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Pemaquid Underwriting Brokerage, Inc., United Messenger Courier, and v. Certain Underwriters At Lloyd's Nspire Re Ltd.


September 29, 2011


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-5723-06.

Per curiam.


Argued May 16, 2011

Before Judges A.A. Rodriguez, Grall and C.L. Miniman.

Plaintiffs Pemaquid Underwriting Brokerage, Inc. (Pemaquid), United Messenger Courier (United), and D&H Alternative Risk Solutions, Inc. (D&H), individually and in their capacities as assignees of Cunningham Lindsey Claims Management, Inc. ("CL"), appeal from summary judgments entered in this declaratory-judgment action in favor of defendants Certain Underwriters at Lloyd's (Underwriters), nSpire Re Ltd. (nSpire), J.P. Flanagan Corp. and Hub International (collectively Hub/Flanagan), Aon Corp. and Aon Risk Services (collectively Aon).*fn2 We now affirm.


Pemaquid is a broker, underwriter, and managing general agent for workers compensation policies of insurance (WC policies). It evaluates the risks of a potential insured employer, calculates the appropriate premium, collects the premium, performs premium audits, and issues the applicable WC policy to each insured. It also evaluates potential third-party subrogation claims associated with the policies it underwrites and issues. United performs the exact same function as Pemaquid, except its business is limited to issuing WC policies to transportation and courier companies. Pemaquid and United were companies under joint ownership. D&H is a third-party administrator of WC insurance claims, coordinating the claims- handling process for clients, directly in some states and through subcontractors in others. Pemaquid and United utilize the services of D&H to administer claims made against the policies they issued. To administer such claims, Pemaquid and United entrusted D&H with claims fund monies in a fiduciary capacity. Those monies came from premiums paid by insureds of Pemaquid and United. D&H was responsible for the investigation and payment of WC claims and expenses related thereto. D&H serviced claims in only two states.

CL is a national third-party administrator (TPA) of insurance claims. D&H subcontracted with CL respecting WC claims against insureds of Pemaquid and United in states other than the two states handled by D&H directly. Pemaquid and United were the intended third-party beneficiaries of the contract between D&H and CL. In 1996 Pemaquid, and in 1998 United, entered into three-party contracts with CL and Legion Insurance Company (Legion) whereby CL agreed that for a negotiated fee it would, inter alia, administer claims for Pemaquid and United. D&H was retained to provide oversight for these claims. More specifically, CL was to: record new claims; investigate their propriety; procure proper and required documentation before authorizing payment of claims and expenses; ensure that payments were not duplicative, were legally warranted, and were recorded by CL in accordance with industry standards and legal requirements; investigate the possibility of subrogation; timely administer payments; ensure timely availability of monies for payment of claims; monitor claims for continued activity; and timely respond to inquiries from plaintiffs.

Underwriters issued Policy No. 823/FD0000493 to Fairfax Financial Holdings, LTD (Fairfax), doing business in Canada, under which CL was insured as a wholly owned subsidiary of Fairfax (the assureds). The Underwriters policy covered the period from May 31, 2000, to May 31, 2003. The policy was subsequently extended to May 31, 2004.*fn3 Part B, Section 4, the Errors and Omissions (E&O) section of the policy, contained policy limits of $250 million over a $1 million self-insured retention. The policy did not give Underwriters the right or duty to defend, but merely stated that it would reimburse the assured for the cost of litigation and in fulfillment of its indemnity obligations.

The E&O policy section provided coverage for any loss resulting from a claim first made against the "assured" during the policy period for a wrongful act in the performance of, or failure to perform, professional services. A claim was considered to be first made on the date that the assured provided written notice to Underwriters in accordance with the notice provisions of the policy. Notice was only required at the point in time when the assured reasonably believed that the claim could exceed $1 million. Notice was to be given in writing as soon as practicable after the assureds became aware of the claim, but in no event later than sixty days after the end of the policy period, i.e., May 31, 2004. Awareness of a claim was further defined as the date that the assureds' general counsel or risk management department "first becomes aware of such Claim or of such fact, circumstance or situation" and one of five conditions existed, including receipt of "a written settlement demand which exceeds 50% of the applicable Retention" or a reasonable belief by general counsel or the risk management department that the loss will exceed 50% of the retention. Despite this language, the policy further provided that:

Inadvertent omission or oversight by the Assureds in advising the Lead Underwriter of any claim or subsequent developments, including the failure to list any Claim on a bordereau,*fn4 shall not, in any way, affect the liability of Underwriters, unless they have been actually and substantially prejudiced thereby. Such delay shall be promptly reported to the Lead Underwriter as soon as the omission or oversight is discovered by the Assureds.*fn5

CL carried a primary, or fill-in, insurance policy with American International Specialty Lines Insurance Company (AISLIC) for the $1 million retention. The AISLIC policy included a $25,000 deductible and obligated AISLIC to defend claims against CL.

On February 11, 2004, plaintiffs sued CL for breach of contract and negligent claims handling on a nationwide basis (the underlying action). Those claims were based on "Professional Services" and were covered by the Underwriters policy, as Underwriters admitted.*fn6 Prior to the institution of that suit, AISLIC in an internal memorandum from Jeffrey S. Desrosiers noted a pre-suit claim against CL by D&H with a demand for $600,000, a potential risk to the insured, and a loss exposure in excess of $1 million. As a result, he transferred the claim to the "complex department."

At the time of the underlying action, CL's TPA business had disbanded and its assets had been sold to a third party. CL was defended in the underlying action by AISLIC. AISLIC assigned the defense to the firm of Marshall, Dennehey, Warner, Coleman & Goggin (the Marshall firm). The parties attempted to settle the case in October 2004 when Pemaquid demanded $1 million (it had demanded $600,000 prior to suit), but CL only offered $250,000. The case did not settle at that time.

Underwriters learned of the underlying action during a claims review meeting on April 28, 2005, with representatives of its coverage counsel (Thomas Sheffield, Esquire, of Boundas, Skarzynski, Walsh and Black, LLC) (the Boundas firm), and Carine Evers, one of CL's few remaining representatives from CL'S Texas office. At this point, none of the reporting conditions within Section IV of the Underwriters policy had been triggered. Sheffield requested copies of written notification to it. On May 16, 2005, Sheffield sought further information from Evers, including information about D&H's claim. She relayed that she was trying to get her new office organized and documents unpacked. In a reply to a follow-up email the next month, Evers apologized and again advised that she was swamped with discovery and many, many other matters. Sheffield wrote that his requests were not urgent and that he could go to Texas and get the information.

On August 29, 2005, plaintiffs served the audit report of their expert, Robert Morrissey, in the underlying action. He had evaluated each and every claim handled by CL on behalf of plaintiffs nationwide amounting to over $42 million in payments. Morrissey determined the quantifiable liquidated damages, such as multiple duplicate payments of claims, continued payment of claims after they had been closed, payments under incorrect rate structures, and other liquidated damages. He found that 45% of the payments that CL had made on behalf of plaintiffs, or $19 million, could not be verified because there was no detailed payment information (i.e., hard copies of the bills) available. However, from the available data on documented payments, Morrissey found that CL had made erroneous payments amounting to a liquidated loss of $11,993,171. This figure was derived from $4,523,162 in duplicate payments and overpayments; $1,333,081 in excess payments to Genex; and $765,027 in indemnity-rate charges for medical-only files. All three categories totaled $6,621,270. That subtotal was 28% of the $23,424,246 in payments with reviewable documentation. Morrissey then applied the 28% error rate to the $19,185,358 of undocumented claims to arrive at an additional sum of $5,371,900 in damages.

Morrissey did not determine other damages that had some subjective element, such as the failure to pursue subrogation claims, simple negligence in adjusting claims, etc. This report put CL on notice that the damages exceeded the AISLIC policy and its self-insured retention under the Underwriters policy. It was only at this point that the magnitude of the claims became known.

A representative of CL further discussed the underlying action and policy issues with Underwriters in August 2005. On August 30 and September 7, 2005, Underwriters' counsel corresponded with CL's counsel regarding the Texas DETSIF action, described infra. Formal notice of plaintiffs' negligence claims was given to Underwriters' designated notice agents, Sedgwick, Detert, Moran & Arnold (the Sedgwick firm), on October 13, 2005, by Aon, CL and Fairfax's insurance broker. That notice was transmitted by the Sedgwick firm to Sheffield on October 19, 2005, but it was not until December 6 that Sheffield issued a reservation-of-rights letter.

On November 1, 2005, CL's general counsel, Daniel Schulz, sent an e-mail to CL's defense counsel, Lawrence Berg, and to Scott Redhead of AISLIC, stating:

We need to start floating two things to the [p]laintiff in this case.

1. [CL] is defunct and insolvent in excess of $10 million.*fn7

2. We expect the excess carrier to disclaim cover[age] based on late notice as the claim was only recently reported to them.

On December 15, 2005, Pemaquid's counsel stated that his clients were willing to accept $3.8 million in full and final resolution of the matter.

On January 5, 2006, Underwriters issued a declination of coverage to CL, resting that decision on the fact that the claim was not made and reported during the policy period.*fn8 Nonetheless over the next six months, CL and Underwriters continued to correspond about the underlying action.

AISLIC hired Caroline Shaw, the former Assistant Vice President in CL's Quality & Audit Department, to review the Morrissey report, but she was not retained as an expert. Shaw audited twenty-five of the 1503 files that Morrissey had reviewed, looking for duplicate payments only. Shaw discovered that only one file had been coded incorrectly. Therefore, Shaw concluded that CL had made duplicate payments only 4% of the time, instead of the 28% that Morrissey determined for duplicate payments.*fn9 However, Shaw believed that it was impossible to make a clear determination of the amount of overpayments because, like Morrissey, she could not get access to "hard copies" of the bills.

On April 13, 2006, the Marshall firm and counsel for plaintiffs in the underlying action jointly notified the Sedgwick firm of ongoing attempts to resolve that suit. They invited Underwriters to participate in a final, and potentially global, resolution of plaintiffs' claims and the coverage issues in advance of settlement. Underwriters declined to participate in the settlement negotiations.

After much negotiation, CL and AISLIC settled with plaintiffs in an agreement made on April 17, 2006. CL agreed to pay plaintiffs $1.1 million of which AISLIC paid $839,311.50 and CL paid $260,688.50. CL assigned its rights against the policies issued by its excess E&O carriers, i.e., Underwriters, nSpire, Axis and Ace. These carriers provided coverage from 2003 until the date of settlement. CL consented to the entry of a judgment against it "for the full current value of Plaintiffs' claims which for the purposes of this settlement is stipulated to be $11,993,171" if its excess E&O carriers failed to contribute towards settlement to plaintiffs' satisfaction.

However, the judgment was enforceable exclusively against the excess E&O carriers. The settlement agreement did not indicate whether the $1.1 million that was going to be paid by AISLIC and CL was to be deducted from the total sum of the judgment in the event one was entered, leaving an outstanding balance of $10,893,171 if the $1.1 million was in fact paid. Finally, CL agreed to cooperate with plaintiffs' attempts to settle their claims with CL's excess E&O carriers. On May 11, 2006, the parties informed Underwriters of the settlement.

On June 26, 2006, the bankruptcy court approved the agreement, stating in part that it was "reasonable and beneficial to the Debtor's estate." Redhead, thereafter, noted in his file on July 19, 2006, that he believed the case could have resulted in a judgment of between three and four million dollars.

With no resolution of the assigned claims on the horizon, plaintiffs filed this declaratory judgment action on July 24, 2006, against Underwriters, nSpire, Axis and Ace seeking indemnification from them. Axis answered on August 22, 2006; Underwriters answered on December 8, 2006; and nSpire answered on February 14, 2007.*fn10 During the first quarter of 2008, plaintiffs filed three amended complaints that included CL's insurance brokers, Aon and Hub/Flanagan as defendants.

Underwriters, NSpire, HUB/Flanagan and Aon filed answers. Underwriters in its answer to the complaint did not disclose a similar proceeding in Texas, which we pause to briefly describe.

The relevant Texas litigation began on September 9, 2005, when CL filed an action against Underwriters in the United States District Court for the Eastern District of Texas under Civil Action No. 2:05CV428 (CL declaratory judgment action) alleging that it was a defendant in Deep East Texas Self-Insurance Fund v. Cunningham Lindsey Claims Management, Inc., Case No 47,646-A in the County Court at Law No. 2 of Smith County Texas (DETSIF action). The DETSIF action had been filed on January 24, 2003, and AISLIC provided the defense. CL sought indemnification from Underwriters for claims that it had negligently performed its duties as a TPA based on conduct similar to that alleged in the underlying action here. It alleged that it was insured by Underwriters for DETSIF's E&O claims and attached as an exhibit to its complaint the same policy that is at issue here. It also attached August 30, 2005, correspondence from Sheffield taking the position that the policy only covered claims made during the policy period and reserving all rights on the ground that notice of the DETSIF action was given until after the policy expired. At some time over the next year, DETSIF took a judgment with a covenant not to execute against CL and was substituted for CL as plaintiff in the CL declaratory judgment action. The name of the defendant may have been amended to SVB Underwriting Limited, the lead underwriter. DETSIF then prosecuted the action, presumably as the assignee of CL.

DETSIF moved for summary judgment and Underwriters cross-moved for the same relief. At a pretrial hearing on January 25, 2007, Underwriters was represented, among others, by the Boundas firm. After disposing of issues relating to choice of law and authorization to do business in Texas, and then finding that the settlement with CL was valid, the court construed the policy, denied Underwriters motion for summary judgment, and found in favor of DETSIF that the notice of claims may be made beyond the end date of the policy. The matter was thereafter mediated and settled by Underwriters in January 2007; it was dismissed by order of April 10, 2007. Thus, the CL declaratory judgment action and this action proceeded in tandem for a period of time.

Returning to consideration of this case, on September 10, 2007, plaintiffs amended their interrogatory answers to include all pleadings, briefs, exhibits, deposition transcripts, written statements, interrogatory answers, affidavits, certifications, insurance policies, exclusions, endorsements, and all other documents from the CL declaratory judgment action in Texas. A similar further amendment was served the following day to include the testimony of Jonathan Andrew Boyns (appearing as designated corporate representative of SVB Underwriting) and Douglas Eric Neil (appearing on behalf of AON). They demanded that Underwriters withdraw its policy defense asserting late notice of claim, based on Boyns's testimony that the inadvertent-omission-of-notice clause meant that Underwriters would not take issue with late notice unless it was prejudiced, and that the provision applied to individual claim notice as well as the bordereau provisions. Neil, too, confirmed this interpretation. Plaintiffs also questioned the good faith of the Boundas firm in not disclosing the CL declaratory judgment action because it was admitted pro hac vice in both actions. Despite being aware of the Texas litigation by this date, plaintiffs did not disclose it in their Rule 4:5-1(b)(2) certifications appended to their amended complaints filed in 2008. Neither did Underwriters do so in their answers to the amended complaints.

On July 21, 2008, plaintiffs filed a statement of damages in the amount of $10,893,171, "[s]uch sum representing the stipulated amount of the claimants' claims pre- and post- judgment interest, [and] costs" together with an undetermined amount for attorneys' fees and costs pursuant to Rule 4:42-9(a)(6).


On February 20, 2009, plaintiffs filed a motion for summary judgment against Underwriters only. Plaintiffs' counsel, Andrew L. Indeck, then with Scarinci Hollenbeck (the Scarinci firm), submitted a supporting certification to which he attached various documents. He certified that plaintiffs and the Scarinci firm were at all times unaware of the DETSIF action. Underwriters cross-moved for summary judgment. On May 8, 2009, Lawrence B. Berg, counsel for CL in the underlying action, certified that he had no personal involvement with the CL declaratory judgment DETSIF action in Texas and that he never advised plaintiffs' counsel "in any way as to the existence" of that matter "at any time prior to the filing of the current Declaratory Judgment action."

On June 12, 2009, the judge heard oral argument on the motions and on June 24 denied plaintiffs' motion and granted Underwriters' motion. Before considering the issues addressed to the interpretation of the Underwriters' policy, the judge considered whether the settlement agreement between plaintiffs and CL was enforceable under Griggs v. Bertram, 88 N.J. 347, 368 (1982). The judge determined that plaintiffs had the initial burden of producing evidence that the settlement was both reasonable and made in good faith. The judge found that CL's contribution of $260,688.50 "to deflect a total exposure of $12.8 million" was "insignificant."

[L]ike the insureds in Pasha*fn11 and Fireman's Fund Ins. Co.,*fn12 the disparity between the amounts paid by the insured and the amount of the settlement to be enforced against the insurer speaks against a finding of reasonableness and good faith. As such, the amounts contributed by CL to the settlement do not set forth a prima facie case of reasonableness and good faith.

Next, the judge considered Redhead's July 19, 2006, memo and observed that Redhead "was explaining only why the $1.1 million payment was, under the circumstances, reasonable from [AISLIC's] perspective." He did not discuss whether a $12.8 million payment would have been reasonable under the same circumstances. Additionally, it was clear that Redhead thought the claim was only worth $3 to $4 million. This, too, suggested that the settlement was not reasonable or made in good faith.

The judge then considered whether the Morrissey report demonstrated the reasonableness and good faith of the settlement. He concluded that it did not because the settlement was in the amount of Morrissey's total calculation of damages plus an additional $1.1 million, making the settlement unreasonable. Additionally, a lack of good faith was found in the provision that barred execution on the judgment against CL, a circumstance found suspicious in Firemen's Fund. He concluded that "[p]laintiffs have not set forth a prima facie case of reasonableness and good faith based on the findings of the Morrissey [r]eport."

As to counsel's claim that the action was settled after engaging in arm's length negotiations based on the relative strength of plaintiffs' case, the judge rejected this claim as a "bald assertion." More particularly,

The question of whether a settlement is reasonable properly requires consideration of available factual information, an understanding of the applicable law, and knowledge of jury verdicts in the forum in which the action is to be tried. Pasha, 344 N.J. Super. 350, 359. There is nothing in the record explaining the factors CL's counsel took into account in recommending that CL settle for an amount representing no discount off the upper limit of [p]laintiffs' claim. There is no discussion of any possible weaknesses in [p]laintiffs' case, and C's potential defenses are not even identified, much less handicapped. There is no survey of jury verdicts in similar cases tried in New Jersey. . . .

Last, the judge considered the bankruptcy court's approval of the settlement and noted that it only considered the reasonableness of the settlement from the perspective of Pemaquid's bankrupt estate, not from the perspective of CL and its insurers. In any event, the bankruptcy court did not engage in the in-depth analysis required by Griggs. Thus, that approval of the settlement did not establish that it was made in good faith and reasonable from CL's point of view. Because the judge concluded that plaintiff's did not meet their burden of production, he did not address the dispute over the terms of Underwriters' policy.

The judge also entered a consent order for judgment against plaintiffs on behalf of nSpire, Hub/Flanagan, and Aon, which made the judgment final as to all defendants on the ground that the settlement was unenforceable but preserved plaintiffs' right to appeal. Finally, the judge denied plaintiffs' motion for sanctions because both plaintiffs and Underwriters failed to disclose the CL declaratory judgment action in their pleadings.

On November 20, 2009, plaintiffs filed a notice of appeal from the summary judgment and the consent order. They contend that the judge incorrectly ruled that they did not make out a prima facie showing of the settlement's enforceability and incorrectly denied their motion for sanctions under Rule 4:5-1(b)(2).


In reviewing a summary judgment order, the propriety of the order is a legal, not a factual, question. Bennett v. Lugo, 368 N.J. Super. 466, 479 (App. Div.), certif. denied, 180 N.J. 457 (2004). Thus, the scope of our review is plenary and we owe no deference to the trial court's interpretation of the law and the legal consequences that flow from established facts. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995); Hirl v. Bank of Am., NA, 401 N.J. Super. 573, 585 (App. Div. 2008), affirmed o.b., 190 N.J. 318 (2009).

We apply the same standard to a summary judgment motion as that governing the trial court. Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Summary judgment is appropriate if there is no genuine issue as to any material fact in the record. R. 4:46-2(c).

[A] determination whether there exists a "genuine issue" of material fact that precludes summary judgment requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party. [Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).]

Thus, we must treat that the non-moving parties' assertions of fact as true and "grant all the favorable inferences to [them]." Id. at 536.


Where an insurer fails to defend an insured after being notified of a claim and does not participate in settlement negotiations, a settlement entered by the insured with a third-party claimant may be enforced against the insurer if the settlement is reasonable in amount and entered in good faith despite a "no action" provision in the policy.*fn13 Griggs, supra, 88 N.J. at 364, 368. The burden of proof, i.e., the burden of production and the burden of persuasion, respecting reasonableness and good faith is divided between the parties. Id. at 366-67. The initial burden of production is the responsibility of the insured because the insured has greater access to the information. Id. at 367. In fact, the insured is presumed to possess all information necessary to make the ultimate determination as to the reasonableness and good faith of the settlement. Fire-man's Fund, supra, 361 N.J. Super. at 565. Where the insured fails to show that the settlement was reasonable or entered in bad faith, it is unenforceable. Griggs, supra, 88 N.J. at 367. However, once sufficient evidence has been produced, the ultimate burden of persuasion that the settlement was unreasonable or entered in bad faith is the responsibility of the insurer. Ibid.

Reasonableness is not just a matter of the extent of the plaintiff's claims, but rather the extent of the defendant's exposure to liability. Excelsior Ins. Co. v. Pennsbury Pain Ctr., 975 F. Supp. 342, 356 (D.N.J. 1996). Reasonableness requires that the insured expend efforts to determine whether the claims were valid and whether the amount proposed was reflective of the injuries claimed. Id. at 357. It is determined by "the size of possible recovery and degree of probability of [the] claimant's success against the [insured]." Luria Bros. & Co., Inc. v. Alliance Assurance Co., Ltd., 780 F.2d 1082, 1091 (2d Cir. 1986) (internal quotation marks omitted); accord Vargas v. Hudson Cty. Bd. of Elections, 949 F.2d 665, 674 (3d Cir. 1991). However, reasonableness is not disproved simply by a settlement containing a covenant to seek relief only from the insurer because the "insured tortfeasor should be able to reach an agreement relieving it of liability when its carrier wrongfully declines to defend." Griggs, supra, 88 N.J. at 370.

One of the indicia of unreasonableness is where a disproportionate amount is left for the refusing insurer to pay. Fireman's Fund, supra, 361 N.J. Super. at 566 (finding settlement unreasonable where it allocated substantial liability to the defendant insured by the one insurer that refused to defend and where no allocation of damages was made between compensatory and punitive damages). Such a disparity is also evidence of bad faith. Id. at 568. The insured's failure to rebut the valuation of damages may be evidence of collusion. Id. at 573-74. Additionally, we noted that the injured party "presented little or no competent evidence to support the reasonableness and good faith nature of the [s]ettlement." Id. at 569. The allegations in the complaint were not evidential and the opinions of counsel "constitute[d] inadmissible net opinions because the attorneys never stated a factual basis for their opinions[.]" Id. at 569, 571. Additionally, the defendants in the underlying action "failed to mount any substantial challenge to [the plaintiff's] valuation of the case," which suggested collusion and bad faith. Id. at 573.

However, in Excelsior, supra, 975 F. Supp. at 357, the prima facie burden of proving that the settlement was reasonable and entered in good faith was met because the claims exceeded $1 million, the costs of continued litigation would have been high, the expert report was credible, and the claims were subrogation claims. Further, the insurer did not meet its ultimate burden of persuasion that the settlement was unreasonable in part because the expert on whom it relied utilized a different data base of information to form his conclusions (a three-month sales trend history rather than the one-year history used by Excelsior's expert). Id. at 358.

By contrast, in Pasha, supra, 344 N.J. Super. at 353, the insured paid $30,000 of a $500,000 settlement and assigned its rights under its insurance policy to the plaintiffs. The parties to the settlement agreement also entered into a confidentiality agreement pursuant to which the plaintiffs agreed to return one-third of any amount recovered from the insurer or $30,000, whichever was less. Ibid. The parties then agreed to the entry of a consent judgment for $500,000. Id. at 354. The insurer moved to set aside the judgment as collusive. Ibid. We agreed with the trial court that the evidence of collusion, along with the facts that the plaintiffs' "documentary submissions contained nothing but guesswork and unsupported anecdotal references, and were wholly insufficient to satisfy their burden [of production] under Griggs." Id. at 359. The certifications from the parties' attorneys were "devoid of content respecting the factors that played a role in arriving at the settlement." Id. at 357.

Plaintiffs state that they have met their burden of producing evidence supporting the reasonableness of the settlement because Morrissey calculated the damages at $11,993,171; Redhead acknowledged the risk of a multi-million-dollar verdict; and the bankruptcy court stated that the agreement was fair. They cite Transportes Ferreos De Venez. II Ca v. NKK Corp., 239 F.3d 555, 562-63 (3d Cir. 2001), for the proposition that even when an insured pays no part of the damages, the settlement can still be upheld. However, the court there found that the amounts paid by each of the parties appeared to reasonably reflect their various responsibilities and there was no evidence of bad faith or collusion. Id. at 563.

Underwriters argues that the agreement was unreasonable and entered in bad faith because the amount of damages was equal to the full amount contained in the Morrissey report without any offset of the $1.1 million that had already been paid by CL and AISLIC and there was no evidence in the record that defendants would have been liable for more than the amount Morrissey calculated. Therefore, Underwriters urges that the agreement was by definition entered in bad faith and not reasonable. Morrissey had estimated the damages at $11,993,171. Additionally, Underwriters contends that Pemaquid bears the burden of producing evidence as to how the settlement amount was determined. Underwriters also points to the disparity between what CL paid ($260,688.50) and the amount for which Underwriters would be liable as further evidence of bad faith and unreasonableness. Finally, Underwriters and Hub/Flanagan state that Shaw's report shows that CL was not interested in arriving at the correct amount of damages, but chose to settle and assign its rights regardless of the actual amount of damages.

We disagree with all parties' arguments to some extent and the judge's reasoning as well, but affirm on the ground that plaintiffs failed to produce sufficient evidence that the settlement was reasonable. Initially, the settlement agreement should have been reasonably construed to provide for only $11,993,171 with the payment of $1.1 million as a set-off against that amount, as we are required to draw all favorable inferences in plaintiffs' favor on these summary judgment motions. Brill, supra, 142 N.J. at 536. This reasonable inference is consistent with plaintiffs' filed statement of damages in this case in the amount of $10,893,171. We also reject the excess carriers' argument that the amount CL paid out of its pocket was disproportionate and evidences bad faith and unreasonableness because the full amount of the primary insurance and more was paid, and should have been considered.

However, we nonetheless consider the amount of the settlement in and of itself to be unreasonable because it reflects no compromise of the maximum provable damages. In doing so, we reject plaintiffs' argument that they surrendered the right to seek unliquidated damages because the record contains no proofs that would have supported such a claim, such as historical data respecting the extent of recovery on subrogation claims per dollar paid in workers' compensation benefits. With no proof of any other damages, this "settlement" was for the full amount of plaintiffs' claim.

Additionally, the settlement reflects a great disparity between its amount, plaintiffs' pre-settlement demands for less than half of the settlement, and the estimation of a jury verdict for even less by Redhead, the primary carrier's adjuster. In this respect, "[t]he very concept of settlement implies some element of compromise." Battista v. Western World Ins. Co., Inc., 227 N.J. Super. 135, 150 (Law Div. 1988), aff'd in part and rev. in part on other grounds, 250 N.J. Super. 330, 338 (App. Div.), certif. denied, 127 N.J. 553 (1991). We recognize that Redhead's estimation of a verdict was made to justify paying the primary policy and not to establish the reasonableness of the settlement, but plaintiffs submitted no evidence from CL, its counsel, or its primary carrier justifying the total amount of the settlement. It seems to be nothing more than a mere capitulation without any true effort to defend the claims against CL, such as retention of an expert to rebut Morrissey's report or presentation of evidence to establish that Morrissey relied on inaccurate data and misinterpreted the documentation produced by CL. We have no certification from anyone employed by CL or its primary carrier attesting to the whys and wherefores of the $11 million settlement nor have CL's attorneys even attempted to justify it. Most glaring is the fact that the settlement was more than double plaintiffs' last demand. There simply is no explanation for this disparity, making the settlement prima facie unreasonable.*fn14

Finally, we note that plaintiffs have not asserted any error in the dismissal based on a right to proceed on any other claim asserted in their third amended complaint.


After carefully reviewing the record in the light of the written and oral arguments advanced by the parties, we conclude that the remaining issue presented by plaintiffs is without sufficient merit to warrant discussion in this opinion, R. 2:11-3(e)(1)(E); we affirm substantially for the reasons expressed by the trial judge in his written opinion dated June 24, 2009. The findings and conclusions of the judge are supported by substantial, credible evidence in the record. See Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974).

In addition, we note that, although there was clearly a factual nexus between this and the Texas litigation, plaintiffs, like Underwriters, failed to disclose that litigation in their Rule 4:5-1(b)(2) certifications. In any event, a decision respecting an award of attorney fees rests within the discretion of the court and is ordinarily reviewed only for a mistaken exercise of discretion. Packard-Bamberger & Co. v. Collier, 167 N.J. 427, 443-44 (2001). An abuse of discretion is shown when "a decision is made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis." Flagg v. Essex Cnty. Prosecutor, 171 N.J. 561, 571 (2002) (internal quotation marks omitted). Here, there was a rational explanation and no departure from established law. See Kavanaugh v. Quigley, 63 N.J. Super. 153, 158 (App. Div. 1960) (a decision based on a misapplication or misperception of applicable law is not entitled to deference).


GRALL, J.A.D., concurring

I would affirm substantially for the reasons stated by the trial judge in his written decision of June 24, 2009.

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