonable or undue delay in the span of time between the fire in September 2004 and the denial of benefits in May 2005. Further, although we affirm the judge's decision to reform the terms of the policy, NJIUA nevertheless articulated a "fairly-debatable basis" for denying coverage.
The judge did not err in denying plaintiffs' motions to amend their complaint to include a bad faith count.
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