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Somerset Medical Center v. Executive Risk Indemnity

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


March 22, 2010

SOMERSET MEDICAL CENTER, PLAINTIFF-RESPONDENT,
v.
EXECUTIVE RISK INDEMNITY, INC., DEFENDANT-APPELLANT.

On appeal from Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-1122-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued February 24, 2010

Before Judges Graves, Sabatino and Newman.

This is an insurance coverage case. Defendant, Executive Risk Indemnity, Inc. (ERII), issued to plaintiff, Somerset Medical Center (Somerset), a "Directors, Officers and Trustees Liability Insurance Including Healthcare Organization Reimbursement Policy." Somerset seeks coverage under the policy for defense and indemnity for underlying lawsuits, which were consolidated in Middlesex County under the designation In re Cullen Litigation with a master complaint. In the underlying lawsuits, nurse Charles Cullen pleaded guilty to committing approximately twenty-nine murders and six attempted murders at various health care facilities, including Somerset. In the master complaint, allegations were made against Somerset and its officers for negligent hiring, negligent supervision and entrustment, negligent reporting, and negligent continuation of employment. The question presented is whether a bodily injury exclusion contained in the ERII policy bars coverage of claims against Somerset and its officers for allegations of negligence relating to the employment of Cullen.

Somerset and ERII filed cross-motions for partial summary judgment and the trial court granted Somerset's. It held that ERII was precluded from asserting the bodily injury exclusion as an affirmative defense for two reasons. First, ERII was barred by collateral estoppel, also known as issue preclusion, because the same exclusion was unsuccessfully asserted as a defense in Warren Hospital v. Executive Risk Indemnity, Inc., No. L-6277-06 (Law Div. June 26, 2009).*fn1 Second, even if collateral estoppel did not apply, the bodily injury exclusion did not bar coverage for the underlying claims.

We granted leave to appeal.*fn2 While we disagree that collateral estoppel could bar the use of the bodily injury exclusion in the policy, we are persuaded that the exclusion did not bar coverage for the underlying claims and affirm.

ERII issued to Somerset a "Directors, Officers and Trustees Liability Insurance Including Healthcare Organization Reimbursement Policy." Somerset sought coverage under the policy for defense and indemnity for the underlying lawsuits in the In re Cullen Litigation. Section I of the policy, "Insuring Agreements," states:

(A) The Underwriter will pay on behalf of the Insured Persons Loss from Claims first made against them during the Policy Period, except for Loss which the Insured Entity pays to or on behalf of the Insured Persons as indemnification.

(B) The Underwriter will pay on behalf of the Insured Entity Loss from Claims first made against the Insured Persons during the Policy Period which the Insured Entity pays to or on behalf of the Insured Persons as indemnification.

(C) [OPTIONAL COVERAGE] If there is a premium charge in ITEM 5(b) of the Declarations, the Underwriter will pay on behalf of the Insured Entity Loss from Claims first made against it during the Policy Period.

The term "Claim" means: "(1) written notice received by an Insured that any person or entity intends to hold any Insured responsible for a Wrongful Act, or (2) a legal, injunctive or administrative proceeding against an Insured Person solely by reason of his or her status as such." "Wrongful Act" is defined as: any actual or alleged error, omission, misstatement, misleading statement or breach of duty (1) by an Insured Person solely in his or her capacity as such, or while serving as a director or trustee or any other non-profit entity at the express written direction of the Insured Entity; or (2) with respect to coverage under Insuring Agreement C, by the Insured Entity.

The bodily injury/property damage exclusion under Section III (as amended) provides:

(B) The Underwriter shall not pay Loss, including Defense Expenses, for Claims:

(1) based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged bodily injury, sickness, mental anguish, emotional distress, disease or death of any person, or damage to or destruction of any tangible property including loss of use thereof[.]

The directors, officers, and trustees liability insurance policy issued by ERII to Somerset is the same type of policy issued by ERII to Warren Hospital. With the exception of certain endorsements not relevant to this appeal, the Warren Hospital policy is identical to Somerset's policy. The bodily injury exclusions in both policies are identical.

Warren Hospital is a defendant in the underlying In re Cullen Litigation. On August 14, 2006, it brought a declaratory action against ERII, Warren Hospital v. Executive Risk Indemnity, Inc., supra, seeking coverage for claims made against it in the underlying In re Cullen Litigation. ERII moved to dismiss Warren Hospital's action, arguing that the bodily injury exclusion in the Warren Hospital policy precluded coverage. On February 2, 2007, Judge Bryan D. Garruto denied ERII's motion to dismiss, ruling that the bodily injury exclusion was not a defense to coverage for the underlying claims.

ERII moved for leave to appeal, and on March 20, 2007, this court denied the motion. Thereafter, ERII and Warren Hospital settled the case. They jointly stipulated to a dismissal with prejudice on June 10, 2008.

On appeal, ERII raises the following issues for our consideration:

POINT I

EXECUTIVE RISK IS NOT COLLATERALLY ESTOPPED FROM ASSERTING THE BODILY INJURY EXCLUSION.

POINT II

THE BODILY INJURY EXCLUSION BARS COVERAGE FOR THE UNDERLYING LAWSUITS AS A MATTER OF LAW.

I.

ERII asserts in Point I that it is not collaterally estopped from asserting the bodily injury exclusion. ERII essentially makes two arguments: (a) there was no final judgment on the merits in the Warren Hospital case, and (b) other considerations preclude giving the Warren Hospital opinion collateral estoppel effect.

The parameters of collateral estoppel have been described as follows:

"'The doctrine of collateral estoppel is a branch of the broader law of res judicata which bars relitigation of any issue actually determined in a prior action generally between the same parties and their privies involving a different claim or cause of action.'" Figueroa v. Hartford Ins. Co., 241 N.J. Super. 578, 584 (App. Div. 1990) (quoting New Jersey Mfrs. Ins. Co. v. Brower, 161 N.J. Super. 293, 297-98 (App. Div. 1978)). As contrasted with res judicata, which requires an identity of the cause of action, collateral estoppel bars relitigation of the same issues in suits that arise from different causes of action. Selective Ins. Co. v. McAllister, 327 N.J. Super. 168, 173, (App. Div.), certif. denied, 164 N.J. 188 (2000). [Monek v. Borough of S. River, 354 N.J. Super. 442, 453-54 (App. Div. 2002).]

For collateral estoppel to apply, a party must establish that: (1) the issue to be precluded is identical to the issue previously decided; (2) the issue was actually litigated in the prior suit and the party had a full and fair opportunity to litigate it; (3) there was a final judgment on the merits in the prior action; (4) the determination of the issue sought to be precluded was essential to the prior judgment; and (5) the party against whom preclusion is asserted was a party to or in privity with a party to the earlier proceeding. In re Estate of Dawson, 136 N.J. 1, 20-21 (1994). Because the doctrine of collateral estoppel has its roots in equity, even if all five elements are met, collateral estoppel may still be denied if applying the doctrine would be unfair.

A judgment is considered final if it is not provisional, tentative, or contingent and represents the completion of all steps in the adjudication of a claim by the court, "short of any steps by way of execution or enforcement that may be consequent upon the particular kind of adjudication." Restatement (Second) of Judgments § 13 comment b (1982).

ERII argues that the third requirement for the application of collateral estoppel, a final judgment in a prior proceeding on the merits, was not met here. Warren Hospital was dismissed by a joint stipulation of dismissal filed by both parties pursuant to a settlement. Somerset concedes that the stipulation of dismissal is not a final judgment to be used for collateral estoppel purposes. Even had Somerset not conceded, the Warren Hospital stipulation of dismissal contained no statement of issues resolved by the judgment which would be essential to constitute a final judgment on the merits. ERII asserts that the Warren Hospital opinion denying ERII's motion to dismiss cannot be considered a final judgment on the merits because it is not final, it is not a judgment, and it is not on the merits. ERII explains that denials of motions to dismiss are the quintessential interlocutory, non-final orders, appealable only by permission. We agree.

As here, a denial of a motion to dismiss is an interlocutory order that is not appealable as of right. In Warren Hospital, we denied ERII's motion to file an interlocutory appeal.

Somerset maintains that ERII ignores Rose v. Schultz, No. 03-CV-1684, 2007 U.S. Dist. LEXIS 28205, at *16 (D.N.J. Apr. 17, 2007). Somerset states that the court in Rose v. Schultz "found that when a court decides a motion to dismiss and expresses its reasons for doing so in a written opinion, the decision should be considered final for purposes of collateral estoppel" (emphasis added). In addition to the fact that the case is unpublished and therefore cannot constitute precedent or be binding on this court, see Rule 1:36-3, Somerset glosses over the holding. The court in Rose v. Schultz, supra, 2007 U.S. Dist. LEXIS 28205, at *16, stated that when a court grants a motion to dismiss and expresses its reasons for doing so in a written opinion, the decision is considered final for purposes of collateral estoppel.

There is a difference in kind between granting and denying a motion to dismiss. Granting a motion to dismiss ends the litigation and requires entry of a judgment in favor of the defendant, and it is immediately appealable. The denial of the motion to dismiss in the Warren Hospital case was interlocutory and was not a final judgment on the merits. The lack of a final judgment constituted a crucial missing element necessary, absent an exceptional circumstance, to invoke collateral estoppel.

Even if the denial of the motion to dismiss in Warren Hospital were viewed as a final judgment on the merits, other considerations preclude giving the decision collateral estoppel effect.

When the elements of collateral estoppel are met, the doctrine may still not be applied if it is not fair to do so. Barker v. Brinegar, 346 N.J. Super. 558, 566 (App. Div. 2002) (citing Kozlowski v. Smith, 193 N.J. Super. 672, 675 (App. Div. 1984)). In Barker, this court cited to Restatement (Second) of Judgments § 29 comment j and stated that "we must decide whether the overarching principle of fairness requires that we reject rigid application of collateral estoppel under the circumstances presented here." 346 N.J. Super. at 567.

ERII contends that two circumstances apply here. First, ERII relies on Restatement (Second) of Judgments § 29(7), which states: "The issue is one of law and treating it as conclusively determined would inappropriately foreclose opportunity for obtaining reconsideration of the legal rule upon which it was based."

Comment (i) for § 29 provides:

When the issue involved is one of law, stability of decision can be regulated by the rule of issue preclusion or by the more flexible rule of stare decisis. See § 28, Comment b. If the rule of issue preclusion is applied, the party against whom it is applied is foreclosed from advancing the contention that stare decisis should not bind the court in determining the issue. Correlatively, the court is foreclosed from an opportunity to reconsider the applicable rule, and thus to perform its function of developing the law. This consideration is especially pertinent when there is a difference in the forums in which the two actions are to be determined, as when the issue was determined in the first action by a trial court and in the second action will probably be taken to an appellate court; when the issue was determined in an appellate court whose jurisdiction is coordinate with or subordinate to that of an appellate court to which the second action can be taken; or when the issue is of general interest and has not been resolved by the highest appellate court that can resolve it. As indicated in § 28, Comment c, it is also pertinent that the party against whom the rule of preclusion is to be applied is a government agency responsible for continuing administration of a body of law applicable to many similarly situated persons. When any of these factors is present, the rule of preclusion should ordinarily be superseded by the less limiting principle of stare decisis.

ERII asserts, relying on Polarome International, Inc. v. Greenwich Insurance Co., 404 N.J. Super. 241, 260 (App. Div. 2008), certif. denied, 199 N.J. 133 (2009), that the interpretation of an insurance contract is a question of law, so the coverage issue in this appeal is a question of law. Here, the Warren Hospital ruling was rendered by the trial court without review. This is the first time the merits of coverage have been considered by an appellate court which can review the exclusionary clause and interpret its meaning.

ERII also points out that the Warren Hospital case was settled at an early stage, after the preliminary ruling denied the motion to dismiss. ERII argues that giving collateral estoppel effect to early interlocutory rulings would deter settlement and such results would contravene this State's strong public policy favoring settlements.

The doctrine of collateral estoppel has its roots in equity. Even if all elements are met, collateral estoppel may still be denied if applying the doctrine would be unfair. Fama v. Yi, 359 N.J. Super. 353, 359 (App. Div.), certif. denied, 178 N.J. 29 (2003); Pace v. Kuchinsky, 347 N.J. Super. 202, 215 (App. Div. 2002). ERII has not had an appellate review of the application of this exclusion to the underlying negligence claims. Equity would favor that be afforded to ERII.

II.

ERII maintains in Point II that the bodily injury exclusion bars coverage for the underlying lawsuits as a matter of law. ERII contends in two subparts that applying the plain language of the exclusion, coverage is barred as a matter of law, and the trial court's reliance on Search EDP, Inc. v. American Home Assurance Co., 267 N.J. Super. 537 (App. Div. 1993), certif. denied, 135 N.J. 466 (1994), was misplaced.

In interpreting contracts for insurance, the trial court noted that coverage provisions are read broadly and exclusionary provisions are read narrowly and that ambiguities should be resolved in the insured's favor and consistent with the insured's reasonable expectations. The court relied on Search EDP, Inc., id. at 540, for the proposition that our courts have ruled against the use of similar exclusionary clauses where insurance companies denied claims for bodily injury exclusions. The court wrote:

Search involved an employment agency that conducted evaluations and screenings of individuals who it then referred to employers. Id. at 539-40. One of these referrals attacked a co-worker. Id. at 540. The co-worker then sued Search EDP. Id. Search then presented the complaint to its insurer, but was denied coverage based on the policies [sic] bodily injury exclusion. Id.

In deciding Search, the Appellate Division articulated a process for evaluating exclusionary policies. First, it must be determined whether there is a facial conflict between the risks covered and the risks that appear to be covered. The court then resolved that conflict by using a proximate cause test. Id. at 543.

The proximate cause test states that where a "peril specifically insured against sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produces the result for which recovery is sought, the insured peril is regarded as the proximate cause of the entire loss." Id. at 543. When applying the test, the court in Search held that the professional negligence of the company was the insured risk and was at the beginning of the causal chain that ended with the assault on the victim. Id. at 544. While recognizing that the "claim for that bodily injury may be read as literally encompassed by the bodily injury exclusion[,] [i]t was, nevertheless, either caused by the insured as a direct and proximate result of a covered risk or not caused by the insured at all." Id. The court concluded that "[i]n these circumstances, application of the proximate-cause rule entitles plaintiffs to a defense and to indemnity as well." Id.

The trial court concluded that there is a facial conflict because the policy provides coverage for wrongful acts while excluding coverage for all claims arising out of bodily injury that results from covered acts. The court stated that under the proximate cause test it is clear that coverage should not be denied based on the bodily injury exclusion. The trial court explained:

The underlying litigation against the plaintiff Somerset Medical was for a variety of negligence actions on the part of plaintiff's officers. The alleged negligent hiring, negligent supervision and entrustment, negligent reporting, and/or negligent continuation of employment of Cullen set in motion the events that allowed Cullen to inflict the bodily injury and death. As such, the insured peril - the wrongful acts by the hospital and administrators - was or was not the proximate cause of the loss to Somerset Medical as a result of the Cullen litigation.

The trial court concluded that the defect at issue is the alleged negligence in hiring, supervision, entrustment, reporting, and continuation of employment of Cullen, not Cullen's subsequent actions. The trial court quoted Search EDP, Inc., id. at 544, where this court stated: "[I]ndemnity cannot reasonably be made to depend upon the particular harmful consequence resulting from covered conduct." The court concluded that the bodily injury exclusion may not be used to deny coverage and indemnity to Somerset and its officers in this case.

ERII first argues that insurance policies must be interpreted according to the plain, ordinary meaning of their words. While there is no disagreement with this proposition of law, this policy has conflicting language regarding coverage and exclusions. This is not a situation where the court has created an ambiguity where none exists.

ERII relies on American Motorists Insurance Co. v. L-C-A Sales Co., 155 N.J. 29, 35 (1998), for the proposition that the "arising out of" language appears frequently in insurance policies and has been interpreted expansively by New Jersey courts in insurance coverage litigation to mean "originating from," "growing out of," and the like. ERII is also correct that in Allstate Insurance Co. v. Moraca, 244 N.J. Super. 5, 13 n.1 (App. Div. 1990), and Prudential Property & Casualty Insurance Co. v. Brenner, 350 N.J. Super. 316, 322-23 (App. Div. 2002), this court has interpreted "arising out of" language broadly. The problem here is not the broad interpretation of this language, but the conflict between clauses of the policy, and the ultimate conclusion that the underlying claims against the hospital and its principals arose from negligence in hiring and supervising Cullen, not in Cullen's actions in harming patients.

ERII relies on Williamson v. Continental Casualty Co., 201 N.J. Super. 95, 104-05 (App. Div. 1985), for the proposition that the expansive phrase "arising out of" is typically interpreted to require only a "but for" test. In Williamson, the court considered coverage under a homeowner's policy based on the insured's ownership of a car and the son's use of it.

Id. at 96, 104. Thus, but for negligent use of the car, no liability could result to the father, so the plaintiff's injuries arose out of the use of a motor vehicle owned by the insured, coverage for which was explicitly excluded by the policy. Id. at 104-05. Here, the underlying claims against the insureds arose because of the failure to contact authorities, which resulted in various forms of alleged negligence by Somerset and its officers. But for that failure there would be no claims. The actions of the nurse of murdering patients, or attempting murder, are not the source of the pertinent claims or where they arose.

ERII maintains that the phrase "directly or indirectly resulting from" is even broader than the "arising out of" language. ERII is correct that in Diamond Shamrock Chemicals Co. v. Aetna Casualty & Surety Co., 258 N.J. Super. 167, 236-37 (App. Div. 1992), certif. denied, 134 N.J. 481 (1993), this court observed that such exclusionary language is extremely broad. ERII further argues that the language "in any way involving" must be viewed as requiring only a minimal connection between the claim and the excluded subject matter. The fundamental defect of this entire argument is that the underlying claims result from and involve acts and omissions by Somerset's officers, not actions by Cullen.

ERII asserts that applying the plain meaning of any of the opening clauses in the bodily injury exclusion, there is no question that the exclusion applies to the underlying lawsuits. Once again, the origin of the underlying lawsuits as they relate to Somerset is not the death or physical injury of patients placed in Cullen's care while a nurse at Somerset. Instead, it is the acts and omissions of Somerset's officers that resulted in the allegations of negligence.

ERII contends that reliance on Search EDP, Inc. was clearly mistaken, that it is distinguishable, and, if not, it should not be followed because it is contrary to settled law in this State.

In Search EDP, Inc., supra, 267 N.J. Super. at 539-40, the insurance policy in dispute was an errors and omissions policy that covered professional negligence. The plaintiff employment agency, insured under both a general liability insurance policy and an errors and omissions policy issued by the defendant, had hired an employee without performing an adequate background check. Id. at 540. When that employee subsequently committed a violent assault against a co-worker, the victim sued, asserting that her injuries were directly attributable to the agency's professional negligence. Ibid. The late Judge Pressler, speaking for the court, concluded that the agency had been professionally negligent in failing to perform a background check, and that such negligence was the proximate cause of the victim's injuries. Id. at 543-44.

This court further recognized that the purpose of an errors and omissions policy, which directly protects an insured against professional negligence, but which excludes coverage for bodily injury, was to protect an insured who commits an act of professional negligence. Id. at 545. Thus, "[i]f an act of professional negligence causes actionable damage to another, but if the insured's right to protection depends not on the nature of the act but rather on the nature of the resulting damage, we believe that the stated policy objective would be substantially nullified." Ibid.

The Search EDP, Inc. court concluded that the errors and omissions policy would fairly fulfill its stated objective only by reading the bodily injury exclusion as excepting bodily injury claims alleged to have resulted from an act of professional wrongdoing. Ibid. Thus, we determined that the victim's damages were caused by the agency's professional negligence, so we concluded that coverage was justified pursuant to the proximate cause doctrine, notwithstanding a policy exclusion for bodily injury. Id. at 544-45.

ERII attempts to distinguish Search EDP, Inc. based on the nature of the insurance policy and the business of the insured. ERII contrasts differences in the language of the exclusion in Search EDP, Inc. to the exclusion here. In Search EDP, Inc., the exclusion barred coverage for claims "for bodily injury to, or sickness, disease or death of any person or persons." Id. at 542. ERII is correct that the "arising out of, directly or indirectly resulting from, in consequence of, or in any way involving" language in the contract here is missing from Search EDP, Inc. However, this distinction does not alter the outcome of this case. The broadening phrases do not change the underlying claim of coverage for alleged negligence by Somerset's officers, directors, and trustees.

Individuals sued Somerset and its officers for negligence, which falls within the category of protection Somerset sought when purchasing the insurance. The different type of insurance in Search EDP, Inc., an errors and omissions policy, does not result in a different outcome because in both cases, it is reasonable to assume that there was an expectation by the insured of coverage for underlying claims. That expectation of coverage is particularly reasonable here in light of the fact that the insured enterprise is a hospital, rather than some other institution that does not care for sick people and assumes the risks inherent in that responsibility.

While ERII seeks to distinguish Search EDP, Inc. on its facts, both an employment placement company and a hospital hire and supervise individuals. The claims in both Search EDP, Inc. and this case involve negligence where the proximate cause test is relevant.

Although ERII asks us not to follow Search EDP, Inc., the trial court's reliance on that case for the proximate-cause test is buttressed by the argument that it should not be disregarded.*fn3 See Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 256 (2004) (citing Search EDP, Inc. as an example of where a proximate-cause test was applied to determine coverage for losses under an errors and omissions policy where the policy covered damages "resulting from" wrongful acts "aris[ing] out of" the insured's business). Cases decided before Search EDP, Inc. support the proposition set forth in Search EDP, Inc. See Franklin Packaging Co. v. Cal. Union Ins. Co., 171 N.J. Super. 188, 190-92 (App. Div. 1979), certif. denied, 84 N.J. 434 (1980) (finding damage to inventory was a loss proximately caused by vandalism when that damage resulted from a sequence of events beginning with vandalism to a water valve and ending with damaged inventory because of a clogged drainpipe); Westchester Fire Ins. Co. v. Cont'l Ins. Cos., 126 N.J. Super. 29, 37-38 (App. Div. 1973) (stating that the phrases "caused by" and "resulting from" equate to proximate cause), aff'd o.b., 65 N.J. 152 (1974).

Both parties also discuss L.C.S., Inc. v. Lexington Insurance Co., 371 N.J. Super. 482 (App. Div. 2004). There, we held that an insurer has a duty to defend a personal injury suit involving a bar fight, where one count alleged the insured bar was negligent in the hiring, training, employment, and supervision of its bouncers and other employees. The court concluded that the underlying suit was not barred from coverage pursuant to an exclusion for claims "arising out of assault and battery." Id. at 487.

ERII seeks to distinguish L.C.S. based on the differences in the "arising out of" language, stating that L.C.S.'s exclusion was not as broad as the language here and that the L.C.S. exclusion only applied to assault and battery claims. The exclusionary provision in L.C.S. stated that the insurance did not apply to:

"Bodily Injury," "Property Damage," "Personal Injury," "Advertising Injury," or "Medical Expenses" arising out of assault and battery or out of any act or omission in connection with the prevention or suppression of such acts, whether caused by or at the instigation of or direction of the Insured, his employees, patrons or other persons.

[L.C.S., supra, 371 N.J. Super. at 487.]

This language is quite broad, and although it is not identical to the exclusionary language at issue here, it is similar to language such as "resulting from," "in consequence of," and "involving" in Somerset's policy.

We reject ERII's argument that the limit of the exclusion in L.C.S. to assault and battery claims makes it inapposite. It is the similarity of the type of underlying claim that is relevant, and the court's conclusion that a comparable exclusion did not bar coverage for allegedly negligent acts.

We need not address ERII's reliance on out-of-state authorities to support its claim because there is more than sufficient authority in this State on the subject matter before us. We are satisfied that the bodily injury exclusion in Somerset's policy with ERII does not bar coverage for the underlying lawsuits.

Affirmed.


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