Dominic Andalora v. R.D. Mechanical Corp.

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3724-14T4
DOMINIC ANDALORA and ELLA
ANDALORA,
APPROVED FOR PUBLICATION
Plaintiffs,
January 10, 2017
v.
APPELLATE DIVISION
R.D. MECHANICAL CORP., COMMERCE
BANK, COMMERCE BANCORP, INC.,
Defendants,
and
ICS BUILDERS, INC.,
Defendant/Third-Party
Plaintiff-Appellant,
v.
SWIFT CONSTRUCTION, LLC,
Third-Party Defendant-
Respondent.
———————————————————————————————————————
Argued October 11, 2016 - Decided January 10, 2017
Before Judges Reisner, Koblitz1 and Rothstadt.
1
With the parties' consent, Judge Koblitz participated in the
court's decision, without the need for further oral argument. R.
2:13-2(b).
On appeal from Superior Court of New Jersey,
Law Division, Essex County, Docket No. L-1432-
08.
Joseph D'Ambrosio argued the cause for
appellant (Ford Marrin Esposito Witmeyer &
Gleser, L.L.P., attorneys; Mr. D'Ambrosio and
Alfred L. D'Isernia, on the brief).
Susan A. Lawless argued the cause for
respondent (Purcell, Mulcahy, Hawkins,
Flanagan & Lawless, LLC, attorneys; Ms.
Lawless and Alyssa K. Weinstein, on the
brief).
The opinion of the court was delivered by
REISNER, P.J.A.D.
ICS Builders, Inc. (ICS) appeals from a March 20, 2015 order
dismissing its third-party complaint against Swift Construction,
LLC (Swift). In brief summary, after the underlying personal
injury lawsuit, which sparked this insurance coverage litigation,
was settled, ICS's insurer retained subrogation rights against
ICS's subcontractor. The insurer's right to assert the subrogation
claim did not turn on whether ICS suffered any actual damages by
virtue of the subcontractor's alleged breach of an indemnification
clause in the construction contract. ICS had no damages because
its insurer paid ICS's alleged share of the settlement.
Procedurally, the insurer should then have asserted its
subrogation claim in its own name as the real party in interest,
but it was error for the trial court to dismiss ICS's lawsuit
2 A-3724-14T4
against the subcontractor with prejudice. Since the insurer has
now filed a separate subrogation lawsuit in its own name, we modify
the March 20, 2015 order to provide for a dismissal of ICS's
lawsuit without prejudice.
I
This appeal arises from a 2006 construction accident. ICS
was the general contractor on the construction project. Its
subcontractors, R.D. Mechanical Corporation (R.D. Mechanical) and
Swift, each signed a contract containing an agreement to indemnify
ICS for losses arising from the subcontractor's work. The
relevant clause provided:
The Sub-Contractor shall indemnify and hold
ICS harmless from all liability, loss, cost
or damage, including attorneys' fees from
claims for injuries to persons or property
damage or death from any cause, while on or
near the project, of its employees or the
employees of its Sub-contractor . . . from any
cause occasioned in whole or in part by any
act or omission of the Sub-Contractor, its
representatives, employees, subcontractors or
suppliers, and whether or not it is contended
ICS contributed thereto in whole or in part,
or was responsible therefor by reason of non-
delegable duty . . . .
The clause provided that it was to be construed as broadly
as permitted under the "applicable law." In New Jersey, the outer
limit of such an indemnification clause is set by N.J.S.A. 2A:40A-
1, which prohibits indemnification of a party for its sole
3 A-3724-14T4
negligence. Thus ICS could not be entitled to indemnification if
an accident was due to ICS's sole negligence.
Mt. Hawley Insurance Company (Mt. Hawley) was ICS's primary
insurer. However, in accordance with the contracts with Swift
and R.D. Mechanical, ICS was also named as an additional insured
on each subcontractor's insurance policy. Swift was insured by
The Hartford Insurance Company of the Midwest (Hartford), and R.D.
Mechanical was insured by Liberty Mutual Insurance Company
(Liberty Mutual).
One of Swift's employees, Dominic Andalora, fell off a
scaffold and was severely injured. Due to the statutory workers'
compensation bar, N.J.S.A. 34:15-8, Andalora could not sue his
employer, Swift. However, he sued ICS and R.D Mechanical. ICS
filed a third-party action against Swift, to enforce ICS's
contractual right to have Swift (and, by extension, its insurer,
Hartford) defend and indemnify ICS.
Additionally, in two separate actions, Hartford sued Mt.
Hawley (L-9317-10), and ICS sued R.D.'s insurer, Liberty Mutual
(L-9585-10), asking the court to determine the responsibility of
the various insurers for providing ICS with coverage in the
Andalora litigation. Those two coverage actions were
consolidated. The issue in those cases were whether all three
insurers were obligated to provide primary coverage to ICS, or
4 A-3724-14T4
whether some of the coverage was only excess. In a September 30,
2011 opinion, memorialized in an October 4, 2011 order, the court
held that all three insurers provided primary coverage and all
three were "each one third liable to defend and indemnify ICS."
However, as discussed later, a subsequent opinion issued by the
same judge clarified that ruling.2
Andalora's personal injury lawsuit was settled for $5
million, with Swift's insurer (Hartford) contributing $3 million
and R.D.'s insurer (Liberty) paying $2 million. The settlement
of the underlying personal injury suit was placed on the record
on October 1, 2012. At that hearing, all of the insurers were
represented by counsel. Although ICS's attorney expressed some
concern over the implications for his client's third-party action
against Swift, none of the insurers, including ICS, argued that
the Andalora case should not be settled.
At the settlement hearing, R.D. Mechanical's insurer, Liberty
Mutual, made it clear that it was not "fronting" its $2 million
settlement contribution, i.e., it was not paying the money subject
to later litigation with the other insurers over R.D.'s
responsibility for the accident. It was paying the $2 million
2
The October 4, 2011 order was interlocutory because the judge
reserved for further decision an issue, unrelated to this appeal,
concerning Liberty Mutual's obligations.
5 A-3724-14T4
without recourse. However, Hartford's attorney represented that
Hartford was "fronting" $3 million toward the settlement. It
plainly appears from the transcript that ICS, Swift, and their
insurers understood that there was going to be continuing
litigation over which insurer (Hartford or Mt. Hawley) would
ultimately be responsible to pay the money.
In the separate coverage litigation, Hartford then filed a
motion to require Mt. Hawley to put up $1 million as its share of
the "fronting" money, and the court granted that motion on October
26, 2012. However, there was no expectation that Mt. Hawley was
going to wind up on the hook to pay $1 million toward the settlement
without first having its day in court on whether its insured was
liable for the accident. If ICS was not solely liable for the
accident, then it was entitled to indemnification from its
subcontractor, Swift, and Hartford would be required to pay the
entire settlement.3
The judge's October 26, 2012 opinion makes it quite clear
that the judge did not enter a final, appealable order requiring
Mt. Hawley to pay Hartford the money, without recourse in future
3
In their original filings on this appeal, neither party provided
us with the Law Division judge's statements of reasons for either
of his orders requiring Mt. Hawley to pay the $1 million. We
directed the parties to provide us with those opinions, which were
issued on September 30, 2011 and October 26, 2012.
6 A-3724-14T4
litigation. Rather, because ICS was entitled to coverage from
both insurers, the judge required Mt. Hawley to put up a share of
the settlement money, pending the outcome of the ICS-Swift
litigation. Acknowledging that Hartford had paid $3 million to
settle Andalora's claims against ICS, the judge found equitable
reasons to require Mt. Hawley to join in the "fronting"
arrangement, but also acknowledged that this arrangement was not
the final determination as to which insurer ultimately would have
to bear the settlement costs:
The court does not agree with Mt. Hawley that
the Hartford's demand is an attempt to
'abrogate' its settlement. . . . It does agree
with Mt. Hawley that the Hartford's demand is
arguably 'premature', but there are equitable
considerations both ways on that issue.
Obviously, either the Hartford or Mt. Hawley
could be paying too much, too soon at this
time (depending on the final result of the
case). In that situation, the court concludes
that forcing the Hartford to pay 100% of the
amount at issue up front when the Hartford
helped all defendants by settling, would be
unfair.
Mt. Hawley paid Hartford the $1 million but its insured, ICS,
delayed in pursuing the third-party action against Swift.
Eventually, ICS asked the Law Division judge to schedule a trial
of its third-party indemnification action against Swift, and the
judge scheduled the trial. A couple of months before the trial
date, Swift moved for summary judgment on the theory that ICS had
7 A-3724-14T4
no damages because Swift's insured, Hartford, had provided ICS
with a defense in the personal injury suit, and both Hartford and
ICS's insurer, Mt. Hawley, had paid to settle that lawsuit. ICS
had paid nothing. The Law Division judge agreed and granted the
motion in a March 20, 2015 order.
A week later, on March 27, 2015, Mt. Hawley, acting as
subrogee to ICS's indemnification claims, filed a federal lawsuit
against Swift, seeking to recoup the $1 million which Mt. Hawley
was ordered to contribute to the personal injury settlement, plus
additional legal costs incurred.
II
We review the Law Division's legal conclusions, and its
interpretations of the pertinent insurance contracts, de novo.
Simonetti v. Selective Ins. Co., 372 N.J. Super. 421, 428 (App.
Div. 2004). As appears from the discussion in part I of this
opinion, the real dispute in this case is between Mt. Hawley and
Hartford, over their respective obligations to contribute to the
settlement of the Andalora lawsuit. As previously discussed,
Hartford agreed to "front" the sum of $3 million toward the
settlement. However, it then sought a contribution from Mt.
Hawley. For reasons he characterized as "equitable," the Law
Division judge ordered Mt. Hawley to pay Hartford $1 million toward
the "fronting" of the settlement amount, pending the outcome of
8 A-3724-14T4
ICS's third-party action against Swift for indemnification.
However, the same Law Division judge then dismissed ICS's lawsuit
against Swift with prejudice, on the theory that ICS had incurred
no damages. We conclude that the Law Division judge's with-
prejudice dismissal elevated form over substance and constituted
a miscarriage of justice.
It is correct that ICS incurred no damages, but Mt. Hawley
incurred a $1 million expense on ICS's behalf.4 We conclude that,
once Mt. Hawley paid the $1 million toward the Andalora settlement,
ICS's indemnification claim should have been pursued by Mt. Hawley
as subrogee. Mt. Hawley's rights in pursuing that claim would be
controlled by the terms of the indemnification clause in the
contract between ICS and Swift.
As ICS's insurer, Mt. Hawley is subrogated to ICS's right to
claim indemnification from Swift for damages Mt. Hawley paid to
settle the Andalora case.
Subrogation is a device of equity to compel
the ultimate discharge of an obligation by the
one who in good conscience ought to pay it.
It is a right of ancient origin, having been
imported from the civil law to serve the
interests of essential justice between the
parties. It is most often brought into play
when an insurer who has indemnified an insured
4
ICS's arguments concerning its alleged unliquidated damages are
not supported by the record. In the trial court, ICS produced no
legally competent evidence concerning the impact of Andalora's
claim on its future insurance rating and premiums.
9 A-3724-14T4
for damage or loss is subrogated to any rights
that the insured may have against a third
party, who is also liable for the damage or
loss. In such a case it is only equitable and
just that the insurer should be reimbursed for
his payment to the insured, because otherwise
either the insured would be unjustly enriched
by virtue of a recovery from both the insurer
and the third party, or in the absence of such
double recovery by the insured the third party
would go free despite the fact that he has the
legal obligation in connection with the loss
or damage.
[Standard Acc. Ins. Co. v. Pellecchia, 15 N.J.
162, 171 (1954) (citations omitted).]
Mt. Hawley has the right to assert its subrogation claim with
or without ICS's consent.
The right does not arise out of contract but
rather exists without the consent of the
insured, although of course the parties may
by agreement waive or limit the right. The
subrogee in effect steps into the shoes of the
insured and can recover only if the insured
likewise could have recovered.
[Id. at 172 (citations omitted).]
In a subrogation claim based on contract, "[t]he insurer
steps into the shoes of the insured and can through subrogation
enforce the contractual obligation of the third party." Id. at
182. In this case, Mt. Hawley has the right to step into the
"shoes" of ICS, in order to enforce ICS's contractual right to
indemnification from Swift. The indemnification clause required
Swift to indemnify ICS against any damage claim filed against ICS
10 A-3724-14T4
by a Swift employee working on the project, and by its terms the
clause was to be construed as broadly as allowed by law. The
scope of the clause is not at issue on this appeal, however, under
New Jersey law, indemnification cannot be required if ICS was
solely negligent for Andalora's injuries. See N.J.S.A. 2A:40A-1.
Therefore, at a minimum, determining ICS's right to
indemnification, and Mt. Hawley's corresponding subrogation rights
against Swift, would require a determination of liability for
Andalora's accident. That determination would be required
regardless of the settlement of the Andalora lawsuit. The only
issue is a procedural one - whether ICS should pursue the lawsuit
in its own name, or whether Mt. Hawley should pursue it.
In pursuing the lawsuit, ICS clearly acted as a surrogate for
its insurer, which at this point is the real party in interest and
is seeking reimbursement from Swift for Mt. Hawley's $1 million
contribution to the Andalora settlement. Peeling the legal onion
further, the real parties in interest in this case are Mt. Hawley,
which solely insured ICS, and Hartford, which insured Swift as its
primary insured and ICS as an additional insured. If Swift is
required to indemnify ICS/Mt. Hawley for the $1 million, Hartford
will pay the judgment.
Ironically, these same two insurers have had this dispute
before. Toward the end of its brief, Mt. Hawley cites a case very
11 A-3724-14T4
similar to this one, in which Mt. Hawley and Hartford litigated
the issue of which of them was ultimately responsible for paying
the settlement of a personal injury lawsuit. Mt. Hawley won that
case, and Hartford's attempt to distinguish the case here is
unpersuasive.
We quote the court's description of the case in full:
Pursuant to a construction contract, a
subcontractor agreed to indemnify the general
contractor for claims and liabilities arising
out of the subcontractor's performance and to
obtain a commercial general liability (CGL)
policy listing the subcontractor as the named
insured and the general contractor as an
additional insured. The general contractor
also had its own separate CGL policy,
designating it as the named insured.
While the construction was in progress, an
employee of the subcontractor was injured and
filed suit against the general contractor.
The subcontractor's insurer provided a defense
and settled the case, using its own funds.
The subcontractor's insurer then filed this
action against the general contractor's own
insurer, seeking payment of one-half of the
defense and settlement expenses. The general
contractor's own insurer asserted it was not
liable for contribution because, under the
indemnity provision in the construction
contract, the general contractor was not
liable to the subcontractor in any amount. On
cross-motions for summary judgment, the trial
court agreed with the subcontractor's insurer
and entered judgment against the general
contractor's own insurer.
We conclude that, just as the general
contractor is not liable to the subcontractor
12 A-3724-14T4
under the indemnity provision, so the general
contractor's own insurer is not liable to the
subcontractor's insurer. To hold otherwise
would negate the indemnity provision in the
construction contract. We therefore reverse.
[Hartford Cas. Ins. Co. v. Mt. Hawley Ins.
Co., 123 Cal. App. 4th 278, 281-82 (Cal. Ct.
App 2004).
In reaching that conclusion the court noted that "[w]here,
as here, the parties have expressly contracted with respect to the
duty to indemnify, the extent of that duty must be determined from
the contract and not by reliance on the independent doctrine of
equitable indemnity."5 We find that reasoning persuasive.
In the contract with Swift, ICS contracted for protection
against the litigation expense and possible damages associated
with lawsuits that might be filed against ICS by Swift's employees.
Because New Jersey law precludes indemnification for a party's
sole negligence, the agreement meant that Swift's insurer
(Hartford), rather than ICS's insurer (Mt. Hawley), would bear the
full cost of such litigation and any damages awarded, unless ICS
turned out to be solely liable for the Swift employee's injuries.
Precluding both ICS and Mt. Hawley (as subrogee) from enforcing
5
The doctrine of equitable indemnity governs the obligations of
multiple insurers that all insure the same entity against the same
risk during the same coverage period. Id. at 290.
13 A-3724-14T4
the agreement would strip ICS of the benefit of its bargain with
Swift.
Likewise, requiring Mt. Hawley to reimburse Hartford $1
million, without further recourse, after Hartford unilaterally
paid the Andalora settlement, would unfairly deny Mt. Hawley the
right to litigate the underlying issue of its insured's (and hence,
Mt. Hawley's) legal liability to pay anything toward the
settlement.6 As a matter of judicial efficiency, once the Andalora
case was settled, Hartford's reimbursement claim against Mt.
Hawley should have been consolidated with ICS's lawsuit against
Swift, so that the issue as to which insurer should ultimately pay
the settlement could have been decided in one lawsuit. However,
it was not; instead the Law Division judge issued what amounted
to a provisional ruling requiring Mt. Hawley to advance Hartford
$1 million, subject to the outcome of the ICS-Swift lawsuit.
Further, as a procedural matter, once Mt. Hawley actually
paid Hartford the $1 million portion of the settlement, Mt. Hawley
became the real party in interest in the ICS-Swift litigation, and
should have substituted in as plaintiff and promptly pursued its
6
Hartford's reliance on Estate of Spencer v. Gavin, 400 N.J.
Super. 220, 256 (App. Div.), certif. denied, 196 N.J. 346 (2008),
and similar cases concerning settling defendants, is misplaced;
those cases do not concern parties having an underlying contract
requiring one party to defend and indemnify the other.
14 A-3724-14T4
claim. R. 4:26-1. That did not happen, either. However, after
the ICS lawsuit was dismissed, Mt. Hawley filed its own lawsuit
against Swift in federal court. We conclude that the interests
of judicial efficiency are best served by allowing Mt. Hawley to
pursue that lawsuit to conclusion, rather than by allowing ICS to
re-open this case in its capacity as a stand-in for Mt. Hawley.7
That conclusion requires that the order in this case be entered
without prejudice, and we remand for the limited purpose of
entering an amended order.
Nothing in our opinion would preclude Mt. Hawley and Hartford,
the two insurers whose financial interests are at issue here, from
agreeing to both litigate the issue directly as parties. See
e.g., Fed. Ins. Co. v. Gulf Ins. Co., 162 S.W.3d 160, 162 (Mo. Ct.
App. 2005) (suit between insurers over contribution to a personal
injury settlement); Hartford v. Mt. Hawley, supra. Nor would our
opinion preclude the two insurers from agreeing to binding
arbitration of their dispute over whether Mt. Hawley is entitled
7
In fact, ICS's brief represents to us that if ICS recovers any
damages from Swift in this case, it will hold those funds "in
trust" for Mt. Hawley.
15 A-3724-14T4
to repayment from Hartford of the $1 million Mt. Hawley was ordered
to front toward the personal injury settlement.8
Affirmed in part, remanded in part. We do not retain
jurisdiction.
8
To the extent not addressed, the parties' arguments are without
sufficient merit to warrant discussion in a written opinion. R.
2:11-3(e)(1)(E).
16 A-3724-14T4