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Thomas P. Lydon and Sharon K. Lydon, H/W v. Chubb Group of Insurance Companies


August 30, 2012


On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1671-05.

Per curiam.


Argued May 1, 2012 --

Before Judges Messano, Kennedy and Guadagno.

On July 11, 2004, fire destroyed the New Vernon home of plaintiffs Thomas P. and Sharon K. Lydon. Plaintiffs had secured a policy of insurance on the home with defendant Chubb Group of Insurance Companies (Chubb) through the efforts of their long-time insurance broker, defendant Otterstedt Insurance Agency (Otterstedt). Plaintiffs made a claim seeking benefits under the policy.

Disputes regarding the extent of coverage could not be resolved, so, on June 9, 2005, plaintiffs filed a complaint naming Chubb, Otterstedt and Hardwood Floors by David Wisser (Wisser) as defendants.*fn1 Plaintiffs alleged Chubb had unilaterally reduced the dwelling and contents coverages of the policy, and they sought reformation of the policy and monetary damages as a result of the fire. As to Otterstedt, plaintiffs alleged it had negligently modified the coverages and policy limits. Plaintiffs also sought punitive damages and attorney's fees, alleging that Chubb and Otterstedt acted in bad faith and in violation of various statutes and regulations.*fn2

After discovery, Chubb and Otterstedt moved for summary judgment as to plaintiffs' bad faith claims. While these motions were pending, Chubb filed a second motion for partial summary judgment to dismiss plaintiffs' claim for "Extended Replacement Cost" (ERC) benefits under the policy. Plaintiffs cross-moved for summary judgment, seeking a declaration that they were entitled to ERC benefits. We discuss the policy terms in greater detail below.

On September 12, 2008, the judge entered an order dismissing plaintiffs' bad faith claims against Otterstedt. On November 19, the judge entered an order granting Chubb summary judgment dismissing plaintiffs' claims for ERC benefits. In the same order, the judge dismissed with prejudice plaintiffs' bad faith claim against Chubb as it related to the "underwriting and issuance of . . . coverage." However, the judge preserved for trial plaintiffs' allegation that Chubb acted in bad faith during settlement efforts; the order also preserved plaintiffs' claim for "Extra Living Expenses" under the policy.

Thus, at trial, plaintiffs' causes of action were limited to: bad faith by Chubb during settlement negotiations; extra living expenses under the policy; and negligence against Otterstedt. At the close of plaintiffs' case, the judge granted Chubb's motion to dismiss plaintiffs' bad faith claim. The remaining two issues were submitted to the jury.

The jury found Otterstedt negligent and determined that $1.5 million would be "necessary to reconstruct [plaintiffs'] home." The jury also found in favor of plaintiffs as to extra living expenses associated with a hotel room used by their son after the fire. However, the jury rejected plaintiffs' claim for extra living expenses associated with a condominium they had rented after October 31, 2005, and also rejected plaintiffs' claim for the costs of furnishings purchased for that property. The judge entered a disposition order indicating that he would "'mould the verdict' by motion or by stipulation." After the parties stipulated to the amount of damages associated with landscaping, debris removal and other items pursuant to "additional coverages" under the policy, plaintiffs moved for a new trial on damages, which the judge denied.

On April 16, 2010, the judge entered a final order for judgment against Chubb in the amount of $225,688, reflecting stipulated amounts of damages under these "additional coverages" and a stipulated amount of damages for the hotel expenses. The judge declined to award prejudgment interest against Chubb.

The order also entered judgment against Otterstedt in the amount of $919,173.59. This figure was calculated by taking the sum of: 1) the jury's verdict as to reconstruction costs, $1.5 million; 2) $750,000 as damages to the contents of the house; 3) landscaping costs Otterstedt agreed to pay; and 4) prejudgment interest, and subtracting the amount previously paid by Chubb under the policy, $1,542,144. This appeal followed.

Plaintiffs contend that the judge erred: in granting Chubb summary judgment regarding ERC benefits under the policy; in precluding testimony regarding Chubb's alleged violation of N.J.S.A. 17:29B-4, and dismissing plaintiffs' claim for bad faith and punitive damages; in fixing the date of the fire as the date of plaintiffs' loss for the purpose of measuring their damages; and in denying prejudgment interest as to Chubb. Plaintiffs also argue that the jury's damage award was against the weight of the evidence or otherwise tainted by cumulative error.

Otterstedt has cross-appealed. It contends that if we reverse the grant of summary judgment to Chubb on the issue of ERC coverage, we must vacate the judgment entered against Otterstedt and dismiss plaintiffs' complaint. Otterstedt also argues that the judge erred: in permitting plaintiffs to pursue their claim as if ERC benefits were in place and instructing the jury that the proper measure of damages would be the amount available under the ERC provisions of the policy; in refusing to instruct the jury that the house was not completed at the time of the fire; and in permitting plaintiffs to amend their expert reports and adduce testimony from those reports "on the eve of trial."

We have considered these arguments in light of the record and applicable legal standards. We affirm the judgment in all respects on the appeal and the cross-appeal.


The most critical issue on appeal is the propriety of the order granting Chubb partial summary judgment and dismissing plaintiffs' claim for ERC benefits under the policy. To the extent factual disputes exist, we accord plaintiffs the benefit of all favorable evidence and inferences in the motion record as presented to the judge. Henry v. N.J. Dep't of Human Servs., 204 N.J. 320, 329 (2010) (citing Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)); see also R. 4:46-2(c). We conduct our review de novo applying the same standards employed by the trial court. Henry, supra, 204 N.J. at 330. We first determine whether the moving party has demonstrated there were no genuine disputes as to material facts. Atl. Mut. Ins. Co. v. Hillside Bottling Co., 387 N.J. Super. 224, 230 (App. Div.), certif. denied, 189 N.J. 104 (2006).

[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, supra, 142 N.J. at 540.]

We then decide "whether the motion judge's application of the law was correct." Atl. Mut. Ins. Co., supra, 387 N.J. Super. at 231. We owe no deference to the motion judge's conclusions on issues of law. Ibid. (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).


The motion record reveals that plaintiffs were in Rhode Island attending a wedding when they received word from their son at about 4:00 a.m. that the New Vernon house was ablaze. At the time: municipal officials had not issued a certificate of occupancy; plaintiffs had moved some personal belongings and furniture into the home, but they had been residing elsewhere since selling their home on Bellevue Avenue in Summit on July 1, 2004; certain fixtures were not yet installed in the home; Wisser was completing work on the hardwood floors and had items stored in the house and garage; and Thomas Lydon did not know that his son intended to stay in the home that evening.*fn3

Plaintiffs had secured a policy of insurance on the New Vernon home through Otterstedt in 2002 when they purchased the property. Thereafter, they demolished the existing structure and commenced construction of a new home in 2003. Thomas told Dina Mascarelli, a representative from Otterstedt, to place $700,000 in dwelling coverage without any coverage for contents during construction. This was an estimate of construction costs provided by Sharon, who was intimately involved in designing the home, selecting its finishes, and choosing subcontractors and a project manager. Thomas understood the policy was a "builder's risk policy."

A Chubb "Masterpiece" policy was issued with an effective date of October 20, 2003 and a one-year policy term. The "Coverage Summary" indicated that the dwelling was insured for $700,000 and no coverage was provided for "contents." The payment basis listed in the Coverage Summary was "Conditional Replacement Cost [CRC]," which we explain in further detail below. Plaintiffs were living in their home in Summit while the New Vernon home was constructed. That home was also insured by Chubb under a Masterpiece policy issued through Otterstedt with dwelling coverage limits of $1.894 million and contents coverage limits of $947,000. The payment basis listed on the Coverage Summary for the Summit home was ERC.

On either June 25 or 26, 2004, Thomas called Mascarelli and told her that the closing on plaintiffs' Summit house was scheduled for June 30, they were moving their contents into the New Vernon home on July 1, and he "wanted her to place the Chubb masterpiece deluxe homeowners policy on" the New Vernon home.

Plaintiffs testified repeatedly that they relied entirely upon Otterstedt for their insurance needs, had dealt with the agency for decades and assumed it, and Chubb, would make sure their homes had the best possible coverage.

Based upon his conversations with Mascarelli, Thomas assumed that the policy on the New Vernon home would provide coverage limits that were no less than those in Summit, although he acknowledged never requesting specific coverage limits as to dwelling or contents in the new policy. Thomas also recalled that, during "two or three" other conversations he had with Mascarelli, he informed her of the mortgagee's name and the amount of the mortgage on the New Vernon property, i.e., $1.004 million. He denied asking for a specific amount of coverage.

Thomas testified that an appraiser working on behalf of Chubb contacted him to inspect the property "at least once and probably twice starting in early 2004 and maybe as late as April or May." Thomas recalled telling the appraiser to stop by the property because Sharon was generally there on a daily basis. Thomas also remembered, however, that he initially told the appraiser the home would be "done in early June," but called him later to advise that the house would not "be completed [until] early July."

Pamela Rasul, an underwriter for Chubb, testified in her deposition that she documented in "Chubb's underwriting note system" a conversation she had with Mascarelli on July 1. Mascarelli told Rasul that construction on plaintiffs' new home was complete, "the insureds [we]re occupying the home" and that Mascarelli added "contents" coverage to the policy. Rasul specifically recalled telling Mascarelli that CRC, as opposed to ERC coverage, would remain in place until Chubb conducted its "course of construction appraisal." Rasul testified that Chubb's computerized appraisal system indicated appraisals on plaintiffs' home were ordered and cancelled several times prior to the fire. One entry indicated that Chubb was told by plaintiffs to return in July because the construction was not complete.

The motion record also included a report from Joseph Sodano, an appraiser from plaintiffs' mortgagee. His inspection was done in March 2004, and the report indicated that construction was not complete. Sodano listed the various items that were unfinished, and he estimated the costs to complete the work to be approximately $35,000 to $40,000.

In her deposition, Mascarelli testified that she spoke to Thomas on June 23, 2004, and he specifically requested coverage of $1.004 million, the amount of the mortgage, effective June 30. On June 28, she sent Thomas a form to cancel the insurance on plaintiffs' Summit home. Mascarelli denied that Rasul told her that the policy would continue on a CRC basis, and, if she had, Mascarelli would have advised plaintiffs. Mascarelli's notes indicated that she "deleted the course of construction."

Mascarelli had given plaintiffs' phone number to Chubb in May so that a final appraisal could be completed, and she did not know why Chubb had not completed the appraisal prior to the fire. After the fire, Rasul told Mascarelli that she was not sure whether ERC or CRC would apply because Chubb had not done a final inspection of the property.

Michael Barbara, another Otterstedt employee, testified at deposition that when plaintiffs' policy was converted from a "builder's risk" to a homeowners policy, the procedure was not to "ask for that specific [ERC] coverage" because "with Chubb[,] if you have a full homeowners policy it does carry full [ERC]." Barbara explained, however, that, "[w]e were not informed as to whether the [ERC] would be in effect at the time that we requested it or whether it would wait until after Chubb had a chance to appraise the property for its value." Robert Cassazza, a senior vice-president at Otterstedt, testified in deposition that he participated in a meeting with Chubb after the fire and learned for the first time it was the company's position that CRC remained in place until an appraisal was performed.

On July 12, the day after the fire, Thomas received the policy update on the New Vernon home through the mail.*fn4 The amendments to the policy's "Coverage Summary" reflected a dwelling coverage limit of $1.004 million, a contents coverage limit of $502,000, and CRC as the payment basis.

It was undisputed that the actual language of Chubb's Masterpiece policy remained unchanged in the policies insuring plaintiffs' first home in Summit, located on Edgemere Road, their second home, the Bellevue Avenue property, and the New Vernon home. The policy provided that the amount of coverage was as "shown in the Coverage Summary." It further provided:

To help you and us agree on the appropriate amount of coverage, we may, but are not obligated to, conduct appraisals of your house and also make periodic adjustments to the amount of coverage. To maintain an appropriate amount of coverage, it is your duty to advise us of additions, alterations or renovations to your house.

The "Coverage Summary" also set forth the "payment basis." CRC payment basis limited Chubb's obligation to the lesser of "the reconstruction cost" or "the amount of coverage" shown in the Coverage Summary.

However, "[i]f the payment basis [wa]s [ERC]," Chubb agreed to "pay the reconstruction cost even if th[is] amount [wa]s greater than the amount of coverage shown in [plaintiffs'] policy." The ERC payment basis was subject to the following:

[ERC] is provided on the condition that you maintain at least the amount of coverage for your house as previously agreed to, including any adjustments by us based on appraisals, revaluations and annual adjustments for inflation.

The ERC payment basis was also subject to the following limitation:

If at any time during any policy period of coverage,

* you are newly constructing your house . . . ; or

* you are constructing additions, alterations, or renovations to your house . . . that results in your living out of the house during any part of the construction, your payment basis for your house . . . will be [CRC]. [CRC] will remain your payment basis until construction is completed and you and we agree on the appropriate amount of coverage for your house . . . .

Your duty: To reduce the possibility of being underinsured, you must notify your agent or broker at the beginning of construction so that the amount of coverage for your house or other permanent structures can be adjusted to reflect the proper reconstruction cost. [(Emphasis added).]

The policy also provided optional coverage for "contents," defined as "personal property you or a family member owns or possesses." The "amount of coverage" for contents was as set forth in the "Coverage Summary." The policy further provided "[i]f a change in the amount of coverage for your house is made, including the application of [ERC], the amount of coverage for contents will be adjusted proportionally." Although not specifically set forth in the policy, it is undisputed that the coverage limit for "contents" was routinely set at fifty-percent of the coverage limit for the dwelling, unless the insured specifically asked for a higher limit, and Chubb agreed.

The day after the fire, plaintiffs met at the New Vernon home with Chubb's representative, William Gussis, to discuss their claim. Gussis inspected the property and informed plaintiffs that the payment basis was CRC. On July 20, Gussis authored a report addressed to his supervisor, describing the facts surrounding the claim, and also estimating Chubb's potential liability. Gussis noted that plaintiffs valued the house at $1.4 to $1.5 million, which exceeded the policy limit. He further noted the state of construction at the house:

At the time of the fire, all interior finishes were completed. There was some minor electrical and plumbing work that required completion. The flooring on the [second] floor was refinished and the insured had personal property in each of the rooms such to the extent one could sleep in the home.

The report also contained the following observations:

I was informed [that] the loss location was approximately one (1) week away from achieving [a] Certificate of Occupancy (CO) . . . . I confirmed this in a conversation with the construction official . . . , during which I was informed the Lydon home had its preliminary final electric and fire inspections. There was a short punch list of electrical work that was to be completed and the inspector was scheduled to return the week of July 12. [The construction official] further indicated that the plumbing inspection had not been completed, and [she] did not know if it was scheduled.

However, she expected [a] CO to be issued sometime this week (the week of July 19). I also confirmed that it is illegal for the house to be occupied until such time as [a] CO is achieved.

On August 3, 2004, Chubb formally denied ERC benefits and reaffirmed that plaintiffs' payment basis was CRC. Gussis wrote to plaintiffs:

It is our further understanding the house was not completed at the time of loss as a Certificate of Occupancy ("CO") was not issued. After discussion with both of you, and the construction official for the Township of Harding, a CO was expected to be issued sometime during the week of July 19, 2004. Thus, the house was still under the course of construction and not completed.

Further, it [was] your duty to reduce the possibility of being underinsured. However, as Mrs. Lydon was the general contractor she had complete records of all costs incurred as the project progressed, and had the ability to prevent the project from being underinsured, but did not.

Gussis further noted that the payment basis was "immaterial" because had plaintiffs reported the full construction costs, $1.5 million, the policy would have provided that coverage, instead of the $1.004 million that they specifically requested. Gussis noted that, based on the consumer price index, plaintiffs were entitled to an upward adjustment under the policy to $1,028,096.


In granting Chubb's motion for partial summary judgment regarding ERC as the payment basis for plaintiffs' loss, the judge reasoned:

Much has been said about whether the policy requires a Certificate of Occupancy or not. Certainly the term does not appear in the policy . . . . It is not whether the certificate of occupancy was required or not . . . . It is whether the policy required that the premises be occupied as a condition for the . . . [ERC] coverage to apply and whether the appraisal had been done.

At the time of the loss, there w[as] . . . some work to be done. Most of the work was done. However, there were items that remained to be finished . . . .

No appraisal was performed. . . .

[T]he failure to [perform] . . . the appraisal under these circumstances cannot be laid at the foot of the carrier as its fault. The record clearly reflects that the carrier acted responsibly, reasonably and promptly . . . in an effort to schedule the appraisal. Unfortunately, . . . an intervening fire precluded that from happening, and that is unfortunate, but it is the reality of the case.

I find . . . the language of the policy clear and unambiguous vis-a-vis the carrier . . . and the insured.

Plaintiffs argue that the policy was ambiguous because it:

(1) did not define when construction was "complete"; and (2) failed to clearly state that an appraisal was required before they and Chubb could "agree" on the appropriate amount of coverage on the home. As a result, the judge should have construed the policy in favor of coverage to comport with their reasonable expectations and reform the policy to provide ERC as the payment basis for their loss.

Interpretation of a contract is a matter of law subject to our de novo review. Sealed Air Corp. v. Royal Indem. Co., 404 N.J. Super. 363, 375 (App. Div.), certif. denied, 196 N.J. 601 (2008). "An insurance policy is a contract that will be enforced as written when its terms are clear in order that the expectations of the parties will be fulfilled. In considering the meaning of an insurance policy, we interpret the language according to its plain and ordinary meaning." Flomerfelt v. Cardiello, 202 N.J. 432, 441 (2010) (citations and internal quotation marks omitted). If the policy terms are unambiguous, we must enforce them as written and "'should not write for the insured a better policy . . . than the one purchased.'" Longobardi v. Chubb Ins. Co. of N.J., 121 N.J. 530, 537 (1990) (quoting Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 116 N.J. 517, 529 (1989)).

"If the terms are not clear, but instead are ambiguous, they are construed against the insurer and in favor of the insured, in order to give effect to the insured's reasonable expectations." Flomerfelt, supra, 202 N.J. at 441 (citations omitted). "A 'genuine ambiguity' arises only 'where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.'" Progressive Cas. Ins. Co. v. Hurley, 166 N.J. 260, 274 (2001) (quoting Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979)).

The policy clearly provided that the amount of coverage was "shown in the Coverage Summary," which also set forth the "payment basis." Prior to June 30, 2004, the Coverage Summary in plaintiffs' policy explicitly stated that Chubb was providing $700,000 dwelling coverage and zero contents coverage, payable under the CRC provisions of the policy. The policy change made as a result of Otterstedt's contact with Chubb increased the dwelling coverage to $1.004 million and added contents coverage, but maintained the payment basis as CRC.

The policy further clearly indicated that ERC was provided subject to certain conditions. "If at any time during any policy period of coverage," plaintiffs were "newly constructing [their] house," the payment basis remained as CRC. This provision is unambiguous and there could be no confusion that it applied under these facts. As a result, the policy explicitly provided that the payment basis became ERC only when "construction [was] completed and [plaintiffs and Chubb] agree[d] on the appropriate amount of coverage." (Emphasis added).

Plaintiffs argue that the home was substantially complete, but they do not argue that construction was completed. It is undisputed that more work needed to be done, that municipal inspections had not taken place and that a certificate of occupancy had not been issued. Under any rational interpretation, construction on plaintiffs' home was not "completed."

But, even were we to agree that the phrase "construction is completed" is ambiguous, plaintiffs had not satisfied the second condition necessary to transform the CRC payment basis, automatically used for any home that was "newly constructed" during the policy term, into the ERC payment basis. Plaintiffs and Chubb had not agreed on the appropriate amount of coverage. There is nothing ambiguous about that language in the policy.

Plaintiffs never attached a specific value to the new home or sought coverage in that specific amount. Thomas testified that he assumed Otterstedt would place the coverage in an amount at least equal to that in place on the Summit property, $1.894 million. But, that was admittedly a personal and idiosyncratic supposition based upon years of dealing with Otterstedt. It strains credulity to believe that plaintiffs expected that, having told Mascarelli the home was completed, ERC coverage was automatically in place, making Chubb responsible for an unknown, and unbargained-for, amount of benefits under the policy. Even if there were an ambiguity in the contract language, and we think there was none, such an expectation was not reasonable.

In fact, the motion record revealed that in 1999, when plaintiffs renovated their Bellevue Avenue home in Summit, their policy was not converted from CRC to ERC payment basis until an appraisal was conducted by Chubb. In an affidavit she filed in reply to an earlier motion, Sharon acknowledged that plaintiffs "relied solely upon Chubb to appraise their home," and that such an appraisal "ha[d] been the only method of agreement of insurance coverage" between Chubb and plaintiffs. Elizabeth Kelly Farrell, an Otterstedt representative, testified in her deposition that, at the time of the renovations on the Bellevue Avenue property, she advised plaintiffs that an appraisal needed to be done before the policy's ERC benefits were in place.

Plaintiffs argue that, even if an appraisal was a reasonable mechanism to employ, Chubb controlled the appraisal process, unreasonably delayed the appraisal and should be estopped from asserting it as a condition to deny the use of ERC as a payment basis. We disagree.

Equitable estoppel may apply in those cases where "an insurer or its agent misrepresents, even though innocently, the coverage of an insurance contract . . . and the insured reasonably relies thereupon to his ultimate detriment." Harr v. Allstate Ins. Co., 54 N.J. 287, 306 (1969). In this case, there was no misrepresentation by Chubb, and its course of conduct regarding the appraisal was reasonable. Rasul testified that she ordered an appraisal in May 2004. The appraisal was cancelled in June. Chubb's records reflected that the cancellation was due to plaintiffs' information that the home was not completed and the appraisal should be conducted in July. Thomas admitted that he told the appraiser that the house was not completed in June and would not be completed until July.

The home was not appraised between July 1, the effective date of the policy change, and July 11, the date of the fire. The consequences were truly unfortunate, but there was nothing in this course of conduct that created an equitable estoppel.

We affirm the order granting Chubb partial summary judgment denying plaintiffs ERC payment basis under the policy.


We move on to consider the remaining arguments plaintiffs have raised regarding the trial.


Testimony revealed that when plaintiffs first met with Gussis, he was accompanied by a contractor, Don Lewis, whom Chubb hired to inspect the property. Plaintiffs indicated their desire to rebuild the home anew, and they expressed dissatisfaction with Gussis's initial indication that the CRC payment basis would apply. Plaintiffs obtained lodging at the Old Mill Inn and the Short Hills Hilton before eventually renting a townhouse in Summit.

In September 2004, Federal issued a partial payment to plaintiffs in an amount of $400,000. Plaintiffs did not accept the payment because they believed they were entitled to ERC benefits and that accepting payment would be deemed a waiver of their rights.

Lewis authored a report dated October 29, 2004, in which he estimated the amount necessary to "repair" the home was $1,241,557. Gussis conveyed the estimate to plaintiffs on November 19, along with an estimate from Comprehensive Inventory Services (CIS), the contractor Chubb hired to document damages to plaintiffs' personal property. Gussis advised that Chubb was prepared to pay the policy limits on plaintiffs' claims upon their execution of a sworn proof of loss statement. On December 9, Gussis sent plaintiffs a copy of the CIS report. He noted that plaintiffs' policy required the proof of loss be returned within sixty days, "otherwise [they would] not be in compliance with the policy conditions."

On January 19, Gussis forwarded another letter to plaintiffs advising that, despite their failure to forward an executed proof of loss form, Chubb was issuing payment for the full dwelling and contents policy limits. Chubb issued checks in amounts of $1,028,096, representing the adjusted limit on the dwelling coverage, and $464,048, representing the adjusted limit on contents coverage, minus $50,000 previously paid to and accepted by plaintiffs.

Plaintiffs did not accept the checks. Thomas testified that Gussis later offered to reissue the checks "without prejudice," but Thomas did not understand the meaning of that term. Plaintiffs believed that Gussis was pressuring them to resolve the dispute with Chubb.

Plaintiffs eventually retained counsel, and it was agreed that plaintiffs could accept the checks without waiving their right to sue Chubb. Plaintiffs never submitted the proof of loss statement. As noted above, on June 9, 2005, plaintiffs filed their complaint.

Additionally, on December 6, 2004, plaintiffs submitted a claim for extra living expenses under the policy, requesting payment of $35,991 for their hotel stays, and three months rent at the Summit townhouse at $6500 per month for October, November and December 2004. The extra living expenses provision of the policy stated:

If your house cannot be lived in because of a covered loss to your house or, if applicable, your contents, we cover the reasonable increase in your normal living expenses that is necessary to maintain your household's usual standard of living. We cover this increase for the reasonable amount of time required to repair, replace or rebuild your house or, your contents, or if you permanently relocate, the shortest amount of time required for your household to settle elsewhere.

Gussis responded to the claim on December 14, 2004, denying hotel expenses incurred prior to July 19, 2004 because that was the earliest date plaintiffs could have secured a certificate of occupancy for the home. He also denied payment for an extra room at the Short Hills Hilton, about which plaintiffs did not inform Chubb before renting, and which plaintiffs' son was using after the fire. Lastly, he requested a copy of the lease for the townhouse "which shows the . . . move in date." Plaintiffs had already submitted the lease to Chubb in September, but Chubb did not issue payment at that time, despite its policy to make payments within forty-eight hours of receiving proper documentation.

Gussis continued to investigate plaintiffs' claim for extra living expenses. Plaintiffs sought reimbursement for their son's room at the Hilton, advising that he had not returned to school in Connecticut until September 20, 2004. Thereafter, plaintiffs' son had returned on various weekends to help with the recovery process and to work on the rental condominium. Plaintiffs sought reimbursement for hotel expenses through October.

In his February 2, 2005, correspondence to plaintiffs, Gussis inquired why plaintiffs' son had not returned to college on September 6, 2004, a date for matriculation Gussis obtained from the Fairfield University website. Ultimately, after the litigation commenced, Chubb issued payment for the room at the Hilton through September 6, 2004.

In February 2005, Chubb issued another check in the amount of $35,000 for plaintiffs' living expenses, i.e., the condominium rent. Gussis testified that he "believed the [2004] rent was included in that." Gussis also explained in his February 2, 2005 letter that Chubb would not pay extra living expenses after October 31, 2005. The letter provided:

Lewis has informed us the time period to rebuild would be 8-9 months, plus an additional 1-2 months for permits, for a total maximum time period of 10-11 months.

While we believe you should have begun moving forward and taken the necessary steps to be[gin] the processes to rebuild your home shortly after the loss occurred, we will begin measuring the time period to rebuild your home as of November 19, 2004, which is when we informed you the damages to your home exceeded your policy limit.

The house was demolished around "late 2007." At the time of trial, plaintiffs had not yet rebuilt the house or taken steps to do so. Thomas testified that the unresolved claim with Chubb precluded them from rebuilding the house, although he acknowledged that no legal obstacles prevented reconstruction. Thomas testified that plaintiffs would rebuild "[o]nce [they] receive[d] the benefits from the insurance policy that [they] expected."

JoAnn Ralph was plaintiffs' expert at trial. After testifying as to Otterstedt's breach of its professional duty to plaintiffs, other witnesses interrupted her continued testimony as to Chubb. Prior to resuming the witness stand, Chubb sought to prevent Ralph from testifying as to any alleged violations of N.J.S.A. 17:29B-4(9), that lists "[u]nfair claim settlement practices," and is part of the Insurance Trade Practices Act (ITPA), N.J.S.A. 17:29B-1 to -14.

Ralph wrote two reports in which she opined that Gussis's conduct failed to comport with the standards required by the ITPA. In particular, Gussis failed to advise plaintiffs "of additional coverage[], such as debris removal, landscaping, etc. to which [the] Lydons were entitled"; to "treat [them] fairly and courteously"; and to "accurate[ly] explain[] . . . his denial of . . . [their] claim." Ralph also opined that Gussis had, in general, created issues where none existed or were applied in an irrelevant manner. For example, the scope of what constituted "completed construction" was overstated by Chubb and ultimately had little relevance to the claims settlement process, nor should it have in this situation.

She concluded that Chubb violated "a duty [owed] to [the] Lydons in accordance with standards of practice and custom in the industry, as well as . . . with State regulations including the [ITPA]."

Ruling on Chubb's motion, the judge noted that Ralph's report addressed negligence principles but did not address "the concept of bad faith." The judge concluded that Ralph's reports contained net opinions and effectively "downgrade[d] the . . . the proof required" to sustain plaintiffs' bad faith claim. He ruled that Ralph was precluded from "referring to the [ITPA]" and plaintiffs could not "utilize[e] the violation of the Act as evidence of bad faith."

At the close of plaintiffs' case, Chubb moved to dismiss the bad faith and punitive damages claim pursuant to Rule 4:37-2(b). The judge concluded that plaintiffs failed to prove that Chubb acted in bad faith, or with malice necessary to support an award of punitive damages, and granted the motion.

Plaintiffs contend that the judge erred by barring Ralph from testifying about alleged statutory violations, resulting in the erroneous dismissal of their bad faith and punitive damages claims against Chubb.*fn5

"[T]he New Jersey Legislature has defined the relationship between insurance companies and insureds by promulgating a broad range of statutory provisions," including "[the ITPA which] regulates the insurance trade by defining and prohibiting unfair practices." Pickett v. Lloyd's, 131 N.J. 457, 467 (1993). "Although the regulatory framework does not create a private cause of action, it does declare state policy." Id. at 468. The Law Division has stated that "[d]ependent upon the underlying reasons for non-compliance, any deviation from the standards [set forth in the ITPA] may be considered as evidence of bad faith." Miglicio v. HCM Claim Mgmt. Corp., 288 N.J. Super. 331, 341 (Law Div. 1995).

To establish bad faith in handling a claim under a policy of insurance, a plaintiff must show the lack of a reasonable basis for denying the claim, and the insurer's knowledge or reckless disregard that it was acting unreasonably. Pickett, supra, 131 N.J. at 473 (citation omitted). No liability exists if the claim was "fairly debatable." Ibid. "Under the 'fairly debatable' standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer's bad-faith refusal to pay the claim." Ibid. (citations omitted).

The test is "essentially the same" for a bad faith in processing claim, which, absent some showing of the insurer's wrongful intent to delay, cannot be sustained merely by allegations of delay in payment. Id. at 474. Neither negligence nor mistake is sufficient to show bad faith. Ibid.; see also Universal-Rundle Corp. v. Commercial Union Ins. Co., 319 N.J. Super. 223, 249 (App. Div.) ("While [the insurer's] decision as such was erroneous, that is not the equivalent of bad faith."), certif. denied, 161 N.J. 149 (1999).

Although we accord substantial deference to the trial judge's evidential rulings, see, e.g., Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 384 (2010), we agree with plaintiffs that it was error to exclude Ralph's testimony regarding Chubb's alleged violations of the ITPA. In our minds, the judge conflated two separate issues -- whether violations of the ITPA are relevant evidence of bad faith and whether such evidence necessarily proves bad faith. The judge noted that Ralph's report did not specifically address "bad faith" but, rather, spoke in terms of Chubb's negligence. But Ralph was not required to express an opinion as to whether Chubb acted in bad faith; evidence that Chubb may have violated the ITPA was plainly relevant as to whether it acted in bad faith. Miglicio, supra, 288 N.J. Super. at 341. The judge believed admitting Ralph's testimony would have "downgraded" Pickett's bad faith requirements to mere negligence standard. But defining the duty was specifically the judge's function and had little to do with the admissibility of the evidence.

However, even were we to consider Ralph's opinions regarding Gussis's conduct and whether it violated the ITPA, we agree with Chubb that the evidence was insufficient under Pickett. In considering a motion to dismiss under Rule 4:37-2(b), the trial judge must "accept[] as true all the evidence which supports the position of the party defending against the motion and accord[] him the benefit of all inferences which can reasonably and legitimately be deduced therefrom." Verdicchio v. Ricca, 179 N.J. 1, 30 (2004) (citations omitted). If "reasonable minds could differ, the motion must be denied." Ibid. We apply the same standard of review. Estate of Roach v. TRW, Inc., 164 N.J. 598, 612 (2000).

Initially, we note that much of plaintiffs' evidence, and much of Ralph's report, specifically addressed Chubb's denial of their request for ERC benefits. Because plaintiffs were never entitled to those benefits, Chubb's denial was certainly "fairly debatable," and, therefore, these specific allegations provide no basis for a bad faith in settlement claim.

As we have made clear, despite the existence of N.J.S.A. 17:29B-4(9), Pickett defined the standard for establishing a bad faith claim, and only a breach of that duty, not a violation of the statute, creates a private cause of action. Universal-Rundle, supra, 319 N.J. Super. at 250. We think the evidence at trial failed to demonstrate that Gussis acted with the necessary wrongful intent to delay the processing of plaintiffs' claims or deny payment based upon reasons that were not fairly debatable. Pickett, supra, 131 N.J. at 474.

Additionally, assuming arguendo that plaintiffs established the elements of bad faith under Pickett, they failed to show economic damages beyond the policy benefits. An insurer may be liable for economic loss in addition to the policy benefits that occur as a natural and probable consequence of its bad faith denial or delay in payment. Pickett, supra, 131 N.J. at 474-75. Here, the damages that plaintiffs claimed as a consequence of delay were hotel and rental expenses, i.e., benefits under the policy. Claims of extra costs associated with the delay in reconstructing the home were not attributable to the egregious conduct of Chubb. Rather, plaintiffs acknowledged that they did not choose to begin re-construction, even though they legally could, because of the ongoing litigation and their belief in entitlement to ERC benefits. It follows that plaintiffs' punitive damages claim was properly dismissed. See id. at 476 (noting that "absent egregious circumstances, no right to recover for . . . punitive damages exists for an insurer's allegedly wrongful refusal to pay a first-party claim)."

We affirm the dismissal of plaintiffs' bad faith and punitive damages claims.


During in limine motions before trial commenced, the judge held that damages must be measured from the date of the fire. The proper mechanism to deal with the passage of time, the judge noted, would be an award of prejudgment interest.

Plaintiffs argue that the judge erred in setting the date of the fire as the date of their loss, thereby limiting their measure of damages. They claim that "[t]his ruling forced [p]laintiffs to absorb increases in the costs of reconstruction over and above what they would have sustained if prompt payment had been made."

Whether the payment basis was ERC or CRC, the policy provided that "'[r]econstruction cost' mean[t] the amount required at the time of loss to repair, replace or rebuild, whichever is less, at the same location, your house . . . using like design, and the quality of materials and workmanship which existed at the time of loss." (Emphasis added).

Based upon our prior discussion, plaintiffs' contention is limited solely to Otterstedt. Had Otterstedt performed in a non-negligent fashion, what would plaintiffs' damages have been "at the time of the loss?" The answer, as found by the jury, was $1.5 million. The only remaining issue is whether any increase in reconstruction costs resulting from the delay occasioned by plaintiffs' pursuit of full ERC benefits is a cognizable consequential damage for which Otterstedt can be held liable.

"[A]n insurance broker who agrees to procure a specific insurance policy for another but fails to do so may be liable for damages resulting from such negligence." Aden v. Fortsh, 169 N.J. 64, 79 (2001) (citing Rider v. Lynch, 42 N.J. 465, 476 (1964)). It has long been recognized that "[t]he damages which may be recovered for breach of an agreement to furnish an insurance policy is the loss sustained by reason of the breach, 'the amount that would have been due under the policy provided it had been obtained.'" Robinson v. Janay, 105 N.J. Super. 585, 591 (App. Div.) (quoting 43 Am. Jur. 2d Insurance § 174, p. 231), certif. denied, 54 N.J. 508 (1969); see also Rider, supra, 42 N.J. at 480 ("if the broker neglects to procure the coverage, or otherwise fails to act with proper skill and care, he becomes liable in damages not exceeding the amount of insurance he was employed to effect").

Plaintiffs do not take issue with these precedents. Instead, they argue that limiting the award to the costs of reconstructing their home as of the date of the fire "runs counter to basic concepts of fairness[,] . . . defeats [their] reasonable expectations in the policy" and prejudgment interest does not adequately capture the extent of their loss. However, Otterstedt did not cause delay in the "prompt payment" that plaintiffs allege increased the costs of their reconstruction. Plaintiffs' right to reimbursement for the costs of their reconstruction was vindicated solely through the litigation, and the delay that occasioned is appropriately addressed through the award of substantial pre-judgment interest.


Plaintiffs argue that the damages award was not supported by the evidence, or in the alternative, should be overturned due to alleged cumulative errors by the trial judge. They argue that the evidence did not support the damage award because: 1) Otterstedt's expert, Seth Leeb, offered a net opinion as to 2004 reconstruction costs; and 2) the jury erred by not awarding rental costs incurred at the Summit townhouse up to January 2009, rather than up to October 31, 2005. We find both arguments lack sufficient merit to warrant extensive discussion. R. 2:11-3(e)(1)(E).

Leeb testified that plaintiffs' house could be "repaired or replaced" for $1,154,625 based upon estimated 2004 construction costs. He reached this estimate by calculating constructions costs as of 2007, when he first authored his report, and reducing the calculation by thirty-percent, ten-percent per year since the fire. Plaintiffs argue there was no explanation for this thirty-percent reduction, particularly since in his deposition, Leeb indicated that he could not estimate 2004 costs with any precision. To the extent there were timely objections to Leeb's testimony, the judge overruled them.

First, we accord generous deference to the trial judge's evidential rulings. Estate of Hanges, supra, 202 N.J. at 384. Second, we note that plaintiffs' own expert, Brian R. Siegel, used a similar methodology to discount his 2007 estimates; he simply deducted ten-percent per year. Third, we discern no prejudice to plaintiffs since the jury did not accept Leeb's estimate, and, instead, accepted Siegel's testimony that the home's value was around $1.4 to $1.5 million at the time of the fire, and Gossis's testimony that the plaintiffs offered a similar estimate of value.

As to the rental costs, plaintiffs continued to reside in a rented townhouse through January 2009. At the same time, plaintiffs owned another home in which they stayed part of the time between the sale of their Summit home and the fire. Thomas testified that plaintiffs chose not to reconstruct the home because of the ongoing disputes with Chubb. As a result, the evidence fully supported the jury's conclusion that Chubb correctly determined it was unreasonable for plaintiffs to continue to rent the townhouse after October 31, 2005.


Plaintiffs note that in deciding to fix the date of their loss as the date of the fire, thereby limiting their damages, the judge explicitly recognized that prejudgment interest was available to "deal with the differential in time." Yet, in deciding plaintiffs' post-verdict motion to mould the jury verdict, the judge denied their request for pre-judgment interest against Chubb. Plaintiffs argue this was error.

Awarding prejudgment interest "on contract and equitable claims is based on equitable principles." Cnty. of Essex v. First Union Nat'l Bank, 186 N.J. 46, 61 (2006). Thus, in a contract case, a prejudgment interest award "is within the sound discretion of the trial court." Litton Indus., Inc. v. IMO Indus., Inc., 200 N.J. 372, 390 (2009). The court's exercise of that discretion will be upheld on appeal unless it is deemed to be "a manifest denial of justice." Ibid.

However, we have said that "imposition of liability upon a primary insurer for prejudgment interest beyond its policy limit is impermissible in the absence of a showing of bad faith." N.J. Mfrs. Ins. Co. v. Nat'l Cas. Co., 413 N.J. Super. 94, 105 (App. Div. 2010) (citing Kotzian v. Barr, 81 N.J. 360, 366-67 (1979)). To determine whether the insurer had engaged in bad faith negotiations to settle the claim within the policy's coverage limit, the court should consider:

(1) whether the carrier made timely settlement offers that were reflective of the strength of the claimants' case, as to both liability and damages; (2) whether the carrier's negotiation strategy had a reasonable prospect for a successful outcome; and (3) whether the carrier offered its policy limit of coverage in a timely fashion, after becoming aware that the case would not settle for an amount within the policy's limit. [N.J. Mfrs. Ins. Co. v. Nat'l Cas. Co., 393 N.J. Super. 340, 344 (App. Div.), certif. denied, 192 N.J. 481 (2007).]

Two weeks after becoming aware that plaintiffs' damages exceeded the policy's limits for dwelling and contents coverage, Chubb offered its full policy limits. The judge specifically and correctly concluded that Chubb had not acted in bad faith.

He did not mistakenly exercise his discretion to deny plaintiffs' claim for prejudgment interest against Chubb.


We consider only those issues raised by Otterstedt's cross-appeal as necessary in light of our decision.

Because the judge granted Chubb partial summary judgment on plaintiffs' claim for ERC benefits, Otterstedt argues it was error to permit plaintiffs to proceed on the theory that Otterstedt negligently failed to obtain a policy that contained ERC as the payment basis.

Otterstedt also claims it was error for the judge to deny their request to instruct the jury that plaintiffs' house was not completed, since the judge had made that determination as a matter of law when granting Chubb partial summary judgment. The judge denied the request, reasoning that whether the home was completed was irrelevant to Otterstedt's negligence because the jury could still find it liable for full replacement costs. Otterstedt argues that the judge should have provided such an instruction because, pursuant to the law of the case doctrine, "the jury may have reached a finding of fact that was inconsistent with" the prior ruling.

Otterstedt also argues that the judge erred in instructing the jury on damages, in particular, by stating:

[R]egarding Otterstedt, if you find that Otterstedt breached its duty to [plaintiffs] and that breach proximately caused damages, the measure of such damages becomes the amount of coverage in dollars that [plaintiffs] would have been entitled to receive had the policy provided for the ERC coverage for the dwelling, which [plaintiffs] believe they should have received. Here you should [equate] the term ERC with the actual amount necessary to rebuild the New Vernon home as of the date of the loss, which is July 11th, 2004.

Otterstedt contends that the jury award should have been limited to payments that plaintiffs were entitled to receive under the CRC payment basis.

Lastly, Otterstedt contends that the court erred by denying its motion in limine to preclude plaintiffs' use of Siegel's supplemental expert report because it was untimely.

We conclude the arguments lack sufficient merit to warrant extensive discussion in a written opinion. R. 2:11-3(e)(1)(E). We add only the following brief comments.

Insurance brokers "are obligated to exercise good faith and reasonable skill in advising insureds." Weinisch v. Sawyer, 123 N.J. 333, 340 (1991) (citing Sobotor v. Prudential Prop. & Ins. Cas. Co., 200 N.J. Super. 333, 337-41 (App. Div. 1984)); see also Carter Lincoln-Mercury, Inc. v. Emar Group, Inc., 135 N.J. 182, 189 (1994) ("[A]n insurance broker owes a duty to the insured to act with reasonable skill and diligence in performing the services of a broker."). A broker "is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available . . . ." Rider, supra, 42 N.J. at 476.

Here, the testimony favorable to plaintiffs was that when Thomas called Otterstedt to modify the coverage effective July 1, Mascarelli assumed that the payment basis under the policy would be ERC. She failed to advise plaintiffs that this coverage would not apply unless they fulfilled specific conditions in the policy, nor did she recommend that the CRC policy limits be increased to the actual construction costs. The order granting Chubb partial summary judgment did not in anyway affect or limit plaintiffs' claims against Otterstedt.

The judge expressly instructed the jury that plaintiffs were not eligible for ERC coverage. Whether construction was completed, however, was irrelevant to the measure of damages. Moreover, Otterstedt agreed that the true measure of damages was the cost of replacement, and it essentially requested that the substance of the final sentence of the charge be included. Otterstedt cannot now take issue with the charge when it "urged the lower court to adopt the proposition now alleged to be error." Brett v. Great Am. Recreation, Inc., 144 N.J. 479, 503 (1996). Even if it did not invite the alleged error, Otterstedt did not object to the charge, invoking plain error review. R. 2:10-2. We are convinced the charge did not amount to plain error.

Siegel submitted a supplemental report dated April 14, 2009, which plaintiffs sent to defendants the same day and beyond the discovery end date. Plaintiffs did not amend their answers to interrogatories, or file a certification of due diligence with Siegel's supplemental report. See R. 4:17-7. Otterstedt moved in limine to bar the supplemental report as out of time. The judge asked Otterstedt's counsel if the issue could be resolved by taking Siegel's deposition before he testified. Counsel agreed that taking Siegel's deposition would be satisfactory. The judge, therefore, denied the motion, and Siegel was deposed. The judge's decision to permit evidence from the supplemental, late report provides no basis to reverse.

The appeal and cross-appeal are affirmed.

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