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Merchants Insurance Co. of New Hampshire, Inc. v. 3 R Painting & Contracting Co.

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY


September 16, 2009

MERCHANTS INSURANCE CO. OF NEW HAMPSHIRE, INC. PLAINTIFF,
v.
3 R PAINTING & CONTRACTING CO., INC.; SMITH GATTA GELOK INC., ET AL. DEFENDANTS.

The opinion of the court was delivered by: Thompson, District Judge

MEMORANDUM & ORDER

This matter is before the Court on the motion of Plaintiff Merchants Insurance Co. of New Hampshire, Inc. for judgment as a matter of law or, in the alternative, for a new trial. For the reasons stated below, Plaintiff's motion is denied.

I. Background*fn1

Plaintiff brought this suit seeking rescission of an insurance policy it issued to Defendant 3R Painting, Inc., alleging that Defendant Fusco, as a principal of 3R Painting, Inc., made several material misrepresentations in the initial application for coverage, including that "3R Painting, Inc." did not even exist and that the actual insured was 3R Painting & Contracting, Co. Plaintiff brought its action after it received a notice of claim arising from an injury suffered by one of 3R Painting & Contracting's employees, David Johnston, while working on a job on which 3R Painting & Contracting was the sub-contractor and Defendant Hessert Construction was the general contractor. Johnston sued Hessert in state court, and Hessert, who was an additional insured under the policy as 3R Painting's general contractor, served the notice of claim on Merchants.

In addition to the equitable claim for rescission on the basis of equitable fraud, Plaintiff also asserted legal claims for breach of contract and negligence against Plaintiff's insurance agent, Defendant Smith Gatta Gelok ("SGG"), for its role in binding the policy.

The parties and the Court agreed that, pursuant to Fed. R. Civ. P. 39, Plaintiff's equitable claim would be tried to an advisory jury and then ultimately decided by the Court and that its legal claims against SGG would be submitted to a second jury for verdict. (Joint Final Pretrial Order 23.)*fn2 The advisory jury returned a verdict in favor of Defendants 3R Painting and Hessert Construction, finding that Plaintiff had waived its right to rescind the policy. The Court adopted that verdict in its findings of fact and conclusions of law under Rule 52(a), concluding that while Fusco had made material misrepresentations in his application, Merchants had waived its right to rescind the policy by failing to act for at least ten months after learning of, or receiving information highly suggestive of, Fusco's misrepresentations. (June 22, 2009 Verdict & Judgment.) The second jury then returned a verdict in favor of Defendant SGG on Plaintiff's breach of contract and negligence claims. The jury found (a) that SGG had breached its contract with Plaintiff but that Plaintiff's damages were not caused by SGG's breach and (b) that SGG had been negligent in handling the 3R Painting placement but that SGG was only 30% negligent as compared to Merchants itself, which was 70% negligent, yielding no recovery for Merchants under New Jersey law. (Verdict Form, Docket # 103.)*fn3

Plaintiff has now moved for a judgment as a matter of law or, in the alternative, for a new trial on its claims against SGG for breach of contract and negligence.*fn4 Plaintiff argues that once the jury found that SGG breached the agency agreement by not correctly ascertaining that Fusco was attempting to secure coverage for 3R Painting & Contracting, Co., not a new entity called "3R Painting, Inc.," and by not passing that information on to Merchants, there was insufficient evidence from which the jury could reasonably find that SGG's breach did not cause Merchants' damages: If SGG had informed Merchants that the insured was in fact 3R Painting & Contracting, Merchants argues, it surely would have cancelled the policy within the 60 day period following the issuance of the policy, during which time, Merchants asserts, it had the option to cancel the policy under New Jersey law, or at least at any time before Johnston was injured. Having cancelled the policy as of right, or before the injury, Merchants never would have needed to litigate its claim for rescission. Therefore there was insufficient evidence from which the jury could reasonably find that SGG's breach did not cause Merchants' damage in the form of the litigation costs associated with seeking the rescission judgment against 3R Painting and Hessert. Similarly, Merchants argues that there is insufficient evidence in the record from which the jury could reasonably find that Merchants itself was 70% negligent in not canceling the policy either within the 60 days or before the Johnston injury.*fn5

II. Analysis

A. Form of Damages

Before addressing Merchants' argument directly, the Court must clarify what Merchants' claimed damages are. In the pending motion, Merchants asserts that the damages SGG's breach and negligence caused are the costs of having to litigate the rescission claim instead of canceling the policy within 60 days as allowed by statute, or at least before the Johnston injury. However, Merchants asserted this damages theory for the first time in its closing argument to the second jury. It does not appear in the Complaint, Merchants' briefing on SGG's motion for summary judgment, the final pre-trial order or Merchants' trial brief. Instead, until closing arguments, Merchants claimed that its damages were its exposure to liability in the underlying state tort action. (See Compl. ¶¶ 84, 90, 94; Joint Final Pre-Trial Order 11 ("Statement of Damages Claimed: ... Merchants seeks ... damages from SGG consisting of defense fees, costs and expenses to be incurred by Merchants in defending and indemnifying 3R Painting & Contracting and/or Hessert in the Underlying Action.").)*fn6 Further, the Court explicitly instructed the jury that Merchants' claimed damages were its exposure to liability in the underlying tort case and that they need not assign a dollar amount because the underlying tort case was still pending.*fn7

Merchants did not object to this instruction, either at the charge conference or after the Court read the instructions to the jury, at which time the Court allowed the parties another opportunity to state any objections to the Court's jury instructions. Therefore, the Court will deny Merchants' motion because it hinges on this theory of damages.*fn8

However, for sake of completeness, the Court will construe Merchants' motion as also arguing on the basis of the 'exposure to liability in the underlying state tort case' damages theory: once the jury found that SGG breached the agency agreement by not informing Merchants of the true corporate identity of the applicant, there was insufficient evidence from which the jury could reasonably find that SGG's breach did not cause Merchants' damages in the form of exposure to liability in the underlying tort action. Similarly, Merchants argues that there is insufficient evidence in the record from which the jury could reasonably find that Merchants itself was 70% negligent in not avoiding exposure to liability in the underlying tort action.

B. Judgment as a Matter of Law

A Court should grant a motion for a judgment as a matter of law under Rule 50 only where "viewing the evidence in the light most favorable to the non-movant and giving it the advantage of every fair and reasonable inference, there is insufficient evidence from which a jury reasonably could find [in favor of the nonmoving party]." Eshelman v. Agere Systems, Inc., 554 F.3d 426, 433 (3d Cir. 2009) (internal citations and quotations omitted). Such motions are granted "sparingly" and only "where the record is critically deficient of the minimum quantum of evidence in support of the verdict." Id. Merchants has not met this standard.

First, Merchants asserts a counter-factual: that it would have cancelled the policy had it known of Fusco's misrepresentations. Merchants points to the testimony of Jim Smith, the Merchants underwriter who initially handled the policy, who testified that the information SGG failed to pass on to Merchants certainly would have been material to Merchants' decision to issue the policy and not cancel it. But, as SGG argues in its opposition, the jury could have reasonably concluded that Merchants would not have cancelled the policy even if it had known of Fusco's misrepresentations. As the Court found in its findings of fact with respect to the rescission claim, Merchants chose not to rescind the policy even after it received the Supplemental Questionnaire and the Audit Report and learned of Fusco's misrepresentation regarding the number of employees -- information highly suggestive of the insured's true identity. From that evidence, the jury could reasonably conclude that if Merchants chose not to rescind the policy when it actually learned of the misrepresentations in March 2005, Merchants would not have cancelled the policy even if it had learned of them earlier on.*fn9 Therefore, the jury had sufficient evidence to find that Merchants would not have cancelled the policy even if SGG had not breached the agreement and therefore that SGG's breach did not cause Merchants' damages. Similarly, since there is sufficient evidence to find that Merchants may not have even cancelled the policy within the 60 days or before the Johnston injury even if given the information, the jury had sufficient evidence to conclude that Merchants itself was substantially more negligent than SGG in its handling of information regarding its insureds.*fn10

Second, even assuming arguendo that the jury could not reasonably escape the conclusion that Merchants would have cancelled the policy within the 60 days or at least before the Johnston injury had SGG informed Merchants of the insured's true corporate identity, all that would establish is that there was insufficient evidence to find that SGG's breach was not a but for cause of Merchants' exposure to liability. However, the jury may still have reasonably concluded that Merchants itself, not SGG, proximately caused the damage by not rescinding the policy when it finally did learn of the misrepresentations from the Supplemental Questionnaire and the Audit Report. Under New Jersey law, a plaintiff must prove that defendant's breach of contract was both a but for cause as well as a proximate cause of the damages, that is, that defendant's breach was a "substantial factor" in causing the damages. See Wade v. Kessler Inst., 778 A.2d 580, 589-90 (N.J. Super. Ct. App. Div. 2001). Here, there was sufficient evidence in the record for the jury to find that Merchants later received from the Supplemental Questionnaire and the Audit Report the information SGG had earlier failed to provide, but then chose not to rescind the policy. (See Verdict & Judgment 13-15.) Therefore, there was sufficient evidence for the jury to reasonably conclude that Merchants' own failure to rescind was the substantial factor which caused its exposure to liability while SGG's breach was only a but for cause. Similarly, again, there was likewise sufficient evidence for the jury to conclude that while SGG was negligent in its collection and communication of information, Merchants itself was substantially more negligent than SGG in its handling of information regarding its insureds.

C. New Trial

While a new trial may be granted even when judgment as a matter of law is inappropriate, it should be granted only when the verdict is contrary to the weight of the evidence or when a miscarriage of justice would result if the verdict were to stand. Brennan v. Norton, 350 F.3d 399, 430 (3d Cir. 2003). For the reasons stated above, the jury's verdict was neither against the weight of the evidence nor resulted in a miscarriage of justice.

CONCLUSION

For the foregoing reasons, IT IS on this 16th day of September, 2009, ORDERED that Plaintiff's motion for judgment as a matter of law or for a new trial [docket # 120] is DENIED.

ANNE E. THOMPSON, U.S.D.J.


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