The Appellate Division of the Superior Court of New Jersey, recently issued a decision, found at, 2009 WL 2341444, upholding the trial court’s dismissal of a $700,000-plus insurance claim filed against Vigilant Insurance Company, arising from a pipe freeze which caused excessive water damage to a newly built home. The case, Chen v. Vigilant Insurance Company, involved a home builder who built a $2 million dollar home in Boonton Township, New Jersey. In applying for the policy, he represented to Vigilant’s agent that he was building the home for his family to live in. Vigilant, relying on that representation, issued a homeowner’s policy but because some “punch list” items had not been completed and the insured had not moved in yet, a vacancy premium surcharge was applied. As you may have guessed, the Chen family never moved in to the house, and never intended to. Instead, Mr. Chen had contracted to sell the home to a third party and had become embroiled in litigation with that buyer. Chen failed to pay the natural gas bills, and as a result of that, the gas service to the home was shut off while he was out of the country. Water pipes froze and burst, causing water damage.

The insured’s claim was initially denied on the grounds that the insured had failed to take reasonable steps to maintain heat in the dwelling. The insured then sued Vigilant and GKAR was asked to defend. At deposition, it was learned for the first time that Mr. Chen had never intended to live in the house and had, instead, built the house for a third party. Had that fact been known to the underwriters, they could not have issued a homeowner’s policy but would have been required to issue a commercial policy, typically a builder’s risk policy. Vigilant obtained permission from the court to raise the misrepresentation in the application as a defense to payment and argued that the doctrine of equitable fraud should apply to rescind the policy based on the misrepresentation.

A non-jury trial was held in Superior Court, Morris County. The judge found that Vigilant had produced clear and convincing evidence, the higher standard which applies in equitable fraud cases, that the insured had misrepresented the intended use and occupancy of the house.

The court further found that the misrepresentation was material to the issuance of the policy; that is, he accepted the testimony of the underwriter that a homeowner’s policy could not have been issued under the circumstances. The court ruled that the coverage was void back to inception and that there was no coverage for the loss. (Vigilant was ordered to refund the full premium to the insured.)

The insured appealed the adverse verdict. In a decision dated July 31, 2009, the Appellate Division noted that a misrepresentation is material if, had it been revealed, it would either have resulted in the policy not being issued or a higher premium would have been charged. The Appellate Division found that the doctrine of equitable fraud would apply in the circumstances of this case. The doctrine, in contrast to legal fraud, which does require intent, does not require the innocent party (in this case, the insurer) to prove that the misrepresenting party knew that the representation was false. The court held that the insurer must prove that the insured misrepresented a presently existing or past fact; that he intended that the insurer rely on it; and that the insurer did detrimentally rely on it. The Appellate Division rejected the insured’s argument that Vigilant had waived the misrepresentation defense by retaining the insured’s premium up through the time of trial.

This decision is noteworthy in that it applies the doctrine of equitable fraud, which New Jersey courts have traditionally applied in life insurance cases, to the field of property insurance. The decision is not officially reported in the New Jersey law books, but it may be cited as an unreported decision pursuant to the New Jersey Court Rules.

The door to recovery of consequential damages in a first party contract action was opened in Acquista v. New York Life Ins. Co., 730 N.Y.S.2d 272 (App. Div. 2d Dept. 2001), in which the court acknowledged that under the right circumstances, consequential damages might be recovered. That door was recently opened wide in two cases recently decided by New York's highest court, reflecting the clear trend in New York toward recovery of such damages. Punitive damages, however, still remain off limits.

This evolving trend is reflected in the New York Court of Appeals decision, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187 (2008), in which consequential damages were found to be available to an insured where the insurer breached an insurance contract by failing to timely and adequately pay benefits for business interruption. The court stated that consequential damages beyond policy limits may be available in the event of an insurer's breach of contract if such damages were the reasonably foreseeable and probable result of the breach at the time the contract was created.

In Bi-Economy Market, a family owned wholesale and retail meat market suffered a fire loss to building, equipment and inventory. Its business owner's policy provided replacement cost coverage for the building, contents and business interruption coverage. Initially, the insurer advanced $163,161.00. The insurer offered to pay for only seven months of business income loss, although the policy provided coverage for up to 12 months of such loss. The insured never resumed operations. More than a year later, after an appraisal, the insured was awarded $407,181.00.

The lower courts found, as a matter of law, and the New York Court of Appeals agreed, that consequential damages were reasonably contemplated by the parties, in part because the policy provided coverage for business interruption, thereby, purportedly, placing the insurer on notice of the insured's needs for the financial support provided by such coverage in order to sustain its business operations in the event of a covered disaster. The threshold for determining foreseeability of consequential damages in the event of non-payment is obviously a low one, and in this case did not even require a remand for an evidentiary hearing.

In the other case, Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008), the insured's rental property suffered water damage while undergoing renovations. At the time of the loss, the insured maintained commercial property insurance which included builder's risk coverage. The insurer denied the claim three months after notification, based upon exclusions for wear, tear and long term, pre-existing water infiltration. The policy contained an exclusion for "consequential loss". In the suit which followed, the insured made claim for reimbursement of its property damage loss and consequential damages.

On a motion to dismiss the claim for consequential damages, the New York Court of Appeals determined that the policy exclusion for consequential damages did not preclude recovery of consequential damages if it could be established that such damages resulted from breach of the covenant of good faith and fair dealing, so long as the damages were "within the contemplation of the parties at the time of or prior to contracting". The matter was remanded for a determination of whether the specific damages claimed were a foreseeable result of the insurer's breach. How this will ultimately be determined is unclear, but we do not believe courts or juries will have much difficulty finding that many types of consequential damages are a foreseeable consequence of an insurer's breach of contract.

All should take notice that in neither Panasia Estates or Bi-Economy Market did the courts require any "bad faith" or egregious conduct to justify payments for consequential damages. The trigger was simply an insurer's failure to make timely payment of the full amount owed to its insured. In both cases, there were strong dissents by two justices, but to no avail.

These cases mark a significant change in New York insurance law, and will undoubtedly mark a new phase in insurance coverage litigation.

High Point Insurance Co. v JM, et al 398 N.J. super. 562, 942 A.2d 804 (N.J. Super. A.D. 2008), was a declaratory judgment action by an insurer seeking a declaration that it was not obligated to provide a defense or indemnification in a personal injury action filed against its insureds under a homeowners policy. Mrs. Insured pleaded guilty to sexual assault on a minor and, when an action was brought against Mr. and Mrs. Insured, both insureds sought coverage and indemnification from their insurer. Not surprisingly, the insurer prevailed as to Mrs. Insured based upon the intentional acts exclusion of the policy, but, somewhat surprisingly, the court also held that the carrier did not have a duty to defend or indemnify her husband, even though he was not accused of any wrongful act.

The court's rationale was that New Jersey public policy requires spouses to "remain vigilant to protect children", and that the same public policy should not allow insurance policies to be interpreted to provide liability coverage for spouses of sexual molesters. It is unclear whether the holding in this case will be extended to other areas where "public policy" trumps the more familiar rules regarding coverage for "innocent" insureds.

Both property and liability insurance policies typically contain sections setting forth the insured's "duties after loss". Those include the duties of giving immediate notice to the company of any loss, protecting the property from further damage, segregating damaged from undamaged property, the submission of a proof of loss within 60 days after demand, and provision of claim-related documents.

New Jersey courts have generally required an insurer to prove that it has suffered prejudice from the insured's breach of a policy condition such as those listed above. Cooper vs. Geico, 51 N.J. 86, 237 A.2d 870, a 1968 case from New Jersey's highest court, addressed an insured's failure to give prompt notice of an accident. There, the New Jersey Supreme Court held that it would be unfair to have the insured forfeit coverage where there was no evidence that the insurer was prejudiced by the late notice.

The court was also concerned with the insurer receiving a windfall based on what might be merely a technical breach of the policy. This has been standard stuff in New Jersey for some time.

This issue was recently revisited by New Jersey's Appellate Division in Hager vs. Gonsalves, 398 N.J. Super. 529, 942 A.2d 160 (N.J. Super. A.D. 2008). The circumstances were a bit unusual.

Hager involved automobile liability coverage. The driver at fault, Gonsalves, was not a named insured. She negligently operated a pickup truck owned by the named insured, Chilito, injuring a third party. Neither Gonsalves nor Chilito notified the automobile insurer of the accident. The insurer, Rutgers Casualty, only learned of it via a letter from the injured party's lawyer five weeks after the accident. Its SIU department tried to investigate the accident but neither Gonsalves nor Chilito responded to numerous telephone calls and letters.

Rutgers filed a lawsuit seeking a declaratory judgment that it had no obligation to defend or indemnify Gonsalves or Chilito. The Appellate Division ruled that the failure of both the driver and the named insured to cooperate prejudiced Rutgers as a matter of law. A key issue was whether Gonsalves had permission from the vehicle owner, Chilito, to drive his car; if she did not, there would be no coverage. The insurer was able to demonstrate prejudice because it was precluded from obtaining any facts from which it could determine whether Gonsalves had Chilito's permission to drive his pickup truck.

Hager held that a court addressing the prejudice issue should look at two factors: (1) whether substantial rights have been irretrievably lost by the insured's breach and (2) the likelihood of success of the insurer in defending against the accident victim's claim, had there been no breach of policy requirements.

The court noted that the innocent victim would be adequately compensated for her injuries by her uninsured motorists coverage. Thus, the strong public interest in seeing that victims of accidents are compensated, which pervades coverage decisions, particularly in New Jersey, was not a factor here. Had such insurance coverage not been available to the accident victim, the Appellate Division may have reached a different result.

In a subrogation lawsuit in which Gennet, Kallmann, Antin & Robinson represented the plaintiffs, E&M Liquors, Inc., et al. v Public Service Electric & Gas Company, 388 N.J.Super. (App.Div. 2007), the Superior Court of New Jersey, Appellate Division, has limited the applicability of a doctrine which immunizes regulated utilities such as providers of natural gas, electric, telephone and water services from certain subrogation claims.

Here is the background. Historically, in New Jersey, water companies were held by courts to be immune from tort claims, subrogated or otherwise, where it was asserted that the municipal water supply was inadequate to extinguish a fire. This immunity was limited by the 1990 New Jersey Supreme Court case of Weinberg v. Dinger, 106 N.J. 469 (1987), a case our firm was also involved in on behalf of an uninsured claimant, which held that, in general, a water company could be sued by an uninsured party under such circumstances. The rationale was that, as to subrogated claims, the water company's consumers would "pay twice"; that is, the premium for its own fire insurance and also higher water rates, because water companies would raise their rates to compensate for exposure to subrogation claims.

Subsequently, several trial courts rejected attempts by other types of utilities to use Weinberg to immunize themselves from their active negligence, such as where a telephone company's truck rear-ended another driver. Those decisions rejected an expansion of Weinberg's subrogation immunity where the utility's active negligence caused the fire or other loss, as opposed to the Weinberg scenario, where the utility's negligence in not supplying enough water exacerbated damages from an accident not caused by the utility itself, such as insufficient water pressure to fight a fire.

In 2006, the New Jersey Supreme Court, in the case of Franklin Mutual Ins. Co. v. Jersey Central Power & Light Co., expanded Weinberg's anti-subrogation rule to apply to all regulated utility companies, not just water companies. This decision had a serious potential effect on the subrogation bar. The decision left unaddressed whether the rule announced in Franklin Mutual immunized utilities from their own negligence which actively causes a fire or other catastrophe, such as a defectively maintained natural gas pipe which leaks and causes an explosion.

E&M Liquors, Inc., et al. v. Public Service Electric & Gas Company, resolved this open issue in favor of subrogating insurers. It involved subrogation claims arising from an explosion caused by the negligence of Public Service Electric & Gas. We alleged that PSE&G was negligent in (1) failing to inspect and maintain a high-voltage power line strung on utility poles outside the insureds' premises, and (2) failing to turn off the electricity for about one hour after the incident. A line fell and contacted the building, causing an explosion and fire. PSE&G argued for the expanded anti-subrogation rule announced in Franklin Mutual and obtained summary judgment dismissing the case at the trial court level. Upon our appeal, the Appellate Division reversed the summary judgment, agreeing in a reported decision that neither Weinberg nor Franklin Mutual immunizes a utility where its active negligence causes the accident.

A first party coverage claim, of interest because an insurer may void coverage is Latha Restaurant Corp. v. Tower Ins. Co., 38 A.D. 3d 321, 831 N.Y.S.2d 411 (1st Dept. 2007). The insured's proof of loss included duplicative items, property as to which it demonstrably had no insurable interest and representation of a loss attributable to debris removal expense, when, it was later learned, the expense had never been incurred. These problematic claims represented approximately $400,000 of the insured's $675,000 in claims.

The Court found that "overvaluation of insured property raises a presumption of fraud in proportion as to the excess...". More importantly, the Court found that the presumption of fraud becomes conclusive where, as was the case, the insurer demonstrates that,

"the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation." It was not necessary, in this case, for the Court to elaborate on the degree of disparity between claimed and actual losses in order for the presumption to become conclusive, although that could become an issue in post-Latha cases. The Court also rebuffed the insured's attempt to attribute the gross disparity to its public adjuster, finding that under recognized agency principles, the adjuster was acting within the scope of his authority and the plaintiff signed a sworn proof of loss.

Synnex Corporation v. ADT Security Services, Inc., Et. Al., 394 N.J. Super. 577 (App. Div. 2007), is a subrogation action in which a corporation contracted with ADT for alarm services. As a result of a failure of the alarm services, the plaintiff, which had insurance, suffered an extensive theft loss. The insurer subrogated against ADT but ADT moved to dismiss, relying upon the exculpatory provisions of its contract.

Upholding the exculpatory provision, the Court distinguished prior decisional law (Lucier v. Williams, 366 N.J. Super. 485 (App. Div. 2004)), which involved the validity of a home inspection contract where the Court had found the contract to be unconscionable, as to a consumer.

In International Flavors v. Royal Insurance Co., 844 N.Y.S.2d 257 (1st Dept. 2007), the New York Appellate Division had before it a declaratory judgment action in which the manufacturer of butter flavoring sought a judgment that its insurers had incorrectly imposed self-insured retentions in connection with each of some 30 suits by current and former employees of a customer who claimed injury as a result of chemicals in the butter flavoring; injuries which were incurred over a substantial period of time.

Based upon the policy language, the Court concluded that each claim was subject to the self-insured retention. The case contains an excellent discussion of New York law on the question of multiple occurrence, and should be reviewed in conjunction with any such issues.

A recent summary judgment decision in Canora Family, Inc. v. Universal Underwriters Co., 2007 WL 1789017 (S.D.N.Y.), rendered by Judge Charles L. Brieant of the United States District Court for the Southern District of New York, and involving this firm, will be of interest. In granting summary judgment to Universal Underwriters, the Court, essentially, rejected a contention that a non-renewal notice was improper under New York statute.

The Court's alternative holding, however, that, even if the notice was improper, the insured cannot expect coverage "forever" without paying the premium, is of considerable interest, as there is little case authority on the point.

A recent decision of interest is Seward Park Housing Corporation v. Greater New York Mutual Insurance Company, decided on May 10, 2007 by the New York Appellate Division, First Department.

While much of the case is relatively mundane discussion of coverage issues involving non-standard language pertaining to collapse coverage, the more interesting discussion involves a trial court ruling, in limine, precluding the insurer from producing evidence of the plaintiff's alleged delays in rebuilding the structure. The plaintiff argued that, because the company had "repudiated" the insurance contract by

denying the claim, therefore, it could no longer rely on policy provisions requiring that the structure be rebuilt "as soon as reasonably possible". The court thereupon engaged in an extended discussion of a concept of repudiation, finding that, even though the carrier in this case had denied coverage, it had not repudiated its policy so that it was not precluded from relying upon a policy provision.

Please do not hesitate to call if you have any questions regarding the foregoing.

As you know, case law in New York has been increasingly rigorous on insurers who do not properly disclaim coverage when they have information sufficient to do so. This applies frequently in "late notice" cases, wherein, the theory goes, the insurer should readily be aware, when it finally receives notice indicating a date of loss, that notice should have been given earlier. A new case, however, Ace Packing Co., Inc. v. Campbell Solberg Associates, Inc., decided on April 10, 2007, WL1053354 (1st Dept.), somewhat modifies this case law, at least to allow the insurer sufficient time to investigate whether, indeed, it has a late notice defense.

The Court, essentially, pointed out that even where the insurer has basis to believe the notice was late, it should be allowed additional time to investigate when the insured first learned of the accident, so as to enable the insurer to evaluate whether asserting the defense would be warranted. As stated by the Court, the position advocated by the plaintiff would simply invite insurers to "disclaim now and investigate later", an approach which, the Court stated, "cannot be said to be in anyone's interest...". .

The New Jersey Appellate Division decision in, Weshifesky v State Farm Fire & Casualty Co., decided on May 4, 2006, is of considerable interest. While the decision is interesting, from the standpoint of allowing the plaintiff to get to a jury on a windstorm case without an expert, based on plaintiff's own observations, what we found important for future cases is that portion of the decision wherein the Court allowed a licensed public adjuster, "with expertise in damage restoration and calculation", who stated that he is, "knowledgeable regarding the types of repairs that are appropriate and necessary for water damage", and that

he is, "familiar with the Exactimate computer program that is used to assess the value of each repair", and that the, "values obtained from the program reflect industry standard numbers for the applicable geographic area...", to testify as an expert.

We have often been concerned with whether an insurance adjuster without actual experience in construction is "qualified" to testify about damage repairs. This case, while dealing with a public adjuster, would appear to clarify that adjusters are experts.

A decision of the New York Court of Appeals in 2005, Great Canal Realty Corp. v. Seneca Insurance Company, Inc., 800 N.Y.S.2d 521 (N.Y. 2005), stemmed the erosion of the "late notice" defense to coverage of liability claims by reversing a 2004 First Department decision. That decision raised doubt that insurers could rely upon such a defense without a showing of prejudice.

In Great Canal, the highest state court in New York declared that it is still New York law that an insurer may rely on the late notice defense without a showing of prejudice. The policy at issue required that notice of the occurrence be given "as soon as practicable", meaning that notice must be given within a reasonable time after the occurrence.

In determining the reasonableness of the notification, the Court reiterated that an excuse for failure to give timely notice may be a "good faith belief of non-liability", but the insured's belief must be reasonable under all the circumstances. Whether the insured has inquired into the circumstances of the accident would be relevant to the insured's good faith belief.

The Court also ruled that the burden of establishing a good faith belief of non-liability is on the insured. In the decision before the Court, the insured did meet its burden, and no showing of prejudice was required.