NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-3434-14T1
MICHAEL ABBOUD,
Plaintiff-Appellant, APPROVED FOR PUBLICATION
v. JUNE 21, 2017
APPELLATE DIVISION NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Defendant-Respondent. ___________________________________
Argued December 20, 2016 – Decided June 21, 2017
Before Judges Ostrer, Leone and Vernoia.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-680-14.
Lawrence R. Lonergan argued the cause for appellant.
Andrew L. Indeck argued the cause for respondent (Weber Gallagher Simpson Stapleton Fires & Newby, LLP, attorneys; Mr. Indeck, of counsel and on the brief; Jane S. Kelsey, on the brief).
The opinion of the court was delivered by
OSTRER, J.A.D.
In this insurance coverage dispute, we interpret an
"insured vs. insured" exclusion in a directors and officers
(D&O) liability policy. Generally speaking, such exclusions bar coverage for claims by one insured director or officer against
another. Plaintiff Michael Abboud sought indemnity and a
defense in connection with counterclaims made against him by
fellow officers of Monarch Medical PET Services, LLC (Monarch).
Defendant National Union Fire Insurance Company of Pittsburgh,
Pa., eventually denied coverage based on the insured vs. insured
exclusion. Abboud filed a declaratory judgment action against
National Union, which ended in summary judgment dismissal and
the present appeal.
We discern no ambiguity in the exclusion, and find no basis
for Abboud's argument that a showing of collusion between the
insureds is required to invoke it. We also find no merit in his
argument that National Union should be barred from denying
coverage because it would violate his reasonable expectations.
We therefore affirm.
I.
Abboud started the underlying litigation by suing: Monarch;
four of its members and managers — Patrick Collins, Andrew
Kreamer Rooke, Sr., Gary Moyers and William McCue; and a non-
member officer, Andrew Kreamer Rooke, Jr. (collectively, "the
defendants"). Abboud was a forty-percent owner of Monarch,
2 A-3434-14T1 which operates and leases PET/CT1 equipment. He alleged the four
member-managers tried to remove him from Monarch's board of
managers and his position as its chief executive officer. In
his verified complaint, Abboud alleged the defendants engaged in
oppressive acts and breached their fiduciary duty and the firm's
operating agreement. He sought: reinstatement, salary and other
employment benefits; an injunction restraining the defendants
from interfering with his access to the premises, its computers
and its employees; as well as attorneys' fees and expenses.
The verified complaint did not address the defendants'
asserted reasons for their actions, but we gather they concerned
Monarch's involvement with two other companies, Monarch Medical
Imaging Equipment, Inc. (Monarch Imaging) — a corporation that
Abboud and Collins owned — and Monarch Medical Technologies, LLC
(Monarch Technologies) — a wholly owned subsidiary of Monarch
Imaging. We infer this from Abboud's complaint, which sought to
justify certain payments Monarch made to Monarch Imaging and the
existence of other agreements between Monarch and Monarch
Technologies.
In their responsive pleading, Monarch and the individual
defendants other than Collins asserted various counterclaims
1 PET/CT refers to positron emission tomography – computer tomography. Stedman's Medical Dictionary 468, 1468 (28th ed. 2006).
3 A-3434-14T1 against Abboud. They alleged Abboud engaged in self-dealing and
exploited Monarch's opportunities for his personal gain or that
of his other companies. Monarch independently alleged Abboud
breached his loyalty and fiduciary duties, and engaged in
intentional interference with prospective economic advantage.
The company and the individual counterclaimants also alleged
breach of the operating agreement. Additionally, they sought a
declaratory judgment that grounds existed for involuntarily
withdrawing Abboud's membership interest in the company.
All the defendants in Abboud's underlying lawsuit sought
and obtained an acknowledgement of partial coverage from
National Union, subject to a reservation of rights, under the
Employment Practices Liability (EPL) section of Monarch's multi-
coverage policy, which also included a D&O liability section.
It appears the defendants made their request in a timely manner.
National Union sent its coverage letter on March 13, 2013, a
month after Abboud filed his complaint and a month before the
filing of the answer and counterclaims.
By contrast, Abboud did not notify National Union of the
counterclaims against him until November 20, 2013, when his
attorney gave "notice of claims covered" under the D&O section
of the policy. The attorney asserted the notice was late
because Monarch and National Union had delayed responding to his
4 A-3434-14T1 requests for information about coverage. National Union did not
respond to the notice.
In February 2014, Abboud filed his declaratory judgment
action. Expressly invoking and quoting the policy's D&O
section, Abboud sought indemnity and defense costs for the
counterclaims in the underlying lawsuit. Referring to the
November 20, 2013 notice of claim, he asserted National Union
failed to respond to his purported "written claim for defense
and indemnification." He argued that its failure barred
National Union from denying coverage based on waiver and
estoppel principles.
In its answer, National Union denied its policy provided
indemnity or defense costs coverage for the counterclaims
against Abboud. Limited paper discovery followed. National
Union objected to many of Abboud's discovery demands, including
requests for claim processing documents and for the
identification of an employee familiar with the policy's D&O
section. Shortly thereafter, National Union filed its summary
judgment motion. Although Abboud's attorney asserted that
National Union's discovery responses were deficient, he did not
formally seek to compel further discovery.
In support of its summary judgment motion, National Union
contended the insured vs. insured exclusion within the D&O
5 A-3434-14T1 section precluded coverage. In opposition, Abboud argued the
exclusion applied only if there was collusion, and whether there
was such collusion presented a genuine issue of material fact.
He also contended enforcing the exclusion would frustrate his
reasonable expectations. He based his estoppel argument on
National Union's failure to respond to the November 2013 notice.
He also argued National Union's motion was premature because
discovery remained pending.
In granting the motion, Judge Katie A. Gummer found that
the insured vs. insured exclusion plainly barred Abboud's claim
for coverage. The court rejected Abboud's arguments about
collusion and reasonable expectations. Also, estoppel did not
apply because Abboud failed to demonstrate any reliance on
National Union's inaction. The judge rejected Abboud's
prematurity argument because he failed to identify the discovery
that would create a dispute over material facts.
On appeal, Abboud renews the arguments he presented to the
trial court. He adds that the court should have sua sponte
found coverage under the policy's EPL section.
II.
We review de novo the trial court's grant of summary
judgment, applying the same standard as the trial court. Templo
Fuente de Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh,
6 A-3434-14T1 Pa., 224 N.J. 189, 199 (2016). The movant is entitled to
summary judgment if the record shows "there is no genuine issue
as to any material fact challenged and . . . the moving party is
entitled to a judgment or order as a matter of law." Ibid.
(quoting R. 4:46-2(c)). Interpretation of an insurance policy
also presents a legal question, which we review de novo.
Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic
Med. & Physical Therapy, 210 N.J. 597, 605 (2012).
The Templo Fuente Court reviewed the rules of construction
that apply to insurance policies:
If the plain language of the policy is unambiguous, we will not engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased.
When the provision at issue is subject to more than one reasonable interpretation, it is ambiguous, and the court may look to extrinsic evidence as an aid to interpretation. Only where there is a genuine ambiguity, that is, where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage, should the reviewing court read the policy in favor of the insured. When construing an ambiguous clause in an insurance policy, courts should consider whether clearer draftsmanship by the insurer would have put the matter beyond reasonable question.
[Templo Fuente, supra, 224 N.J. at 200 (internal quotation marks and citations omitted).]
7 A-3434-14T1 Consistent with these rules, our courts will enforce
exclusionary clauses if "specific, plain, clear, prominent, and
not contrary to public policy," notwithstanding that exclusions
generally "must be narrowly construed," and the insurer bears
the burden to demonstrate they apply. Flomerfelt v. Cardiello,
202 N.J. 432, 441-42 (2010) (internal quotation marks and
citations omitted).
We look first to the policy language, which we conclude
plainly and unambiguously bars coverage because the
counterclaims against Abboud fall within its insured vs. insured
exclusion. We begin with the language of the relevant provision
defining the D&O coverage before turning to the exclusion.
As D&O Coverage, National Union agreed to
pay the Loss of an Individual Insured of the Company arising from a Claim made against such Individual Insured for any Wrongful Act of such Individual Insured, except when and to the extent that the Company has indemnified such Individual Insured. The Insurer shall, in accordance with and subject to Clause 7 of this D&O Coverage Section, advance Defense Costs of such Claim prior to its final disposition.
Except for "Company," which is defined to mean Monarch in the
policy's "General Terms" section, the highlighted terms are
separately defined within the D&O section. These definitions
establish the coverage's scope.
8 A-3434-14T1 An "Individual Insured" includes an "Executive" or
"Employee of a Company." The two categories are mutually
exclusive. An "Executive" refers to "any past, present or
future duly elected or appointed director, officer, management
committee member or member of the Board of Managers . . . ."
"Employee" explicitly excludes Executives, as the definition
states it means "any past, present, or future employee, other
than an Executive of a Company . . . ." A "Wrongful Act" by an
"Executive or Employee of a Company" means "any breach of duty,
neglect, error, misstatement, misleading statement, omission or
act . . . in their respective capacities as such, or any matter
claimed against . . . [them] solely by reason of his or her
status as an Executive or Employee of a Company . . . ."
The insured vs. insured exclusion is one of several
exclusions in the D&O section for which the insurer "shall not
be liable to make any payment for Loss in connection with any
Claim made against the Insured." The exclusion disallows claims
depending on which party raises them; specifically, it excludes
any claim "which is brought by or on behalf of a Company or
Individual Insured, other than an Employee of the Company
. . . ."2
2 The insured vs. insured exclusion has various exceptions that do not apply here.
9 A-3434-14T1 There is nothing ambiguous, convoluted, or opaque about
this exclusion when interpreted in accord with the definitional
provisions. The exclusion disallows coverage when the claim is
raised by either an executive of the company (i.e., an
"Individual Insured" who is not an "Employee") or the company
itself. Its application here is equally clear. The claims
raised against Abboud were brought by Monarch and five of its
executives (whose status within the company Abboud does not
contest). Therefore, the insured vs. insured exclusion bars
these claims.
Abboud seeks to avoid the plain import of the exclusion on
two grounds. First, he contends it violates his reasonable
expectations. Second, he contends the exclusion applies only in
cases of collusion between the individual insureds, about which
there remains an issue of fact. We are unpersuaded.
Our courts "have recognized the importance of construing
contracts of insurance to reflect the reasonable expectations of
the insured in the face of ambiguous language and phrasing, and
in exceptional circumstances, when the literal meaning of the
policy is plain." Doto v. Russo, 140 N.J. 544, 556 (1995)
(citation omitted); see also Pizzulo v. N.J. Mfrs. Ins. Co., 196
N.J. 251, 271 (2008) ("Indeed, in some circumstances, we have
recognized that it might be appropriate to permit an insured's
10 A-3434-14T1 reasonable expectation to overcome the plain meaning of a
policy."); Werner Indus. v. First State Ins. Co., 112 N.J. 30,
35-36 (1988) ("At times, even an unambiguous contract has been
interpreted contrary to its plain meaning so as to fulfill the
reasonable expectations of the insured . . . .").
These exceptional circumstances are narrowly confined. The
"reasonable expectations" doctrine applies to policy forms that
have the characteristics of an adhesion contract. See, e.g.,
Doto, supra, 140 N.J. at 556. Courts are more inclined to apply
the doctrine in cases of personal lines of insurance obtained by
an unsophisticated consumer. See, e.g., Oxford Realty Grp.
Cedar v. Travelers Excess & Surplus Lines Co., ___ N.J. ___, ___
(2017) (slip op. at 15-16); Werner Indus., supra, 112 N.J. at
38; see also Nunn v. Franklin Mut. Ins. Co., 274 N.J. Super.
543, 550 (App. Div. 1994). Yet, the doctrine has been applied
to commercial lines, as well. See, e.g., Nav-Its, Inc. v.
Selective Ins. Co. of Am., 183 N.J. 110, 123-24 (2005) (applying
the doctrine to a pollution exclusion clause of a building
contractor's comprehensive general liability insurance policy);
Sparks v. St. Paul Ins. Co., 100 N.J. 325, 338-39 (1985)
(applying doctrine to a legal malpractice policy).
Courts may vindicate the insured's reasonable expectations
over the policy's literal meaning "if the text appears overly
11 A-3434-14T1 technical or contains hidden pitfalls, cannot be understood
without employing subtle or legalistic distinctions, is obscured
by fine print, or requires strenuous study to comprehend."
Zacarias v. Allstate Ins. Co., 168 N.J. 590, 601 (2001)
(citations omitted) (rejecting "reasonable expectations"
argument because the policy language was "not so confusing that
the average policyholder cannot make out the boundaries of the
coverage," nor was an "entangled and professional interpretation
of an insurance underwriter . . . pitted against that of an
average purchaser of insurance" (internal quotation marks and
citation omitted)).
The expectations of coverage must be real. See Werner
Indus., supra, 112 N.J. at 39 (remanding for a factual
determination whether the insured, through its broker, conveyed
an intent contrary to the policy's unambiguous language); Di
Orio v. N.J. Mfrs. Ins. Co., 79 N.J. 257, 270 (1979) (declining
to deviate from policy language where "as a factual matter the
record is barren of any suggestion that the [insureds]
'expected' that they had primary or excess coverage"). The
expectations must also be "objectively reasonable." See, e.g.,
Templo Fuente, supra, 224 N.J. at 210.
In assessing whether the expectations are objectively
reasonable, a court will consider communications regarding the
12 A-3434-14T1 coverage between the insured or its broker and the insurer or
its agent that relate to the insured's expectations. See, e.g.,
Doto, supra, 140 N.J. at 557-58. A court must also consider
whether the scope of coverage is so narrow that it "would
largely nullify the insurance" and defeat the purpose for which
it was obtained. See Sparks, supra, 100 N.J. at 337-39
(internal quotation marks and citation omitted). For example,
the Court in Sparks concluded that a claims-made legal
malpractice policy that excluded claims arising out of
occurrences preceding the policy period "d[id] not accord with
the objectively reasonable expectations of the purchasers of
professional liability insurance." Id. at 340. Additionally, a
court must consider whether policies with "unrealistically
narrow coverage" cause "broad injury to the public at large[,]"
which may preclude enforcement on public policy grounds. Id. at
340-41.
Applying these principles, we discern no basis to set aside
the insured vs. insured exclusion based on Abboud's alleged
expectations of coverage. The policy provides commercial
insurance to a presumably sophisticated consumer. The public at
large has no identified interest in finding coverage. The
policy language is straightforward, as discussed above, and is
"not so confusing that the average policyholder cannot make out
13 A-3434-14T1 the boundaries of the coverage." Zacarias, supra, 168 N.J. at
601 (internal quotation marks and citation omitted). The record
is also devoid of competent evidence of Abboud's expectations of
coverage or proof that such expectations would be objectively
reasonable, given that D&O insurance typically covers liability
for third-party claims, see Biltmore Assocs., LLC v. Twin City
Fire Ins. Co., 572 F.3d 663, 668 (9th Cir. 2009) (stating,
"[t]he reasonable expectations of the parties [to a D&O policy]
were that they were protecting against claims by outsiders, not
intra-company claims"), and enforcement of the exclusion
nonetheless leaves broad D&O coverage. In sum, the policy's
plain language need not be tailored to conform to Abboud's
alleged expectations.
We also reject Abboud's contention that proof of collusion
is a prerequisite to applying the insured vs. insured exclusion.
As our courts have not expressly addressed the question, Abboud
relies on several decisions from other jurisdictions adopting
this view,3 and there are others. See 3-22 New Appleman Law of
Liability Insurance § 22.06(2)(c) n.30 (2017) (collecting
cases). However, the contrary view is both more persuasive and
more consistent with our rules of construction.
3 The cases Abboud cites were not formally published; consequently, we will not address them.
14 A-3434-14T1 The insured vs. insured exclusion was, reportedly, the
insurance industry's "reaction to several lawsuits in the mid-
1980s in which insured corporations sued their own directors to
recoup operational losses caused by improvident or unauthorized
actions." Biltmore Assocs., supra, 572 F.3d at 668; see also
Appleman, supra, § 22.06(2)(c). These suits thus extended
liability coverage to intra-company claims and transformed the
nature of the insurance; specifically, they "turned liability
insurance into casualty insurance, because the company would be
able to collect from the insurance company for its own mistakes,
since it acts through its directors and officers." Biltmore
Assocs., supra, 572 F.3d at 669.
Although the specific formulation of this exclusion may
vary from policy to policy, its purpose was not simply to bar
collusive claims — as Abboud implies. Instead, it was intended:
to exclude coverage both of collusive suits — such as suits in which a corporation sues its officers or directors in an effort to recoup the consequences of their business mistakes, thus turning liability insurance into business-loss insurance — and of suits arising out of those particularly bitter disputes that erupt when members of a corporate, as of a personal, family have a falling out and fall to quarreling.
[Level 3 Commc'ns, Inc. v. Fed. Ins. Co., 168 F.3d 956, 958 (7th Cir. 1999) (emphasis added) (citations omitted).]
15 A-3434-14T1 See also Biltmore Assocs., supra, 572 F.3d at 669 ("The
exclusion protects of course against collusion, and also against
the risk of selling liability insurance for what amounts to a
fidelity bond."); Appleman, supra, § 22.06(c).
The question is whether this history requires us to deviate
from the exclusion's plain language by requiring an insurer to
prove collusion as Abboud contends. We think not. As Judge
Posner concluded in Level 3 Communications, the argument that
collusion must be proved "confus[es] a rule with its rationale
. . . ." Supra, 168 F.3d at 958. The drafters were free to
develop a standard that assumed some risk of over-inclusiveness
— that is, to include claims that did not involve collusion or
corporate family spats — to achieve the benefit of simplicity
and ease of enforcement. After all, "[a] standard, like 'no
coverage for collusive suits or lovers' quarrels,' [would be]
contoured exactly to [the exclusion's historical] purpose, but
it cannot be applied without a potentially costly, time-
consuming, and uncertain inquiry into the nature of the
underlying dispute sought to be covered." Ibid.
In any event, it is clear from the face of Abboud's
verified complaint, and the counterclaims, that what we have is
one of those "particularly bitter disputes that erupt when
members of a corporate . . . family have a falling out . . . ."
16 A-3434-14T1 Ibid. Although there is no evidence of collusion, enforcing the
insured vs. insured exclusion here nonetheless satisfies one of
the primary historical goals of the exclusion.4
In sum, guided by our rules of construction that place
dispositive weight on the plain language of a provision that is
neither ambiguous, convoluted nor opaque, we reject Abboud's
proposed gloss on the insured vs. insured exclusion's plain
language. We are in good company. See, e.g., Sphinx Int'l,
Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 412 F.3d
1224, 1229-30 (11th Cir. 2005) (applying Florida law); Level 3
Commc'ns, supra, 168 F.3d at 958; Foster v. Ky. Hous. Corp., 850
F. Supp. 558, 561 (E.D. Ky. 1994); Durant v. James, 189 So. 3d
993, 996 (Fla. Dist. Ct. App.), review denied, No. SC16-1004,
2016 Fla. LEXIS 1989 (Sept. 7, 2016); Robinson v. Rockhill Ins.
Co., 139 So. 3d 1031 (La. Ct. App. 2014).5
4 At least one insurer has drafted an insured vs. insured exclusion that expressly provides that it applies regardless of whether the claim is collusive. See Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 710 (8th Cir. 2009). That development lends no support to Abboud's argument, but merely reflects an insurer's effort to avoid the headaches such an argument creates. 5 We note, happily, that this case does not require us to address other knotty issues involving the scope of insured vs. insured exclusions. Questions have arisen when some claimants are insureds and others are not, see, e.g., Miller v. St. Paul Mercury Ins. Co., 683 F.3d 871 (7th Cir. 2012); and when claims are brought in the context of bankruptcy or other insolvency- (continued)
17 A-3434-14T1 III.
Abboud's remaining arguments lack sufficient merit to
warrant extended discussion. R. 2:11-3(e)(1)(E). Abboud's
estoppel argument falls short because he has failed to show any
detrimental reliance on National Union's alleged unjustified
delay in denying coverage. See Knorr v. Smeal, 178 N.J. 169,
178 (2003) (noting that estoppel requires a showing that the
adversary "engaged in conduct, either intentionally or under
circumstances that induced reliance, and that plaintiffs acted
or changed their position to their detriment"); Greenberg &
Covitz v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 312 N.J.
Super. 251, 265 (App. Div. 1998) ("[D]etrimental reliance by the
insured is a prerequisite to finding that coverage has been
expanded by estoppel."), modified on other grounds, 161 N.J. 143
(1999).
His argument that summary judgment was premature fails
because he does not identify what discovery he needs. See
(continued) related proceedings, see, e.g., W Holding Co. v. AIG Ins. Co., 748 F.3d 377, 385-86 (1st Cir. 2014) (discussing split in case law on whether insured vs. insured exclusion applies to Federal Deposit Insurance Corporation); Appleman, supra, § 22.06(2)(c) (noting the issue of the "Insured vs. Insured exclusion in the bankruptcy context . . . is becoming less significant as more D&O policies contain exclusions for claims 'brought or maintained by or on behalf of a bankruptcy or insolvency trustee, examiner, receiver or similar official'."); see also 9A Couch on Insurance 3d § 131:36 n.1 (2015) (collecting cases).
18 A-3434-14T1 Trinity Church v. Lawson-Bell, 394 N.J. Super. 159, 166 (App.
Div. 2007) ("A party opposing summary judgment on the ground
that more discovery is needed must specify what further
discovery is required, rather than simply asserting a generic
contention that discovery is incomplete.").
Finally, we decline to reach Abboud's claim that he was
entitled to coverage under the policy's EPL section (although
there appears to be little that is employment-related in the
counterclaims against Abboud). Abboud invoked only the D&O
section in his notice of claim, in his declaratory judgment
complaint, in discovery, and in argument before the trial court.
See Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973)
(stating that "appellate courts will decline to consider
questions or issues not properly presented to the trial court
when an opportunity for such a presentation is available unless
the questions . . . go to the jurisdiction of the trial court or
concern matters of great public interest" (internal quotation
marks and citation omitted)).
Affirmed.
19 A-3434-14T1