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New Jersey Manufacturers Insurance Company v. the Town of Kearny


March 15, 2011


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-2136-04.

Per curiam.


Argued February 28, 2011

Before Judges Reisner and Sabatino.

The Town of Kearny (Kearny or the Town) appeals from a trial court order dated September 6, 2005, in favor of New Jersey Manufacturers Insurance Company (NJM), and a December 8, 2009 order in favor of General Security Property and Casualty Insurance Company (General). Except for the denial of Kearny's counsel fee motion, which we affirm, we reverse both orders.


Norman Swartz, a Kearny police officer, was involved in an accident while on duty in his police vehicle. Swartz sued the tortfeasors and settled for their entire $100,000 policy. He then pursued a claim for underinsured motorist benefits (UIM) by seeking UIM arbitration with both Kearny and his personal auto insurer, NJM. When a dispute arose concerning the UIM coverage, NJM filed a declaratory judgment action in Hudson County against Kearny, Kearny's excess insurer General, and Swartz, contending that Swartz was entitled to UIM coverage under the General policy. Swartz filed a cross-claim against Kearny and General. Swartz also filed a separate lawsuit in Essex County against NJM, Kearny and General, seeking UIM payment for his serious injuries.

We pause here to describe the relevant insurance policies involved in this case. The NJM policy provided Swartz with $300,000 in UIM coverage, but also provided that "with respect to a vehicle you do not own [the UIM coverage] shall be excess over any other collectible insurance providing such coverage on a primary basis." Hence, if the General policy provided the primary UIM coverage for the accident, the NJM policy would be excess to that coverage. See Magnifico v. Rutgers Cas. Ins. Co., 153 N.J. 406, 416 (1998).

We next describe Kearny's insurance coverage. By an ordinance adopted in 1995, Kearny had established a $100,000 self-insurance fund "pursuant to the provisions of N.J.S.A. 40A:10-6," which permits a municipality to create such a fund. The terms of that fund were set forth in the ordinance's statement of purposes. In pertinent part, those purposes were:

A. To insure against liability resulting from the use or operation of motor vehicles, . . . owned by, or controlled by, the Town of Kearny. . . .

B. To insure against liability for the Town of Kearny's negligence and that of its officers, employees and servants . . . .

C. Liability resulting from claims and petitions filed by employees pursuant to the New Jersey Workers Compensation Act . . . .

Notably, nothing in the ordinance suggested that Kearny intended to create or fund insurance for anything beyond its possible legal "liability." The ordinance did not mention creating underinsured motorist insurance or any other type of coverage that Kearny was not legally required to provide. See Downey v. City of Elizabeth, 273 N.J. Super. 335, 339 (App. Div. 1994) (municipal self-insurer is not required to provide UIM coverage).

To protect against its possible liability for amounts over $100,000, Kearny purchased an excess policy from General, which provided $5 million in coverage. However, under the terms of the policy, Kearny would have to exhaust its $100,000 self-insurance fund before General would be required to pay on a claim.

The "PUBLIC ENTITY EXCESS AUTO LIABILITY DECLARATIONS" page of the General policy listed, under "Schedule of Coverages," $5 million in uninsured (UM) coverage and $5 million in UIM coverage. There is no dispute on this record, however, that the UM and UIM coverage was sold as a package; that no additional premium was charged for the UIM coverage; and that the parties did not negotiate the terms of the policy's UM/UIM provisions, which were standard ISO boilerplate.

In the declaratory judgment action which gave rise to this appeal, Kearny moved for summary judgment, and NJM and General cross-moved for summary judgment. In support of its motion, Kearny filed a certification from its insurance consultant, Dominick S. Cinelli, who had recommended that the Town procure the General policy. He attested that the purpose of procuring the General policy was "to protect the assets of the Town of Kearny and not to provide Underinsured Motorists coverage, which is not mandated by law." Cinelli stated that General provided UIM coverage as part of a "package" with UM coverage and did not charge "anything extra" for UIM coverage. He also stated that in procuring the General policy, Kearny did not intend "to expose the Town . . . to the first $100,000 [for UIM coverage] when the law does not require this coverage."

No party submitted legally competent evidence rebutting that certification. In its cross-motion, General not only joined in Kearny's position but also relied on Cinelli's certification in its brief and at oral argument on the motions.*fn1

In arguing the summary judgment motion, NJM's attorney relied on the declarations page of the General policy which referred to $5 million in UIM coverage. He also relied on language in the policy that referred to the policy as "primary" with respect to covered autos owned by the policyholder, as opposed to autos not owned by the policyholder, for which the insurance provided under the policy would be "excess." From that language, he argued that the General policy was actually a primary insurance policy and not an excess policy.

In granting summary judgment for NJM, the judge accepted NJM's arguments. She relied on the declarations page in determining that the General policy provided primary UIM coverage, and that the NJM policy only provided excess coverage. The judge disregarded Cinelli's certification on the grounds that it did not matter what Kearny intended in purchasing the General policy. She reasoned that the wording of the policy governed the issue of coverage. The judge entered an order on September 6, 2005, declaring that, except for a claim for UIM benefits, Swartz could not assert a direct claim against Kearny due to the bar of the Workers Compensation statute. See N.J.S.A. 34:15-8. The order further declared that the General policy provided UIM coverage for the accident, but that the step-down provision of the General policy operated to reduce the coverage for this accident to the same $300,000 provided by Swartz's NJM policy. Therefore, NJM had no UIM coverage obligation to Swartz arising from the accident.

Kearny and General filed motions for leave to appeal from that 2005 order, which we denied. Thereafter, on a date not specified in the record, General paid $200,000 to settle Swartz's separate Essex County lawsuit seeking UIM benefits from General, Kearny and NJM. In 2009, General filed a motion in the Hudson County action to compel Kearny to reimburse General in the amount of Kearny's $100,000 self-insured retention. Kearny opposed the motion and cross-moved for counsel fees, contending that General filed its motion in bad faith.*fn2 The motions were heard by a second Hudson County judge. He treated the first judge's 2005 ruling as the law of the case, granted General's motion for reimbursement of the $100,000 payment, and denied the cross-motion for counsel fees.


We review both judges' summary judgment decisions de novo, employing the standard set forth in Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). Agurto v. Guhr, 381 N.J. Super. 519, 525 (App. Div. 2005). We determine whether there are material facts in dispute and, if not, we apply the applicable law to the undisputed facts, giving the non-moving party the benefit of all favorable inferences to be drawn from the evidence. Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 374 (2010); Agurto, supra, 381 N.J. Super. at 525. Applying that standard, we conclude that there were no material facts in dispute, but the undisputed evidence does not establish that Kearny provided UIM coverage for the vehicle Swartz was driving.

Relying on N.J.S.A. 17:28-1.1(b), and Downey, supra, 273 N.J. Super. at 339, Kearny argues that it had no legal obligation to provide UIM (as opposed to UM) coverage as a self-insured employer. Citing Arico v. Township of Brick, 281 N.J. Super. 471 (App. Div.), certif. denied, 142 N.J. 515 (1995), Kearny contends that it never undertook to provide its employees with primary UIM coverage and, therefore, any language in the excess policy about UIM coverage cannot, by itself, create such coverage. Finally, Kearny argues that General stood shoulder-to-shoulder with Kearny in arguing that there was no UIM coverage, until the first judge disagreed with them and held that there was coverage. Then, General changed its legal position, settled with Swartz, and sought reimbursement from Kearny for $100,000. Kearny contends this constituted bad faith.

General argues that, unlike the policy in Arico, its policy did provide UIM coverage. General further argues that it acted in good faith after the first judge ruled on the coverage and we denied leave to appeal from that ruling. According to a certification from General's attorney, all counsel in the Essex lawsuit agreed that Swartz's injuries could result in a verdict higher than the limits of the General policy. Therefore, rather than risk a huge verdict, General contends that it reasonably settled with the badly injured Swartz for $200,000, which was the remaining UIM coverage available under the General policy after implementing the step-down clause ($300,000 minus the $100,000 Swartz already recovered from the tortfeasor).

Turning first to the coverage issue, with exceptions not relevant here, all auto insurance policies must include UM coverage, but need not include UIM coverage unless the policyholder chooses to purchase that coverage. N.J.S.A. 17:28-1.1b. As we recognized in Downey, supra, 273 N.J. Super. at 337, "ordinarily the statutory requirement of compulsory UM coverage applies to both private and public self-insurers of all types of motor vehicles." Downey relied in part on Christy v. City of Newark, 102 N.J. 598, 607 (1986), in which the Court held that municipal self-insurers must provide UM coverage. As the Court reasoned in Christy:

It is the fact of self-insurance, not the form in which or document by which it is evidenced, that results in UM coverage.

When it created a fund under N.J.S.A. 40A:10-6, Newark effected a statutory contract, obligating itself to furnish the UM coverage mandated under N.J.S.A. 17:28-1.1 to the extent of at least the statutory minimum of $15,000. [Id. at 608.]

In Downey, we reiterate the principle that "'the status of a self-insured is considered the equivalent of insurance, thus requiring the provision of UM coverage.'" Downey, supra, 273 N.J. Super. at 338 (quoting Ross v. Transp. of N.J., 114 N.J. 132, 142 (1989)); cf. White v. Howard, 240 N.J. Super. 427, 431-33 (App. Div. 1990)(discussing the different ways in which self-insurance has been treated in various insurance disputes). However, following that logic, we concluded that because "a self-insurer is required to afford only those coverages mandated by statute" and "UIM is not a compulsory coverage, . . . the City's self-insurance obligation did not encompass it." Downey, supra, 273 N.J. Super. at 336. Indeed, we could "perceive no acceptable rationale for extending a self-insurer's obligation to types of coverage beyond those mandated by statute." Id. at 339.

In Arico, supra, we addressed the following issue: whether an excess insurance policy purchased by a self-insured municipality, to pay all claims above a fixed amount arising out of accidents involving motor vehicles owned by the municipality, provides UIM primary coverage when the municipality has elected not to provide basic underinsured (UIM) benefits in connection with its motor vehicles. [281 N.J. Super. at 472.]

In Arico, a municipal worker employed by Brick Township was injured while riding in a municipal vehicle. Id. at 473. Unlike Kearny, Brick Township did not have a self-insurance fund, but it had purchased an insurance policy that by its terms, in a section captioned Agreement F, provided coverage (after payment of a deductible) for all sums the insured "shall be legally obligated to pay," including UM and UIM "coverage." Id. at 473-74. While conceding that Brick was not legally obligated to provide UIM coverage, the plaintiff argued that the wording of Agreement F should be construed as creating UIM coverage. Id. at 474. We rejected that argument in language pertinent to this case:

We reject plaintiff's argument because it ignores other salient provisions of Agreement F, and the structure of the policy on the whole. An excess policy provides protection to an insured for liability for an amount above, or in excess of, the maximum coverage supplied by the primary policy. 8A Appleman, Insurance Law and Practice § 4909 (1981). Where, as here, a public entity elects not to purchase automobile liability insurance, as it is permitted to do by statute (N.J.S.A. 39:6-54), it may elect to place a ceiling on its personal exposure to claims by purchasing an excess insurance policy. In essence, the municipality becomes the primary insurer, and the excess insurer's obligation to pay does not accrue until some agreed upon condition precedent occurs. That is what occurred in this case. Brick purchased an excess liability policy from Surplus. [Id. at 474-75 (emphasis added).]

We then looked to the "primary" coverage, to which the Surplus policy was excess. In Arico, that primary coverage consisted of the coverage Brick was legally obligated to provide. Id. at 475. By law, that coverage did not include UIM, and hence there was no basis on which to infer that the excess policy included UIM, even though it mentioned UIM as one possible type of coverage it would provide. Ibid.

Contrary to plaintiff's argument, the policy is not ambiguous. Surplus [the excess insurer] is not required to pay anything under the policy until Brick has paid $50,000 on any one claim, or $175,000 in the aggregate for one year. More importantly, under Agreement F, Brick's qualifying payment must be made because it is "legally obligated" to do so, or because it has assumed the obligation to do so "under contract or agreement[.]" In this case, Brick has paid nothing to plaintiff in recognition of his UIM claim. Beyond that, however, is the fact that Brick is not "legally obligated" to do so under the Downey opinion, nor has Brick voluntarily assumed the obligation to do so under "contract" with any municipal employee union. Thus, the conditions precedent for Surplus' obligation to pay simply have not been met under the clear wording of the policy. The mere mention of UIM coverage in the excess policy does not automatically convert the excess policy into a primary policy without more. [Ibid.]

We find Arico entirely on point here.*fn3 As we recognized there, an excess policy is "excess" to a primary policy. Id. at 474-75. It is not transformed into primary coverage simply because it mentions a type of coverage that it may provide on an excess basis if the primary policy also happens to provide that type of coverage. As in Arico, where a municipality's excess policy mentions UIM coverage, we do not reason backward to infer that the municipality therefore must have provided primary UIM coverage. Rather, we look to the actual terms of the municipality's primary coverage.

In Arico, there was no self-insurance ordinance, so we simply considered what the municipality was legally obligated to provide, which did not include UIM coverage. Id. at 475. Here, we look to the Kearny ordinance, which is the source of the town's primary coverage. Nothing in the wording of the ordinance allows us to infer that the municipality intended to create UIM coverage for its employees. By its terms, the ordinance provides coverage only for the municipality's "liability" -- which does not include payment of UIM benefits, because the law does not require the municipality to provide UIM coverage. See Arico, supra, 281 N.J. Super. at 475.

The undisputed evidence in this case, which General adopted before the first Law Division judge as factually correct, established that the General policy was an excess policy; the UIM coverage language was ISO boilerplate for which Kearny paid nothing extra; and Kearny had no intention of either buying UIM excess coverage or creating primary UIM coverage. Evidently, the first Law Division judge accepted NJM's argument that certain language in the General policy should be read as creating, in essence, primary coverage with a $100,000 deductible. That was error.

Not only does the declarations page of the General policy clearly refer to it as "excess" coverage, but the UM and UIM endorsement, on which General relies, refers in section E(1)c(2), to what General would pay "if the coverage under this Coverage Form is provided . . . [o]n an excess basis." Further, the self-insured retention endorsement states that General will indemnify the insured for sums that the insured "shall become legally obligated to pay."

The standard treatise on New Jersey auto insurance notes that "[b]ecause the usual practice in New Jersey is to bundle UIM coverage with UM coverage and charge a single premium, the optional nature of UIM coverage is lost to most insurance purchasers." Cynthia M. Craig & Daniel J. Pomeroy, New Jersey Auto Insurance Law § 26:2-2, at 456 (2011 ed.). At oral argument of this appeal, General's attorney agreed that the UIM provisions of the General policy were ISO boilerplate and that there was no additional charge for the UIM coverage. The fact that boilerplate language in the General policy would have provided excess UIM coverage if Kearny had primary UIM coverage does not transform Kearny's self-insurance into UIM coverage. See Arico, supra, 281 N.J. Super. at 474-75; Craig & Pomeroy, supra, at 455-56, 494.

In light of this undisputed factual record, and the applicable law concerning municipal self-insurance, we conclude that General could not prove that its own policy provided primary coverage or that Kearny had an underlying, primary UIM policy. Therefore, Kearny was entitled to summary judgment dismissing the complaint.

We find, however, no basis to award Kearny counsel fees premised on General's alleged "bad faith." Once the first Law Division judge granted NJM's summary judgment motion, and we denied leave to appeal, General acted reasonably in settling with Swartz. In that settlement, General reserved its right to seek reimbursement from Kearny in the amount of the Town's self-insurance reserve. General's subsequent application to recover the $100,000 from Kearny was not bad faith, in light of the Law Division's ruling on the UIM coverage issue, which was the law of the case at that time.*fn4 See Pickett v. Lloyd's, 131 N.J. 457, 473 (1993).

We reverse the December 8, 2009 order directing Kearny to reimburse General for the amount of Kearny's self-insurance retention. We affirm the denial of Kearny's cross-motion for counsel fees.

Affirmed in part, reversed in part.

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