Rulings point to challenging days ahead for insurance companies.

The insurance industry should be seeing amber, if not red, if two recent and decisive rulings of the New Jersey Supreme Court are any indication of what might lie ahead regarding issues important to the industry.

In one case, the Court clearly legislated from the bench in order to determine the standard of proof required under an insurance fraud related statute.

In the other, the Court's result effectively rewrote the insurance contract between the parties and has negative implications with respect to the rights of insurance companies to require insureds to adhere to specific late notice provisions in the future in the absence of prejudice.

The first case, Liberty Mutual v. Land, presents a particularly colorful and provocative factual scenario. The case involved the Lands, a couple with a vacation cabin in Highland Lakes, N.J.; Joseph Rizzo, their next door neighbor; Steven Burge, the Lands' nephew and also a New Jersey-licensed public adjuster; and Liberty Mutual, the insurer of the Lands' cabin.

On December 12, 2000, a tree on the Rizzos' property fell on the roof of Lands' cabin. The Lands called Burge to assess the damage for insurance claim purposes and secure the cabin. Shortly thereafter, Joseph Rizzo observed and videotaped Burge and two helpers on the roof of the Lands' cabin, slamming a portion of the tree repeatedly against the roof, creating further damage to the cabin, including, but not limited to, a broken skylight. The Lands filed an insurance claim with Liberty Mutual, prepared by Burge, for $69,338, of which Burge was to receive a 15 percent "commission." Burge submitted four separate proofs of loss at Liberty Mutual's request on the Lands' behalf, along with a signed declaration by the Lands in support of the claim.

Ten days after the incident, a Liberty Mutual insurance adjuster and a building contractor named Joseph Balinski inspected the Lands' cabin and determined that the roof repairs could be made for only $9,391.23. Balinski later testified that some of the purported damage resulted from an earlier falling tree incident claim, for which he also prepared an estimate.

The suspicious nature of the Lands' claim led Liberty Mutual to deny coverage and file suit against the Lands and Burge for violating the New Jersey Insurance Fraud Prevention Act (the "IFPA"). The Lands and Burge filed counterclaims against Liberty Mutual for breach of contract and bad faith. At the trial, the three defendants were found to have "knowingly misrepresented, concealed, or failed to disclose material facts concerning the property loss." The trial court decision was based on a "clear and convincing" evidence standard. Liberty Mutual was awarded treble damages, counsel fees, and investigative costs totaling $82,412.64.

Both parties appealed the decision to the Appellate Division. The Lands and Burge asserted that prejudicial errors had taken place during the trial; Liberty Mutual claimed the trial court erred in charging the jury that an IFPA violation must meet the standard of clear and convincing evidence. The Appellate Court reversed the trial court's decision and called for a new jury trial. Separately, the Appellate Court panel concluded that the burden of proof under IFPA was a clear and convincing evidence standard.

The resulting Supreme Court certification was limited solely to establishing the appropriate standard of proof for an IFPA violation, and the Court determined that the standard was "a preponderance of evidence," the least demanding of the three evidentiary standards (preponderance of evidence, clear and convincing evidence, and proof beyond a reasonable doubt).

At issue was the Legislature's "silence" in the IFPA legislation on the appropriate standard of proof. In essence, "the court chose not to interpret the Legislature's silence as an indication that it intended to depart from the customary standard of proof in civil cases. Rather, the more reasonable conclusion is that the absence of an evidentiary standard indicates that a preponderance of the evidence--the traditional, default standard--applies."

The Supreme Court ruling, agreed to by four justices and concurred in by another justice, drew a sharp dissent, authored by Justice Barry T. Albin: "The majority divines that standard by unnecessarily and vainly searching for a legislative intent when, apparently, the Legislature did not give a second thought to the subject."

Justice Albin continued in his dissent: "A defendant who is found liable under the IFPA is subject to compensatory damages, treble damages, mandatory assessment of investigation expenses, attorneys' fees and costs ... those penalties in their totality are more than the equivalent of punitive damages, which by statute must be proved by clear and convincing evidence.

"The significant consequences that flow from a judicial determination of IFPA liability should warrant a heightened degree of accuracy. The preponderance of evidence standard sets the bar too low. There is no sound reason why insurance companies should not bear the burden of proving an IFPA violation by clear and convincing evidence."

Although the Liberty Mutual Insurance Co. v. Land Supreme Court decision is clearly a victory of sorts for insurers who are defrauded by insureds on claims, the industry would be well advised to recognize the emergence of a court that will not hesitate to presume legislative intent in a statute and to legislate from the bench to suit its purposes.

As such, insurance company advocates should ponder when the insurance industry itself may become an aggrieved party of such an activist court.

The second case--Gazis v. Miller--though not as factually interesting and colorful, was equally precedent-setting and found the insurance industry on the losing end. In this instance, a Roman Catholic priest, Father Fred Miller, struck and injured a pedestrian, John Gazis, while driving a car owned by his employer, the Archdiocese of Newark.

Miller's car was insured by Lumberman's Mutual Casualty, with liability protection of $250,000, and with an excess or umbrella policy of $750,000 issued by the National Catholic Risk Retention Group, Inc. The National policy contained a specific clause that failure to notify the insurer of an "event" in writing, and within 120 days, would result in forfeiture of the excess insurance. That clause was triggered when the Archdiocese failed to give notice within the 120-day window.

A complaint filed by Gazis led to arbitration, which resulted in Gazis receiving an award of more than $1 million.

The Archdiocese ultimately settled with Gazis for $500,000, half of which was to come from the defendant's primary policy and the remainder from the umbrella policy. Both National and Gazis filed motions for summary judgment, and the trial court sided with National based on the late notification.

Gazis appealed, and the Appellate Division reversed the trial court and remanded the decision for entry of against National, finding that "under this occurrence-based liability policy the excess carrier could not forfeit coverage unless it proved both 'a breach of the notice provision and a likelihood of appreciable prejudice'."

In doing so, the Appellate Division reached back to 1968 and the Supreme Court's opinion in Cooper v. Gov't. Employees Ins. Co., the case that led to the "appreciable prejudice" requirement with respect to late notice provisions. In effect, the Appellate Division was extending an old ruling to a new type of policy and to a policy with a specific notice requirement as opposed to a general requirement that an insured provide notice "as soon as practicable."

The Supreme Court affirmed the Appellate Division's ruling and carried the rationale a few steps forward. The majority opinion stated: "At bottom, we are concerned here with liability insurance coverage for an automobile accident victim, notwithstanding that this coverage is excess to the insured's primary policy.

"We approach the coverage question in these circumstances, mindful of the strong and overreaching public policy that led to the omnibus liability coverage statute governing every owner of a motor vehicle registered in New Jersey."

The Court's majority decision drew a strong rebuke from Justice Roberto A. Rivera-Soto, who wrote in his dissenting opinion:

"In invoking 'the public interest in assuring that tort victims receive compensation for injuries caused by automobile operation,' both the Appellate Division and the majority threaten the uncontested facts and the clear and unambiguous policy language. However, that public interest cannot serve as the all-purpose excuse for a clear breach of contract."

Justice Rivera-Soto went on to write: "Sophisticated commercial parties are entitled to rely on the commonsense notion that they will be bound by the plain meaning of the words to which they agree. When sophisticated parties covenant that an act is to be performed 'no more than 120 days after receiving notice of any event which ... may give rise to a covered Loss,' they mean precisely that: 120 days.

"For a rationale inapplicable in this setting--that our public policy favoring compensation for victims of automobile accidents trumps clear, bargained--for contractual limitations of coverage--the majority denies National the benefit of its bargain and rewrites the contract between these parties to now read that notice must be given 'no more than 120 days after receiving notice of any event which ... may give rise to a covered Loss, provided, however, that the 120-day deadline for performance will be extended to the benefit of the defaulting party and to the detriment of the non-defaulting party for so long as the non-defaulting party is not appreciably prejudiced thereby."

The sarcasm implicit in the added text of Justice Rivera-Soto's dissenting opinion is unmistakable. There is, however, nothing remotely amusing about the substance of the majority's opinion in Gazis to any of us who represent insurance companies in New Jersey. Not when we must resign ourselves to the fact that it appears from that opinion that the current New Jersey Supreme Count may be prepared to rewrite any insurance contract and extend any deadline set forth in an insurance policy for as long as an insurance company is not appreciably prejudiced.

Given these two recent decisions, it appears that we are dealing with a much more activist Supreme Court and that this portends interesting and challenging days ahead for the insurance industry and for those of us who represent that industry.

BY JOSEPH G. HARRAKA, JR., PARTNER BECKER MEISEL, LLC