Opinion
C.A. NO. 03-5823.
April 28, 2004
MEMORANDUM OPINION AND ORDER
The plaintiffs brought this declaratory judgment action, seeking a declaration that the defendant must advance defense costs, for two nearly identical actions pending in New Jersey state court. The defendant has filed a counterclaim for a declaratory judgment, seeking a declaration that it owes no coverage to plaintiffs for the state court actions and that it is not required to advance any defense costs. Presently before the court are the parties' cross-motions for summary judgment. For the reasons which follow, the motion of the plaintiff is granted and the motion of the defendant is denied.
There is no dispute as to the material facts. On July 29, 1999, two former employees of the plaintiffs, Henry H. Boeheim and Benjamin E. Baumiller ("the Claimants"), filed two separate actions against the plaintiffs ("the Employers") in the Superior Court of New Jersey ("the Underlying Actions"). Both suits asserted claims for breach of contract, breach of the duty of good faith and fair dealing and constructive discharge. The Employers sought coverage, including defense costs, under a Directors and Officers Liability and Private Company Indemnification Insurance Policy ("the Policy") issued by defendant to plaintiff Applied Tech Products.
Insuring Clause C of the Policy, as endorsed, provides that:
The Insurer will pay on behalf of the Insured Company, Loss which exceeds the Retention set forth in Item 4(b) of the Declarations up to the available maximum aggregate Limit of Liability set forth in Item 3(b) of the Declarations, and which Loss is incurred by the Insured Company as the result of any . . . Employment Claim first made against the Insured Company and reported in writing to the Insurer during the Policy Period . . . for a Wrongful Act.
Policy, Exhibit A to Plaintiffs' Motion for Summary Judgment at Endorsement No. 9 (emphasis in original).
An "Employment Claim" is defined in Section 2 of the Policy as: ". . . a Claim relating to any past, present or prospective Employee(s) of the Insured Company and alleging Wrongful Employment Practices by one or more Insureds." Id. at Section 2.L (emphasis in original). A "Wrongful Employment Practice" means "any actual or alleged: (1) wrongful demotion, dismissal, discharge or termination (either actual or constructive) of employment; [or]. . . . . (14) breach of an implied contract or agreement relating to Wrongful Employment Practices as defined herein . . ." Id. at Section 2.I (emphasis in original).
The Policy further provides:
When the Insured has not elected the Duty to Defend option as indicated in item 10 of the Declarations, the Insurer will not assume the defense of any Claim, rather (1) the Insurer shall advance Defense Costs within 60 days of the written request of the Insured, and prior to the final disposition of the Claim. Any advancement of Defense Costs under this Policy shall be subject to the Insurer's receipt of a written undertaking by the Insured(s), to repay the Insurer any advanced Defense Costs which are not covered under this Policy. . . . . .Id. at 7B. (emphasis in original).
Count One of both Underlying Actions expressly alleges that the Employers breached their contractual obligations to Claimants under the Employment Agreements by: (a) "[m]aterially increasing and changing [Claimants'] duties and responsibilities over and from [Claimants'] duties and responsibilities immediately prior to the consummation of the transaction contemplated by the Purchase Agreement"; (b) "engaging in a course of conduct to prevent Sussex from obtaining its goals under the Incentive Compensation plan;" (c) "failing to act in good faith"; and with respect to Claimant Baumiller, (d) "refusing to reimburse [him] for maintaining the same or similar health and medical coverage plan he maintained immediately prior to entering into the Employment Agreement." See Exhibits B and C to Plaintiffs' Motion for Summary Judgment.
Count Two of both Underlying Actions asserts a claim for Breach of Duty of Good Faith and Fair Dealing by the Employers. The alleged acts committed by the Employers constituting such breach are the same acts that are alleged to have breached the Employment Agreement in Count One of the Underlying Actions.Id.
Count Three of both Underlying Actions asserts a claim for constructive discharge. Specifically, the Claimants allege that "[d]uring the course of his employment with defendants, [each Claimant] was subjected to material increases and changes in his duties and responsibilities in his employment by defendants[,]" and, "[a]s a result of these actions of defendants, [each Claimant] was required to resign from his position of employment with defendants." Id.
The defendant argues that each of these three causes of action is excluded from coverage (and therefore advancement of defense costs) under Section 4.L of the Policy. That provision states that the Insurer shall not be liable to make any payment for Loss in connection with any Claim:
for Loss in connection with any Claim for any actual or alleged breach of an express written or oral contract or agreement; however, this exclusion shall not apply . . . to an Employment Claim if such liability would have attached to the Insured Company in the absence of the express contract in question . . . [.]
Plaintiffs" Motion for Summary Judgment, Exhibit A, Section 4.L.
Because Count One of the Underlying Actions does in fact allege "breach of an express written or oral contract or agreement," Count One cannot give rise to liability by the Employers in the "absence of the express contract in question," and therefore there can be no coverage for any Loss, including Defense Costs, which the Employers may incur in connection with Count One.
Defendant maintains that the claims for breach of the duty of good faith and constructive discharge are also excluded from coverage under Section 4.L. With regard to the claim for breach of the duty of good faith, defendant correctly notes that, under New Jersey law, in the absence of an employment contract there can be no claim for breach of an implied covenant of good faith and fair dealing. See, e.g., Schlichtig v. Inacom Corp., 271 F. Supp.2d 597, 606 (D.N.J. 2003); Barone v. Leukemia Society, 42 F. Supp.2d 452, 457 (D.N.J. 1998); Noye v. Hoffmann-LaRoche, Inc., 238 N.J. Super. 430, 433 (1990). Defendant contends that since the Claimants would have no cause of action for breach of an implied covenant of good faith and fair dealing in the absence of their Employment Agreements, Count Two also is excluded by Section 4.L.
Defendant also argues that the claim for constructive discharge falls within the exclusion of Section 4.L Defendant again correctly notes that New Jersey law permits constructive discharge claims in the absence of a contract only where the alleged discharge violates anti-discrimination laws or is contrary to public policy. Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58 (N.J. Supreme 1980). Defendant notes that the Claimants do not allege in either of the Underlying Actions that the Employers' alleged constructive discharge of the Claimants violated public policy or any anti-discrimination laws. Thus, according to defendant, if the constructive discharge claims can be maintained, they may be maintained only based on the Employment Agreement. As a result, defendant argues that Count Three is also excluded from coverage under Section 4.L.
Defendant overlooks the fact that its own policy covers "Wrongful Employment Practice" which is defined to specifically include claims for: "(1) wrongful demotion, dismissal, discharge or termination (either actual or constructive) of employment:" and "(14) breach of an implied contract requirement relating to Wrongful Employment Practices as defined herein. . . ." See Policy, Section 2, Definition of "Wrongful Employment Practice." Therefore any reasonable Insured reading the Policy would believe a claim for breach of the duty of good faith and fair dealing and constructive discharge is specifically covered under the Policy.
We read the "absence of an express contract" language contained in exclusion 4.L as serving only to provide an exemption to the application of the exclusion 4.L. In other words, the breach of contract exclusion will not apply to Employment Claims if such liability would have attached to the Insured Company in the absence of an express contract. Rather than narrow the application of the exclusion, defendant's interpretation of the "absence of an express contract" language" actually expands the exclusion contrary to its plain meaning. At the very least, the definition of "Wrongful Employment Practice" contained in Section 2 of the Policy indicating coverage for employment claims for wrongful discharge and breach of the implied covenant of good faith and fair dealing conflicts with the language of Exclusion 4.L which, defendant would have us read as excluding such claims. It is well-settled that such ambiguities must be resolved against the Insurer. See Medical Protective Co. v. Watkins, 198 F.3d 100, 104 (3d Cir. 1999).
Defendant seeks support for its position in Phico Ins. Co. v. Presbyterian Medical Serv. Corp., 444 Pa. Super. 221 ( Pa. Super. 1995) In Phico, the Superior Court of Pennsylvania held that claims in an underlying action for gross negligence and willful misconduct actually sounded in contract and therefore were excluded under a policy provision which precluded coverage for claims arising in connection with the breach of oral and written agreements unless they relate, among other things, to the employment of persons rendering professional health care service. However, unlike the Policy in the case sub judice which specifically provided coverage for breach of implied covenant of good faith and fair dealing and constructive discharge, the insurance policy in Phico did not specifically provide coverage for claims of gross negligence and willful misconduct. Therefore,Phico is inapposite.
Defendant also requests that in the event we find that some of the claims in the Underlying Actions are excluded from coverage and some are not, that we confirm that the Policy requires that defendant only has to advance defense costs for those claims that are not excluded. Defendant cites the Policy's allocation provision which states:
A. If . . . in any Claim the Insureds. . . . incur both Loss [including Defense Costs] covered under this Policy, and Loss not covered under this Policy, the Insureds and the Insurer shall fairly and reasonably allocate such amount between covered Loss and non-covered Loss based upon the relative liability exposure of the parties to such covered and non-covered matters.
B. If the Insurer and the Insureds cannot agree on an allocation of Loss, then in any arbitration, suit or other proceeding between the Insurer and the Insureds, no presumption shall exist concerning what is a fair and reasonable allocation between covered Loss and non-covered Loss
Plaintiffs' Motion for Summary Judgment, Exhibit A, Section 8. (emphasis in original).
Here, we have found the breach of contact claims to be excluded under the Policy while the breach of duty of good faith and fair dealing and constructive discharge claims are not excluded. While the parties are welcome to attempt to allocate the defense costs between the covered and non-covered claims, we note that when defense costs cannot be apportioned, the insurer ordinarily must assume the cost of the defense for both covered and non-covered claims.
An appropriate Order follows.
ORDER
The motion of the defendant for summary judgment is DENIED.The motion of the plaintiffs for summary judgment is GRANTED.
Judgment is ENTERED in favor of the plaintiffs and against the defendant.
The Court DECLARES that there is coverage under Select Policy No. GS 0436239 for any liability Applied Tech products and/or Sussex Technology, Inc. may have by reason of the allegations made against them for breach of duty of good faith and fair dealing and for constructive discharge in connection with the complaints captioned Henry H. Boheim v. SKM Applied Technology Partners and Sussex Technology, Inc. and/or Benjamin E. Baumiller v. SKM Applied Technology Partners and Sussex Technology, Inc. filed in the Superior Court of New Jersey, Law Division-Sussex County on or about July 29, 1999, Action Numbers L 000524-99 and L 000523-99, respectively, and with respect to any settlements of the foregoing actions; and the Court further
DECLARES that plaintiffs Applied Tech Products and Sussex Technoloy, Inc. are entitled to Defense Costs under Select Policy No. GS 0436239 with respect to the foregoing actions, including but not limited to an advancement of Defense Costs.
IT IS SO ORDERED.