May 4, 2011
GRANDE LEATHER AND FUR L.L.C., NEW WAVE LEATHER PRODUCTS L.L.C., GRANDE INDUSTRIES L.L.C., VINCENT GRANDE,
AND KIM GRANDE, PLAINTIFFS-APPELLANTS,
EDWARD P. BOND, CPA, AS FISCAL AGENT,
DEFENDANT-RESPONDENT/ CROSS-APPELLANT/ CROSS-RESPONDENT, AND HARBIN ADJUSTMENT COMPANY, INC.,*FN1 DEFENDANT, AND CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON AND PACIFIC INSURANCE COMPANY LIMITED,*FN2 DEFENDANTS-RESPONDENTS/ CROSS-APPELLANTS/ CROSS-RESPONDENTS.
On appeal from Superior Court of New Jersey, Law Division, Union County, Docket No. L-1341-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 25, 2011
Before Judges Wefing, Payne and Koblitz.
Plaintiffs, Grande Leather and Fur, L.L.C., New Wave Leather Products L.L.C., Grande Industries, L.L.C., Vincent Grande and Kim Grande appeal orders of summary judgment entered against them and in favor of defendants Edward P. Bond, CPA, Certain Underwriters at Lloyd's of London and Pacific Insurance Company, Limited. On appeal, plaintiffs present the following arguments:
I. THE TRIAL COURT ERRED IN DISMISSING PLAINTIFFS' CASE AGAINST DEFENDANT EDWARD BOND WHERE THE COURT HELD THAT THE PLAINTIFFS' ENTIRE CASE AGAINST DEFENDANT, EDWARD BOND, MUST FAIL IF THE PLAINTIFFS CANNOT RELY UPON THE TESTIMONY OF AN EXPERT AT THE TIME OF TRIAL.
II. THE TRIAL COURT ERRED IN DECIDING THAT THE STATUS OF THE FISCAL AGENT WAS THAT OF A PERSON JUST STANDING IN THE PLACE OF THE PLAINTIFFS RATHER THAN HOLDING THAT THE FISCAL AGENT WAS A SEPARATE ENTITY THAT HAD NO PRIOR CLAIM HISTORY WHERE THE FISCAL AGENT ACTED FOR HIS PRINCIPAL AND NOT ON BEHALF OF THE PLAINTIFFS AND HAD COMPLETE AUTONOMY AND CONTROL OF THE BUSINESS AND UNDER THE CIRCUMSTANCES OF THIS CASE THE INFORMATION AS PROVIDED BY THE FISCAL AGENT SHOULD NOT HAVE BEEN USED AS A BASIS TO DENY COVERAGE.
III. THE TRIAL COURT ERRED IN HOLDING THAT THE NEW JERSEY CONSUMER FRAUD ACT IS NOT APPLICABLE AND SHOULD HAVE PERMITTED THE PLAINTIFFS TO AVAIL THEMSELVES OF THE ACT'S PROTECTION AND REMEDIES.
IV. PLAINTIFFS' CLAIMS REGARDING THE INSURERS' BAD FAITH SHOULD NOT HAVE BEEN DISMISSED BY WAY OF SUMMARY JUDGMENT WHERE THE PLAINTIFFS PROVIDED A SUFFICIENT BASIS FOR SAME.
V. THE TRIAL COURT ERRED IN HOLDING THAT THE EXECUTION OF A RELEASE IN FAVOR OF THE INSURANCE COMPANIES COULD BE USED TO EXTINGUISH COVERAGE OF INSURANCE AB INITIO WHERE THE UNDERWRITERS DEMANDED THE RECEIPT OF THE RELEASE IN ORDER TO RETURN THE PREMIUM PAID AFTER THE UNDERWRITERS IMPROPERLY VOIDED COVERAGE.
VI. THE TRIAL COURT ERRED IN DENYING PLAINTIFFS' REQUEST FOR LEAVE TO AMEND THE COMPLAINT.
VII. THE TRIAL COURT ERRED IN GRANTING SUMMARY JUDGMENT WHERE THERE ARE MATERIAL ISSUES OF FACT THAT ARE GENUINELY DISPUTED INCLUDING THE STATUS OF THE FISCAL AGENT, THE ISSUE OF FACTUAL MISSTATEMENTS BY DEFENDANTS AND BREACH OF DEFENDANT, EDWARD BOND'S, PROMISES TO PLAINTIFFS.
Plaintiffs Vincent and Kim Grande have been, since 1997, the owners of the corporate plaintiffs, businesses initially selling leather and fur clothing at a store located on Route 22 in Union, New Jersey. In 1999, the Grandes opened an additional store in Linden, New Jersey. The Route 22 store was closed in June 2003.
During the operation of the businesses, a number of losses occurred as the result of theft. In 1999, the plaintiffs submitted to insurer CNA Insurance Company a claim for a loss of between $16,000 and $18,000 arising from a theft at the Union location. In 2000, a theft occurred at the Linden location, resulting in a claim for losses in the amount of $50,000 that was submitted to CNA. In 2002, a further loss of $110,000 occurred at the Linden location, for which a claim was submitted to plaintiffs' new insurer, Kemper Insurance Company. In 2003, plaintiffs obtained coverage from Peerless Insurance Company. However, that company declined to renew the coverage when the policy expired in January 2004. Thereafter, plaintiffs were unable to obtain theft insurance, and remained uninsured for a period of approximately one and one-half years.
During that period of time, plaintiffs suffered business reverses. In 2005, following a default in loan payments, creditor bank PNC filed a verified complaint and order to show cause in the Chancery Division seeking the appointment of a receiver to bring to a close the day-to-day operations of the three companies and liquidate the inventory and other assets. On June 9, 2005, a consent order was entered, instead appointing Edward P. Bond, CPA, a principal in the accounting firm of Bederson & Company, L.L.P., as a fiscal agent over the assets of the companies. The order directed that he take enumerated actions, including obtaining possession of all inventory, opening new bank accounts, collecting amounts owed to the companies, paying normal operating expenses, and monitoring the sales of existing inventory. The order also contained provisions concerning actions that Bond was not authorized to take without notice and further court order and a provision requiring that Bond report to the court on the status of the businesses within fourteen days.
In accordance with the court's order, Bond submitted a June 16, 2005 certification that recommended that a receivership be established. In cataloguing the status of the businesses, Bond stated, in paragraph 3(d):
There is no theft insurance on the inventory located at the [Linden] location and, upon information and belief, there has not been any such insurance for several months due to a prior burglary at the [Linden] location.
But when asked at his examination under oath whether, on that same day, when filling out an application for insurance, was he aware of a prior burglary, Bond responded: "Absolutely not."
As stated, on June 16, 2005, in addition to reporting to the court, Bond contacted an insurance broker, who had not previously been used by plaintiffs, Joseph Lobosco of Lobosco Insurance Group L.L.C., in order to procure commercial insurance. Lobosco filled out an application over the telephone, and then faxed it to Bond for its execution and return. According to a certification by Bond submitted in support of his motion for summary judgment, Lobosco advised him that when he became fiscal agent over the assets of the three Grande companies, "a new entity was formed and the theft insurance was being procured for a new entity."*fn3 Nonetheless, the commercial insurance application, executed by Bond and certified by him as containing "true, correct and complete" answers, listed under "APPLICANT INFORMATION" as "Named Insureds" and "Other Named Insureds," the three existing businesses, Grande Industries, New Wave Leather, and Grande Leather and Fur, as well as "Edward P. Bond, Fiscal Agent."
The application contained significant material misrepresentations. Under "LOSS HISTORY," a response of "None" was given to the instruction to "Enter all claims or losses (regardless of fault and whether or not insured) or occurrences that may given rise to claims for the prior five years (three years in KS & WY)." Under "GENERAL INFORMATION," question six asked: "Any policy or coverage declined, cancelled or non-renewed during the prior five years (Not applicable in MO)?" "No" was checked. Across a section labeled "PRIOR CARRIER INFORMATION," there was written: "None." Across a section labeled "LOSS HISTORY," there was also written: "None." Finally, in the portion of the application labeled "PROPERTY SECTION," that asked, as question eighteen under "GENERAL INFORMATION," "Have any crimes occurred or been attempted on your premises within the last three years," the response was "No."
The completed application was sent by the Lobosco Agency to insurance producer, Continental Marmorstein & Malone, which acted as agent for Lloyd's and Pacific. Following an underwriting review by an Assistant Vice President employed by Continental, Ellen Sopko, coverage was bound, effective June 16, 2005 to December 16, 2005, with Lloyd's assuming seventy percent of the risk and Pacific assuming thirty percent.
The policies of the two companies, which were identical, contained the following language:
A. CONCEALMENT, MISREPRESENTATION OR FRAUD
The Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:
1. This Coverage Part,
2. The Covered Property;
3. Your interest in the Covered Property; or
4. A claim under this Coverage Part.
In a certification in support of summary judgment on behalf of the insurers, Sopko stated that, if the true loss history of the three Grande companies had been correctly reported on the application, including the September 2002 loss paid by Kemper of approximately $110,000, she would have had no binding authority with respect to either Lloyd's or Pacific and would have had to refer the underwriting decision to the insurers. The record additionally contains certifications on behalf of both insurers that coverage would not have been issued if the true facts of the companies' prior losses and denial of coverage had been disclosed.
One week after Bond's first report to the court and execution of the application for insurance, on June 23, 2005, he submitted a further report to the court that stated with respect to the companies' insurance, a topic upon which he had been directed to report:
Mr. Grande informed us that the insurance coverage maintained by the Defendants was obtained through the landlord and billed to Grande and that there was no current contents insurance policy due to prior thefts. We immediately contacted PNC Bank and an insurance broker to obtain a quote for the necessary coverage. With the PNC Bank's approval and acceptance of the amount of the estimated insurance premium, the insurance has been placed and is now in force.
On August 29, 2005, a theft occurred at the Linden store, resulting in a claim to Lloyd's and Pacific in the amount of $166,560. Following investigation, the claim was denied by Thomas Harbin of Harbin Adjustment Company, Inc., an agent for Lloyd's and Pacific, by a letter dated August 7, 2006. After setting forth the policy provision regarding concealment, misrepresentation or fraud, Harbin stated:
Pacific Insurance Company and Certain Underwriters at Lloyd's, London have advised that, in their view, Grande Industries, New Wave Leather, Grande Leather & Fur, and Edward P. Bond, Fiscal Agent, have violated that provision, in that the policy of insurance was secured by misinformation as to loss history and prior cancellation and in that representatives of the insureds provided false testimony at Examination Under Oath proceedings.
For the above-mentioned reasons, the above-mentioned insurers will not be making any voluntary payments in this matter.
Following the denial of coverage, on April 19, 2007, Lobosco wrote to Continental seeking a refund of the premiums paid for coverage. The carriers agreed, and cancelled the policy effective as of the date of issuance, June 16, 2005. On April 25, 2007, Bond executed a policy release statement, which provided:
The undersigned agrees that The above referenced policy is lost, destroyed or being retained No claims of any type will be made against the Insurance Company, its agents or its representatives under this policy for losses which occur after the date of cancellation shown above[.]
The form indicated that the reason for cancellation was that coverage had been voided.
On April 11, 2007, plaintiffs filed suit against defendants asserting causes of action against the insurers and Harbin Adjustment Company for breach of the insuring agreements, consumer fraud, breach of the duty of good faith and fair dealing, and for "total disregard of the rights of the plaintiffs." Causes of action sounding in negligence and failure to perform the safekeeping responsibilities of a bailee were asserted against Bond.
On July 3, 2008, following two adjournments at plaintiffs' request, plaintiffs' complaint against Bond was dismissed pursuant to Rule 4:23-5 for failing to provide discovery.*fn4
Thereafter, Bond moved for a dismissal with prejudice, and plaintiffs cross-moved for an order vacating the prior dismissal and restoring the matter to the active trial calendar. During argument, counsel for plaintiffs characterized the damages suffered as limited to the amount of the insurance claim. He stated:
The plaintiff's claim is the loss that we believe is covered by insurance. And frankly the whole case really I believe moves around whether or not there's coverage. And I think we all agree that that's really the issue. And frankly it's ripe for summary judgment because there's no facts dispute [sic]. The forms were filled out the way they were filled out. We believe as a matter of law they're sufficient.
When asked the basis for plaintiffs' claim against Bond, counsel replied: "It obviously would be negligence." However, counsel stated that he did not intend to call an expert to aid in proving plaintiffs' claim against him. As counsel characterized the case, "[e]ither there's coverage or Mr. Bond, unfortunately, did something that he shouldn't have."
Following argument, the judge denied Bond's motion as the result of plaintiffs' representation that certain documents would be produced that day. However, because the discovery had not yet been produced, the relief sought by plaintiffs was also denied. The order entered by the judge contained the following statement:
Plaintiff represents that no expert will be called to support claim against Defendant Bond. It is for this reason that the motion to dismiss with prejudice is denied. As this representation is made following the expiration of the discovery period, plaintiff is barred from producing any expert testimony against Defendant Bond at trial.
Restoration of plaintiffs' complaint was ordered on January 9, 2009.
Following restoration of plaintiffs' action, defendants Bond, Lloyd's and Pacific moved for summary judgment. Alternatively, Bond moved to file a third-party complaint against Lobosco. Defendants' summary judgment motions were orally argued on March 6, 2009 and were granted, thereby mooting Bond's motion to file a third-party complaint. Addressing claims against Bond, the motion judge held that expert testimony was required to establish his status and the extent of his duty, and also to establish "whether there was a breach of that duty and whether damages were proximately caused by such a breach." In other words, if there had been no negligence, that plaintiffs could have obtained insurance. With respect to the insurance coverage issue, the judge held it's undisputed that Mr. Bond was identified as the fiscal agent, but that also the plaintiffs were listed as insureds under the application and under the policy, and so clearly all representations that were made with respect to them applied here. It's not just what Mr. Bond's status was, whether he had suffered any losses, but the representations also had to include accurate statements with respect to the plaintiffs as well.
Further, the judge stated that "the facts strongly support a conclusion that the carriers were correct in terms of determining that there had been a material misrepresentation with respect to the loss history and so as a result the claims against them cannot survive summary judgment here."
Plaintiffs appealed from the judge's orders, and defendants filed protective cross-appeals.
We address first plaintiffs' appeal from the order granting summary judgment to insurers Lloyd's and Pacific as the result of a finding of material misrepresentations by Bond in the insurance policy application. On appeal, plaintiffs argue that Bond, as fiscal agent, "was in all respects a separate entity from the plaintiffs and should not have been considered as a mere surrogate or alter ego for the plaintiffs and thus the information proved by defendant Edward Bond regarding the claim loss history was correct and should not have been permitted to be used to void coverage." We do not accept that argument. Regardless of Bond's status, it was clear that Grande Industries, New Wave Leather, and Grande Leather and Fur were also proposed by Bond as insureds in the insurance application as to which the application's questions pertained. Indeed, it was principally their assets for which protection was sought to be obtained. Nonetheless, Bond failed to provide the businesses' relevant loss history, to reveal the declination of coverage by Peerless in 2004, and to disclose prior crimes committed on business premises.
"'[A] representation by the insured, whether contained in the policy itself or in the application for insurance, will support the forfeiture of the insured's rights under the policy if it is untruthful, material to the particular risk assumed by the insurer, and actually and reasonably relied upon by the insurer in the issuance of the policy.'" First Am. Title Ins. Co. v. Lawson, 177 N.J. 125, 137 (2003) (quoting Allstate Ins. Co. v. Meloni, 98 N.J. Super. 154, 158-59 (App. Div. 1967)). A misrepresentation is material if, when made, "a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action." Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 542 (1990). To be material, the false statement must have "'naturally and reasonably influence[d] the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.'" Mass. Mut. Life Ins. Co. v. Manzo, 122 N.J. 104, 117 (1991) (quoting Kerpschak v. John Hancock Mut. Ins. Co., 97 N.J.L. 196, 198 (1922)).
Demonstration of an intent to defraud is not required. Id. at 114-15. "The law is well settled that equitable fraud provides a basis for a party to rescind a contract." First Am. Title, supra, 177 N.J. at 136 (citing Jewish Ctr. of Sussex Cnty. v. Whale, 86 N.J. 619 (1981)). Equitable fraud "'requires proof of (1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party.'" Id. at 136-37 (quoting Liebling v. Garden State Indem., 337 N.J. Super. 447, 453 (App. Div.), certif. denied, 169 N.J. 606 (2001)).
In the present case, it is uncontroverted that the statements that we have noted on Bond's insurance coverage application were false, that Continental's underwriter relied upon them in binding coverage, and that neither insurer would have accepted the risk if the true facts had been known. Thus, summary judgment was properly granted to the insurers in this case.
Our determination of this issue in the insurers' favor makes it unnecessary to consider plaintiffs' claims of consumer fraud and bad faith that arise out of the denial of coverage.
Turning to the summary judgment in favor of Bond, plaintiffs argue for the first time on appeal that: "The plaintiffs' action against defendant Bond is in part based upon Bond's failure to fulfill his promise to obtain coverage of insurance for the contents of the plaintiffs' businesses; thus this cause of action sounds in contract or bailment and not negligence." We decline to address this argument, which was not presented to the motion judge, before whom only claims of Bond's negligence were offered. Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973).
Addressing the issue of negligence, plaintiffs contend, contrary to the motion judge's position, that testimony by an expert was not required because their claims could be resolved by use of common knowledge. To an extent, we concur with that position, finding no grounds to conclude that the duty of a fiscal agent to accurately complete an insurance policy application differs from the duty applicable to any other person. If the issue also included whether a fiscal agent, without specific direction from the court, was required to obtain insurance for the companies whose welfare he was directed to protect, then we would agree with the motion judge's analysis. However, we are uncertain whether this broader issue was raised by the parties.
We agree with the motion judge's conclusion that, because plaintiffs failed to offer expert testimony or other evidence that coverage would have been offered to them by an insurer if the businesses' true loss and policy history had been disclosed, plaintiffs have failed to demonstrate a causal connection between Bond's breach of duty and damages. Froom v. Perel, 377 N.J. Super. 298, 315 (App. Div.) (holding in a transactional legal malpractice context that "there must be evidence to establish that the negligence was a substantial factor in bringing about the loss of a gain or benefit from the transaction"), certif. denied, 185 N.J. 267 (2005). As we have previously noted, plaintiffs have acknowledged that their damages consist solely of the loss of coverage. They have additionally acknowledged that, as the result of their unfavorable loss history, they were unable to obtain coverage in the period from January 2004 when Peerless declined to renew the policy issued to them and June 2005 when coverage was fraudulently obtained with Lloyd's and Pacific. Thus, to prevail, plaintiffs were required to demonstrate that coverage would have been available to them at the time of their August 2005 loss. They were demonstrably unable to do so. As a consequence, we find that summary judgment was properly entered in Bond's favor.
Our resolution of this matter makes it unnecessary for us to address the additional arguments of Bond with respect to summary judgment or the parties' protective cross-appeals.