City of Asbury Park v. Star Ins. Co.
| Citation | 242 N.J. 596,233 A.3d 400 |
| Decision Date | 29 June 2020 |
| Docket Number | A-20 September Term 2019,083371 |
| Parties | CITY OF ASBURY PARK, Plaintiff-Appellant, v. STAR INSURANCE COMPANY, Defendant-Respondent. |
| Court | United States State Supreme Court (New Jersey) |
Denise M. DePekary argued the cause on behalf of appellant (Weber Gallagher Simpson Stapleton Fires & Newby, attorneys; Denise M. DePekary, Andrew L. Indeck, and Kenneth E. Sharperson, Bedminster, on the briefs).
Thomas E. Hastings argued the cause on behalf of respondent (Dilworth Paxson, attorneys; Thomas E. Hastings, of counsel and on the brief).
In this case, we address a question of law certified by the United States Court of Appeals for the Third Circuit arising from a dispute between a workers' compensation insurance carrier and its insured, a public employer.
Both plaintiff, the City of Asbury Park (the City), and its workers' compensation carrier, defendant Star Insurance Company (Star), seek reimbursement of monies paid toward an injured firefighter's workers' compensation claim from funds he recouped through settlement with a third-party tortfeasor. The funds available for reimbursement will not cover the full amount paid collectively by the City and Star. The question is whether, under the equitable "made-whole" or "make-whole" doctrine, the City has priority to recover what it paid before Star may recover any of its losses.
Here, that question turns on the interplay between the made-whole doctrine and a particular provision of the contract between Star and the City under which the City "shall retain, as a self-insured retention," a per-occurrence deductible for workers' compensation claims. By virtue of that self-insured retention, the City bears what is known as the "first-dollar risk" -- making it responsible for the first $400,000 of any workers' compensation claim, with Star bearing responsibility for sums exceeding that amount.
The certified question is:
Whether, under equitable principles of New Jersey law, the made-whole doctrine applies to first-dollar risk that is allocated to an insured under an insurance policy, i.e., a self-insured retention or deductible.
We answer the certified question in the negative.
From February 2010 to February 2011, the City held an insurance policy (the Policy) with Star that provided coverage for workers' compensation claims against the City pursuant to the Workers' Compensation Act, N.J.S.A. 34:15-1 to -146. The Policy included a "self-insured limit retention for workers' compensation" losses against the City in the amount of $400,000 per occurrence. In turn, Star agreed to indemnify the City for its workers' compensation losses that exceeded the self-insured retention. In the event of such a loss, Star also agreed to indemnify the City for claim expenses, such as investigation and legal expenses, "in the proportion that the insurer's portion of the loss bears to the total amount of such final award, verdict or judgment against the insured."
The Policy further contained a subrogation provision which provided:
In the event of any payment under this insurance contract, the insurer shall be subrogated to all of the insured's rights of recovery therefore against any person or organization, and the insured and the service company shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. No person or organization shall do anything to prejudice such a right.
In January 2011, John Fazio, an employee of the Asbury Park Fire Department, suffered life-threatening injuries while fighting a fire. Fazio filed a workers' compensation claim against the City, which in turn paid Fazio $400,000, the full amount of its self-insured retention limit; Star paid $2,607,227.50, the amount exceeding the City's self-insured retention limit. Pursuant to N.J.S.A 34:15-40, the payments by the City and Star created a workers' compensation lien in the amount of $3,007,227.50, entitling the City and Star to reimbursement on any recovery by Fazio against a third party.
On December 28, 2012, Fazio filed suit against a third party for the injuries he suffered in the 2011 fire. Fazio and the third party reached a settlement agreement for $2,700,000. Subsequently, Fazio, the City, and Star agreed that $935,968.25 of the settlement proceeds would be set aside in partial satisfaction of all liens held by the City and Star. The $935,968.25 is being held in escrow by the City's workers' compensation defense counsel, who agreed to distribute the funds only as directed by the City and Star, or court order.
Star issued a demand to recover the entire $935,968.25 held in escrow, contending that pursuant to the Policy, it was entitled to be reimbursed in full before the City could recover amounts paid on the self-insured retention. The City asserted that under the made-whole doctrine, it was entitled to be reimbursed in full before Star could assert its subrogation right. Star responded that the made-whole doctrine does not apply to self-insured retentions, as application of that doctrine in this case would unjustly enrich the City.
The City filed a declaratory judgment action against Star in Superior Court asserting that it "has subrogation rights arising out of its payment of its self-insured retention of $400,000.00 and is entitled to be reimbursed out of the" escrow account before Star may recover anything. Star removed the matter to the United States District Court for the District of New Jersey. The district court denied the City's motion to remand the case to state court. Star then filed for a declaratory judgment claiming that it is "entitled to be reimbursed in full before any reimbursement of the City's self-insured retention."
Both parties moved for summary judgment pursuant to Fed. R. Civ. P. 56. The district court granted Star's motion and denied the City's motion. Relying on the plain language of the Policy, the court found that "the City has no insurance coverage for the first $400,000.00," and the parties expressly agreed under the subrogation provision that "Star has the right to substitute itself for the City and is subrogated to all of the City's rights of recovery."
Moreover, the court rejected the City's contention that the made-whole doctrine applies to this case. First, the court reasoned that an insured's right to be made whole before the insurer can recover anything from a third-party tortfeasor can be altered by the insurance contract. Here, the court found that the Policy's subrogation provision altered the City's right to be made whole. Second, the court determined that the made-whole doctrine does not apply to first-dollar coverage such as deductibles or self-insured retentions, because to hold otherwise "would convert [the Policy] to an insurance policy without a deductible," allowing the City "to gain an unbargained-for windfall at the expense of [Star]."
The City appealed the district court's judgment. After briefing, the Third Circuit determined that the appeal raised an important and unresolved matter of New Jersey law. Pursuant to Rule 2:12A-3, the Third Circuit certified its question to this Court. We accepted the question as posed by the Third Circuit. 240 N.J. 45, 219 A.3d 572 (2019).
The City primarily relies on Providence Washington Insurance Co. v. Hogges, 67 N.J. Super. 475, 171 A.2d 120 (App. Div. 1961), in support of its contention that in New Jersey, the insured is to be "made whole" before an insurer may recover proceeds from a third-party tortfeasor, even if the insured's only remaining loss is from the policy's deductible or self-insured retention. The City points out that in Hogges, the policy at issue contained a subrogation provision that is essentially identical to the subrogation provision in this case. (discussing Hogges, 67 N.J. Super. at 476, 171 A.2d 120 ).
The City stresses that the Appellate Division in Hogges labeled the subrogation provision as a "general clause" and determined that, under such a clause, (quoting Hogges, 67 N.J. Super. at 482, 171 A.2d 120 ). Thus, the City contends that, in this case, the subrogation provision in the Policy does not contain "express terms" that run contrary to its rights as an insured under the made-whole doctrine.
Further, the City points out that in Hogges the insured sued a third-party tortfeasor in part for $900 in property damage caused to his vehicle without notifying his carrier, which paid for this loss minus a $50 deductible. (discussing Hogges, 67 N.J. Super. at 476-78, 171 A.2d 120 ). In finding that the insured did not violate the subrogation provision by filing the third-party suit and alleging property damage, the Appellate Division determined that the insured "still had a prior right to $50 of any sum recovered for property damage from the tortfeasors, and to any surplus over $900," while the carrier would have been indemnified up to the $850 paid on the policy. (quoting Hogges, 67 N.J. Super. at 479, 171 A.2d 120 ). On that basis, the City contends that the Appellate Division endorsed the made-whole doctrine and "required reimbursement of an insured's insurance deductible prior to the insurer receiving any monies by way of subrogation." The City asserts that this result was "cited favorably" by this Court in Culver v. Insurance Co. of North America, 115 N.J. 451, 458, 559 A.2d 400 (1989), in which we stated that the Hogges court "allowed the insured to be paid its $50 deductible from the third party award before the insurer could be reimbursed for its insurance payment."
Star contends that applying the made-whole doctrine to deductibles or self-insured retentions would circumvent "the bargain made by the parties" of an insurance...
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