SURETY MECHANICAL SERVICES, INC. v. THE TRAVELERS INDEMNITY COMPANY et al
Filing
57
OPINION. Signed by Judge Noel L. Hillman on 6/27/2014. (tf, )
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
SURETY MECHANICAL SERVICES,
INC.,
Plaintiff,
CIVIL NO. 1:12-cv-3242
(NLH/AMD)
v.
THE PHOENIX INSURANCE COMPANY
et. al,
Defendants.
OPINION
Appearances:
RAYMOND JAMES WENT, JR.
HANKIN, SANDSON, SANDMAN, BRADLEY & PALLADINO, PC
30 SOUTH NEW YORK AVENUE
ATLANTIC CITY, NJ 08401
Attorney for plaintiff Surety Mechanical Services, Inc.
ERIN MARIE MCDEVITT-FRANTZ
BOROWSKY & BOROWSKY LLC
59 AVENUE AT THE COMMON
SUITES 101 & 102
SHREWSBURY, NJ 07702
STUART M. BERGER
BOROWSKY & BOROWSKY LLC
59 AVENUE AT THE COMMON
SUITES 101 & 102
SHREWSBURY, NJ 07702
Attorneys for defendant The Phoenix Insurance Company
HILLMAN, District Judge
Before the Court are cross Motions for Partial Summary
Judgment by Plaintiff Surety Mechanical Services, Inc.
(“Surety”) and Defendant The Phoenix Insurance Company
(“Phoenix”).
For the reasons set forth below, Phoenix’s Motion
will be granted in part and denied in part, and Surety’s Motion
will be denied. 1
Jurisdiction
The Court has jurisdiction over this matter pursuant to 28
U.S.C. § 1332 because there is complete diversity of citizenship
between the parties and the amount in controversy exceeds
$75,000.
Choice of Law
In diversity cases, federal courts apply the forum state’s
choice of law rules to determine which state’s substantive laws
are controlling.
Maniscalo v. Brother Int’l (USA) Corp., 709
F.3d 202, 206 (3d Cir. 2013)(citing Klaxon Co. v. Stentor Elec.
Mfg. Co., Inc., 313 U.S. 487 (1941)).
However, defendants must
raise choice of law issues or they are waived.
1
Neely v. Club
Surety has also requested costs and attorney’s fees in
connection with the present action pursuant to N.J. Ct. R. 4:429(a)(6). However, that request will be denied since the Court
is also denying Surety’s Motion for Summary Judgment and the
rule authorizes fees only for successful claimants.
2
Med Mgmt. Servs., Inc., 63 F.3d 166, 180 (3d Cir. 1995) (en
banc).
Neither party has questioned the applicability of New
Jersey law, which is the basis of Surety’s claims.
Therefore,
the Court will apply New Jersey substantive law. 2
Background
This case arises from a dispute between an insurance
carrier and its insured over the insurer’s duty to defend the
insured in a lawsuit.
In August, 2006, Surety entered into a
contract with Cape May County Vocational Technical School
District (“Tech School”) to provide mechanical services for the
school’s heating, ventilation, and air conditioning (“HVAC”)
system.
(Aff. of Thomas Paul [Doc. No. 51-22] ¶¶ 2-4.)
finished its work and was paid on August 19, 2008.
C.)
Surety
(Id. at Ex.
Three years later, on August 24, 2011, the Tech School
filed a lawsuit in the Superior Court of New Jersey (“Tech
School Litigation”) alleging that Surety performed its work
negligently, that it “failed to perform [its] contractual
obligations in a workmanlike manner,” and that it failed to
perform its work in accordance with “common industry standards
2
New Jersey’s choice of law rules are in accord with this
result. See DeMarco v. Stoddard, 84 A.3d 965, 972 (N.J. Super.
Ct. App. Div. 2014) (stating that a trial court has discretion
whether to permit parties to raise choice of law issues not
raised early in the case); see also Chalef v. Ryerson, 648 A.2d
1139, 1142 (N.J. Super. Ct. App. Div. 1994) (declining to
consider choice of law issue on appeal when it was not properly
presented before the trial court).
3
and the expectations for the Project.”
(Pl.’s Statement of
Material Facts Ex. E [Doc. No. 51-8], at 10-12.)
As a result,
the Tech School claimed it suffered “compensatory and
consequential damages.”
(Id.)
From May 16, 2006 through May 16, 2009, Surety was insured
under a Commercial General Liability (“CGL”) policy issued by
Phoenix (“Policy”).
(Id. at Ex. A-C.)
Surety submitted the
Tech School’s claim to Phoenix for indemnity and defense, and on
March 15, 2012 Phoenix issued a letter declining coverage.
at Ex. J.)
(Id.
Surety subsequently filed the instant action in the
Superior Court of New Jersey seeking a declaratory judgment as
to Phoenix’s duties to indemnify and defend.
Ex. A [Doc. No. 1-2].)
Court.
(Notice of Removal
Phoenix then removed the action to this
(Notice of Removal [Doc. No. 1].)
Surety moved for summary judgment on the issues of whether
Phoenix has a duty to defend in the Tech School Litigation, and
whether Phoenix is obligated to reimburse Surety for the costs
it has already incurred in the Tech School Litigation.
Mot. for Summ. J. [Doc. No. 51].)
(Pl.’s
Phoenix filed its opposition
and a Cross Motion for Summary Judgment on the same issues.
(Def.’s Cross Mot. For Summ. J. [Doc. No. 54].)
Standard for Summary Judgment
Summary judgment is appropriate where the Court is
satisfied that there is no genuine issue as to any material fact
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and the moving party is entitled to a judgment as a matter of
law.
Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986); Fed.
R. Civ. P. 56(a).
An issue is “genuine” if it is supported by
evidence such that a reasonable jury could return a verdict in
the nonmoving party's favor.
477 U.S. 242, 248 (1986).
Anderson v. Liberty Lobby, Inc.,
A fact is “material” if, under the
governing substantive law, a dispute about the fact might affect
the outcome of the suit.
Id.
Judgment is appropriate as a
matter of law if there can only be one reasonable verdict under
the governing law.
Id. at 250.
Initially, the moving party bears the burden of
demonstrating the absence of a genuine issue of material fact.
Celotex, 477 U.S. at 323.
Once the moving party has met its
burden, the nonmoving party must go beyond the pleadings and
identify, by affidavits or otherwise, specific facts showing
that there is a genuine issue for trial.
Id. at 323-24.
Thus,
to withstand a properly supported motion for summary judgment,
the nonmoving party cannot rely upon mere allegations, general
denials, or vague statements to establish a genuine issue of
material fact.
Saldana v. Kmart Corp., 260 F.3d 228, 232 (3d
Cir. 2001).
When deciding a motion for summary judgment, courts look
to the pleadings, depositions, documents, electronically stored
information, affidavits or declarations, stipulations,
5
admissions, and interrogatory answers.
330; Fed. R. Civ. P. 56(a).
Celotex, 477 U.S. at
However, “a district court may not
make credibility determinations or engage in any weighing of the
evidence; instead, the nonmoving party's evidence ‘is to be
believed and all justifiable inferences are to be drawn in his
favor.’”
Marino v. Indus. Crating Co., 358 F.3d 241, 247 (3d
Cir. 2004) (citing Anderson, 477 U.S. at 255).
Discussion
Both parties have moved for summary judgment on the issues
of: (1) whether Phoenix has a duty to defend Surety in the Tech
School Litigation, and (2) whether Surety is entitled to
reimbursement for its costs in defending the Tech School
Litigation.
I.
Duty to Defend or Reimburse
An insurer’s duty to defend is based on its duty to pay,
which in turn is dictated by the terms of the insurance policy.
Abouzaid v. Mansard Gardens Assocs., 23 A.3d 338, 346 (N.J.
2011); Hartford Accident & Indem. Co. v. Aetna Life & Cas. Ins.
Co., 483 A.2d 402, 405 (N.J. 1984).
In general, an insurer has
a duty to defend its insured against any claims that are
“potentially coverable” under the policy.
346.
Abouzaid, 23 A.3d at
A claim is potentially coverable if the insurer would be
obligated to indemnify the insured in the event that the third
party prevails against the insured.
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Id.
Thus, the duty to
defend is broader than the duty to pay because an insurer may be
required to defend against claims for which it ultimately would
not have to pay.
In determining whether a claim is potentially coverable,
courts compare the complaint with the language of the insurance
policy and resolve any doubts or ambiguities in favor of the
insured.
Id.; see also, Flomerfelt v. Cardiello, 997 A.2d 991,
998 (N.J. 2010).
However, courts are not strictly limited to
the complaint and may also consider facts that arise in the
course of litigation.
Abouzaid, 23 A.3d at 347.
If the
complaint contains multiple causes of action, the insurer has a
duty to defend until all potentially covered claims are
resolved.
Flomerfelt, 997 A.2d at 998.
In Burd v. Sussex Mut. Ins. Co., 267 A.2d 7 (N.J. 1970),
the New Jersey Supreme Court recognized two exceptions to the
general rule that insurers must defend all potentially coverable
claims.
The one exception relevant to this case holds that an
insurance carrier is not obligated to defend its insured if it
intends to dispute coverage based on a question of fact that is
not material to the underlying litigation.
11.
Burd, 267 A.2d at 9-
The need for this exception becomes clear in light of the
interaction between the following two rules:
first, once a
carrier takes up the insured’s defense, it cannot deny coverage
if that defense fails; second, a carrier cannot defend an
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insured so as to “leave him liable and uncovered.”
Id. at 11
(citing Williams v. Bituminous Cas. Corp., 238 A.2d 177 (N.J.
1968)).
Without the Burd exception, the interaction of these two
rules would obligate insurers to pay claims while denying them
the opportunity to dispute coverage.
For example, in Williams
v. Bituminous Cas. Corp., 238 A.2d 177 (N.J. 1968), a plaintiff
brought a workers compensation claim against his employer.
Although the complaint alleged the injury occurred within the
policy period, the insurer claimed it happened one day before
the policy took effect.
Id. at 178-79.
The issue of the injury
date could not be litigated since it was irrelevant to the
employer’s liability.
Id.
Consequently, if the insurer
defended the insured and lost, it would have been obligated to
pay the claim without having the opportunity to dispute the date
of injury.
Id.
Furthermore, even if the insurer could have
litigated the injury date in the underlying case, it would have
been precluded from asserting its interest because, if
successful, the insured would be left without coverage.
Id.
Therefore, when the insurer intends to dispute coverage
based on an issue that is not material to the underlying case,
the insured must bear the initial burden of defending itself,
but the carrier must reimburse the insured if it is later
determined that the claim was actually covered by the policy.
8
Burd, 267 A.2d at 10; see also, Hartford Accident & Indem. Co.
v. Aetna Life & Cas. Ins. Co., 483 A.2d 402, 407, n.3 (N.J.
1984).
Thus, the duty to defend becomes dependent on the actual
facts of the case, not on the allegations of the complaint.
Burd, 267 A.2d at 9.
II.
The Policy
Under the Policy, Phoenix must indemnify Surety for any
“property damage” caused by an “occurrence” while the policy is
in effect.
(Pl.’s Statement of Material Facts, Ex. D [Doc. No.
51-7], at 1.)
The Policy defines “property damage” in relevant
part as “[p]hysical injury to tangible property.”
(Id. at 15.)
It further defines an “occurrence” as an “accident, including
continuous or repeated exposure to substantially the same
general harmful conditions.”
(Id. at 14.)
Thus, under the
plain terms of the Policy Phoenix only has an obligation to pay
once an accident causes physical injury to property.
The Policy also contains several exclusions for claims that
would otherwise be covered.
Of particular relevance to this
case are the exclusions for damage to “your product” or “your
work.”
“Your product” is defined in relevant part as “[a]ny
goods or products [that are] manufactured, sold, handled,
distributed or disposed of by [the insured].”
(Id. at 15.)
“Your work” is defined in relevant part as “[w]ork or operations
performed by you or on your behalf; and . . . [m]aterials, parts
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or equipment furnished in connection with such work or
operations.”
(Id. at 15-16.)
These terms are standard among CGL policies and the Supreme
Court of New Jersey has interpreted them as insuring against
“the possibility that the goods, products or work of the
insured, once relinquished or completed, will cause . . . damage
to property other than to the product or completed work itself.”
Atlantic Mut. Ins. Co. v. Hillside Bottling Co., Inc., 903 A.2d
513, 519 (N.J. Super. Ct. App. Div. 2006) (quoting Weedo v.
Stone-E-Brick, Inc., 405 A.2d 700, 791 (N.J. 1979)).
Thus, CGL
policies cover damage that follows from defective work, but they
do not cover the work or product itself.
The Supreme Court of
New Jersey made the distinction succinctly when it said: “[a CGL
policy does not] cover an accident of faulty workmanship but
rather faulty workmanship which causes an accident.”
Weedo, 405
A.2d at 796.
Thus, Phoenix would ordinarily have a duty to defend Surety
against any claims for damage to property, other than Surety’s
product, which is caused by Surety’s work.
Under Burd, however,
Phoenix would not have to defend Surety if it intends to dispute
coverage based on a fact that is immaterial to the underlying
case.
III. Phoenix’s Duty to Defend Has Not Been Triggered
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Phoenix is not obligated to defend Surety in the Tech
School Litigation because it disputes coverage and that dispute
depends on a question of fact that is not material to the Tech
School Litigation.
In reviewing the Tech School complaint, Phoenix would
ordinarily have a duty to defend Surety.
The Tech School
claimed it suffered consequential damages as a result of Surety
performing its work negligently.
(Pl.’s Statement of Material
Facts Ex. E [Doc. No. 51-8], at 10-12.)
The fact that the Court
must resolve any doubts in favor of the insured, combined with
the allegation of negligence and the fact that consequential
damages typically go beyond the subject of the contract itself,
are enough to make out a potentially coverable claim.
The
existence of a potentially coverable claim is further supported
by the Tech School’s answers to interrogatories which allege
that Surety’s work on the HVAC system caused excessive humidity
which in turn caused $51,041 in damage to desks and ceiling
tiles.
(Id. at Ex. I [Doc. No. 51-12].)
Nevertheless, Burd compels the conclusion that Phoenix does
not have to defend Surety.
the outset.
Phoenix has disputed coverage from
(Id. at Ex. J [Doc. No. 51-13].)
In particular,
Phoenix disputes whether the Tech School suffered damages beyond
the cost of repairing Surety’s work.
11
(Def.’s Br. [Doc. No. 54-
1] at 19.)
Phoenix also questions whether any damages occurred
while the Policy was in effect.
(Id. at 18.)
The issue of whether the Tech School’s damages go beyond
Surety’s work will be resolved by the underlying litigation.
The Tech School will have to prove its damages, and it should be
clear from that proof whether those damages go beyond the cost
of repairing Surety’s work.
However, the issue of whether any
damages occurred during the policy period will not be
sufficiently resolved in the Tech School Litigation.
Here, as
in Williams, 3 the exact timing of the damages is immaterial to
Surety’s liability.
If Phoenix defended Surety and lost, it
would be obligated to pay the claim without having the
opportunity to dispute coverage.
Furthermore, if Phoenix were
able to litigate the date-of-damage issue in the underlying
action, it would be prohibited from asserting its interest lest
it leave Surety uncovered.
3
In its reply brief, Surety argues that Williams is inapposite
because there is no dispute that Surety performed the work while
the Policy was in effect. However, under the plain terms of the
policy, a coverable event does not occur until there is
“physical injury” to property. Furthermore, as Phoenix pointed
out in its brief, the New Jersey Supreme Court specifically held
that, “[w]hen parties dispute the identity of the operative
‘occurrence’ for purposes of coverage, the actual damage to the
party asserting the claim, not the wrongful act that
precipitated that damage, triggers the ‘occurrence.’” Memorial
Props., LLC v. Zurich American Ins. Co., 46 A.3d 525, 533 (N.J.
2012) (citing Hartford, 483 A.2d 402).
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Therefore, Phoenix properly declined to defend Surety
because it disputes a factual issue of coverage that will not be
properly resolved in the underlying litigation.
Accordingly,
judgment will be entered in favor of Phoenix on its claim that
it does not have to defend Surety.
IV.
There Is a Genuine Issue of Material Fact Regarding
Phoenix’s Duty to Reimburse Surety
Although Phoenix does not have to defend Surety in the Tech
School Litigation, it may be obligated to reimburse Surety if
the actual facts of the case show that Phoenix has a duty to
indemnify Surety.
Burd, 267 A.2d at 10.
To prevail on summary
judgment, Surety must show that, based on the uncontroverted
evidence, a reasonable jury could only conclude that the Tech
School actually suffered damages covered by the Policy.
Anderson, 477 U.S. at 250.
That is, the Tech School’s property,
other than the HVAC system, must have been physically damaged
between May 16, 2006 and May 16, 2009.
The only evidence of coverable damage is contained in a
letter sent by the Tech School’s attorney as a supplement to the
Tech School’s answers to interrogatories.
Material Facts Ex. I [Doc. No. 51-12].)
(Pl.’s Statement of
The letter, which is
certified by the Tech School’s business administrator, states
that the “daily onslaught of high humidity [from Surety’s HVAC
system] caused doors to swell . . . desks to bow and [ceiling]
13
tiles to dislodge.
Some student desks bowed so badly that the
distributor Nickerson New Jersey, Inc. installed brackets to
support them.”
(Id.)
The letter further states that the damage
started at some point between September 2007 and March 2008, and
totaled $51,041. Surety has not provided receipts, images, or
any other information supporting the statements in the letter.
(Id.)
If proven at trial, the statements in the letter would
certainly trigger Phoenix’s duty to pay.
However, based on such
limited evidence, the Court cannot say that a reasonable jury
could only find in favor of Surety.
Moreover, because the
letter was certified by the Tech School’s business
administrator, granting Surety summary judgment based on the
letter would require the Court to make an impermissible
credibility determination.
The Supreme Court has squarely held
that, because credibility determinations and weighing of
evidence are the province of the jury, courts “must disregard
all evidence favorable to the moving party that the jury is not
required to believe.”
Reeves v. Sanderson Plumbing Products,
Inc., 530 U.S. 133, 150-51 (2000).
Thus, the Court cannot grant
Surety’s motion for summary judgment on the issue of
reimbursement because it has not provided evidence from which a
reasonable jury could only find that the Tech School actually
suffered coverable damages.
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On the other side of the coin, Phoenix claims it is
entitled to summary judgment on the issue of reimbursement
because Surety’s only evidence of coverable damage is contained
in the letter, discussed supra, which is not admissible in
court.
(Def.’s Br. at 17.)
When there is a “complete failure
of proof” as to an essential element of the nonmoving party’s
case, the movant is entitled to summary judgment.
v. Catrett, 477 U.S. 317, 322-23 (1986).
Celotex Corp.
However, it is well
settled that, in order to withstand a motion for summary
judgment, the nonmoving party does not have to produce evidence
in a form that would be admissible at trial (so long as it is
reasonable to conclude it will take on an admissible form at
trial).
Id. at 324.
All the nonmoving party must do is “go
beyond the pleadings and . . . designate specific facts showing
that there is a genuine issue for trial.”
quotation marks omitted).
Id. (internal
Surety has satisfied its burden here
because it has gone beyond the pleadings and provided a
statement, certified by the Tech School’s business
administrator, which tends to show that the Tech School suffered
coverable damages.
Thus, the letter is enough to withstand Phoenix’s motion
for summary judgment, but it is not enough to establish Surety’s
right to summary judgment.
Accordingly, both parties’ motions
on the issue of reimbursement for the Tech School Litigation
15
must be denied because there is a genuine issue of material
fact.
CONCLUSION
For the foregoing reasons, Defendant’s Motion for Summary
Judgment shall be granted in part and denied in part, and
Plaintiff’s Motion for Summary Judgment shall be denied.
_s/ Noel L. Hillman______
NOEL L. HILLMAN, U.S.D.J.
At Camden, New Jersey
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