Restaurant Enterprises, Inc. v. Sussex Mutual Insurance

The opinion of the court was delivered by

Hareman, J.

The trial of this action resulted in a verdict of no cause of action in favor of Sussex Mutual Insurance Company (Sussex Mutual) in plaintiff’s suit on a purported fire insurance binder and no cause of action in favor of Joseph Paggi, an insurance agent, in plaintiff’s suit for the negligent processing of an insurance application. The jury returned no verdict on the cross-claims filed between defendants. The Appellate Division reversed as to both defendants and remanded the case for a new trial. Restaurant Enterprises, Inc. v. Sussex Mutual Insurance Co., 96 N. J. Super. 26, 27 (App. Div. 1967). We granted certification on petitions filed by both defendants. 50 N. J. 297 (1967).

The facts giving rise to plaintiffs suits are fully treated in the opinion below and need be repeated only briefly here.

Paggi had a written agreement with Sussex Mutual under which he was appointed its agent authorized to accept proposals for insurance and to issue binders, limited to $40,000 on a single risk. He was obliged to notify Sussex Mutual within 48 hours in writing after he bound it to any risk.

Plaintiff contacted Paggi with reference to obtaining coverage on one of its properties. Since the rate applicable to the type of risk involved was not standard, Paggi, on September 27, 1962, requested from the Mutual Service Organization (Mutual Service), which is involved in the business of calculating such rates and making them available for the use of-its subscribers, the suggested rate. • -

On October14, 1962, while Paggi’s agency relationship with Sussex Mutual was still in effect and before the Mutual Service rates had been received, Paggi issued to plaintiff a written binder of insurance to be effective as of that date, in the sum of $32,000. An examination of the binder shows that the printed duration term had been crossed out and the remark “Pending MSO rates” had been substituted. The binder was therefore by its terms issued for such time as would be required to obtain those rates and not for a timé to be measured by a specified number of days. Paggi testified that a copy of the binder was sent to Sussex Mutual. Sussex Mutual, however, denied receipt thereof. Plaintiff contacted Paggi several times thereafter, asking when the policy would issue and was told each time that the Mutual Service rates had not yet arrived. Paggi never suggested that there was a lack of coverage.

On December 30, 1962 a .fire destroyed the property covered by the binder and on January 2, 1963 the Mutual Service rates were received by Paggi. Plaintiff filed a timely notice of loss, received a disclaimer of responsibility and instituted this action.

At trial plaintiff introduced the written binder and adduced evidence of a conversation between Paggi and a representative of the mortgagee of the covered property. Plaintiff contended that by this conversation an oral binder was created on December 27, 1962. The trial court instructed the jury that the written binder had terminated at the expiration of 60 days from October 14, 1962, by virtue of N. J. S. A. 17:36-5.16 but nevertheless submitted the issue of coverage thereunder to the jury. Judgment which was entered in behalf of Sussex Mutual was reversed on appeal to the Appellate Division for reasons not material here. The Appellate Division by way of instructions for the retrial indicated that the written binder, which it found to have expired by operation of law, should not have come to the attention of the jury.. Sussex Mutual appeals from the order for a new trial on the grounds that there was insufficient evidence to support the existence of an oral binder and, since the written binder had expired before the fire, it argues that there is no basis for a judgment against it. Paggi appeals on the asserted incorrectness of the Appellate Division interpretation of N. J. S. A. 17;36-5.16.

N. J. S. A. 17:36-5.16 requires that:

“Binders or other contracts for temporary insurance may be made orally for a period which shall not exceed ten days or in writing for a period which shall not exceed 60 days and shall be deemed to include all the terms and conditions of a fire insurance policy as specified by this law and all such applicable endorsements filed with the Commissioner of Banking and Insurance as may be designated in such contract of temporary insurance, except that the cancellation clause and the clause specifying' the hour of the day at which the insurance shall commence may be superseded by the express terms of such contracts of temporary insurance.”

The Appellate Division, as noted, was of the opinion that this section is mandatorially binding on both insurer and insured. On the strength of Flowers by DiAlton's v. American Ins. Co., 42 N. J. Super. 493 (App. Div. 1956) affirming 39 N. J. Super. 44 (Law Div. 1956), the Appellate Division ruled that: the effect of this provision was to terminate any binder upon the expiration of a 60 day term measured from its date of issue. See also Decor-El, Inc. v. Bertsch,, 13 N. J. Super. 166 (Law Div. 1951). We'cannot agree that this was the intent of the legislature in enacting this provision.

It is clear that the statute seeks to prevent the issuance of binders with more than a 60 day duration. It does not, however, indicate the sanction to be imposed if’a binder purporting to be of a longer duration is in fac-t issued. The Appellate Division held, the sanction intended was to declare the binder void. But such a sanction could lead to incongruous and inequitable results. Thus a prospective insured, such as plaintiff, might well believe himself to be fully covered and feel it is unnecessary to attempt to secure either the actual policy or insurance from another company only to find himself without the insurance he was led to believe he possessed. Cf. Lewis v. Travelers Ins. Co., 51 N. J. 244 (1968). Such a result is patently unfair, visiting, at it does, a penalty upon the insured who has no reason actually to know of the statutory limitation while the insurer who has a duty to know thereof, receives an unjust benefit.

Under such a sanction the insurer can never be harmed by issuing a binder for more than 60 days and the prospective insured, unaware of the statutory limitation, alone can be harmed by accepting- it. This result is objectionable because its penalty falls upon the party not intended by the legislature to be penalized. An intention to cause such a result cannot be imputed to the legislature, which is after all presumed to act consonant with reason and good discretion. Sperry & Hutchinson Co. v. Margetts, 15 N. J. 203 (1954); Wright v. Vogt, 7 N. J. 1 (1951); Sharrock v. Borough of Keansburg, 15 N. J. Super. 11 (App. Div. 1951). A further indication that this was not the intent behind the statute comes from the words of the enactment which speak of prohibiting the “making” of a binder, something ordinarily thought of as done by the insurer rather than the insured.

We conceive the statute to be an industry regulation directed to the insurer. The enactment is for the benefit of the insured requiring the insurer to reduce the terms of the insurance to specific policy provisions, more descriptive than binder terms. Thus while the action of the company in issuing a binder for more than 60 days may be prohibited, the prohibition is not meant to void the action as regards an insurance purchaser. The Commissioner of Banking and Insurance who is charged “with the execution of all laws relative to insurance * * *” by N. J. S. A. 17:1 — 1, has the power to impose sanctions other than voiding the policy upon the insurer’s noncompliance with N. J. S. A. 17: 36-5.16.

Having thus determined that the written binder was still in effect at the time of the fire, it is apparent that judgment should have been entered against Sussex Mutual on the basis of the written binder. On this view of the matter it is unnecessary to determine whether adequate evidence existed to submit the question of the oral binder to the jury. The question of the liability of Paggi on the Sussex Mutual claim has yet to be decided. Upon remand, judgment shall be entered against Sussex Mutual in favor of plaintiff as to liability and the issue of the amount of damages shall be retried; plaintiff’s action against Paggi and Paggi’s action against Sussex Mutual shall be dismissed; and the cross-claim of Sussex Mutual against Paggi shall be tried.

Reversed and remanded consistent with the foregoing.