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William B. Kessler Memorial Hospital, Inc. v. North River Insurance Co.

Superior Court of New Jersey, Appellate Division

November 15, 2013

NORTH RIVER INSURANCE COMPANY, a New Jersey Corporation, Defendant-Respondent, And CRUM & FORSTER; and THE FAIRFAX GROUP, jointly, severally and in the alternative, Defendants.


Argued November 4, 2013

On appeal from the Superior Court of New Jersey, Law Division, Atlantic County, Docket No. L-5540-12.

Gerard W. Quinn argued the cause for appellant (Cooper, Levenson, April, Niedelman & Wagenheim, P.A., attorneys; Mr. Quinn, on the brief).

John S. Favate argued the cause for respondent (Hardin, Kundla, McKeon & Poletto, P.A., attorneys; Mr. Favate, of counsel and on the brief; Michael J. Forino, on the brief).

Before Judges Harris and Guadagno.


Plaintiffs appeal from the Law Division's December 7, 2012 order dismissing their five-count complaint seeking declaratory relief, together with compensatory, treble, and punitive damages. We affirm.


Because this case was decided under the auspices of Rule 4:6-2(e), we apply the well-established standard that governs motions to dismiss for failure to state a claim. Green v. Morgan Props., 215 N.J. 431, 437 (2013) (citing Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989)). Accordingly, our inquiry is limited to an indulgent examination of the legal sufficiency of the facts alleged in, or readily referable to, the complaint. Ibid.

In September 2008, defendant North River Insurance Company (North River), issued a one-year claims-made liability insurance policy —— a "Platinum Management Protection" policy (the policy) —— to plaintiffs William B. Kessler Memorial Hospital, Inc. and Foundation of William B. Kessler Memorial Hospital. The nine individual plaintiffs were trustees of the Kessler entities, and are insured pursuant to the terms of the policy.[1]

Section I of the policy provides three types of liability coverage: Insured Person and Organization Liability Coverage (Insuring Agreement A); Employment Practices Liability Coverage (Insuring Agreement B); and Fiduciary Liability Coverage (Insuring Agreement C). Relevant to this appeal is Insuring Agreement A, which provides, in pertinent part, the following:

[T]he insurer shall pay on behalf of:
1. an Insured Person, all Loss in excess of the applicable retention, for which such Insured Person becomes legally obligated to pay as a result of any Insured Person Claim first made during the Policy Period or during the Extended Reporting Period, if exercised, except Loss for which the Organization is required by law or is permitted to indemnify such Insured Person.

Section III of the policy contains the following definitions:

Claim means:
1. for purposes of Insuring Agreement A.1 . . ., any Insured Person Claim[.]

Insured Person Claim means a:

1. written demand for monetary damages or non-monetary relief;
2. civil proceeding commenced by service of a complaint or similar pleading;
3. criminal proceeding commenced by an indictment or similar charging document; or
4. formal administrative or regulatory proceeding commenced by filing of a notice of charges, formal investigative order, or similar notice or order;
including any appeal therefrom, against an Insured Person for an Insured Person Wrongful Act.
Loss means the amount that the Insureds are legally obligated to pay as the result of a Claim, including damages, judgments, settlements, pre- and post-judgment interest, and Defense Costs. However, Loss shall not include the following:
1. fines or penalties, including but not limited to criminal or civil fines and civil and money penalties;

Section VI, entitled, "General Conditions, " contains subsection B, "Defense and Settlement, " which provides, in pertinent part:

1. The Insurer shall have the right and the duty to defend any Claim regardless of whether any of the allegations are groundless, false, or fraudulent.

Beginning in 2009, the Internal Revenue Service sought to collect unpaid section 941 employment taxes from plaintiffs. In October 2009, plaintiffs requested that North River defend the nine trustees and indemnify them pursuant to the policy with respect to the demand of the Internal Revenue Service. In November 2009, North River denied coverage to plaintiffs, stating, "the Policy does not provide Kessler with coverage for this matter."

The dispute concerning the policy ultimately led to the filing of plaintiffs' complaint, which sought declaratory relief (count one); reimbursement for "legal fees and costs in their defense of the claims of the Internal Revenue Service" (count two); compensatory and punitive damages pursuant to N.J.S.A. 17:29B-4; remedies under the Consumer Fraud Act, N.J.S.A. 56:8-1 to -195 (count four); and counsel fees "[p]ursuant to the New Jersey Rules of Court" (count five). North River responded to the complaint by filing a motion to dismiss pursuant to Rule 4:6-2(e). After oral argument, the motion judge issued a thirteen-page opinion dismissing all of plaintiffs' claims. This appeal followed.


On appeal, plaintiffs reprise their contentions that North River's repudiation of its duty to defend against the Internal Revenue Service's attempt to impose section 941 liabilities (1) breached the insurance contract, (2) was an unfair trade practice, and (3) constituted an unconscionable business practice. Because the foundation for all of plaintiffs' claims is built upon whether the insurer had a duty to defend, we address that issue first.[2]

Plaintiffs' main argument is that because North River's definition of "Insured Person Claim" does not specifically refer to its definition of "Loss, " North River's promise to "defend any Claim" must be honored notwithstanding that taxes and penalties are policy exclusions. In other words, even though North River might not be obliged to indemnify plaintiffs if they were ultimately made responsible for the section 941 taxes, plaintiffs were, nonetheless, entitled to have their defense costs paid for under the policy because the Internal Revenue Service was asserting an "Insured Person Claim."

We are not persuaded by this overly-simplistic and literal interpretation of the policy. The notion advanced by plaintiffs would require North River to provide a defense against any and all claims lodged against its insureds, regardless of whether the claim embraced a covered risk. This novel interpretation is contrary to our settled jurisprudence with respect to liability policies, and not supported by principles of interpretation applied to insurance policies in general.

Our starting point is the recognition that because the interpretation of an insurance contract is a question of law, Ohio Cas. Ins. Co. v. Island Pool & Spa, Inc., 418 N.J.Super. 162, 168 (App. Div.), certif. denied, 206 N.J. 329 (2011), we undertake a de novo and plenary review of the motion judge's application of the law, noting the motion judge's "interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Selective Ins. Co. of America v. Hudson E. Pain Mgmt. Osteopathic Med., 210 N.J. 597, 604 (2012) (quoting Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

When engaged in this process, we "examine the plain language of the policy and, if the terms are clear, they 'are to be given their plain, ordinary meaning.'" Pizzullo v. N.J. Mfrs. Ins. Co., 196 N.J. 251, 270 (2008) (quoting Zacarias v. Allstate Ins. Co., 168 N.J. 590, 595 (2001)). Our analysis also requires that any interpretation "fulfill the expectations of the parties, " Passaic Valley Sewerage Comm'rs v. St. Paul Fire and Marine Ins. Co., 206 N.J. 596, 608 (2011), interpret "the policy as written, " and "avoid writing a better insurance policy than the one purchased." President v. Jenkins, 180 N.J. 550, 562 (2004).

An insurer is contractually obligated "to provide the insured with a defense against all actions covered by the insurance policy." Abouzaid v. Mansard Gardens Assocs., LLC, 207 N.J. 67, 79 (2011). The insurer's duty to defend, which is "broader than the duty to indemnify, " Jolley v. Marquess, 393 N.J.Super. 255, 274 (App. Div. 2007), is triggered by the filing of a complaint or a demand alleging a covered claim. Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 173 (1992).

Even though we follow "those well-settled principles governing the interpretation of contracts of insurance that mandate broad reading of coverage provisions, " Sealed Air Corp. v. Royal Indem. Co., 404 N.J.Super. 363, 375 (App. Div. 2008), nothing in this case abrogates our responsibility to "enforce the policy as it is written." Hebela v. Healthcare Ins. Co., 370 N.J.Super. 260, 269 (App. Div. 2004) (quoting Royal Ins. Co. v. Rutgers Cas. Ins. Co., 271 N.J.Super. 409, 416 (App. Div. 1994)). We are also bound by the admonition to "be careful not to disregard the 'clear import and intent' of a policy's exclusion." Flomerfelt v. Cardiello, 202 N.J. 432, 442 (2010)(internal quotation marks and citations omitted).

Plaintiffs' potential exposure to the Internal Revenue Service's effort to impose responsibility for section 941 liabilities is undoubtedly either a tax or a penalty. It is also clear that the policy excludes coverage for fines, penalties, or taxes. Nevertheless, plaintiffs argue that an Insured Person Claim and a Loss are two separate terms and provisions in the policy. They point to Section VI "General Conditions" as creating an independent duty to defend, regardless of whether the loss is contemplated by the policy. This fragmentary approach stands in contradistinction to our obligation to "interpret the policy as written and avoid writing a better policy for the insured." Homesite Ins. Co. v. Hindman, 413 N.J.Super. 41, 46 (App. Div. 2010) (citing President, supra, 180 N.J. at 562). Moreover, in construing the terms of an insurance contract, "[w]e will not read one policy provision in isolation when doing so would render another provision meaningless." Id . at 47 (citing Hardy v. Abdul-Matin, 198 N.J. 95, 103-04 (2009)).

Plaintiffs' universal-right-to-a-defense contention fundamentally changes the nature of the policy that was purchased for their benefit. Essentially, they seek to transform a liability insurance policy into a contract for unlimited legal services. The record contains not a hint of such an intention, and is flatly contradicted by the overall insuring agreement. Plaintiffs were protected by a conventional liability insurance policy that embraced the predictable expectation that a defense would be provided if, and only if, a covered claim were involved. Because the only exposure suffered by plaintiffs was a fine, penalty, or tax, they had no reasonable expectation of coverage under the policy for the claim brought by the Internal Revenue Service. When a claim is one that "even if successful, would not be within the policy coverage, " there is no duty to defend. Danek v. Hommer, 28 N.J.Super. 68, 77 (App. Div. 1953), aff'd, o.b., 15 N.J. 573 (1954); see also Burd v. Sussex Mut. Ins. Co., 56 N.J. 383, 389 (1970).

Having concluded that the motion court correctly parsed the policy and found no duty to defend, we further determine that the Law Division properly dismissed the remainder of plaintiffs' claims as they are entirely derivative of the duty-to-defend issue.


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