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Muhammad v. Metropolitan Property and Casualty Insurance Co.


April 26, 2010


On appeal from Superior Court of New Jersey, Law Division, Somerset County, No. L-1359-05.

Per curiam.


Argued January 20, 2010

Before Judges Wefing, Grall and Messano.

Plaintiffs appeal from a trial court order granting defendant Metropolitan Property and Casualty Insurance Company ("MP&C") "an assignment of the proceeds of Judgment of $85,820.21" and setting a deadline of February 19, 2009, for plaintiffs to submit a claim for replacement value. After reviewing the record in light of the contentions advanced on appeal, we reverse.

Plaintiffs owned a home located in the Washington Park Historic District of North Plainfield and insured the dwelling and its contents through MP&C under a policy which named plaintiffs and their mortgagee, National City Mortgage Company ("National City") as insureds. The policy insured the dwelling and its contents and provided coverage for alternate living expenses.

The home had been divided into four units; plaintiff Burton occupied one unit, plaintiff Muhammad occupied another. They intended to renovate the remaining units. The house suffered significant water damage in January 2003 when pipes froze and burst, making it uninhabitable. Since that incident, plaintiff Muhammad has incurred continued expenses for alternate living accommodations, but plaintiff Burton has not, due to his status as a member of the military. Both, however, remained liable to National City on the mortgage. While investigating the water damage, a pre-existing mold condition was discovered, which had to be remediated before further repair work could be done. MP&C paid for the mold remediation and then retained a contractor to perform the needed repairs. Plaintiffs were dissatisfied with the quality of the work of that contractor and, with MP&C's approval, plaintiffs retained ASW Contracting ("ASW") to make the necessary repairs. MP&C advanced more than $20,000 for ASW's work. While in the course of performing its work, ASW started a fire that partially destroyed the building. As ASW was uninsured, plaintiffs' policy with MP&C covered the loss. Plaintiffs hired Executive Adjustment Bureau, Inc. ("Executive") to adjust the loss and Metropolitan Restoration, Inc. ("Metropolitan") to perform the needed repairs. Plaintiffs' contract with Metropolitan called for it to finish its work by July 11, 2004, in exchange for any recovery Executive could negotiate with MP&C.

In April 2004, MP&C issued a check payable jointly to plaintiffs, National City and Executive for $328,998.19 for the actual cash value of damage to the dwelling. In its letter, MP&C explained that it had estimated plaintiffs' replacement cost damages at $501,575.66 but had withheld the estimated depreciation, sales tax and deductible. It notified plaintiffs that if they wished to assert a claim for the dwelling's full replacement cost, they had to do so within 180 days. From that sum, plaintiffs authorized the payment of $109,666 to Metropolitan for work it had performed to date.

Various disputes ensued between plaintiffs and MP&C as to how much additional monies plaintiffs were entitled to as full replacement cost; the details of those disputes are not material to the issue before us. Repair and restoration of plaintiff's house was complicated by the fact that it was located in a historic district. Metropolitan did not complete the work by its contractual deadline of July 11, 2004. In August 2004, plaintiffs notified Executive that they were terminating its services; by that date, no work beyond certain required demolition had been completed, and design approval had yet to be obtained. Plaintiffs notified MP&C that Executive and Metropolitan had been terminated and Metropolitan and Executive in turn notified MP&C that they were asserting a claim against the remaining insurance proceeds for monies they claimed plaintiffs owed to them.

In September 2005, plaintiffs filed suit against MP&C for the sums allegedly due under their policy and joined Executive, Metropolitan and ASW as additional defendants. MP&C, Metropolitan and Executive all filed answers, counterclaims and cross-claims. During the course of that litigation, MP&C deposited $461,931.53 with the Superior Court Clerk's office. These deposits were in addition to the $607,000 MP&C had paid to plaintiffs under various provisions of their policy.

On May 1, 2008, plaintiffs and MP&C executed a Stipulation and Order of Settlement which provided in pertinent part Plaintiffs have asserted various other claims against [MP&C] in their complaint and it is hereby agreed and stipulated by and between Plaintiffs and [MP&C] that, for and in consideration of the payment of $5,000 by [MP&C] (which amount shall be paid by it to the attorneys for Plaintiffs, as trustee), Plaintiffs hereby release and forever discharge and dismiss with prejudice and without costs or fees as to either party, all claims asserted or that could ever have been asserted by Plaintiffs against [MP&C], its agents and attorneys, including, but not limited to, all those asserted in the complaint, except that Count 8 of the Complaint shall survive this stipulation of dismissal only to the limited extent of Plaintiffs' right to collect from [MP&C] an amount not to exceed $305,000, representing the difference between [Actual Cash Value] amounts paid by [MP&C] and the [Replacement Cash Value] appraisal award of $800,000 on the Dwelling, such amount to be recoverable in accordance with the provisions of the Policy, and [MP&C's] rights at law and/or in equity, including, but not limited to, any reduction thereof for the value of the land and for other improvements or enhancements on the land of the replacement Dwelling upon any purchase of a replacement Dwelling, and subject to proof, reasonably satisfactory to [MP&C], that (a) Plaintiffs have completed a purchase of a replacement Dwelling, and (b) as to the amount of the purchase price paid for said replacement Dwelling. In the event that the parties cannot agree upon a value of the land and other improvements or enhancements on the land of the replacement Dwelling, the parties shall endeavor to agree upon a certified real estate appraiser with whom neither of the parties or their law firms has any relationship, who will arrive at a binding estimate of the value of the land and for other improvements or enhancements to or on the land of the replacement Dwelling. The cost of the appraisal shall be borne equally by the parties. If the parties cannot agree on the selection of an appraiser within twenty (20) days, Plaintiffs and [MP&C] will each submit the names of the three certified appraisers to the Court, and the Court shall pick one from among the six appraisers submitted.

The parties further agreed that the funds previously deposited with the clerk's office would remain on deposit pending further order of the court.

The next day, prior to the trial of plaintiffs' claims against Executive and Metropolitan, counsel for MP&C notified plaintiffs' attorneys, Executive, and Metropolitan that MP&C asserted a subrogation claim against any proceeds plaintiffs recovered as compensation for additional living expenses they had incurred following the damage to the property. Plaintiffs pursued their claims against Executive and Metropolitan, and at trial argued that they were entitled to recover the mortgage payments they had made to National City from the time defendants breached their contract to the time of trial. Following a jury trial, judgment was entered in plaintiffs' favor for $85,820.21.

Plaintiffs thereafter filed a motion to withdraw the balance of the funds on deposit with the clerk's office and MP&C filed a cross-motion asserting a subrogation claim. These motions resulted in two orders. The first, entered October 17, 2008, directed the clerk's office to issue two checks, one for $263,000 to National City in full satisfaction of its mortgage on the premises and one for $113,103.32, payable to plaintiffs and their attorney. This order directed that the remaining balance again be held, pending further order of the court. The second was entered November 21, 2008; it provided in pertinent part that MP&C's application "seeking an assignment of the proceeds of Judgment of $85,820.01 is Granted." It is this order, which the trial court subsequently stayed, which is on appeal to this court.

Having reviewed this matter, we are satisfied that defendant's theory of recovery, subrogation, is wholly inapplicable to this matter.

Subrogation is an equitable remedy, which requires "the ultimate discharge of an obligation by the one who in good conscience ought to pay it." Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 171 (1954) (citations omitted). The right of subrogation is commonly applicable when an insurer indemnifies an insured for a loss caused by a third party.

Ibid. An insurer is properly reimbursed for the initial payment to the insured by the third party that actually caused the loss. Ibid. In the absence of subrogation, the insured would either receive a windfall in the form of double recovery for the loss (from the insurer and the third party that caused the loss) or the culpable third party would never pay for the damage it caused and has a legal obligation to pay. Ibid.

Subrogation is not an absolute right, but is highly favored in the law and applied in accordance with equitable principles. Id. at 171-72; Schmid v. First Camden Nat'l Bank & Trust Co., 130 N.J. Eq. 254, 266-67 (Ch. Div. 1941). Although subrogation has broad application, it should not be applied in favor of a "mere stranger or volunteer," that does not have a legal obligation or duty to pay the debt of another. Schmid, supra, 130 N.J. Eq. at 266. When an individual pays a debt in order to protect a continued interest, he or she is not a volunteer and subrogation may be applied. Id. at 267. "'It is unquestionably the rule that, when an obligation is discharged by one not primarily liable for it, but who believes himself to be acting either in the performance of a legal duty, or for the protection of a legal right, or at the request of the party ultimately bound, and even in certain other cases, favored by public policy, where none of the above circumstances may be present, the party thus discharging the obligations is entitled in equity to demand, for his reimbursement, and subject to any superior equities, the performance of the original obligation, and the application thereto of all securities and collateral rights held by the creditor.'" Camden County Welfare Bd. v. Federal Deposit Ins. Corp., 1 N.J. Super. 532, 552 (Ch. Div. 1948) (quotations omitted).

The funds on deposit in the clerk's office are not the result of any payments by Executive and Metropolitan to satisfy the judgment entered against them. Indeed, at the time of MP&C's cross-motion, plaintiffs had not recovered anything under their judgment. Rather, those funds were deposited by MP&C to satisfy its obligations to its insureds under their policy. If the trial court's order were enforced, MP&C would simply receive back the funds it owed its insureds, relieving it of its duty to its insureds and leaving the insureds with a potentially worthless piece of paper. Nothing within the principles of subrogation would sanction such a result.

Additionally, plaintiffs' judgment against Executive and Metropolitan does not represent a loss for which MP&C compensated them. Plaintiffs sued Executive and Metropolitan for breach of contract and claimed as contract damages the cost of the mortgage payments they were obligated to continue to pay while unable to occupy the house. They did not assert as damages the additional living expenses incurred during that time frame; it is that expense which was covered under the MP&C policy and is represented in the funds deposited with the clerk's office.

One final aspect to the trial court's order must be noted. It directed that plaintiffs were required to purchase a new dwelling and submit proofs in support of their claim for replacement value by February 19, 2009. That provision has clearly been mooted by the passage of time. We remand this matter to the trial court to permit it to determine what would constitute a reasonable period of time for plaintiffs, in accordance with the parties' settlement agreement, to submit to MP&C proof of purchase of a replacement dwelling and the amount paid.

The order under review is reversed and the matter is remanded to the trial court for further proceedings. We do not retain jurisdiction.


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