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General Security National v. New Jersey Intergovernmental Insurance Fund

August 25, 2011


On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket Nos. L-2792-07 and L-2868-07.

Per curiam.


Argued: January 10, 2011

Before Judges Grall, C.L. Miniman and LeWinn.

This is a declaratory judgment action growing out of an underlying hostile work environment claim against a municipal employer alleging federal and state civil rights violations over a five-year period from 2000 to 2004. Five insurers issued multiple policies during this period; four were excess carriers. Plaintiff General Security National Insurance Company (General), as attorney-in-fact for General Security Property and Casualty Company, in this declaratory judgment action, appeals a June 17, 2009, order (1) granting summary judgment to defendant New Jersey Intergovernmental Insurance Fund (the Fund) and denying General's motion for summary judgment; (2) declaring that the claims asserted in an underlying action comprised one claim under the first-issued General policy; (3) declaring that one self-insured retention applied; (4) finding that the settlement of the underlying action was reasonable and requiring General to indemnify the Fund for settlement and post-judgment interest in the amount of $976,705.04; (5) granting the Fund's request for attorneys' fees, and awarding it $181,518.83 for attorneys' fees, disbursements, and costs together with post-judgment interest; and (6) deeming moot all other motions between General and defendants Specialty National Insurance (Specialty), The North River Insurance Company (North), and State National Insurance Company, Inc. (State) in light of the preceding relief. The Fund cross-appeals from the partial denial of its application for attorneys' fees and costs. We now affirm.


To place this insurance coverage dispute in context, we begin with the facts relevant to the underlying action, Spagnola v. Town of Morristown, No. 05-577(JLL) (D.N.J. Dec. 7, 2006). Anne Marie B. Spagnola, an information technology manager for the Town of Morristown (the Town), worked with the mayor and other managers, including the business administrator, Eric Maurer. On multiple occasions from November 2000 through June 2004, Spagnola encountered sexually explicit material on Maurer's work computer. Spagnola, supra, (slip op. at 4).

General admits that on August 8, 2001 Spagnola "complained to the Town's [m]ayor" about Maurer's conduct. Additionally, Spagnola alleged retaliation throughout this period, including one occasion in January 2003 when she tendered her resignation to the mayor; he persuaded her to remain in the Town's employ; but he took no action to end the harassment. Finally, after Spagnola attempted to resign in 2003, she met with town counsel, informing him of Maurer's sexual activities, and turned over sexually explicit materials found in Maurer's possession at work. She was dissuaded from resigning by town counsel's misrepresentations in an opinion letter to the mayor dated April 10, 2003, that the Town had no duty to protect her because Maurer's conduct did not satisfy the legal definition of harassment. On August 13, 2004, she resigned due to the hostile work environment.

In January 2005, Spagnola filed a complaint against the Town, the mayor, Maurer, and town counsel. She claimed gender discrimination in the form of a hostile work environment in violation of federal civil rights law and the New Jersey Law Against Discrimination (NJLAD), N.J.S.A. 10:5-1 to -49, and the intentional and negligent infliction of emotional distress. Spagnola alleged that she repeatedly complained to the mayor and town counsel from August 2001 through July 2004, yet no one ever took any effective action and, instead, engaged in retaliatory conduct that included permitting Maurer to reduce Spagnola's responsibilities. She sought compensatory and punitive damages. Spagnola amended the complaint three times, in ways that are not relevant to the issues on appeal. The underlying defendants demanded defense and indemnification from the carriers who are parties in this action.


General issued the Fund Excess Public Officials and Employees General Liability Insurance (POL) policy MP980021 for 2000 and then issued renewal policy 23MP27000044 for 2001; both contained policy limits of $5 million and Self-Insured Retentions (SIR) of $100,000 per occurrence. Neither policy was effective after January 1, 2002. Specialty issued excess policy 3XZ167626-00 for 2002 with a limit of $10 million per occurrence and a SIR of $250,000 per occurrence. North issued excess multi-risk policy 544-000169-7 for 2003, which contained a limit for each occurrence of $6 million and a SIR of $250,000 per occurrence. State issued its multi-risk policy MDB 02191 82 for 2004 with policy limits of $15 million per occurrence and a SIR of $500,000 per occurrence. All policies required covered insureds to expend the SIR before the insurer would commence coverage. The Fund is a self-insurance fund that provides primary insurance coverage to the Town and other municipalities in New Jersey, who are additional insureds under the excess policies, for the amount of their SIR. It provided such coverage for the period from January 1, 2000, through January 1, 2005.

The excess policies required the insurers to pay "those sums that the insured becomes legally obligated to pay as damages because of a 'wrongful act'" committed by a public official. The North and State policies were identical policies except for the policy limits and SIRs discussed above. All of the policies shared a general understanding of the definition of "wrongful act."

The excess policies differed in how they dealt with covered conduct that was sporadic and with related wrongful conduct that occurred outside of the policy period. The General policies stated: "All claims against any Insureds arising out of the same Wrongful Act, or logically or casually [sic] connected Wrongful Acts, will be considered one Claim" and were "considered first made at the time the earliest such Claim was made against any Insured." Likewise, Specialty's policy stated that the wrongful act had to occur during the policy period, but "[c]laims based on or arising out of the same act or interrelated acts of one or more INSURED(S) shall be considered a single WRONGFUL ACT," to which only one SIR would apply.

In contrast, the North and State policies covered a "Wrongful Act" that occurred "prior to the inception date of [the] policy. . . . only if the 'Wrongful Act' was unknown to you as a public official or to your employees until on or after the inception date of this policy. In addition, the 'Wrongful Act' must have occurred within 1 year prior to the inception date of this policy."

Additionally, the General policies provided that the insured would not settle any claim without the prior written consent of General, and General had no obligation to indemnify for a settlement without its consent.

On October 1, 2004, Eric J. Nemeth, General Counsel, on behalf of the Fund wrote to the Town acknowledging receipt of a copy of the Tort Claim Notice the Town received from Spagnola.*fn1

The Fund apparently agreed to defend under a reservation of rights. On March 4, 2005, Nemeth again advised that the Fund would provide a defense to the Town, the mayor, and Maurer subject to a reservation of rights. Coverage was not extended to town counsel because he and his firm were not insureds under the policies. Coverage was limited to $100,000.

On September 8, 2005, General acknowledged receipt of the Spagnola complaint and agreed to handle and investigate the matter under the POL coverage, but reserved the right to deny coverage to the extent any acts "d[id] not constitute an 'occurrence' . . . or to the extent the claim falls within any . . . exclusions." Additionally, the SIRs had to be exhausted by the Fund and no coverage was available for acts occurring after January 1, 2002, when General's policies lapsed.

On December 1, 2005, North acknowledged receipt of the Spagnola claim but on December 7, it denied coverage on the ground that the alleged wrongful acts began in mid-2000, which was more than one year prior to its policy's inception.

On December 8, 2005, State issued a reservation of rights, noting that only unknown wrongful acts occurring within one year prior to the policy inception on January 1, 2004, would be covered; therefore, on the face of the Complaint, coverage would not be extended.

On April 7, 2006, Specialty issued a reservation of rights letter to the Town agreeing to investigate and defend subject to its right to disclaim coverage because many of the allegations in Spagnola's complaint fell outside the policy period.

On January 10, 2007, General advised the Town that it would "continue with the handling, investigation, and defense" of the Spagnola action under the POL coverage "subject to a complete reservation of rights." Coverage was "limited to 'wrongful acts' caused by an 'occurrence' that takes place during the period of [General's] coverage." No coverage was available for wrongful acts occurring after January 1, 2002, when the policies lapsed. It noted that Specialty "has agreed to participate in the defense of the action" and "reserve[d] the right to seek an allocation of defense costs as against Specialty."

On February 19, 2007, after the first settlement conference before a federal magistrate, Nemeth on behalf of the Fund wrote to the three other insurers to report his impression that settlement would "not be a simple or inexpensive process," and that the magistrate urged mediation. While Nemeth considered Spagnola's settlement demand for $1.6 million "extreme," he noted that she could claim attorney fees if she prevailed, which would be minimized if the case settled before discovery.

On April 23, 2007, General wrote to Specialty, North, and State advising that North denied coverage and Specialty and State acknowledged potential coverage for the Spagnola action. General demanded that all carriers share in the defense of the matter. It asserted that the POL language in the North policy was the same as that in the other policies and it had wrongfully denied coverage. General demanded that North withdraw its disclaimer and agree to participate in the defense. It reserved all rights to pursue them for contribution.

On June 5, 2007, North prospectively withdrew its denial of coverage once the $250,000 SIR applicable to its policy was exhausted. However, it noted that POL coverage did not apply to acts occurring more than one year prior to policy inception on January 1, 2003, and as to that one-year period, only if the acts were unknown to the insured prior to January 1, 2003.

On August 15, 2007, on the basis of the limited discovery to date, the defense counsel retained by General for the Town estimated the "verdict value" of Spagnola's case at $500,000 inclusive of attorney fees and costs.

On October 1, 2007, General instituted this declaratory judgment action against the Fund, Specialty, North, and State seeking allocation of the costs of defense and indemnification. On October 5, 2007, the Fund filed its own declaratory judgment action*fn2 against General seeking a determination "that the alleged acts, errors, and omissions of the Town . . . and its employees be considered one occurrence and one claim" and declaring that ...

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