SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3443-01T3
FIREMAN'S FUND INSURANCE
COMPANY and FIREMAN'S FUND
INDEMNITY CORPORATION,
Plaintiffs,
v.
JOHN C. IMBESI, AMERICAN
MOTORISTS INSURANCE COMPANY,
LUMBERMENS MUTUAL CASUALTY
COMPANY, NORTH AMERICAN BEVERAGE
COMPANY, CLICK CORPORATION OF
AMERICA, INC.,
Defendants-Respondents,
SALLY JAMES,See footnote 11
Defendant-Appellant/
Cross-Respondent,
HARLEYSVILLE MUTUAL INSURANCE
COMPANY,
Defendant-Respondent/
Cross-Appellant.
..............................
Argued: May 7, 2003 - Decided: July 1, 2003
Before Judges King, Wefing and Lisa.
On appeal from the Superior Court of New
Jersey, Law Division, Ocean County, OCN-L-
3798-98.
Mark S. Stewart argued the cause for
appellant/cross-respondent James (Ballard
Spahr Andrews & Ingersoll, attorneys; Arthur
Makadon, admitted pro hac vice, and Anne C.
Gillespie, admitted pro hac vice, of counsel;
Dean C. Waldt and Mr. Stewart, on the brief).
Joseph A. Venuti (Swartz, Campbell &
Detweiler) and Lance J. Kalik (Riker, Danzig,
Scherer, Hyland & Perretti) argued the cause
for respondent/cross-appellant Harleysville
Mutual Insurance Company (Mr. Venuti and Mr.
Kalik, on the brief).
The opinion of the court was delivered by
KING, P.J.A.D.
This is an insurance coverage dispute involving the employers'
liability aspect of workers' compensation and employers' liability
policies. In the underlying litigation, Sally James sued her
former employers, Click Corporation of America, Inc. (Click) and
North American Beverage Company (North American), and their
principal and her former supervisor, John C. Imbesi (Imbesi).
(None of the parties have sought to pursue this litigation
anonymously. In view of the subject matter, we use a pseudonym,
Sally James, for the claimant-appellant only.) She alleged, among
other things, sexual harassment in violation of the New Jersey Law
Against Discrimination (LAD), N.J.S.A. 10:5-12. She claimed both
compensatory and punitive damages. The case settled before trial.
Under the terms of the settlement, a sum of money, $1 million,
was paid and a consent judgment was entered in James's favor on her
LAD claims, and her claims for negligent transmission of venereal
herpes and negligent infliction of emotional distress. The
remaining claims were dismissed with prejudice. The entire
settlement, $4.15 million, ostensibly represented James's
compensatory damages. No portion was attributed to punitive
damages.
Imbesi, Click, and North American paid James $700,000, and
assigned to her their rights to prosecute and recover from the non-
settling insurers. An additional $300,000 was paid by American
Motorists Insurance Company (American Motorists), which had
provided Click and North American with commercial general liability
and excess liability insurance, and Lumbermens Mutual Casualty
Insurance Company (Lumbermens), which had provided Click and North
American with workers' compensation and employers' liability
insurance during fourteen months of James's term of employment.
American Motorists and Lumbermens are part of the Kemper group of
insurance companies. The parties sometimes collectively refer to
American Motorists and Lumbermens as "Kemper." We refer separately
to the companies because their interests are somewhat different.
The non-settling insurance companies were: (1) Fireman's Fund
Insurance Company and Fireman's Fund Indemnity Corporation
(Fireman's), which had provided homeowners' insurance to Imbesi;
and (2) Harleysville Mutual Insurance Company (Harleysville), which
had provided commercial general liability, excess liability, and
workers' compensation and employers' liability insurance to Click
and North American during a five-month portion of James's
employment. Both Fireman's and Harleysville denied coverage for
James's claims. They did not participate in negotiating the
settlement.
This lawsuit which focused on coverage for the $4.15 million
judgment ensued. The action was for declaratory relief to
determine the various insurance companies' rights and
responsibilities and to allocate the settlement amount and defense
costs in the underlying litigation.
The Law Division judge held that, under the employers'
liability policy, Harleysville had been obligated to indemnify and
provide a defense to Click and North American with respect to
James's LAD claims. However, the judge also found that the overall
settlement was unreasonable, collusive and unenforceable against
Harleysville. In her final judgment, the judge dismissed all
claims against Harleysville, with one exception; Harleysville was
held to a duty to reimburse Lumbermens for twenty-five percent of
the defense costs ($11,500) it incurred in the underlying
litigation in which James claimed damages.
James appeals, claiming the judge erred in refusing to enforce
the settlement against Harleysville. Harleysville cross-appeals,
claiming the judge erred in holding it was obligated to indemnify
and provide a defense to Click and North American with respect to
James's LAD claims. We affirm on the appeal and dismiss the cross-
appeal.
For about nineteen months, between July 1995 and February 1997, James worked as an office manager for Click and North American, in a two-room office located in Ocean City, Cape May County, New Jersey. Imbesi, who for many years had run his family's soft-drink business (the Imbesi Bottling Group), founded and ran both Click and North American, which engaged in the business of manufacturing, marketing, and distributing soft-drink beverages.
Click and North American were small, closely-held corporations. During the period of James's employment, Imbesi was the president, sole shareholder, and sole director of Click. He was the president, majority shareholder, and sole director of North American. In various documents, Imbesi's wife, Patricia, was identified as secretary and treasurer of Click and Imbesi's three brothers were identified as officers and directors of Click. Imbesi admitted that his wife played only a limited role at Click, and his brothers played no role at all.
Imbesi had no superiors at either Click or North American. His subordinate employees consisted of James, Dennis King, and James Burns. While James worked in Ocean City, King and Burns were located in Pittsburgh, Pennsylvania.
The record reflects substantial overlap in the operations of the two corporations. For example, although James, King, and Burns performed services for both Click and North American, they were paid only by Click. The companies shared office space, but only Click paid rent, in the amount of $1 per year, to another of Imbesi's companies. Funds from one company were used to finance the operations of the other. There is also some indication that Imbesi may have commingled his personal and business accounts, using funds from personal accounts to pay corporate expenses and vice versa.
James alleged that during the entire period of her employment at Click and North American, Imbesi made sexual comments to her, exposed his genitalia to her, touched her in a sexual manner, and demanded sexual favors from her. When she rejected his advances, Imbesi became verbally abusive, but he continued to sexually harass and proposition her.
James also alleged that, in about September 1995, two months after her hiring date, she began a sexual relationship with Imbesi. Their sexual activities occurred both in the office and elsewhere. James claimed this relationship was actually coercive; she participated in it only out of fear of losing her job and of Imbesi's potential violence towards her. She alleged that, on occasions when she temporarily ended the relationship, Imbesi became verbally abusive, and his demands for sexual favors were imposed in an increasingly threatening manner. Most significantly, James alleged that one day in December 1996, after driving her home, Imbesi forced his way into her home and raped her.
James also alleged that Imbesi directly tied her participation in their sexual relationship to her compensation and continued employment at Click and North American. For example, James alleged that: (1) in May or June 1996, when she threatened to end the relationship, Imbesi threatened her with the loss of employment and stock options; (2) in July 1996, Imbesi refused to give her the paycheck until she performed sexually; (3) in October 1996, when she told Imbesi she was leaving the company because she "could not take it anymore," Imbesi told her she could not leave; and (4) in October or November 1996, when she refused Imbesi's sexual demands, he withheld her paycheck and said he would have to review her salary.
Finally, James alleged that in February 1997 she was diagnosed with genital herpes, contracting the disease from Imbesi in the fall of 1996. According to James, Imbesi knew he had herpes but never told her. Except on one occasion, he did not wear a condom when they had sex.
James did not receive health insurance through her employment with Click and North American. She claimed that, when she asked Imbesi to pay her medical bills, he demanded that she perform sexual favors in return, which she did out of desperation. Finally, James alleged that, as a result of Imbesi's abuse, she suffered from severe anxiety, panic attacks, and herpes outbreaks which were painful, humiliating, disruptive of her present marriage, and created risks for complications during any future pregnancy or childbirth. James admitted, however, that she had suffered from emotional problems before meeting Imbesi.
For his part, Imbesi admitted having a sexual relationship with James; he claimed it was entirely consensual. Imbesi specifically denied demanding sex in exchange for compensation. However, he admitted making personal loans to James. Supporting Imbesi's claim of a consensual relationship are several personal cards and notes James gave to him during the course of her employment with Click and North American.
As to the issue of venereal disease, Imbesi admitted: he contracted genital herpes in the 1980's; he was aware of his infection during his relationship with James; and he did not advise James that he had the disease. However, Imbesi claimed: he did not believe he was contagious when he was asymptomatic; he was unaware he had subjected James to the possibility of contracting herpes, presumably because he did not have a herpes outbreak during the period of her employment; and he never intended to infect her with the disease.
Imbesi also admitted using company funds to pay James's medical bills. However, he claimed he did so to fulfill a promise he made to her when she began working with the companies. Imbesi denied demanding sex in exchange for these medical payments.
Between November 1981 and May 1995, Imbesi was employed as president of the 7-Up Bottling Company of Philadelphia, the parent company of his family's soft-drink bottling business. During that period, Imbesi was twice accused of sexual harassment.
First, in 1986, Kimberly Flavin, a receptionist at the 7-Up Bottling Company in Virginia Beach, Virginia, filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC). Flavin complained that she had been sexually harassed by Imbesi, and fired from her job because she refused Imbesi's sexual advances. That case was settled before any litigation.
Second, in 1995, Deborah Goodwin, an account manager with the 7-Up Bottling Company of Philadelphia, filed a sexual harassment complaint against Imbesi in the Pennsylvania Human Relations Commission followed by a complaint in the United States District Court for the Eastern District of Pennsylvania. Goodwin claimed Imbesi continually made comments of a sexual nature to her, propositioned her, touched her in a sexually offensive manner, and punished her for refusing his sexual demands. She claimed the harassment resulted in her constructive discharge, when she resigned because she could no longer withstand Imbesi's abuse. Imbesi denied Goodwin's allegations of wrongdoing. However, a jury returned a verdict in Goodwin's favor for more than $2 million. In unreported decisions, the court reduced Goodwin's award to $425,041, representing $325,041 in compensatory damages, and $100,000 in punitive damages, the applicable punitive damages cap under Title VII. Goodwin v. Seven-Up Bottling Co. of Philadelphia, 1 998 WL 438488 (E.D. Pa. July 31, 1998); Goodwin v. Seven-Up Bottling Co. of Philadelphia, 1 998 U.S. Dist. LEXIS 11853 (E.D. Pa. Aug. 3, 1998). The case eventually settled for $1 million.
Over the years, Imbesi also had sexual affairs with other female subordinates. One of those affairs resulted in the birth of a son, as well as a 1995 restraining order against Imbesi in Vermont, based upon an allegation that he had been physically abusive towards the woman and child.
Counts One and Two: quid pro quo and hostile
work environment sexual harassment, contrary
to the LAD, N.J.S.A. 10:5-12;
Count Three: gender-motivated violence,
contrary to the Violence Against Women Act
(VAWA),
42 U.S.C.A.
§13981;
Count Four: assault and battery;
Counts Five and Six: negligent and
intentional transmission of a venereal
disease;
Counts Seven and Eight: negligent and
intentional infliction of emotional distress;
Count Nine: negligent supervision and
retention of Imbesi;
Count Ten: unlawful retaliation for James's
refusal to testify falsely on Imbesi's behalf
in the Goodwin litigation, ultimately
resulting in her constructive discharge,
contrary to the Conscientious Employee
Protection Act, N.J.S.A. 34:19-3;
Count Eleven: wrongful discharge;
Counts Twelve and Thirteen: conspiracy to
deprive James of her civil rights as a
prospective witness in the Goodwin litigation,
contrary to
42 U.S.C.A.
§1985(2) and
42 U.S.C.A.
§1986.
James alleged that Click and North American were the "alter egos"
of Imbesi and his brothers, and that each defendant should be held
jointly and severally liable. She also claimed that defendants
were directly liable for their own misconduct, and vicariously
liable for Imbesi's misdeeds. James sought compensatory damages
for lost earnings, physical and psychological injuries, and
punitive damages.
Imbesi retained Dilworth Paxson (Dilworth) to defend him in
the Federal Action. All defendants filed motions to dismiss. By
memorandum decision and order dated January 27, 1998, the court:
(1) dismissed with prejudice the claims under
42 U.S.C.A.
§1985(2)
and § 1986 as against all defendants; and (2) dismissed without
prejudice the majority of state law claims against Click, North
American, Imbesi, and Imbesi's three brothers, declining to
exercise supplemental jurisdiction over those claims. After this
decision and order, the only remaining claims in the Federal Action
were against Imbesi for: (1) gender-motivated violence contrary to
the VAWA (Count Three); and (2) assault and battery (Count Four).
About six months later, on August 5, 1998 James commenced an
action in the Court of Common Pleas of Philadelphia County, by
filing a civil summons and jury demand (Philadelphia Action). The
named defendants were the same as in the Federal Action: Click,
North American, Imbesi, and Imbesi's three brothers. James later
provided Imbesi, Click, and North American with a draft copy of a
complaint she intended to file in the Philadelphia Action, in which
she asserted those claims over which the federal court declined to
exercise supplemental jurisdiction. James, however, never actually
filed a complaint in the Philadelphia Action.
On November 9, 1998 the parties agreed to a tentative settlement, contingent upon their obtaining permission for the Philadelphia Action to proceed under seal and using pseudonyms. The parties filed a joint petition requesting this relief. Also pursuant to the tentative settlement, the defendants filed a writ of summons in the Court of Common Pleas, Philadelphia County, against Fireman's, American Motorists, Lumbermens, and Harleysville, seeking a declaration that the insurance carriers were obligated to defend and indemnify them with respect to any costs, attorneys' fees, settlements, judgments, or monetary awards arising from or relating to the Philadelphia Action. Finally, also pursuant to this tentative settlement, on November 30, 1998 the federal court dismissed the remaining claims against Imbesi, those for assault and battery and violation of VAWA.
On December 16, 1998 James declared the tentative settlement null and void, because the parties had been unable to obtain an order permitting the Philadelphia Action to proceed under seal. James then filed a motion in federal court, seeking to vacate the dismissal of her claims, which the court granted.
Despite the collapse of the tentative settlement, the parties continued to engage in settlement discussions in which American Motorists and Lumbermens participated. Although advised of these discussions, Harleysville chose not to participate. Settlement conferences were held before Judge Scuderi on January 19 and 25, 1999 at which Harleysville did not appear. Pursuant to these discussions, and with the federal court's approval, on January 25, 1999 James filed an amended complaint in the Federal Action, in which she reasserted all the claims from her original complaint, except the claims under 42 U.S.C.A. §§1985(2) and 1986, which had been dismissed with prejudice.
After considering the submissions of James's counsel and representations made by counsel at the January 25, 1999 settlement conference, Judge Scuderi stated in terse, conclusory letters dated February 8 and 9, 1999 (Appendices B and C) that $4.15 million constituted a reasonable settlement figure for the case, in exchange for a consent judgment in plaintiff's favor on Counts I (LAD), II (LAD), V (negligent transmission of a venereal disease), and VII (negligent infliction of emotional distress) of the amended complaint, and dismissal, with prejudice, of the remaining counts. In February 1999, James entered into a confidential settlement agreement (Settlement or Settlement Agreement) with: (1) defendants Imbesi, Click, and North American; (2) insurers, American Motorists and Lumbermens; and (3) Patricia Imbesi (Imbesi's wife). Imbesi executed the agreement on behalf of himself, Click, and North American. Imbesi's three brothers entered into a separate settlement agreement with James, Click, North American, American Motorists, and Lumbermens.
The Settlement Agreement provided, in pertinent part:
(1) A Consent Judgment would be entered in the Federal Action, in favor of James, against Imbesi, Click, and North American, jointly and severally, in the amount of $4.15 million, on the LAD sexual harassment claims (Counts One and Two), the claim of negligent transmission of a venereal disease (Count Five), and the claim of negligent infliction of emotional distress (Count VII). No part of the $4.15 million would be deemed attributable to James's claim for punitive damages. Payment of the $4.15 million would be structured as follows:
(a) Imbesi, Click, and North American agreed to pay James $550,000. They also agreed to assign to James their rights to prosecute and recover from the "Non-Settling Insurers," Fireman's and Harleysville, any amounts attributable to the Federal and Philadelphia Actions. Finally, they guaranteed James payment of an additional $150,000, payable in full within two years of the Settlement, if, as of that date, James had received no money from the Non-Settling Insurers. However, James agreed to reimburse Imbesi, Click, and North American for this "guarantee payment," depending upon the amount she eventually received from the Non- Settling Insurers.
(b) American Motorists and Lumbermens agreed to pay James $200,000. They also guaranteed payment of an additional $100,000, payable in full within two years, if, as of that date, James had received no money from the Non-Settling insurers, Fireman's and Harleysville. However, James agreed to reimburse American Motorists and Lumbermens for this "guarantee payment," depending upon the amount she eventually received from the Non- Settling Insurers; and
(c) Dilworth was retained to represent Imbesi, Click, North American, and James in an action against the Non- Settling Insurers, seeking, among other things: (1) attorneys' fees and costs incurred in connection with the Federal Action, the Philadelphia Action, and the declaratory judgment action; (2) the up-front payments of $750,000, made to settle the dismissed claims; (3) the guarantee payments of $250,000; (4) the remaining $3.15 million of the total Settlement amount; and (5) damages for bad faith, for failing to settle James's claims within the policy limits, and failing to defend Imbesi, Click, and North American against James's claims.
(2) James agreed to dismiss with prejudice the remaining claims in her Federal Action, and in her Philadelphia Action, and release all other claims and causes of action she might have against Imbesi, Click, North American, American Motorists, and Lumbermens.
(3) Imbesi, Click, and North American agreed to dismiss, without prejudice, their declaratory judgment action in the Court of Common Pleas, Philadelphia County, and release all claims against James, American Motorists, and Lumbermens.
The parties agreed that the Settlement was fair, reasonable, and made in good faith, based upon their competing estimates of James's injuries, and the potential for liability on her claims. Pursuant to the Settlement, on March 5, 1999 the parties stipulated to a judgment in James's favor on Counts One, Two, Five, and Seven of the complaint, and to the dismissal with prejudice of the remaining counts. In a separate, and again a terse, conclusory documentation of "findings," also dated March 5, 1999, Judge Scuderi found that the Settlement was fair and reasonable, and was entered into in good faith (Appendix D). By order dated March 9, 1999 the federal court sealed and impounded the case record and by order dated March 17, 1999 the federal court dismissed the case in accordance with the parties' stipulation. Finally, also pursuant to the Settlement, James voluntarily dismissed the Philadelphia County Action.
Following the federal court's January 27, 1998 order, dismissing the majority of James's claims, Fireman's withdrew its defense, taking the position that the remaining claims, for assault, battery, and gender-motivated violence under the VAWA, were not covered under its policy. Fireman's also denied coverage with respect to the subsequent Philadelphia Action.
(1) Commercial General Liability Policy. This policy excluded from coverage all employment-related injuries, and all injuries arising from employment practices. The policy covered executive officers and directors, such as Imbesi, but only with respect to their official duties.
(2) Commercial Blanket Excess Liability Policy. This policy excluded from coverage all employment-related injuries, and all injuries arising from employment practices. Executive officers, directors, and stockholders, such as Imbesi, were covered, but only while acting within the scope of their official duties.
(3) Workers' Compensation and Employers' Liability Policy. This policy insured only North American and Click. It did not insure officers, directors, or shareholders of the corporations, such as Imbesi. The Workers' Compensation portion of the policy covered accidental bodily injuries, or diseases caused or aggravated by the conditions of employment.
The Employers' Liability portion of the policy covered accidental bodily injuries arising out of and in the course of the injured employee's employment, and bodily injury by disease caused or aggravated by the conditions of employment. Under Exclusion C5, the Employers' Liability Policy excluded from coverage damages for "bodily injury intentionally caused or aggravated" by the insured (emphasis added).
In addition, under Exclusion C7, the Employers' Liability Policy excluded from coverage "damages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts or omissions." Under Schmidt v. Smith, 155 N.J. 44 (1998), Exclusion C7 was void as against public policy to the extent it purported to deny coverage for bodily injuries arising from the conduct described, including emotional injuries accompanied by physical manifestations.
In letters written after the Federal Action had been filed, Dilworth again requested coverage from Harleysville. In two letters dated December 30, 1997 one addressed to North American and Imbesi's three brothers and the second addressed to Click and Imbesi, Harleysville denied all coverage for James's claims in the Federal Action, with the exception of James's claims that: (1) North American and Imbesi's three brothers should be held vicariously liable for Imbesi's misconduct; and (2) North American and Imbesi's three brothers were negligent in their supervision of Imbesi. As to these two claims, Harleysville agreed to provide a defense to North American and Imbesi's three brothers, under the Commercial General Liability Policy.
However, Harleysville denied indemnity under all three of its policies. Harleysville denied coverage under the Employers' Liability Policy on the basis of Exclusion C5, for intentional conduct, and Exclusion C7, for damages arising out of "coercion, . . . discipline, . . . harassment, humiliation, discrimination against or termination of any employee or any personnel practices, policies, acts, or omissions."
Harleysville denied coverage to Imbesi, individually, because he was alleged to have engaged in intentional misconduct. Harleysville denied coverage to Click and North American because they were allegedly Imbesi's alter ego. Harleysville denied coverage to Imbesi's three brothers to the extent they participated in, ratified, or acquiesced in Imbesi's misconduct.
Harleysville further stated that the insureds' failure to provide relevant disclosures regarding Imbesi's pre-policy conduct, as referenced in James's complaint, could amount to misrepresentations sufficient to void the policies altogether, and to exclude all coverage that might otherwise apply.
Finally, Harleysville disclaimed liability for James's damages, other than those resulting from unintentional bodily injuries, which occurred in employment-related activities, during the time period the policies were in effect. In this regard, Harleysville stated its belief that James's damages arose from a single course of conduct, commencing prior to the policy period. Therefore, none of her damage claims were covered.
After receipt of the January 27, 1998 opinion and order in the Federal Action, which dismissed the majority of James's claims, Harleysville advised that it would not provide Click or Imbesi with a defense or indemnification as to the remaining causes of action, i.e., assault and battery, and gender-motivated violence contrary to the VAWA.
After James filed the Philadelphia Action, Dilworth made additional requests for coverage, advising Harleysville of the new litigation, and the parties' settlement discussions. In October 1998, James's counsel also wrote to the various insurance carriers, advising them of the tentative settlement of the Federal and Philadelphia Actions, and asking if they had any objections to it.
Harleysville responded to James's counsel by stating it was in the process of evaluating insurance coverage issues relating to the Philadelphia Action. Harleysville objected to unilateral settlement of that lawsuit. It also requested a copy of the proposed settlement agreement which Dilworth agreed to provide only if Harleysville agreed to maintain its confidentiality.
By letter dated November 11, 1998 Harleysville denied coverage with respect to the Philadelphia Action. In a letter dated December 4, 1998 Harleysville provided the reasons for its denial of coverage, which largely mirrored the reasons given in its three previous denial letters, relating to the Federal Action. Harleysville also declined invitations to participate in the parties' continuing settlement discussions.
After the Settlement, on March 26, 1999 Harleysville filed an amended complaint in its declaratory judgment action: (1) adding James as a defendant; and adding alternative claims that (2) the Settlement was not made in good faith, was unreasonable, and was the product of collusion, and Harleysville had no obligation to pay any portion of the settlement amount, and (3) if coverage were found, Harleysville was entitled to contribution from, or indemnification by, American Motorists, Lumbermens, and Fireman's. Harleysville's Pennsylvania declaratory judgment action eventually was dismissed.
Imbesi, Click, North American, and James answered Fireman's amended complaint, denying that Fireman's was entitled to the relief it sought. Imbesi and James also asserted counterclaims against Fireman's: (1) seeking a declaratory judgment that the homeowner's policy provided coverage for James's claims; (2) alleging breach of contract and bad faith refusal to indemnify and settle James's claims; and (3) seeking an award of attorneys' fees. Imbesi also asserted a counterclaim against Fireman's, alleging bad faith refusal to defend.
Imbesi, Click, North American, and James also asserted cross- claims against Harleysville: (1) seeking a declaratory judgment the policies issued by Harleysville provided coverage for James's claims; (2) alleging breach of contract and bad faith refusal to settle or indemnify; and (3) seeking an award of attorneys' fees. Imbesi, Click, and North American also cross-claimed against Harleysville alleging bad faith refusal to defend. American Motorists and Lumbermens separately answered Fireman's amended complaint, denying any obligation to provide coverage for James's claims, except as provided under the terms of the Settlement. Lumbermens also asserted a cross-claim against Harleysville, seeking contribution as to the defense costs incurred in the underlying litigation. Harleysville denied liability on all claims.
Harleysville then filed an amended answer to Fireman's amended complaint, and to the cross-claims asserted by Imbesi, Click, North American, James, and Lumbermens. Harleysville continued to deny liability on the claims asserted against it. Harleysville also asserted a counter-claim against Fireman's, and cross-claims against American Motorists, Lumbermens, Imbesi, Click, North American, and James, seeking a declaratory judgment that it had no obligation to provide coverage for James's claims, or, alternatively, seeking indemnification from the other insurance companies. Harleysville also filed amended cross-claims against Imbesi, Click, North American, and James.
By oral decision and order dated March 1, 2001, the judge granted Fireman's summary judgment motion, and dismissed all claims against it. Also on March 1, 2001 the judge denied both Harleysville and American Motorists' summary judgment motions, and granted, in part, the summary judgment motion filed by Imbesi, Click, North American, and James. The judge orally held that, under Schmidt, 155 N.J. 44, Harleysville had a duty to both defend and indemnify Click and North American, with respect to James's sexual harassment claims under the LAD, to the extent the alleged harassment resulted in bodily injuries. That duty arose under Harleysville's Employers' Liability Policy.
Harleysville moved for reconsideration and also moved for a ruling it was not estopped from challenging the enforceability of the Settlement, and seeking apportionment of reasonable defense costs. After hearing oral argument, the judge entered separate orders dated May 2, 2001: (1) denying Harleysville's motion for reconsideration; but holding that (2) Harleysville was not estopped from challenging any aspect of the Settlement; and (3) Harleysville was required to reimburse Lumbermens for no more than twenty-five percent of reasonable defense costs incurred by Lumbermens in defending Click and North American in the underlying litigation.
On May 22, 2001 Harleysville moved for leave to appeal from the judge's orders denying its motion for summary judgment, and its motion for reconsideration. This court and the Supreme Court denied the motions for leave to appeal.
On June 14, 2001 upon further consideration of Harleysville's motion for summary judgment, the judge granted partial summary judgment in favor of Harleysville, holding that Harleysville was not liable for the defense costs of Imbesi, Click, and North American, and dismissing these parties' cross-claims against Harleysville. However, the judge maintained her earlier holding that Harleysville was obligated to reimburse Lumbermens for twenty- five percent of the reasonable attorneys' fees and costs Lumbermens incurred in defending Click and North American in the underlying litigation.
On June 22, 2001 Harleysville filed another motion for summary judgment. This time, Harleysville sought: (1) judgment that the Settlement was unreasonable, collusive, and not entered into in good faith; and (2) dismissal of all remaining claims against it. In support of this motion, Harleysville submitted, among other things, an expert report from John J. Gibbons, Esq., former Chief Judge of the United States Court of Appeals for the Third Circuit. (See Appendix A.) Judge Gibbons reasoned that the Settlement, although summarily approved by Judge Scuderi, was unreasonable because: (1) it was based upon inadmissible net opinions of attorneys, and not upon an evaluation of the competing evidence relating to the likelihood of James's success on the merits and her alleged damages; and (2) it did not represent a good faith compromise on the part of James, because the Settlement amount of $4.15 million exceeded any settlement or verdict ever reported in any New Jersey case involving sexual harassment or negligent transmission of a venereal disease, exceeded the verdict in the Goodwin litigation, and most likely exceeded the amount James could have recovered and sustained had the case been tried to a jury. Judge Gibbons stated:
24. In sum, it is my opinion that the
settlement reached in the James litigation is
not reasonable because it does not represent a
good faith comprise of James's claims and
there was an insufficient record upon which
Magistrate Judge Scuderi could approve the
settlement. Clearly, the amount of the
consent judgment would not have been
considered by the parties were the insurance
companies not the responsible entities.
On July 2, 2001 the judge entered an amended scheduling order.
As it relates to the present appeal, the judge ordered that a jury
trial would be limited to the issue of James's compensatory
damages, the category of damages for which James had settled, and
the appropriate allocation of such damages "between and among the
defendants." Thereafter, on July 20, 2001 the judge granted
partial summary judgment in favor of Harleysville, declaring that
the Settlement was unreasonable. However, the judge denied the
portion of Harleysville's motion that requested dismissal of all
claims against it.
Harleysville moved for reconsideration of both the July 2 and
July 20, 2001 orders which the judge denied. Harleysville also
moved for leave to appeal, which both this court and the Supreme
Court denied.
On October 10, 2001 Click and North American moved to compel
James to file a pleading, setting forth all claims she intended to
present against Imbesi, Click, and North American, including a
prayer for relief. In response, James filed a cross-claim against
Click and North American, asserting claims of quid pro quo and
hostile work environment sexual harassment under the LAD, the only
claims as to which the court found insurance coverage, which Click
and North American moved to dismiss based upon the terms of the
Settlement. Harleysville also moved to dismiss James's cross-
claim, under R. 4:6-4(b)(1), on the grounds that it was improper.
During oral argument on October 26, 2001 the judge initially
indicated an intent to deny the motions to dismiss James's cross-
claims. However, the court reserved judgment in order to consider
the effect of our decision in Pasha v. Rosemount Mem'l Park, Inc.,
344 N.J. Super. 350 (App. Div. 2001), certif. denied,
171 N.J. 42
(2002), decided just ten days earlier.
In an oral decision on January 18, 2002 based upon Pasha, the
judge ruled that the Settlement was unenforceable against
Harleysville as unreasonable and collusive. This ruling had the
effect of: (1) foreclosing any recovery by Imbesi, Click, North
American and James on their cross-claims against Harleysville; and
(2) granting judgment in favor of Harleysville on its cross-claims
against the other co-defendants, with the exception of the partial
summary judgment which had been entered in favor of Lumbermens on
the issue of defense costs.
In accordance with her January 18, 2002 oral decision, and her
earlier decision regarding the allocation of defense costs, in an
order dated January 31, 2002, the judge: (1) directed that
Harleysville reimburse Lumbermens in the amount of $11,400,
representing twenty-five percent of the reasonable legal fees and
costs incurred in defending the underlying litigation; and (2)
vacated the orders of July 20 and August 31, 2001, entered summary
judgment in favor of Harleysville, and consistent therewith,
dismissed with prejudice all remaining claims and cross-claims
asserted by all parties.
James filed a timely notice of appeal and Harleysville filed
a timely notice of cross-appeal.
As the sole issue in her appeal, James contends the judge erred in refusing to enforce the Settlement against Harleysville, based upon her findings that the Settlement was unreasonable and collusive. She urges, alternatively, if we decline to hold that the Settlement is reasonable as a matter of law the case be remanded for a plenary hearing on the issue of reasonableness, before a different judge. James now contends Judge Cooper has pre- judged this issue. If, after such a hearing, the judge finds the Settlement amount unreasonable, then James contends a trial should be held on the merits of her sexual harassment claims under the LAD, the amount of her compensatory damages, and the portion of those damages which Harleysville should be held liable to pay. James contends, however, that no damages should be allocated between and among Imbesi, Click, and North American.
If there is a genuine issue as to any material fact, then summary judgment should be denied. R. 4:46-2(c). However, if the evidence is "'so one-sided that one party must prevail as a matter of law,'" then summary judgment must be granted. Brill, 142 N.J. at 540, quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 2512, 91 L. Ed.2d 202, 214 (1986).
The applicable law is well-established.
"Where an insurer wrongfully refuses coverage
and a defense to its insured, so that the
insured is obliged to defend himself in an
action later held to be covered by the policy,
the insurer is liable for the amount of the
judgment obtained against the insured or of
the settlement made by him. The only
qualifications to this rule are that the
amount paid in settlement be reasonable and
that the payment be made in good faith."
[Griggs v. Bertram,
88 N.J. 347, 364 (1982),
quoting Fireman's Fund Ins. Co. v. Sec. Ins.
Co. of Hartford,
72 N.J. 63, 71 (1976),
quoting New Jersey Mfrs. Indem. Ins. Co. v.
United States Cas. Co.,
91 N.J. Super. 404,
407-08 (App. Div. 1966) (emphasis added).]
"[A] settlement may be enforced against an insurer in this
situation only if it is reasonable in amount and entered into in
good faith." Id. at 368 (emphasis added).
Thus, as a preliminary matter, James is incorrect when she
argues that, in order to deny enforcement of the Settlement against
Harleysville, we are obligated to find both that the Settlement was
unreasonable and that it was made in bad faith. Rather, under
Griggs, 88 N.J. at 364-68, the judge should deny enforcement if
either of those conditions exist.
The New Jersey case upon which James relies does not support
her argument on this point. See Battista v. W. World Ins. Co.,
Inc.,
227 N.J. Super. 135, 146-51 (Law Div. 1988) (refusing to
enforce settlement that was unreasonable in amount, but made in
good faith) aff'd in relevant part, and rev'd in part sub. nom,
Battista v. Olson,
250 N.J. Super. 330 (App. Div.), certif. denied,
127 N.J. 553 (1991). The only case James cites which is supportive
of her argument comes from another jurisdiction. This case is
unpersuasive in light of the Supreme Court's explicit, contrary
holding in Griggs, 88 N.J. at 364-68. Alton M. Johnson Co. v.
M.A.I. Co.,
463 N.W.2d 277, 279-80 (Minn. 1990).
The insurer bears the ultimate burden of persuasion by a
preponderance of the evidence. The insurer is not liable if the
settlement is either unreasonable, or was reached in bad faith.
Griggs, 88 N.J. at 365-68. The insured, however, bears the initial
burden of production or the burden to produce evidence to support
the reasonable and good faith nature of the settlement. The
insured is presumed to possess all essential information necessary
to make such a determination. Id. at 367-68.
James claims the court's determination of unreasonableness was incorrect. James's primary contention is that without a finding that Judge Scuderi abused his discretion in approving the Settlement, the judge in New Jersey is bound by his finding that the Settlement amount was reasonable. For this argument, James primarily relies upon federal court decisions involving the review of class-action settlements, a review required under Fed. R. Civ. P. 23(e). James's argument misapprehends the applicable law and is based upon faulty logic.
Under Griggs, 88 N.J. at 364-68, it is the court's obligation to conduct an independent review of the Settlement in order to determine whether it is reasonable and made in good faith. See also, Cont'l Cas. Co. v. Hempel, 4 Fed. Appx 703 (10th Cir. 2001) (mere fact that judge approved settlement is insufficient to render it reasonable). Here, there are at least two ways in which the Settlement amount is unreasonable on its face: (1) the entire $4.15 million is attributed to James's compensatory damages, with none allocated to punitive damages; and (2) Harleysville is deemed liable disproportionately to pay, at the very least, seventy-six percent of the Settlement amount, $3.15 million, and perhaps even the entire Settlement amount of $4.15 million, even though Harleysville insured Click and North American for only five of James's nineteen months of employment.
The judge could find these particular aspects of the Settlement amount unreasonable without questioning Judge Scuderi's more general conclusory finding that the overall $4.15 million constituted "a reasonable settlement figure" for James's LAD claims, and her claims for negligent transmission of a venereal disease and negligent infliction of emotional distress.
Judge Scuderi did not find that $4.15 million represented a reasonable evaluation of James's compensatory damages. As discussed at 40-to-45 post, the parties never presented Judge Scuderi with the evidence necessary to make such a conclusion. We conclude it extremely doubtful that such a conclusion could ever be reached under the circumstances of this case.
In addition, Judge Scuderi never found that assigning Harleysville liability for $3.15 million of the $4.15 million Settlement amount, or even potentially the entire $4.15 million, was reasonable. We conclude it extremely doubtful that such a finding could be reached.
Judge Scuderi found only, and very generally, that the parties' proposed settlement agreement constituted "a reasonable and good faith resolution of the difficult issues in this case." There is no conflict between that very general finding, and a specific finding by this court that the Settlement amount is quite unreasonable in its particular context and allocations.
Our grounds for concluding that the Settlement amount is unreasonable substantially overlap with our bases for concluding that the Settlement was collusive and made in bad faith. See Midwestern Indem. Co. v. Laikin, 119 F. Supp.2d 831, 843 (S.D. Ind. 2000) (issues of bad faith or collusion closely related to issue of reasonableness of settlement amount, and evidence often overlaps). We discuss these points now and we find the Settlement unreasonable on its face.
We recently addressed the issues of bad faith and collusiveness in the context of finding a settlement agreement unenforceable against an insurance company. Pasha, 344 N.J. Super. 350. In Pasha, plaintiffs were the five surviving children of Dorthea Coleman. During Coleman's burial, her casket tilted while being lowered into the grave and it fell to the bottom. When the casket was retrieved, water had seeped into the structure. After being "reconditioned," Coleman's body was buried at a different site. Id. at 353.
The plaintiffs sued the cemetery, Rosemount, seeking damages for emotional distress resulting from mishandling a corpse. Rosemount notified its insurance company of the claim and the company denied coverage.
The plaintiffs and Rosemount then entered into a settlement agreement in the amount of $500,000. Rosemount agreed to pay $30,000, and assigned to plaintiffs its rights against its insurance company. The plaintiffs agreed to pay Rosemount one- third of the amount they recovered against the insurance company, up to a maximum of the $30,000 Rosemount had paid to settle. Pursuant to the settlement, a consent judgment was entered in favor of the plaintiffs against Rosemount.
The parties agreed that Rosemount's $30,000 payment, and the plaintiffs' agreement to repay that amount if they were successful in their suit against the insurance company, would be kept confidential. No similar confidentiality agreement was entered into with respect to the $500,000 nominal settlement amount, which plaintiffs intended to make public, to serve as a "wake-up call." Id. at 353-54.
On a motion for summary judgment, the judge entered judgment in favor of the insurance company, finding the settlement collusive. Id. at 354-55. We affirmed. Id. at 355-59. We held that the plaintiffs had not satisfied their burden under Griggs, 88 N.J. at 364-68, to produce evidence that the settlement agreement was reasonable in amount and entered into in good faith. Id. at 356-59.
To satisfy their burden of production, the plaintiffs in Pasha had submitted: (1) a certification from their own attorney; (2) a certification from Rosemount's attorney; and (3) a certification from an expert that the settlement was reasonable. Id. at 356-57. We faulted the attorneys for failing to identify the factors they took into consideration in the settlement of the case, or the factors which ordinarily affect such cases in general, and for failing to discuss the plaintiff's damages or injuries, physical, psychological or otherwise. Id. at 357.
We also faulted the expert for concluding that the settlement was reasonable, without giving a proper explanation based upon the facts of the case. The expert noted only that the settlement was reasonable: (1) in light of the "extremely wide range of sustainable verdicts and even greater range of reasonable settlements"; (2) the fact that the case would be tried in Essex County, where "juries tend to award higher verdicts than juries elsewhere in all types of cases"; and (3) the plaintiffs shared the ethnic characteristics of those who might be expected to serve as jurors. Ibid.
We found that the attorney and expert certifications contained "nothing but guesswork and unsupported anecdotal references." Id. at 359. These were "wholly insufficient to satisfy [the plaintiffs'] burden under Griggs." Ibid. In finding collusion, we also relied upon the terms of the settlement agreement. We emphasized the disparity between the amount paid by Rosemount to the plaintiffs, just $30,000, with the total amount of the settlement, $500,000. Id. at 357-58. We found additional evidence of collusion in the parties' agreement to publicize the $500,000 settlement, but to conceal Rosemount's responsibility for paying only $30,000, an amount which Rosemount could recover if the plaintiffs were successful in pursuing their claim against the insurance company. Id. at 358. We conclude here that James also failed to meet her burden of production.
(1) the allegations in her complaint;
(2) the affidavit of Alan D. Berkowitz, a Pennsylvania attorney specializing in labor and employment law, who expressed that: (a) "[i]n light of the grossly egregious conduct of which Mr. Imbesi and the two corporations that he controls are accused, and the severe damages that flow from such conduct, from a defendants' employment lawyers' point of view, we believe that a stipulated judgment in the range of $3,000,000 to $5,000,000 for compensatory damages only on Counts I, II, V and VII of the Amended Complaint would be quite reasonable and appropriate"; and (b) "the Confidential Settlement Agreement is reasonable in its entirety [sic], particularly in light of the fact that two insurance companies have refused, to date, to indemnify and defend Mr. Imbesi, Click Corporation of America, Inc. and North American Beverage Company";
(3) the affidavit of Patricia V. Pierce, an attorney admitted to practice in Pennsylvania, New Jersey and California, specializing in labor and employment law, expressed that: (a) "[i]n light of the criminal nature of the conduct that Mr. Imbesi perpetrated on Ms. James, and the lifetime of physic