Reasonable Expectations Must Be Reasonable
Although the common law in the United States continues to acknowledge that the covenant of good faith and fair dealing devolves equally on the insured as it does on the insurer, people continue to refuse to act fairly and in good faith to their insurers.
In Rob K. Construction & Company, Plaintiff–Appellant, v. Rutgers Casualty Insurance Company, and American European Insurance Group, Inc., Merchants Insurance Group, Rutgers Enhanced Insurance Company, and United International Insurance Company, Superior Court of New Jersey, Appellate Division, Merchants Insurance Group, Rutgers Enhanced Insurance Company, and United International Insurance Company (6/27/17) the appellate division was faced with a claim by an insured who developed what he claimed to be his “reasonable expectations of coverage” which expectations were different than the clear and unambiguous wording of the policy.
Plaintiff Rob K. Construction & Co., a general contractor, appealed from a trial judge’s involuntary dismissal of its complaint at the end of plaintiff’s case. Plaintiff’s complaint alleged that defendant American European Insurance Group (AEIG), through its related entity defendant Rutgers Casualty Insurance Company (Rutgers), wrongfully denied coverage for a claim made by an employee of one of plaintiff’s subcontractors.
The claim arose when the employee was injured at a job site that was under plaintiff’s supervision. Plaintiff alleged the claim was covered by the commercial general liability policy defendants issued to plaintiff. The trial judge, relying upon the policy’s express language and representations made by plaintiff in its application for insurance, determined that defendants properly denied coverage.
Plaintiff was formed in 2004 by its principal, Robert Krakowiak, an assistant portfolio manager at a financial institution, to perform maintenance on portfolio properties held by a coworker. During the ensuing years, the nature of plaintiff’s business expanded to include home renovations and, ultimately, new construction. Beginning in 2008, plaintiff started to build homes in New York “worth more than $500,000.” Plaintiff served as the general contractor for these new construction projects, working with clients to develop the architectural plan and hiring subcontractors to perform the work.
Plaintiff applied for general liability insurance in early 2006 and falsely represented to its agent and defendants that plaintiff had one employee, did not hire subcontractors, and only performed remodeling work as compared to structural work. Krakowiak understood that this information impacted the type of coverage plaintiff required. Based on that information, Rutgers issued a general liability policy to plaintiff. The premium for the policy at the time of the subject claim was $1,352.00. According to a representative from AEIG, had plaintiff purchased insurance coverage for general contractors the premium would be “at least tenfold” more expensive.
Plaintiff renewed the policy from year to year without ever informing defendants of any change in plaintiff’s operations. For example, on March 4, 2009, plaintiff submitted a policy holder report to defendants that stated plaintiff was engaged in interior remodeling, with annual sales of $30,000, which Krakowiak acknowledged was “a grossly under-estimated statement of … net sales.”
The policy that defendants issued each year contained an exclusion entitled “Exclusion of Injury to Employees, Contractors and Employees of Contractors.” The exclusion provided: “This insurance does not apply to:¶ ….¶ II. ‘bodily injury’; to any contractor or any ‘employee’ of any contractor arising out of or in the course of the rendering or performing services of any kind or nature whatsoever by such contractor or ‘employee’ of such contractor for which any insured may become liable in any capacity[.]”
Krakowiak testified at trial that he understood a claim made by an injured employee of a subcontractor would be excluded from coverage, although he admitted that he did not read the policy “carefully enough.”
The underlying claim occurred in June 2011, when an employee of plaintiff’s plumbing sub-contractor was allegedly injured at one of plaintiff’s job sites. The injured worker sued plaintiff in New York. Plaintiff gave notice of the claim to defendants, who denied coverage, citing, among other bases, the exclusion for employees of contractors cited above. Defendants’ denial of coverage resulted in plaintiff suing the insurer.
Plaintiff’s complaint was tried before a jury. At the end of the plaintiff’s case, defendants moved for dismissal. Plaintiff opposed the motion, arguing that the evidence established that it had a reasonable expectation of coverage.
TRIAL JUDGE RULING
The trial judge granted the motion and placed his reasons on the record. The judge rejected plaintiff’s contention that it had a reasonable expectation of coverage, as Krakowiak did not read the policy, nor offer any proof that “anything in the policy caused him to believe he had coverage for bodily injury claims made by [a subcontractor’s] employees at the work site,” or that defendants had led him to believe as much. The judge also pointed out that plaintiff never advised defendants that it was operating a business that included the participation of subcontractors and their employees. Rather, the application supported the conclusion that Krakowiak “was [running] a one man operation.” Based on the applications that the plaintiff sent in where it denied having any subcontractors and stated its gross sales were $30,000, there’s nothing inconsistent. There’s nothing even in the application that would entitle the plaintiff to say its reasonable expectations were not fulfilled by the exclusion. The exclusion was consistent with its own application.
The judge concluded: “Simply put, there was no coverage for injuries sustained by a worker on the job site. …. [Therefore], there is nothing to go to a jury. So the plaintiff’s case is dismissed in its entirety.”
On appeal, plaintiff contends that the judge misapplied the standard for consideration of a motion filed pursuant to Rule 4:37–2(b) and that he failed to strictly construe the disputed exclusion against defendants.
A motion for involuntary dismissal is premised on the ground that upon the facts and upon the law the non-moving party has shown no right to relief.” If a court, accepting as true all the evidence which supports the position of the party defending against the motion and according him the benefit of all inferences which can reasonably and legitimately be deduced therefrom, finds that reasonable minds could differ, then the motion must be denied.’
Applying the standards of insurance policy interpretation, the appellate court found that plaintiff’s arguments were without merit to warrant discussion in a written opinion. It simply affirmed the trial judge for the reasons expressed by the trial judge in his oral decision.
Even applying the liberal principles favoring the insured that guided the appellate court’s review of coverage interpretation disputes. Coverage provisions are to be read broadly, exclusions are to be read narrowly, potential ambiguities must be resolved in favor of the insured, and the policy is to be read in a manner that fulfills the insured’s reasonable expectations.
Plaintiff offered no evidence that the policy’s exclusion was contrary to its reasonable expectations. In any event, the exclusion was specific, plain, clear, prominent, and not contrary to public policy.
The insured lied when he applied for the insurance and continued to lie about his business at each renewal. He did not read the policy. He had no basis for his claim of reasonable expectations other than the fact that he was sued for a situation where there was no intent to cover the risk. The lie was sufficient, under the equitable remedy of rescission to defeat the claim. The trial judge should have reported the insured to the local prosecutor since he attempted insurance fraud by suing the insurer.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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