SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-3786-95T1
LIBERTY MUTUAL INSURANCE
COMPANY,
Plaintiff-Respondent,
v.
PRESIDENT CONTAINER, INC.,
Defendant-Appellant.
__________________________________________
Argued November 20, 1996 - Decided January
13, 1997
Before Judges King, Keefe and Loftus.
On appeal from the Superior Court of New
Jersey, Law Division, Bergen County.
Jay D. Fischer argued the cause for appellant
(Fischer, Weisinger, Caliguire & Porter,
attorneys; Arthur L. Porter, Jr., on the
brief).
Jonathan M. Kuller argued the cause for
respondent (Alan Wasserman, attorney).
The opinion of the court was delivered by
KEEFE, J.A.D.
On an issue of first impression in New Jersey, Law Division
Judge Peter E. Doyne held: "once the insurer [under a
retrospective premium policy] has shown or there is no dispute
that it in fact has paid settlements, the burden shifts to the
insured to make some showing of the carrier's negligence in its
claim handling." Because Judge Doyne found that "defendant has
failed in discovery and at trial to identify any instance of unreasonableness with which to cast sufficient doubt upon Liberty's
claim handling," he awarded plaintiff Liberty Mutual Ins. Co.
(Liberty) judgment in the amount of the retrospective premiums
sought from defendant President Container, Inc. (President). On
appeal, President primarily contends that the judge erred in
placing any burden upon it to come forward with evidence, and
also erred when he found that Liberty had not breached a 1983
agreement between the parties.
Liberty filed a complaint alleging that it had provided
President with workers' compensation insurance coverage from
November 1, 1985, to November 1, 1988, and asserted that
President owed $131,072 in retrospective premiums. Unlike a
standard insurance policy, a retrospective premium policy
provides for the insurer's retrospective determination of the
insured's premium obligations based, in part, on the insured's
past claims and loss experience. In other words, the insured's
premiums are basically calculated after the fact, rather than before. See generally Alexander & Alexander Inc. v. Rose,
671 F.2d 771, 773 (3d Cir. 1982).
As the trial judge noted, the factual circumstances
surrounding this action were largely undisputed. President did
not dispute Liberty's calculations of the retrospective premiums
allegedly due for the three policy years in question. However,
President asserted that "Liberty Mutual failed to perform a
condition precedent to the contract as set forth by the October
1983 agreement," thereby relieving President from performing
under the contract. President relied on the following language
in the 1983 agreement:
(e) Loss runs shall be mailed to Marvin
Grossbard, President, President Container, on
a monthly basis. Any billing or notice shall
be forwarded to that same party.
(f) The insured shall have the opportunity of loss reserve review, it being the
intention that Liberty Mutual shall maintain
loss reserves at proper levels and subject to
fair and reasonable standards.
(g) Liberty Mutual shall review the loss
reserves with the Workmen's Compensation Bureau as to the current makeup of experience
modification. The insured shall supply such
information as indicates a flagrant disregard
of loss reserves. In the event that the experience modification is adjusted, the premium shall be adjusted accordingly.
The 1983 agreement ends with this sentence: "The agreement of
the insured to place its insurance lines in the hands of Liberty
Mutual is based upon the representations made herein and in
consideration thereof."
While defendant asserted that the 1983 agreement was
"breached because it was not kept informed of loss reserves and
claims on an on-going basis" so it could "review the same for
compliance with fair and reasonable standards," Judge Doyne
concluded that "there is no competent evidence before this court
that the reserves were set unreasonably or unfairly high," and
found that "defendant has failed in discovery and at trial to
identify any instance of unreasonableness with which to cast sufficient doubt upon Liberty's claim handling." While the judge
found no evidence of a "material breach" of the 1983 agreement by
Liberty, most significant with regard to his ruling was his
rejection of President's assertion that anything in the 1983
agreement constituted a "condition precedent" to defendant's
obligation to pay retrospective premiums to plaintiff:
[N]othing in the 1983 agreement, the binder
for the Worker's Compensation policy, nor the
evidence at trial suggests that Liberty Mutual agreed that compliance with all terms of
the 1983 agreement [was] a condition
precedent to defendant's payment of premiums
after Liberty Mutual had managed and settled
its claims.
President contends that the judge's "placement of the burden on the insured to make a showing of the carrier's negligence in its claims handling was a mistake of law, manifestly unjust, and reversible error." President urges that we adopt the rule announced by the Minnesota Supreme Court in Transport Indemnity Co. v. Dahlen Transport, Inc., 161 N.W.2d 546 (Minn. 1968), where an insurer sued its insured for additional premiums allegedly due under a retrospective premium policy. The Minnesota Supreme Court held as follows:
[W]e believe, in the absence of any directly controlling precedent of which we are aware, that the right of the insurer to collect from the insured in the form of a retrospective premium amounts paid out by it as losses should be contingent upon proof by the insurer that the settlements so made were in good faith and reasonable. The insurer, having been charged with the responsibility for investigating and adjusting the loss, is in possession of the relevant information upon which a determination of reasonableness and good faith must be based. The insured, having delegated the right and duty of investigation and settlement to the insurer,
and having agreed to pay the expense in
carrying out their assignment, has, by the
terms of the insurance contract, put the
information critical to the issue of
reasonableness and good faith in the
exclusive possession of the insurer. If the
insured is to pay out as a retrospective
premium the amounts paid by the insurer in
settlement of liability claims under
circumstances where, theoretically at least,
the settlement of the claim has been
beneficial to both . . . , the insured should
be entitled, it seems to us, to have the insurer produce the information pertinent to
the reasonableness and good faith of the
settlement and assume the burden of proof on
the issue.
[161 N.W.
2d at 549.]
The Louisiana Court of Appeals rejected the Transport
Indemnity rule in Insurance Co. of North America v. Binnings
Construction Co., Inc.,
288 So.2d 359 (La. Ct. App. 1974)
(hereafter "Binnings"). While the Binnings court agreed with the
observations in Transport Indemnity "that the insurer is the
party in possession of the evidence upon which the propriety of
the settlements must be judged," and "that the insurer must ultimately bear the burden of proving reasonableness of its
settlements," Id. at 361, it held:
[W]e believe that, once an insurer under a retrospective premium plan has shown (or there is no dispute) that it in fact has paid settlements, it is entitled to a presumption of law that it has exercised reasonableness and good faith in making the settlements. Thus, even when a plaintiff, an insurer who proves the settlements were made would thereby rebuttably establish entitlement to the corresponding premium. The insurer need not give evidence, as to each claim settled, of circumstances of the accident or of what the medical reports indicated so as to indicate probability of liability and quantum; nor
should a court be obliged to decide the reasonableness of each settlement. Here, for
example, there were apparently 130 claims
settled, and it would abuse both the parties
and the judicial system to require proof in
each of 130 settlements in a $12,000 lawsuit,
unless there is reason to question the reasonableness of each.
Thus, while the plaintiff insurer will
always bear the burden of proof, the
presumption of reasonableness will shift to
defendant insured the burden of going forward
with the evidence to rebut the presumption.
Insured need not prove unreasonableness, but
must cast sufficient doubt to deprive plaintiff insurer of the benefit of the presumption, whereupon plaintiff's burden of proof
will not have been met unless it goes forward
with evidence of the reasonableness of the
settlement.
[288 So.
2d at 362.]
In other words, once the insured presents evidence as to any settlements "sufficient to raise a question of the reasonableness"
of those settlements, the insurer will be deprived of the benefit
of the presumption. Ibid. Whereupon the insurer's "burden of
proof will not have been met," unless it "can present evidence to
establish the reasonableness of any sufficiently questioned
settlements." Ibid.
Transit Casualty Co. v. Topeka Transportation Co., Inc.,
663 P.2d 308 (Kan. Ct. App. 1983), also involved an action by an insurer against its insured to recover retroactive premiums. With
regard to the "two approaches" exhibited in Transport Indemnity
and Binnings, the Kansas Court of Appeals said "we prefer that of
the Minnesota Supreme Court [i.e., Transport Indemnity]." Id. at
311. The Kansas Court of Appeals explained why it preferred the
approach in Transport Indemnity:
Without unnecessary complication it places
the burden of proof on the plaintiff where it
traditionally belongs. It requires the party
with the information at hand to produce it,
and it puts upon the party acting in a fiduciary capacity the burden of proving fair
dealing.
[663 P.
2d at 311.]
Then came Port East Transfer, Inc. v. Liberty Mutual
Insurance Co.,
624 A.2d 520 (Md. 1993), which involved the same
question. After analyzing the decisions in Transport Indemnity,
Binnings and Transit Casualty, the court in Port East agreed in
part with the approach in Binnings, to the extent that "once it
[the insurer] has proved payment of settlements," the insured
must "come forward with some evidence of the bad faith of the
insurer or unreasonableness of particular settlements." 624 A.
2d
at 523-25. However, the Port East court did not agree with the
approach in Binnings, to the extent that Binnings held that "once
it [the insurer] has proved payment of settlements it is entitled
to a presumption of law that it exercised reasonableness and good
faith in making the settlements." Id. at 523 (emphasis added).
As the Maryland Court of Appeals explained in Port East:
Creating a legal presumption of good
faith is one method of allocating a burden of
production to the insured, see . . .
[Binnings], but it is not the exclusive method. Because the creation of a presumption
carries with it potential complications with
respect to the longevity of the presumption
and instructions to the jury concerning the
presumption, we elect to fix this burden of
production [on the insured] without accompanying it with a presumption. The allocation
is simply a device for predetermining who
shall have the burden of producing sufficient
evidence to legitimately create an issue.
When the burden of production is satisfied,
and the issue is therefore properly before
the trier of fact, the plaintiff-insurer will
shoulder the burden of persuasion on the issue.
[624 A.
2d at 525 (emphasis added).]
It, thus, stated the applicable rule as follows:
In an insurer's action for unpaid retrospective premiums, the unreasonableness and good
faith of the insurer in connection with
claims subject to such retrospective premium
adjustment need not be specifically alleged
in the complaint nor proven as a part of the
insurer's case in chief. The burden of production of evidence [on that issue] is upon
the defendant-insured; the burden of persuasion when that issue is properly generated is
upon the plaintiff-insurer.
[624 A.
2d at 525.]
In his opinion of January 25, 1996, Judge Doyne held as
follows:
This is a case of first impression in the
State of New Jersey with respect to which
party bears the burden of proving the reasonableness of settlements with retrospective
premiums. As a conflict of interest is inherent in such an arrangement where the insurer is settling claims with the insured's
money, the Minnesota Supreme Court [in
Transport Indemnity] has held that the insurer bears the burden of proving the reasonableness and good faith of the premium raising settlements. . . .
The Court of Appeals of Louisiana in the case of . . . Binnings . . . , agreed with Transport in the observation that the insurer is the party in possession of the evidence upon which the propriety of the settlements must be judged. Further, the Court [in Binnings] held that although the plaintiff
ultimately bears the burden of proving every
element of its cause of action, including
reasonableness of its settlements, that:
[O]nce an insurer under a retrospective premium plan has shown (or
there is no dispute) that it in
fact has paid settlements, it is
entitled to a presumption of law
that it has exercised reasonable-ness and good faith in making the
settlements.
Id. at 362. . . .
This court need not go as far as to
provide the plaintiff such a presumption.
Based on the reasoning of the Binnings decision, this court rules that[,] once the insurer has shown or there is no dispute that
it in fact has paid the settlements, the burden shifts to the insured to make some showing of the carrier's negligence in its claims
handling. . . . This court finds that defendant has failed in discovery and at trial to
identify any instance of unreasonableness
with which to cast sufficient doubt upon
Liberty's claim handling.
[(emphasis added).]
As can easily be seen, while Judge Doyne referred to the
"reasoning of the Binnings decision," he actually followed the
reasoning of Port East, which is cited without discussion in his
decision. In light of President's argument on appeal, the Port
East decision warrants further discussion.
In Binnings, supra, the court noted that "there were apparently 130 claims settled," and concluded that it "would abuse
both the parties and the judicial system to require proof in each
of 130 settlements in a $12,000 lawsuit, unless there is a reason
to question the reasonableness of each." 288 So.
2d at 362. The
court in Port East agreed with that analysis. It said that "to
require the insurer, in the absence of any evidence of bad faith,
to offer proof of its good faith in investigating, adjusting, and
settling hundreds of claims in order to prove its action for
premiums, 'would abuse both the parties and the judicial
system.'" 624 A.
2d at 524.
Reasoning from that basic premise, the Port East court
concluded:
We hold, therefore, that in a case such as
this, although the ultimate burden of proof
of its claim remains at all times with the
insurer, the burden of production of evidence
of violation by the insurer of an implied
condition of good faith is upon the insured.
We believe this allocation of the burden of
production will provide adequate protection
for the party claiming bad faith, but will
not unnecessarily burden the insurer or the
court with protracted proceedings and unnecessary production of evidence concerning matters not legitimately at issue.
In allocating to the insured this burden
of coming forward with the evidence, we have
taken into consideration that the insurer
will ordinarily have superior knowledge of
the facts bearing on the issue. Of necessity, then, wide latitude must be given the
insured in pretrial discovery. It seems unlikely that an insured will undertake the
considerable expense of an extended inquiry
into every case file without some reasonable
suspicion that the insurer failed in its implied obligation. If the insured wishes such
an inspection, however, modern discovery
techniques are entirely sufficient to permit
it, and the parties may thereby determine the
existence of legitimate issues that should
properly be brought before the court.
[624 A.
2d at 524-25.]
In Liberty Mutual Insurance Co. v. Marty's Express, Inc.,
910 F. Supp. 221 (E.D. Pa. 1996), decided contemporaneously with
Judge Doyne's decision, the United States District Court was
required to decide how the Pennsylvania Supreme Court would
answer this very question. The District Court found the Port
East reasoning persuasive:
We agree with Port East that this regime
of burden allocation best provides adequate
protection for the insured, but will not
needlessly burden the insurer or the court
with protracted proceedings and production of
evidence concerning matters not legitimately
at issue.
[910 F. Supp. at 224.]
Given this, the District Court ruled that the defendant insured
should "bear the burden of producing evidence that plaintiffs
violated their implied duty to act reasonably and in good faith
in handling claims," and that, "[i]f defendants produce evidence
that plaintiffs mishandled a claim, then plaintiffs bear the
burden of persuading the jury that they acted in good faith in
handling that claim and that the settlement of the claim was reasonable." Id. at 225.
Although this is a case of first impression in New Jersey we
believe there is analogous authority for Judge Doyne's conclusion
in American Home Assurance Co., Inc. v. Hermann's Warehouse
Corp.,
117 N.J. 1 (1989). In American Home, the insurer settled
a claim (the Adler claim) against its insured for an amount in
excess of the applicable deductible, and then sued its insured to
recover the deductible. In the course of the Supreme Court's
opinion, it noted that insurance companies must act in good faith
in settling claims, and although the concept had not been applied
in cases involving an insured's deductible, there was no reason
why it should not be applicable in such circumstances. 117 N.J.
at 10. However, in affirming a judgment in favor of the insurer,
the Supreme Court noted that, "at the trial level [neither] in
affidavit form or depositions," was there "even a hint of bad
faith . . ., either in the carrier's handling of the defense of
the Adler claim or in its settlement of that claim." 117 N.J. at
10.
That passage from the Court's opinion is an implicit
suggestion that, if the defendant-insured intended to attack the
plaintiff-insurer's settlement of the Adler claim as being the
product of bad faith, as opposed to simply bad judgment, the insured had the burden of presenting some evidence indicating that
the insurer had acted in bad faith, even if it was no more than
"a hint of bad faith." 117 N.J. at 10. Thus, we conclude that
our Supreme Court, if faced with the issue now before us, would
adopt the rule of burden allocation set forth in Port East, as
did Judge Doyne.
Defendant contends that the judge's "finding that Liberty Mutual's settlement of claims was reasonable is so wholly unsupported by reasonable credible evidence as to be unjust." We disagree.
The flaw in defendant's argument is that the judge made no finding that plaintiff's "settlement of claims was reasonable." To the contrary, Judge Doyne found as follows:
Based on the reasoning of the Binnings decision, this court rules that[,] once the insurer has shown or there is no dispute that
it in fact has paid settlements, the burden
shifts to the insured to make some showing of
the carrier's negligence in its claims handling. . . . This court finds that defendant
has failed in discovery and at trial to identify any instance of unreasonableness with
which to cast sufficient doubt upon Liberty's
claim handling.
Thus, there was no finding that plaintiff's "settlement of
claims was reasonable." Rather, the judge found that defendant's
evidence did not cast "sufficient doubt" upon plaintiff's
settlement of the claims, in that defendant's evidence "failed .
. . to identify any instance of unreasonableness." We agree with
Judge Doyne's finding.
Given that the judge made no finding that plaintiff's "settlement of claims was reasonable," there is no underlying factual
support for defendant's contention that such a finding is "unsupported by reasonable credible evidence."
President contends that the judge's ruling that Liberty had not materially breached the 1983 contract is against the weight of the evidence. Because "Liberty Mutual . . . did not comply with the provisions of paragraphs (e), (f) or (g) of the 1983 Agreement," which provisions were "conditions precedent that Liberty Mutual should have performed," President asserts in its brief that "there can be no liability on behalf of President."
The parties to a contract "may make contractual liability dependent upon the performance of a condition precedent." Duff
v. Trenton Beverage Co.,
4 N.J. 595, 604 (1950). However,
condition precedents are "disfavored by the courts." Marsa v.
Metrobank For Savings, F.S.B.,
825 F. Supp. 658, 664 (D.N.J.
1993), aff'd,
26 F.3d 122 (3d Cir. 1994). This is because the
"failure to comply with a condition precedent works a forfeiture." Castle v. Cohen,
840 F.2d 173, 177 (3d Cir. 1988). Given
this, a condition precedent "must be expressed in clear language
or it will be construed as a promise." Ibid. See Kennedy v.
Westinghouse Corp.,
29 N.J. Super. 68, 78 (App. Div. 1953),
aff'd,
16 N.J. 280 (1954) ("where by the terms of the contract
performance on one side is made a condition precedent to performance by the other, such an intention expressed in the contract
will be given effect"). See also Marsa, supra, 825 F. Supp. at
664 ("where the contract language is unclear, an obligation
should be interpreted as a promise, rather than a condition
precedent"). Judge Doyne rejected defendant's argument because,
"nothing in the 1983 agreement, the binder for the Worker's
Compensation policy, nor the evidence at trial suggests that
Liberty Mutual agreed that compliance with all terms of the 1983
agreement [was] a condition to defendant's payment of premiums
after Liberty Mutual had managed and settled its claims." Judge
Doyne's findings are amply supported by the record and
established principles of law. Thus, we reject defendant's
contention on this point.
Affirmed.