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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 ...

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