Why it matters: A New Jersey appellate panel ruled that an insured’s settlement of an underlying action involving alleged defective installation of windows was reasonable and ordered the insurer to pay the amount of the settlement.
In this case, a condominium association sued Home Improvements by Randy (HIBR), a window installation company, after discovering water damage due to allegedly defective installation of windows in the association’s buildings. HIBR tendered the suit to three of its insurers that provided liability policies during the relevant time period.
Two of the insurers provided a defense, but National Grange Mutual Insurance Company refused to participate. HIBR settled the underlying suit and assigned its rights in its insurance to the condo association, which then sued National Grange.
A trial court ruled that National Grange was not required to pay the underlying settlement because the association had not demonstrated that the amount of the settlement was reasonable. But the appellate panel reversed, determining that the deal was reasonable.
“In view of the probability of the association’s success and the size of the possible recovery at a potential trial, the association met its burden of showing that a reasonable factfinder could have found that a settlement for thirty percent of the damages that expert reports attributed to HIBR was reasonable,” the court said.
Detailed discussion: The Rockaway Condominium Association manages fourteen buildings and a clubhouse in an age-restricted residential condominium development in New Jersey known as Fox Hills.
The first building was completed in 1999 and construction on the last building was completed in 2003. A few years later, an engineering company discovered substantial damage at Fox Hills resulting from continual exposure to moisture that had entered the buildings through defectively installed windows. The association filed suit against 77 entities alleging construction defects, product defects, and breach of contract.
One of the defendants was Home Improvements by Randy (HIBR), which was a subcontractor hired to install most of the windows at Fox Hills between April 2000 and March 2003. During the relevant time period, HIBR was covered by three insurance policies: one issued by Ohio Casualty Insurance Company, effective from 1995 through 2002; one issued by Zurich Insurance Company, effective from July 2003 through July 2004; and one (plus a separate umbrella policy) issued by National Grange Mutual Insurance Company, effective July 2003 through July 2007.
OCI and Zurich provided HIBR with a defense in the Fox Hills litigation, but National Grange denied coverage and refused to defend. Prior to trial in the underlying case, the parties stipulated that, between 1999 and 2007, water infiltrated each of the buildings and caused damage due to a variety of causes, including defectively installed windows. An engineering company provided a report attributing 30 percent of all water infiltration damage—or $4.5 million—to HIBR’s defective window installation.
HIBR eventually settled the claims against it for $1.9 million. Of this amount, HIBR settled its insurance claims against OCI and Zurich for $159,436 and $140,563, respectively. HIBR then assigned its claims for coverage of the remaining $1.6 million against National Grange to the Association.
The association then sued National Grange. At trial, the parties agreed to numerous stipulations, including the expert reports that attributed 30 percent of the damage to HIBR and the timeline for when the damage occurred.
National Grange moved to dismiss the association’s claims, arguing that the $1.6 million settlement amount was not reasonable in light of HIBR’s potential liability.
National Grange also argued that HIBR’s settlement of its claims against OCI and Zurich for only $300,000 (combined) was unreasonable because the other two insurers paid far less than the amount being demanded from National Grange despite their having provided coverage for a longer period of time. The association countered that the expert reports showed that the water damage increased as time went on and peaked during National Grange’s coverage period. The trial court agreed with National Grange and granted its motion to dismiss.
The association appealed, and the appellate panel reversed, finding that the settlement was reasonable in amount and entered into in good faith, as required by New Jersey law. “The Association provided ample proof to determine the reasonableness of the HIBR settlement,” the court opined.
It was not contested that HIBR defectively installed windows at the development, causing substantial property damage, the court noted. While National Grange submitted no expert testimony on liability or damages, the association provided an expert report with “a spreadsheet detailing the exact amount of damages incurred by each injury to the property, the source of that damages amount if no invoice was available, and the parties responsible for each injury.”
Examining the risk to the settling parties, the panel emphasized that expert testimony established HIBR was exposed to liability of up to $4.5 million. “The Association settled its claims against HIBR for $1.86 million, which amounts to approximately thirty percent of HIBR’s potential liability,” the panel wrote.
Moreover, the amount of the settlement that National Grange was required to assume was not unreasonable when compared to the settlement amounts of the other insurers, the court added, because the damage caused by HIBR’s defective installations manifested during 2005, within National Grange’s coverage period. “The damage did not manifest during the coverage periods of OCI or Zurich, and their liability exposure was consequently less” than National Grange, the panel opined.
“Given these proofs and [National Grange’s] refusal to settle or provide a defense, HIBR was bearing ‘the full burden of protecting its own interests’ at a trial with the Association,” the court said.
“The extent of its liability was demonstrated by expert reports, ‘not mere allegations in the plaintiffs’ complaint.’ Although HIBR’s ‘actual liability’ was not fully established, more than the required potential liability was shown to exist here. In view of the probability of the Association’s success and the size of possible recovery at a potential trial, the Association has met its burden of showing that a reasonable factfinder could have found that a settlement for thirty percent of the damages that expert reports attributed to HIBR was reasonable.”
To read the decision in Fox Development Co. v. Praetorian Insurance Co., click here.
SUPERIOR COURT
OF NEW JERSEY
APPELLATE
DIVISION
FOX DEVELOPMENT CO.,
INC.,
GIANT ASSOCIATES, INC.,
MORTON SALKIND, CAROLE
SALKIND,
STEPHEN SALKIND, and
JOHN HARRIS,
Plaintiffs,
v.
PRAETORIAN INSURANCE
COMPANY,
f/k/a INSURANCE
CORPORATION
OF HANOVER, SELECTIVE
INSURANCE COMPANY
OF AMERICA,
HARLEYSVILLE INSURANCE COMPANY,
SCOTTSDALE INSURANCE
COMPANY,
QUINCY MUTUAL FIRE
INSURANCE COMPANY,
OHIO CASUALTY COMPANY,
CHARLES F. HEIDT,
INC., and JAMES E.
GILMORE AGENCY, INC.,
Defendants,
and
OHIO CASUALTY INSURANCE
COMPANY,
Third-Party
Plaintiff,
v.
INTERSTATE FIRE AND
CASUALTY COMPANY,
INDIAN HARBOR INSURANCE
COMPANY,
COLONY NATIONAL
INSURANCE COMPANY,
and ZURICH INSURANCE
COMPANY,
Third-Party
Defendants,
and
FOX HILLS AT ROCKAWAY
CONDOMINIUM
ASSOCATION, INC.,
Plaintiff/Intervenor-Appellant/
Cross-Respondent,
and
NATIONAL GRANGE MUTUAL
INSURANCE
COMPANY,
Third-Party
Defendant-Respondent/
Cross-Appellant.
___________________________________________________
April
27, 2015
Argued
February 23, 2015 – Decided
Before
Judges Simonelli, Guadagno, and Leone.
On
appeal from the Superior Court of New Jersey, Law Division, Morris
County, Docket No. L-446-08.
James
G. O'Donohue argued the cause for appellant/cross-respondent (Hill
Wallack LLP, attorneys; Mr. O'Donohue and Susan L. Swatski, of
counsel and on the brief; Lisa Chapland, on the brief).
Haydn
J. Brill argued the cause for respondent/cross-appellant (Brill &
Associates, P.C., attorneys; Mr. Brill, of counsel and on the briefs;
Corey M. Reichardt, on the briefs).
PER CURIAM
Plaintiff-intervenor Fox Hills at Rockaway Condominium Association
(Association) appeals from the order entered September 11, 2013
dismissing its complaint against third-party defendant National
Grange Mutual Insurance Company (NGM). NGM cross-appeals from the
trial court's findings that plaintiff-intervenor's settlement with
another defendant, Randy Lee, trading as Home Improvements by Randy
(HIBR), involved a business judgment and that coverage existed by
estoppel. For the reasons that follow, we reverse and remand for a
new trial.
I.
The Association manages the lands and buildings at the age-restricted
residential condominium development known as Fox Hills at Rockaway.
Fox Hills consists of fourteen buildings in the Township of Rockaway.
Construction on the first building was completed in 1999 and the
last was completed in 2003.
In March 2005, the Association was sued by its landscaper, Benkendorf
Grounds Pro, Inc., for unpaid labor and services. During the
pendency of the Benkendorf action, damage was discovered at Fox Hills
when an engineering company, Flannery, Webb and Hansen, P.A. (FWH),
conducted an inspection which revealed that substantial damage to the
development had resulted from continual exposure to moisture that had
entered the buildings through, among other places,
defectively-installed windows.
After extensive litigation in the Benkendorf action, the Association
filed an amended third-party complaint against seventy-seven entities
alleging construction defects, product defects, breach of contract,
mismanagement of the condominium property, fraud, and statutory and
regulatory violations (the 2010 action).
HIBR was named as a defendant in the 2010 action. HIBR was hired by
United Window and Door to install most of the windows at Fox Hills,
which it did from April 2000 until March 2003.
During the relevant time period for the 2010 action, HIBR had three
insurance policies: (1) an Ohio Casualty Insurance Company (OCI)
policy effective July 10, 1995 through July 10, 2002; (2) a Zurich
Insurance Company policy effective July 11, 2003 through July 11,
2004;1
and (3) an NGM policy effective July 12, 2003 through July 12, 2007.
NGM provided a business owner's liability coverage policy and an
umbrella policy.
OCI and Zurich provided HIBR with a defense in the 2010 action. NGM
denied coverage for the claims, and refused to defend HIBR. During
the litigation, OCI filed a third-party complaint against NGM for
contribution.
Prior to trial, the parties stipulated that between 1999 and 2007,
water infiltrated each of the fourteen buildings and the club house,
and damage occurred to the interior elements at Fox Hills due to a
variety of causes including the defectively-installed windows. In
2009, French Engineering, Inc. (FEI) provided the Association with a
budget projection for remediating the water-induced damage at the
development. FEI's report broke the damage into eight categories of
moisture exposure, and then broke those categories into subparts
specifying the type of damage caused by each kind of exposure. FEI
attributed thirty percent of all water infiltration damages, or $4.5
million, to HIBR's defective window installation.2
Before trial began, two mediation sessions were held. Counsel for
NGM attended the first session but left before negotiations
concluded. No NGM representative appeared on the second day of
mediation. While NGM claims that it "was excluded" from
the discussions, it provides no support for this assertion. Indeed,
the judge expressly found that NGM "was not willing . . . to
work out that settlement."
Following mediation, HIBR and the Association entered into a
settlement, effective September 12, 2011, resolving "any and all
disputes and/or claims for damages between them" and assigning
to the Association any and all claims that HIBR might have against
NGM. HIBR agreed to a stipulated judgment for "$1,860,000
comprised of $1,360,000 in payment of the Association's claims for
damage to its property . . . and $500,000 for repair and replacement
costs of doors and windows[.]"
In a separate agreement, HIBR and the Association settled the
property damage claims covered by the OCI and Zurich insurance
policies. OCI agreed to pay $159,436.71, while Zurich paid
$140,563.29 to the Association.
Noting the payment of $300,000 of the $1,860,000 stipulated
settlement amount, the trial court entered a judgment in favor of the
Association against HIBR in the amount of $1,560,000 on November 4,
2011. The order provided that HIBR would assign its claims against
NGM to the Association.
In January 2012, NGM acknowledged receipt of the HIBR-Association
settlement, and reiterated its denial of coverage "for any
claims arising out of or in connection with execution of the
Settlement Agreement and Release." On April 20, 2012, the
Association filed an intervening complaint in OCI's third-party suit
against NGM in order to seek declaratory relief for payment of the
judgment, as well as consequential damages and attorneys' fees.
Trial between the Association and NGM began on June 18, 2013. The
trial judge repeatedly encouraged the parties to reach factual
stipulations in order to obviate the need for expert witness
testimony. The court made several comments indicating its strong
preference for trying the case without the need for expert testimony:
Well, of course, if you were totally sure of your position, then you
could say I'll stipulate . . . and we don't need the expert.
. . . .
The question is do we need the [expert] guy from Texas.
. . . .
So the question is agreeing to that does that hurt your case? Well,
think about it.
. . . .
See if we can work out a stipulation of facts so we can avoid the
testimonial portion of it.
Counsel for the Association repeatedly insisted that he needed his
expert's testimony to establish both the timeline of liability and
amount of damages. The judge took a recess to allow both attorneys
to contact their clients to attempt to reach factual stipulations.
The court suggested that counsels' negotiations on the stipulations
could be off the record. Following negotiations, the parties then
entered into thirteen stipulations on the record:
[1] [F]rom 1999 to 2003, water infiltrated each of the 14 buildings
and club house due to a variety of reasons; including windows,
E.F.I.S., stucco, roofs, gutters, and stone; including in the years
1999 through 2007. The exact cause of any one particular leak on any
particular date is undetermined. That's the first stipulation, Your
Honor.
[2] Second, Warren French, that's [the Association's] expert, would
testify that water infiltrated each of the Fox Hills buildings from
the completion of construction [of the first building in 1999]
through 2007 and damage occurred to the interior elements, including
in 2003 to 2007 as a result of construction issues related to
E.F.I.S., stucco, roof, gutters, and stone and the windows.
[3] Warren French would not be able to testify as to the precise
cause or component at fault for any one particular leak which
resulted in consequential damage to the common elements of the
Association.
[4] Warren French's expert[] reports . . . attribute
30 percent of the water infiltration to the window installation or
misinstallation. And attribute 30 percent of the consequential
damages to window leaks, with the cost of repair at 4.5 million
dollars.
[5] Warren French's testimony in this action would be consistent
with those reports and would attribute 30 percent of the water
infiltration to the window installation and attribute 30 percent of
the consequential damages to window leaks, with a 4.5 million dollar
cost to repair.
[6] The parties agree that the contents of th[ese] stipulation[s] are
not intended to expand upon or enlarge the contents of any report or
opinion issued by Warren French in the underlying litigation.
[7] In August 2005, F.W.H. . . . issued an
engineering transition report for Fox Hills based upon non invasive
investigation studies and inspections performed by F.W.H. on various
dates, commencing in January of 2005.
[8] All reports concerning the cause and origin of water intrusion
into the buildings of Fox Hills were delivered to the Association in
or about August of 2005.
. . . .
[9] The work for which Randy Lee was hired by United Windows did not
include flashing or integration with other building components,
including the stucco or E.F.I.S. cladding.
[10] [The Association's] liability experts reports by F.W.H. opined
that flashing installation is the responsibility of the window
installer[.]
[11] Randy Lee had no contract or agreement with [the Association] or
[the development company].
[12] Randy Lee's counsel in the [2010 action] retained experts who
disputed the findings and opinions of FWH Associates and Warren
French in whole or in part as set forth in those reports. And I
should tell the Court we are going to mark the reports of both the
Plaintiff's experts and Defendant's experts. And those are going to
be submitted by stipulation.
[13] And then the last stipulation. None of the stipulation[s] by
the parties are intended to concede an occurrence under the [NGM]
policy issued to [HIBR] . . . [o]r any other policy.
Once the stipulations were placed on the record, the court stated,
"Okay. So that means we don't need the live witness[es]. . . .
What's next?" Counsel noted that they would also be stipulating
about twenty documents into the record, which they would review over
lunch and submit at the end of the day for overnight judicial
consideration. Notably, the record does not identify what documents
were stipulated into the record for the judge's consideration.
The Association then rested, and NGM moved for dismissal pursuant to
Rule 4:37-2(b). NGM first argued that although its coverage
for Randy Lee individually was in place during July 2003-04, the
damage did not "manifest" until its discovery in March
2005, and NGM's subsequent policies were issued to Randy Lee's
corporation, HIBR, which was not sued in the 2010 action. NGM also
argued that the HIBR, OCI, and Zurich settlements were not
reasonable, as those policies had limits of $500,000 per year for
four years of total coverage, the Association settled those
$2,000,000 claims for $300,000 total, and entered a $1.86 million
judgment against HIBR to recover from NGM, who provided only one year
of coverage.
The Association responded that its expert reports showed that the
damages increased as time went on, peaking during the NGM coverage
period. The Association reasoned that HIBR should bear more of the
cost because "as this time goes by, there's more and more water
infiltration in more and more buildings and more and more work done
by Randy Lee that results in more and more damage." The
Association also noted that NGM's own disclaimer letters, provided in
discovery, stated that NGM provided Randy Lee with coverage beginning
"7/12/03 and was renewed under the same policy number and the
same form until cancelled on 7/12/07." NGM responded that the
person who wrote the disclaimer letter "obviously made a
mistake."
The court held NGM to the contents of its disclaimer letter,
rejecting its argument that it did not cover Randy Lee's work,
whether as HIBR or individually, during the manifestation period of
2005 and later. The court then noted, "With respect to the
reasonableness of the settlement, we have a dispute as to the expert
witnesses. And there's at least a facially reasonable argument that
most of the damage was done later and that would explain the higher
amount. So you [NGM] can produce evidence on that." On these
grounds, the court denied NGM's motion to dismiss.
On the following day, the judge indicated that he had reviewed the
stipulations. He then reversed his earlier decision and granted
NGM's motion to dismiss.
Relying on
Pasha v.
Rosemount
Memorial
Park, Inc.,
344 N.J.
Super. 350
(App. Div.
2001), certif.
denied, 171
N.J. 42
(2002), and Kelly
v. Berlin,
300 N.J.
Super. 256
(App. Div.
1997), the
judge found that
the Association had failed to carry its burden of production
that the
$1.86 million
settlement figure
was reasonable. He
noted that the other two insurer settlements were around $150,000
apiece; the Association earlier considered settling with all HIBR
insurers, including NGM, for less than $500,000; Randy Lee's
deposition indicated that he had no concern for the amount of HIBR's
liability because he knew NGM would be paying; and the Association's
expert reports showed that three other entities were "responsible"
for water infiltration and did not adequately provide why thirty
percent was attributed to HIBR.
The judge was most troubled with the fact that the Association had
not provided expert testimony from an attorney or insurance
professional to establish that a settlement for $1.86 million was
reasonable in light of HIBR's liability exposure at a potential
trial.
When the Association's attorney noted that he was moving for
reconsideration because NGM had never argued that attorney or
insurance professional expert testimony was necessary to show
reasonableness, the court agreed to reserve entering its judgment
granting NGM's motion until after the reconsideration motion.
On reconsideration, the court stated that it had been "entitled
to [expert] testimony" to analyze "the relative strengths
and weaknesses of the [expert] reports" in determining the
reasonableness of the settlement. The Association responded that it
had been prepared to present its experts' testimony demonstrating how
they had arrived at the thirty percent liability/$4.5 million damages
figure, but NGM had instead stipulated to entry of the Association's
expert reports wholesale. The Association also noted that it settled
with HIBR for just one-fourth of the amount ascribed to HIBR by its
experts ($1.86 million of $4.5 million), which the Association argued
should constitute a prima facie showing of reasonableness.
The court concluded:
I'm going to leave my decision as it is. . . . I
think I was entitled to testimony that would demonstrate that the
million-dollar figure was a reasonable figure to settle this case.
Am I sure I'm right about that? No, I am not.
The only things I'm absolutely sure about — no, not even — no.
I'll say I'm unsure. And — and so it's a motion for
reconsideration and a motion for reconsideration is not supposed to
lead to reconsideration and a change unless I'm clearly convinced
that I clearly made a mistake of law or fact. So I'm not clearly
convinced of that so it doesn't meet the standard. And, anyway, this
case is going up anyway and I will not be the last word on it. So I
look forward to what the Appellate Division will do. Okay.
The court then entered an order dismissing the Association's
complaint with prejudice.
On
appeal, the Association presents the following points:
point
i
the trial court erred in
granting NGM's motion to dismiss at the close of the association's
case.
point
ii
the trial court committed
patently reversible error in failing to accept plaintiff's stipulated
experts' reports on their face, instead requiring the experts to
testify.
In its cross-appeal, NGM argues:
point
i
the trial court correctly
determined that the association failed to satisfy its prima facie
burden of demonstrating the reasonableness and good faith of its
settlement by relying solely upon expert reports that were prepared
in connection with the underlying construction defect litigation.
point
ii
the trial court correctly
determined that plaintiff's experts were required to testify as the
reports failed to sustain the association's burden of demonstrating
the reasonableness and good faith of their settlement with hibr.
point
iii
the trial court should have
granted ngm's motion to dismiss at the close of plaintiff's case
based on [THE COURT'S] finding that the settlement did not involve a
business judgment by hibr.
point
iv
the trial court committed
patently reversible error by essentially finding coverage by
estoppel.
II.
The Association first argues that the trial court erred in granting
NGM's motion to dismiss under Rule 4:37-2(b). In reviewing
such a motion, we employ the same standard as the trial court. See
Cameco, Inc. v. Gedicke,
157 N.J. 504, 509 (1999).
Under Rule 4:37-2(b), a defendant may move to dismiss a case
or claim at trial once the plaintiff completes presentation "on
all matters other than the matter of damages[.]" The trial
court must deny a defendant's motion to dismiss at the close of the
plaintiff's case "if the evidence, together with the legitimate
inferences therefrom, could sustain a judgment in plaintiff's favor."
Ibid.
The judicial function on a Rule 4:37-2(b) motion "is
quite a mechanical one. The trial court is not concerned with the
worth, nature or extent (beyond a scintilla) of the evidence, but
only with its existence, viewed most favorably to the party opposing
the motion." Dolson v. Anastasia,
55 N.J. 2, 5-6
(1969).
The trial judge granted NGM's motion to dismiss the Association's
complaint on the basis that the HIBR settlement was not reasonable.
It is well-settled that where an insurer wrongfully refuses coverage
and fails to defend its insured and the insured is later held to be
covered, "the insurer is liable for the amount of the judgment
obtained against the insured or of the settlement made by him."
Griggs v. Bertram,
88 N.J. 347, 364 (1982) (quoting
Fireman's Fund Ins. Co. v. Sec. Ins. Co.,
72 N.J. 63,
71 (1976)). A settlement between the insured and a third party is
enforced against the insurer to the extent that "it is
reasonable in amount and entered into in good faith." Id.
at 368.
The insured has the initial burden to demonstrate reasonableness and
good faith, while the insurer has the ultimate burden of persuasion
on these two elements. Ibid. In deciding that the insurer
should bear the ultimate burden by a preponderance of the evidence,
the Court in Griggs reasoned that the "insurer by its
unfair dealing has imposed upon the insured the full burden of
protecting its own interests and has placed it in the difficult
predicament of attempting on its own to secure the benefits of
insurance under the policy[.]" Id. at 367-68; see
also Jefferson Ins. Co. v. Health Care Ins. Exch.,
247 N.J. Super. 241, 247-48 (App. Div. 1991) (insured-third party
settlements enforceable against insurer who refused to participate in
settlement negotiations). On the other hand, the insured bears the
burden of production because it "can best marshal[] the basic
facts relating to the settlement" in which the insurer was not
involved. Griggs, supra, 88 N.J. at 367.
In determining whether a settlement is prudent and reasonable, a
court must consider the risk to the settling parties. "It is
the extent of the defendants' exposure to liability and not mere
allegations in the plaintiffs' complaint that govern the appraisal of
reasonableness." Fireman's Fund Ins. Co. v. Imbesi,
361 N.J. Super. 539, 571 (App. Div.) (quoting Vargas v. Hudson
Cty. Bd. of Elections,
949 F.2d 665, 674 (3d Cir. 1991)),
certif. denied,
178 N.J. 33 (2003).
Although testimony by industry experts is preferable to establish the
reasonableness of a settlement, courts can still make such a
determination with a "description of the factors [taken] into
consideration in the settlement of the case or the factors that
ordinarily come to play in the settlement of a generic case of this
kind." See Pasha, supra, 344 N.J.
Super. at 357-59.
The trial court granted NGM's motion to dismiss because the
Association did not produce expert testimony regarding "the
relative strengths and weaknesses of the [expert] reports";
specifically, testimony regarding the thirty percent allocation of
liability and damages to HIBR among the various tortfeasors.
The Association provided ample proof to determine the reasonableness
of the HIBR settlement. Bruce Regenstreich, who was retained by OCI
and Zurich to represent the interests of HIBR in the 2010 action,
certified,
I considered the Settlement Agreement to be [a] reasonable, fair and
equitable resolution of the Association's claims against HIBR in
light of the following facts and circumstances of the [2010 action]:
(1) HIBR had a strong desire to achieve finality on the claims; (2)
the Association's expert's report on damages evidenced property
damage in amounts that was multiples of the amount of the settlement,
and I found those reports to be credible; (3) NGM refused to defend
HIBR, and Ohio Casualty and Zurich were in the midst of negotiating a
separate settlement with the Association which could have left HIBR
without counsel on the eve of trial; and (4) the considerable
likelihood that the Association would prevail at trial.
It was not contested that HIBR defectively installed windows at the
development, causing substantial property damage. While NGM
submitted no expert testimony on liability or damages, FWH's
stipulated report states, "It is apparent that Randy Lee was not
properly trained and that he was not properly equipped for a job of
this character. His description of the efforts he made to install
the windows indicates that he failed to live up to industry standards
to make sure the windows were watertight." The report details
specific technical failures on Lee's part in properly installing the
windows, and also notes Lee's failure to properly install and seal
the development's sliding glass doors.
The FWH report also contains a spreadsheet detailing the exact amount
of damages incurred by each injury to the property, the source of
that damages amount if no invoice was available, and the parties
responsible for each injury. HIBR is specifically listed (with
others) for thirty-five of the injuries identified by FWH, with
damages in the several millions. The report states that the
"reasonableness of the damages, in this case, was determined by
experts other than [FWH]."
FWH's report further provides, "[B]ased on the written discovery
we reviewed and the deposition testimony, we were able to identify
the contractors responsible for the damages enumerated herein to a
reasonable degree of engineering and construction certainty, unless
indicated to the contrary herein." The report lists four
contractors as "responsible for the inherent problems in the
windows themselves": The Standard Group, United Window and
Door, HIBR, and Barton & Associates. The report indicated that
HIBR was responsible for the "defective installation" of
the windows. The Standard Group and United (the window manufacturer
and distributor, respectively) are listed only as principals
"responsible for the work of Randy Lee" as their agent.
Barton & Associates, the development's architect, was responsible
only to the extent that it failed to observe HIBR's defective window
installation in violation of its drawings. The FWH report therefore
identifies HIBR as the only party directly responsible for the
defectively-installed windows.
The thirty percent allocation of water-induced damage to HIBR is
supported by FEI's February 5, 2010 report explicitly addressing the
costs of remediating the development's water-induced damage. The
property damage was broken down into six categories: damage to
units' interiors, doors, windows, exterior cladding components,
ceilings, and structural damage. FEI then calculated what portion of
that damage was caused by water infiltration through leaks in each of
the following eight locations: windows, balconies, handrails, doors,
skylights, cladding, weather barriers, and penetration leaks. FEI
found that thirty percent of all damage resulting from water
infiltration was attributable to window leaks. Therefore, of the
$14.4 million in total water damage, $4,350,732.15 was attributed to
window leaks. Again, the parties stipulated that FEI attributed $4.5
million to damage from window leaks.
With regard to the settlement amount, as the only party directly
responsible for the defective window installation and subsequent
leaks, HIBR was exposed to liability of up to $4.5 million. The
Association settled its claims against HIBR for $1.86 million, which
amounts to approximately thirty percent of HIBR's potential
liability. HIBR was independently represented by counsel, Don
Driggers (in addition to insurer-appointed counsel Regenstreich), at
all times during trial preparations, negotiations and settlement.
Lee contacted his counsel when he received correspondence regarding
negotiations and settlement. NGM's counsel even called Lee on his
personal phone during negotiations and "suggested [he] should
contact [his] lawyer," which delayed entry of the settlement
agreement.
Lee further testified that he reviewed the settlement agreement with
his attorney, he understood its terms after that review, and he
voluntarily entered the settlement agreement without coercion or
outside pressure. Specifically, Lee understood that OCI and Zurich
would be paying a portion of the Association's claims against him,
but NGM would not. Lee thought that NGM would provide coverage for
property damage resulting from his negligence at the development, but
that would be dealt with at "a later date."
Although he knew OCI and Zurich had agreed to pay some portion of the
claims against HIBR, he did not know how much they paid. Lee also
testified that he did not know how the $1.86 million settlement
figure was reached, did not have conversations about how that figure
was reached, and "could not care less about how these numbers
were determined" because he did not think HIBR was legally
obligated to pay. Instead, Lee testified that all negotiations
happened through the attorneys; he was not personally involved.3
As to NGM's portion of the settlement amount, the damage caused by
HIBR's defective installations occurred prior to and manifested
during 2005, clearly within NGM's coverage period. The damage did
not manifest during the coverage periods of OCI or Zurich, and their
liability exposure was consequently less than NGM's. In
contemplating a $500,000 total settlement between all three of HIBR's
insurers, the Association had earlier broken down the insurers'
liability based on days each covered HIBR's work: OCI, 18.48%, based
on 97,292 days of coverage; Zurich, 16.29%, based on 85,775 days of
coverage; and NGM, 65.22%, based on 343,335 days of coverage.
Given these proofs and NGM's refusal to settle or provide a defense,
HIBR was bearing "the full burden of protecting its own
interests" at a trial with the Association. Griggs,
supra, 88 N.J. at 367. The extent of its liability was
demonstrated by expert reports, "not mere allegations in the
plaintiffs' complaint." Imbesi, supra, 361 N.J.
Super. at 571. Although HIBR's "actual liability" was
not fully established, more than the required potential liability was
shown to exist here. Luria Bros. & Co. v. Alliance Assurance
Co.,
780 F.2d 1082, 1091 (2d Cir. 1986). In view of the
degree of probability of the Association's success and the size of
possible recovery at a potential trial, the Association met its
burden of showing that a reasonable factfinder could have found that
a settlement for thirty percent of the damages that expert reports
attributed to HIBR was reasonable, taking these facts in a light most
favorable to the non-moving party as required by Rule
4:37-2(b). The trial court erred in concluding otherwise.
The Association next argues that the trial judge should have accepted
its experts' reports rather than require the experts to testify. The
parties, however, did not stipulate that the contents of the FEI and
FWH reports were true. Rather, they stipulated that the drafters of
the FEI and FWH reports would have testified consistently with their
reports had they been called at trial. Although, ultimately, the
credibility of the experts and the significance of their reports
remains to be resolved by a factfinder, the court was required to
accept as true the proffered testimony and reports favorable to the
settlement for purposes of a motion under Rule 4:37-2(b).
In any event, the judge did not seek testimony from the authors of
the reports that were stipulated into evidence. Rather, relying on
Pasha, supra, 344 N.J. Super. at 357 and Berlin,
supra, 300 N.J. Super. at 268, the judge sought
additional expert testimony from a legal or insurance expert stating
that the settlement amount for these kinds of claims was reasonable.
We have determined that Regenstreich's certification, along with
other evidence presented by the Association, was adequate under Pasha
and Berlin to survive a Rule 4:37-2(b) motion to
dismiss without such additional expert testimony. Whether a
factfinder will find that evidence persuasive with or without
additional expert testimony is a matter to be determined at the new
trial. The parties are free at the new trial to offer such live
testimony, expert testimony, documentary evidence, and stipulations
as they see fit, subject to the Rules of Evidence.
III.
In its cross-appeal, NGM argues that its successful motion to dismiss
should have been granted on other grounds. Specifically, NGM asserts
the court should have granted the motion because it found that the
settlement did not involve a business judgment by HIBR.
At the outset, we note that only a party aggrieved by a decision may
appeal from it. Howard Sav. Inst. v. Peep,
34 N.J. 494, 499 (1961). Likewise, appeals are taken from judgments, not
statements of reasons. Glaser v. Downes,
126 N.J. Super. 10, 16 (App. Div. 1973), certif. denied,
64 N.J. 513
(1974). Peep and Glaser suggest that NGM cannot appeal
this issue because NGM prevailed and is thus not aggrieved by the
decision, and NGM seeks only to appeal the trial court's reasoning,
and not its judgment. As such, this argument is procedurally barred.
In light of our remand, we briefly address the merits of NGM's
contention.
NGM argues that the trial judge should have granted its motion
because the settlement did not involve a business judgment by HIBR.
NGM relies on language in Pasha, where we expressed concern
"with the soundness of a business judgment to settle particular
litigation for a given amount." Pasha, supra, 344
N.J. Super. at 358-59. Pasha does not stand for the
proposition that a settlement must be shown to be a sound business
judgment in order to be considered reasonable. Rather, Pasha
relied on the Griggs test, discussed supra, for
determining the reasonableness of a settlement. Id. at 358.
Moreover, Pasha is distinguishable. There, the court found
the plaintiffs failed to meet their burden of production on
reasonableness because their expert certifications failed to set
forth the factors considered in reaching agreement, instead relying
on the "extremely wide range of sustainable verdicts and even
greater range of reasonable settlements." Id. at 357-58.
We criticized plaintiff's documentary submissions because they
"contained nothing but guesswork and unsupported anecdotal
references, and were wholly insufficient to satisfy their burden
under Griggs." Id. at 359.
By contrast, Regenstreich certified to the factors considered in
reaching the settlement, including HIBR's exposure to liability and
the Association's likelihood of success at trial; the very factors
identified as dispositive of reasonableness in our jurisprudence.
See Imbesi, supra, 361 N.J. Super. at
571; Luria Bros., supra, 780 F.
2d at 1091. The
Association's burden was limited to showing that its settlement was
reasonable and in good faith. Griggs, supra, 88 N.J.
at 368. Proof that the settlement constituted a sound business
judgment is not part of the Griggs calculus and we perceive no
error in the trial judge's failure to grant NGM's motion to dismiss
on that basis.
NGM also argues that the court erred by "essentially finding
coverage by estoppel." The Association asserts that the judge
did not find estoppel, but that NGM waived its right to deny coverage
on the basis that HIBR was not the named insured on the policy when
the loss manifested.
It is not disputed that Lee installed the windows and doors at Fox
Hills in 2000-03 as Randall Lee t/a Home Improvements by Randy, a
sole proprietorship. In July 2004, after the installation was
completed but before the damage was discovered in 2005, Lee formed
Home Improvements by Randy, LLC, and was the sole member of that LLC.
NGM's policy for the LLC provided coverage for members. Only the
proprietorship, and not the LLC, is a named party in this litigation.
When disclaiming coverage, NGM indicated in several letters that its
policy for HIBR was "effective date of 7/12/03 and was renewed
under the same policy number and form until cancelled on 7/12/07."
NGM also indicated that it issued HIBR an "Umbrella Policy . .
. effective 7/11/05 to 7/10/07."
The trial court questioned counsel for NGM specifically as to its May
1, 2007 coverage disclaimer letter and asked how NGM could provide
the letter in discovery and rely on it for the purpose of
demonstrating that NGM disclaimed coverage to Lee, then take a
position inconsistent with that letter as to coverage at trial.
Counsel for NGM responded:
[COUNSEL]: That letter, the person who wrote that letter obviously
made a mistake because what happened here is that you had two
insureds; Home Improvements by Randy and Home Improvements by Randy,
LLC.
THE COURT: But your side gave that letter to them in discovery.
[COUNSEL]: That was in response to a request for all the disclaimer
letters that were. And we gave him that and we gave him the other
disclaimer[s].
THE COURT: Without saying to him by the way that disclaimer letter
has it wrong, that's not true?
[COUNSEL]: (No response).
The
judge then held:
In light of the letter just read into the record, as a matter of
discovery you can't say in discovery here's our position with respect
to the insurance. And then come to trial and say oh by the way they
sued on the wrong policy. So you're bound by what's in that
l[e]tter.
NGM renewed its claim that the representations in the letters
provided in discovery were "mistaken" and that the
Association sued the wrong party in its motion to dismiss. The court
again rejected this argument:
I am satisfied that [HIBR] was insured by National Grange for the
claim and the claim became known in 2005 during the period of time
that the National Grange policies were in effect.
I have rejected and continue to reject National Grange's argument
that the change of the policy from Randy Lee individually to the LLC
made any difference and it's particularly based on their own letter
indicating that the same policy number applied from July 12, '03 to
July 12, '07. That was a letter dated May 1 of 2007.
None of the reservation of rights letters said anything about the
claim that the wrong entity had been sued, so I don't put any
substance in that.
The trial court rejected NGM's coverage argument as a matter of
discovery. Appellate review of a trial court's evidentiary and
discovery decisions is governed by an abuse of discretion standard.
State ex rel. A.B.,
219 N.J. 542, 554 (2014). However,
the interpretation of written terms of a contract is generally a
matter of law and therefore subject to our de novo review.
Fastenberg v. Prudential Ins. Co. of Am.,
309 N.J. Super. 415, 420 (App. Div. 1998). In particular, the interpretation of the
terms of an insurance contract is a matter of law to be undertaken by
the court. Rena, Inc. v. Brien,
310 N.J. Super. 304,
321 (App. Div. 1998). Under either standard of review, we affirm the
trial court's decision as to coverage.
Central to the trial judge's finding of coverage were the six
"declination" letters sent by NGM between May 2007 and
January 2012, wherein its litigation specialist repeatedly assured
Randall Lee that the policy covering HIBR, with effective date of
July 2003 through July 2004, was renewed until it was cancelled on
July 12, 2007. The trial judge rejected NGM's explanation that the
litigation specialist was mistaken in reassuring Lee that the initial
policy remained in effect. We agree.
The trial judge's decision, that NGM's failure to raise the claim
that HIBR was not the named insured on the relevant policies in any
of its six disclaimer letters constituted a waiver of its ability to
deny coverage, finds adequate support in the record. This evidence
also supports an inference that NGM acknowledged coverage. See
Bonnet v. Stewart,
68 N.J. 287, 294 (1975); Merchs.
Indem. Corp. of N.Y. v. Eggleston,
37 N.J. 114, 130-31
(1962).
Reversed and remanded for a new trial. We do not retain
jurisdiction.
1
Both parties assert that Zurich's coverage spanned from 2002-2013.
However, the sole Zurich policy in the record is an annual policy
with an effective date of July 11, 2003. It appears that Zurich's
predecessor company was named "Northern," and may have
provided the 2002-03 coverage, but no Northern policy is in the
record. Likewise, nothing in the record suggests Zurich insured
HIBR from 2004 through 2013.
2
FEI's report attributed $4,350,732.15 to damage caused by window
leakage, but the parties stipulated that the report provided a
figure of $4.5 million.
3
Lee also testified that he did not understand what "claim"
or "notice of claim" meant, despite owning several
insurance policies and being involved in protracted insurance
litigation for a decade. Lee is clearly an unsophisticated party
who relied heavily on his attorneys to represent his interests.