National Premium Budget Plan Corp. v. National Fire Ins. Co. of Hartford, L--11133

Citation97 N.J.Super. 149,234 A.2d 683
Decision Date13 September 1967
Docket NumberNo. L--11133,L--11133
PartiesNATIONAL PREMIUM BUDGET PLAN CORPORATION, a corporation of the State of Michigan, Plaintiff, v. NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, a corporation of the State of Connecticut, Louis J. Martone, Edwin M. Rothberg and Price Agency, a partnership composed of Louis J. Martone and Edwin M. Rothberg as co-partners, Defendants.
CourtSuperior Court of New Jersey

Page 149

97 N.J.Super. 149
234 A.2d 683
NATIONAL PREMIUM BUDGET PLAN CORPORATION, a corporation of
the State of Michigan, Plaintiff,
v.
NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, a corporation
of the State of Connecticut, Louis J. Martone, Edwin M.
Rothberg and Price Agency, a partnership composed of Louis
J. Martone and Edwin M. Rothberg as co-partners, Defendants.
No. L--11133.
Superior Court of New Jersey
Law Division.
Sept. 13, 1967.

[234 A.2d 686]

Page 154

Verling C. Enteman, Washington, and Andrew S. Polito, Newark, for plaintiff.

Gordon L. Kent, Newark, for defendant, National Fire Ins. Co. of Hartford (Budd, Larner, Kent & Gross, Newark, attorneys).

Victor R. King, Plainfield, for defendant, Edwin M. Rothberg.

OPINION

STAMLER, J.S.C.

Is an insurance company liable to a finance company under theories of fraud and deceit or negligence for the acts of an insurance agent who submits fraudulent loan applications falsely evidencing the issuance of insurance policies and who thereafter forges verifications of their existance upon which the finance company relies when making loans to fictitious assureds, the proceeds being then converted by the insurance agent to his own use?

In considering similar schemes with minor variations Louisiana and Florida courts have answered in the affirmative. The New York courts and the Court of Appeals for the 8th Circuit deny recovery. New Jersey courts are faced with this question for the first time in the case Sub judice.

Subsidiary questions as to defendants other than the insurance company are readily answered when the basic liability as above set forth is determined.

Page 155

Charging fraud and deceit, or in the alternative negligence, a complaint containing 42 counts was filed by plaintiff National Premium Budget Plan Corporation (hereinafter National Premium), a corporation of the State of Michigan. Sifted to eliminate the excess verbiage in the 76-page complaint, there remain ten transactions upon which recovery is sought amounting to a claimed loss by plaintiff of $177,758.07 and interest if the 'benefit of the bargain' measure is applied, or $156,967.07 and interest if calculated by 'out-of-pocket' standards. Defendant National Fire Insurance Company of Hartford (hereinafter National Fire) is charged with fraud and deceit or with negligence for the full amount on all ten transactions. Defendant Edwin M. Rothberg, individually and as an alleged partner of Price Agency, stands accused only of fraud and deceit in two of the ten transactions, with a claimed loss to plaintiff of $54,114.30. From defendant Louis J. Martone, charged in fraud and deceit, full recovery is sought on each of the ten transactions. Martone pleaded guilty to criminal acts arising out of a number of the transactions, is presently confined in New Jersey State Prison and has not filed any answering pleading. The other defendants deny liability. Plaintiff's demand for a jury trial was waived.

Installment buying has become a way of life for the consuming public. In some cases such transactions are made directly with the seller of a commodity or service and the seller remains the lender throughout. In others money is borrowed directly from a bank or finance company, the borrower using the proceeds of the loan to pay the seller in full and repaying the loan in periodic installments. In such case the seller[234 A.2d 687] has nothing more to do with the transaction. Most frequently a third method is utilized: the seller of the commodity or service accepts evidence of the debt from the purchaser and then sells and assigns the documents to a lending institution, the seller remaining secondarily liable in most transactions. This latter method was used in the case at bar. The seller was insurance agent Martone; the

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purchaser-borrower the assured; the finance company plaintiff National Premium; the commodities were insurance policies of defendant National Fire.

Briefly defined, insurance premium financing as a form of installment lending designed to permit an insured to space the payment of his insurance premium over the major portion of the life of the policy contract. Its principal benefit is to eliminate the advance cash outlay which frequently occurs at an inopportune or financially stringent time. An additional benefit lies in the ability of the assured to make a single payment to the insurance company for multiple years of coverage with substantial reduction in premium charge. For example, the purchase of a five-year policy requires only four times the annual premium; a three-year policy costs but 2 1/2 times.

The insurance company relies preponderantly upon insurance agents or brokers for the business it writes. The insurance premium finance company is dependent exclusively upon the insurance agent or broker for its source of customers. In initiating a loan transaction it does not deal directly with insurance companies or insureds. This is true not only on new business but also on repeat business. In the greater percentage of legitimate transactions, the only direct communications between the insured and the finance company are late notices or notices of payments overdue sent by the finance company to the insured, copy to the agent (but not the insurance company), and payments made by the insured directly to the finance company. The finance company also sends a 'welcome letter' and a coupon payment book directly to the insured at the beginning of each transaction.

The insurance agent is the salesman for the finance company and on behalf of the insured applies for the loan directly to the finance company. (One may be critical of the use of the word 'loan' instead of sale,' but for reasons hereinafter set forth the sale is a fiction--the 'sale' is clearly a loan approved by the finance company in advance

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of the initial operation.) After the loan is made subsequent contact between finance company and insurance agent is limited to copies of late notices, but the agent remains liable to the finance company that has received the assignment of the contract and debt with recourse or repurchase. In the event of default the finance company makes a demand upon both insurance agent and insurance company for its collateral, the return of the unearned premium.

Some lending institutions operate in a broafd spectum of financing, relying for collateral on anything from automobiles to zithers. Others specialize. Plaintiff was and is a specialist in the field of 'Insurance Premium Financing.'

In 1939 in Detroit, Michigan, Green Investment Company was formed by two brothers, Leonard and Robert Green. It operated as a finance company in diversified fields, mostly automobile. In 1958 Green Investment changed its name to National Premium Budget Plan Corporation and restricted its operations to insurance premium financing.

From a very small office in Detroit, with the brothers Green as the only principal officers and about five in clerical staff, a very substantial dollar business was conducted. National Premium placed advertisements in periodicals which would come to the attention of insurance agents and brokers inviting them to make use of its speedy service in financing premiums for insureds on an installment budget plan. Although National Premium remained in [234 A.2d 688] small quarters, its business grew to where nationally it was second only to AFCO Incorporated, a New York Company.

In legitimate transactions the operation of the 'budget plan' pleased everyone: (1) the insured avoided an advance cash payment or secured a longer term policy at a reduced rate; (2) the insurance agent or broker sold a policy and in most cases a longer term policy, the entire premium was paid at once and his commission was immediately available; (3) the insurance company received its net premium on a policy for a longer term; and (4) the finance company, fully secured by the insured's promise to pay the installments

Page 158

as they became due, supported by the secondary liability or guaranty of the agent or broker and the 'return premium' collateral called for by the 'premium budget plan' contract, put its money out at interest rates called 'service charges' averaging 14.78%.

Prior to May 1957 defendant Martone, as the Louis J. Martone Agency, whose office was located at 516 Park Avenue, Plainfield, New Jersey, was acting as insurance agent for a number of companies. On May 6, 1957 he entered into an insurance agency agreement with National Fire. This agreement granted authority to Martone to receive and accept proposals for contracts of insurance covering risks located in Plainfield and victinity, limited to such certain classes of risks as National Fire would authorize from time to time; to collect, receive and receipt for premiums 'on insurance tendered by the Agent to and accepted by the Company,' and to retain commissions out of premiums collected.

The principal office of National Fire was located in Hartford, Connecticut. In a number of cities National Fire had service offices the primary functions of which were to supply appointed insurance agents with stationery and forms, assist them with regard to risks, suggest methods of selling more insurance, and advise on how to assist the prospective assured, including where appropriate a discussion of premium financing. A representative of National Fire told Martone that many banks engaged in such financing, as did AFCO, the largest finance company in the United States specializing in this field. Thereafter Martone placed financing for his clients through AFCO and Passaic-Clifton National Bank. Such financing included but was not restricted to National Fire policies.

In 1959 Martone came across the advertisement of National Premium. The unusual and interesting feature was the emphasis on speed in remitting--seven to ten days. AFCO had required longer periods, sometimes up to 30 days, before it would remit on a financing request. The

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