August 1, 2011
CITY OF TRENTON, PLAINTIFF-RESPONDENT,
CANNON COCHRAN MANAGEMENT SERVICES, INC., AS SUCCESSOR TO ALLIED RISK SERVICES, INC., DEFENDANT-RESPONDENT, AND INSERVCO INSURANCE SERVICES, INC., DEFENDANT-APPELLANT.
On appeal from Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-1169-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 14, 2011*fn1
Before Judges Grall, LeWinn and Coburn.
The City of Trenton filed a complaint against two contractors it retained as third-party administrators - defendant Inservco Insurance Carriers, Inc. (Inservco) and defendant Cannon Cochran Management Services, Inc. (Cannon). During the separate terms of their respective contracts, defendants were obligated to notify Trenton's excess automobile insurance carrier of claims in accordance with the policy issued by the carrier, General Security Property & Casualty Company (General Security).
Inservco was Trenton's third-party administrator from January 1, 2000 to January 1, 2004, and Cannon was the administrator thereafter. Although Trenton received a claim on June 9, 2000 for personal injuries sustained in a March 24, 2000 auto accident, General Security was not notified until December 3, 2004. By that date, non-binding arbitration in a personal injury case arising from the accident resulted in an award for the claimant in excess of Trenton's self-insured retention and covered by General Security. Additionally, demand for trial de novo had been filed and a jury had been selected. The case was ultimately mistried because the jurors were overheard discussing the case before all the evidence was presented.
Consequently, General Security, reserving its right to disclaim coverage due to Trenton's late notice, stepped in and settled with the claimant. General Security subsequently invoked a provision of Trenton's policy requiring binding arbitration of coverage disputes between them and was awarded $750,000 plus interest by arbitrators who found that Trenton's notice was untimely and prejudiced General Security.
Trenton then filed this suit to recover from defendants the amount the arbitrators awarded General Security. Trenton alleged that both third-party administrators failed to notify General Security of the claim and thereby breached their respective contracts and negligently performed their respective fiduciary duties. Upon receipt of the complaint, both defendants filed answers, raised affirmative defenses asserting Trenton's failure to mitigate damages and avoid the consequences of any breach, and filed cross-claims seeking contribution and indemnification from each other.
The trial judge awarded Trenton summary judgment on its claim that Inservco breached their contract. Subsequently, and before Trenton litigated Cannon's liability, the judge granted Trenton's motion for summary judgment against Inservco in the full amount Trenton owed General Security and denied Inservco's cross-motion to preserve its claim for contribution from Cannon. With respect to contribution by Cannon, the judge concluded that there was no equitable, common law or statutory right to contribution on a contract claim. The judge later certified the judgment as final pursuant to Rule 4:42-2.
Inservco appeals, alleging that there is a disputed issue of material fact as to whether its breach proximately caused Trenton's damage and, in the alternative, that it should have been permitted to seek contribution from Cannon.*fn2 This court must consider the evidence in the light most favorable to Inservco and determine whether Trenton is entitled to judgment as a matter of law. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). Applying that standard, we affirm the partial grant of summary judgment on liability. Nevertheless, there are disputed material questions of fact pertinent to avoidable consequences that require reversal of the award of damages against Inservco - specifically, evidence tending to show that Trenton could have avoided some of the loss after Inservco's contract expired if Trenton had made reasonable efforts to notify General Security or Cannon had not breached its contract. Accordingly, we reverse the damage award and reinstate Inservco's cross-claims for contribution and indemnification.
The pertinent facts are stated in the light most favorable to Inservco. The City of Trenton is self-insured, but it has a excess automobile insurance policy with General Security that covers claims in excess of Trenton's $300,000 self-insured retention.
As third-party administrator for Trenton from January 1, 2000 until January 1, 2004, Inservco contracted to estimate the value of claims and notify Trenton and General Security "of any specific claim that may involve" the excess carrier. The contract also required Inservco to "comply with all reasonable claims reporting requirements of the excess carrier in such cases." When Inservco's contract was terminated, Cannon's contract similarly obligated it to report claims to General Security "in accordance with the reporting requirements established by the carrier."*fn3
General Security's policy requires notice in three circumstances implicated by the personal injury claim at issue. Pursuant to Section IV(A)(1)(a)(1), (6) and (8), immediate written notice is required where a claimant's demand is for more than fifty percent of the self-insured retention; where the claimant has a resulting "disability" that is in excess of or reasonably likely to be in excess of six months; or where the claimant has "multiple injuries."
On March 24, 2000, Joseph Escoto, the passenger in a car driven by Michael Cottrell, was injured when an on-duty police officer rear-ended Cottrell's car. Cottrell submitted a claim for damages to his car that did not implicate the policy. On June 12, Trenton received a notice of claim from Escoto's attorney and sent the claim to Inservco on July 20. In the notice of claim, the lawyer reported that Escoto had two herniated discs and a torn meniscus and estimated Escoto's damages would exceed $100,000.
On October 16, 2000, an Inservco employee wrote to Trenton on behalf of Inservco's claims representative, James Kremzier. The letter reported that Escoto was employed by Amtrak, had been out of work since the March 24, 2000 accident and that Escoto's medical records confirmed a bulging disc, two herniated discs, a tear of the undersurface of the posterior horn of the medial meniscus and "a small loose body in the knee." Despite the multiple injuries and duration of the disability, Inservco did not notify General Security. Later, during his deposition, Kremzier acknowledged he should have given General Security notice in October 2000 because of Escoto's multiple injuries and prolonged absence from work.
Escoto filed a personal injury action in February 2002. At that point, Trenton's defense was assigned to Caryl Amana, an attorney employed in Trenton's law department. Kremzier was not advised that Escoto had filed a complaint until August 6, when he was asked to arrange an independent medical examination.
Kremzier asked for Escoto's file on August 22 and November 25, 2002, but he did not hear anything else about the case until Fall 2003, when Joel Korin, a private attorney retained in June to defend Trenton, mentioned that he was handling the matter.
Korin agreed to give Kremzier an updated report but did not. In December 2003, Kremzier phoned Korin and was told that if a jury credited Escoto's claims it could award him $500,000. Thereafter, Kremzier raised his estimate of the reserve required on Escoto's case to $200,000 - $50,000 above the amount triggering Trenton's obligation to give General Security notice. Although Kremzier made a note to notify General Security, he never did.
On February 19, 2004, after Cannon replaced Inservco, Escoto was awarded $1.75 million at non-binding arbitration. According to Escoto's attorney, despite that award her client would have accepted $750,000 to settle the case. On February 26, Korin reported the arbitration award to Amana and Cannon received a copy of Korin's letter on March 12.
On April 27, Marilyn Collichio, a Cannon employee, reviewed the file and reported that Escoto had demanded $2.5 million at a settlement conference following arbitration. Collichio knew she should report the claim to General Security and sent notice to an insurance agent on July 15. On July 20, the agent gave Collichio the name of the agent handling claims for General Security, but Collichio did not draft a letter to that agent until October 27. Collichio claims to have mailed the letter that day, but General Security claims never to have received it.
Jury selection for the Escoto trial commenced on December
1. On December 3, General Security received a notice from Cannon indicating that the trial was scheduled for December 13. On December 8, the Escoto case was declared a mistrial because jurors were overheard favorably discussing Escoto's claims. Escoto's attorney later indicated that he was still prepared to accept $750,000 before the mistrial, but that his demand increased once he heard of the jurors' discussions.
On February 17, 2005, General Security took over the case, reserving its right to deny coverage. Escoto and Trenton then settled for $1.5 million at a cost of $1.24 million to General Security.
During the Trenton-General Security binding arbitration, Trenton asserted that its obligation to give General Security notice was not triggered until Escoto was awarded $1.5 million in arbitration. The arbitrators rejected that claim, and awarded General Security the damages General Security sought - $750,000 plus six-percent interest.
Inservco's objections to entry of partial summary judgment in favor of Trenton on breach of contract do not have sufficient merit to require extensive discussion. R. 2:11-3(e)(1)(E).
Accordingly, we provide only a brief explanation for our decision to affirm.
Inservco contends that Trenton is judicially estopped from pursuing an action based on Inservco's breach of its contractual duty to give General Security notice of Escoto's claim, because Trenton's position in this case is inconsistent with the one Trenton took in binding arbitration with General Security. The argument ignores a critical fact - the record does not establish that the arbitrators accepted Trenton's position or that General Security reduced its initial demand on the ground that notice was not required during the term of Inservco's contract. Accordingly, judicial estoppel has no relevance here. Kimball Int'l, Inc. v. Northfield Metal Prods., 334 N.J. Super. 596, 606-07 (App. Div.), certif. denied, 167 N.J. 88 (2000); Cummings v. Bahr, 295 N.J. Super. 374, 387 (App. Div. 1996). Inservco also contends that Trenton was not entitled to summary judgment on Inservco's liability for breach because Trenton did not meet its obligations under their contract. The record does not support that claim.
The contract requires Trenton to "promptly report all claims" to Inservco that Trenton is not handling itself. The undisputed facts establish that Trenton met that obligation. Trenton received notice of Escoto's claim on June 12, 2000, and Inservco had that notice by July 20. The undisputed facts also establish that Inservco breached its obligation in October 2000; that is when Inservco failed to give General Security notice of the claim despite Inservco's knowledge of two facts triggering its duty to notify General Security - Escoto had been out of work for more than six months and Escoto had evidence of multiple injuries sustained in the accident. A party in breach of contract cannot rely on the other party's subsequent failure to perform to excuse its own prior breach. See Nolan v. Lee Ho, 120 N.J. 465, 472 (1990); Restatement (Second) of Contracts § 237 (1981).
Inservco urges us to reverse the grant of summary judgment on liability because there are material disputed facts relevant to proximate cause. But liability for breach of contract does not require proof of damage beyond the breach itself. "The general rule is that whenever there is a breach of contract or an invasion of a legal right, the law ordinarily infers that damage ensued, and, in the absence of actual damages, the law vindicates the right by awarding nominal damages." Nappe v. Anschelewitz, Barr, Ansell & Bonello, 97 N.J. 37, 45-46 (1984) (citation omitted); see Karcher v. Philadelphia Fire & Marine Ins. Co., 19 N.J. 214, 217 (1955) (observing that an established breach of the contract entitles the plaintiff "to at least a judgment for nominal damages"). Inservco's failure to give notice of Escoto's claim as required under the terms of General Security's policy was a material breach inconsistent with Trenton's reasonable expectations in retaining Inservco as its third-party administrator. Where breach of contract is at issue, the nexus between the breach and the harm alleged by the aggrieved party is relevant to damages, not liability. See Totaro, Duffy, Cannova and Company, L.L.C. v. Lane, Middleton & Company, L.L.C., 191 N.J. 1, 12 (2007) (noting that a focus on principles of proximate cause was irrelevant in a contract case and confounded the analysis of damages).
Having considered Inservco's objections and the undisputed evidence of its breach, we conclude that Trenton was entitled to the partial summary judgment on liability.
Although judgment on liability for Inservco's breach of contract was proper, Trenton did not establish that as a matter of law it was entitled to recover all of its damages from Inservco.
Were it not for the evidence of inaction by Trenton and Cannon after Inservco's contract with Trenton expired, we would affirm. As the party aggrieved by Inservco's breach, Trenton is entitled to all damages that "'may fairly and reasonably be considered as either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach.'" Id. at 13 (quoting Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854)); see Restatement (Second) of Contracts, supra, at § 351 (quoted and recognized as consistent with New Jersey precedents in Totaro). Contrary to Inservco's claim, compensatory damages for breach of contract are not limited by principles of proximate causation; they are limited by the rules of foreseeable loss set forth above. Totaro, supra, 191 N.J. at 13.
Trenton's loss was foreseeable under those standards. When Inservco agreed to carry out Trenton's responsibility for giving General Security notice of Trenton's covered claims as required by the excess policy, Inservco could reasonably have foreseen that its breach of that obligation would cause Trenton to lose the protection the policy afforded. Similarly, Inservco could have reasonably foreseen that if it failed to give the requisite notice of a covered claim while its contract was in effect, then a third-party administrator under a subsequent contract with Trenton would fail to detect and correct Inservco's mistake in time to avert the loss. See Restatement, supra, at § 351 cmt. d (noting that the breaching party is not liable for circumstances contributing to the loss that it could not have foreseen).
The conclusion that this loss was foreseeable does not end the inquiry, however. There are limitations on contract damages for foreseeable loss. The doctrine of avoidable consequences is one that is implicated in this case. See id. at § 350.
The doctrine of avoidable consequences - also referred to as mitigation of damages - "has application in the law of contract, as well as in the law of torts." Ostrowski v. Azzara, 111 N.J. 429, 437 (1988). Its effect is the denial of recovery for damages that the aggrieved party could have avoided or mitigated through reasonable efforts after an offending party's tort or breach of contract. Ibid.; Ingraham v. Trowbridge Builders, 297 N.J. Super. 72, 82-83 (App. Div. 1997). It applies when the aggrieved party is in a position to avoid additional loss with reasonable effort after the breach and the breaching party is not in a position to avoid the loss. Ingraham, supra, 297 N.J. Super. at 82-83. In this context, reasonable efforts do not include efforts that involve "'undue risk, burden or humiliation.'" Id. at 83 (quoting Restatement, supra, at § 350(1)). The doctrine does not absolve the breaching party of liability; instead that aggrieved party's failure to make reasonable efforts to mitigate its loss is accounted for in the calculating damages. Id. at 83. The breaching party has the burden of showing the potential for mitigation and its value. See ibid.; Sandler v. Lawn-A-Mat Chem. & Equip. Corp., 141 N.J. Super. 437, 455 (App. Div.) certif. denied, 71 N.J. 503 (1976).
The application of the doctrine of avoidable consequences is complicated in this case because of Trenton's separate contracts with Inservco and Cannon. Between January 1, 2004, the date on which Inservco's contract expired and Cannon's took effect, and December 3, 2004, the date General Security was given notice of Escoto's claim, Trenton, through it contract with Cannon, had delegated Trenton's duty to give the notice required under General Security's policy to Cannon and Cannon had assumed that obligation. Consequently, Trenton and Cannon, but not Inservco - whose contract has expired - were in a position to make the reasonable efforts necessary to avoid loss of coverage on the Escoto claim.
The Trenton-Cannon contract did not and could not alter the contractual relationship between Trenton and Inservco. Inservco was not a party to that contract. Thus, Trenton had no right to recover damages from Inservco for losses that could have been avoided through reasonable efforts taken by either Trenton or Cannon in performance of its contract.
The foregoing analysis of the pertinent relationships leads to the following conclusions. Inservco could meet it burden on avoidable consequences by pointing to the inaction of either Trenton or Cannon. In turn, Trenton's right to recover for loss not avoided due to Cannon's breach of its contract with Trenton would be against Cannon, not Inservco. Inservco's and Cannon's cross-claims for contribution against one another were relevant to mitigation of Trenton's damages.
Trenton mistakenly litigated its contractual claims against Inservco and Cannon as if their respective contractual obligations were joint and several.*fn4 Because Trenton's contracts with the third-party administrators are separate and cover distinct periods of time, the administrators' respective liability is separate, not joint and several. See Bd. of Educ. v. Howard, 65 N.J.L. 75, 77-79 (Sup. Ct. 1900); see also Cherry Hill Manor Assocs. v. Fuango, 182 N.J. 64, 72-73 (2004) (distinguishing between joint and several and successive liability in a malpractice case). When contracts are separate, neither contractor can be held responsible for the other's breach, at least in the absence of an agreement providing for a different outcome. Howard, supra, 65 N.J.L. at 79.
For the foregoing reasons, we consider Inservco's evidence of inaction by Trenton and Cannon in determining whether Inservco's evidence was adequate to withstand Trenton's motion for summary judgment on damages and preserve its cross-claim against Cannon. More aptly stated in light of that fact that Inservco did not move for summary judgment on damages, the question is whether the evidence relevant to avoidable consequences precludes a determination as a matter of law that Trenton was entitled to a full recovery for its loss from Inservco.
We conclude that the damage award must be reversed. Inservco presented evidence in opposition to Trenton's motion for summary judgment on damages that, if believed, would permit a jury to conclude that a significant portion of Trenton's entire loss - the amount assessed by the arbitrators in Trenton's binding arbitration with General Security - could have been avoided if Trenton or Cannon made a reasonable effort to notify General Security of Escoto's claim. By March 12, 2004, Trenton and Cannon both had information from Trenton's lawyer that a jury could find for Escoto in excess of Trenton's self-insured retention and that information would have alerted a reasonable person in their respective positions to the importance of either confirming that General Security had notice of Escoto's claim or providing notice of the claim. Inservco also had evidence that would permit a jury to find that if General Security had received notice at that point, it would have provided coverage. During binding arbitration of the subsequent coverage dispute, General Security asserted that "the Escoto case could have settled for $750,000 prior to trial." In addition, General Security initially demanded the full amount it paid to settle Escoto's claim, but subsequently reduced its claim to eliminate the amount it would have paid if the case had settled for $750,000 prior to trial. Those facts were disputed, but on Trenton's motion for summary judgment, the disputes had to be resolved in Inservco's favor.
We recognize that Inservco pled Trenton's failure to mitigate as an affirmative defense, and cross-claimed for contribution from Cannon with reference to the Comparative Negligence Act. We also recognize that Inservco's arguments in the trial court and on this appeal are cast in terms of proximate causation, equitable contribution and comparative fault and not in terms of avoidable consequences. In Ostrowski, however, the Court discussed the close relationship between these distinct doctrines and their similar impact on damage awards. 111 N.J. at 437-44. The Court recognized that when avoidable consequences are at issue "principles of comparative negligence may be of assistance to a jury in determining the just allocation of responsibility for damages," including stating failure to mitigate as a percentage of fault. Id. at 445. This court has reiterated that statement in a case involving damages for a violation of a consumer protection law. Ingraham, supra, 297 N.J. Super. at 82. In light of those precedents, a damage award can be fashioned to account for the parties' respective and relevant fault whether or not the Comparative Negligence Act applies.
The grant of partial summary judgment on Inservco's liability for breach is affirmed; the judgment on damages is vacated; the order dismissing the cross-claims is vacated; and the matter is remanded.