Colliers Lanard v. Lloyds of London , 458 F.3d 231 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
8-11-2006
Colliers Lanard v. Lloyds of London
Precedential or Non-Precedential: Precedential
Docket No. 05-3497
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PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Case No: 05-3497
COLLIERS LANARD & AXILBUND
v.
LLOYDS OF LONDON; HALLMARK INSURANCE CO.,
INC.
*CERTAIN UNDERWRITERS OF LLOYDS OF
LONDON,
Appellant
*(Pursuant to Rule 12(a), F.R.A.P.)
___________________
On Appeal from the United States District Court
for the District of New Jersey
District Court No.: 02-CV-06127
District Judge: The Honorable Joseph R. Rodriguez
___________________
Argued July 10, 2006
Before: SMITH, ALDISERT, and ROTH, Circuit Judges
(Filed: August 11, 2006)
___________________
Counsel: Vincent F. Reilly
Patricia M. Henrich (Argued)
Reilly, Janiczek & McDevitt
2500 McClellan Boulevard
Suite 240, Kevon Office Center
Merchantville, NJ 08109
Counsel for Appellant
Alan C. Milstein
Jeffrey P. Resnick (Argued)
Sherman, Silverstein, Kohl, Rose &
Podolsky
4300 Haddonfield Road
Suite 311
Pennsauken, NJ 08109
Counsel for Appellee
OPINION OF THE COURT
SMITH, Circuit Judge.
Appellant Lloyds of London (“Lloyds”) provided a
2
“claims made” professional liability insurance policy1 to
appellee Colliers, Lanard & Axilbund (“CL&A”), a real estate
brokerage. The policy provided retroactive coverage for claims
“provided that the insured had no knowledge of any suit, or any
act or error or omission, which might reasonably be expected to
result in a claim or suit as of the date of signing the application
for this insurance.” CL&A brought a breach of contract action
in the District Court after Lloyds denied coverage for a claim
arising from a mistake that CL&A had committed prior to
obtaining the policy. Following a bench trial, the District Court
concluded that the policy did not exclude the disputed claim and
entered judgment in favor of CL&A.
On appeal, the key issue in this diversity case governed
by New Jersey law is the proper construction of the policy
exclusion. We hold that the plain language of the policy
exclusion mandates a subjective test for the first part of the
necessary inquiry–whether the insured had knowledge of a suit,
act, error, or omission–and an objective test for the second part
of the necessary inquiry–whether the suit, act, error, or omission
might reasonably be expected to result in a claim or suit. We
further predict that the New Jersey Supreme Court would hold
that this clear and unambiguous policy exclusion should be
1
A “claims made” policy provides retroactive coverage for
liability arising out of acts which occurred before the policy
effective date provided that the claim is brought during the
policy period.
3
applied according to its plain language.
Consequently, we conclude that the District Court erred
as matter of law by applying an objective test to the first part of
its inquiry and a subjective test to the second part of its inquiry.
Because the District Court’s conclusion that the policy did not
exclude the disputed claim depended on its application of this
erroneous test, we will vacate the District Court’s judgment and
remand for further proceedings.2
I.
West Jersey Medical and Professional Plaza (“West
Jersey”) hired CL&A to be their real estate leasing broker for
the West Jersey Medical and Professional Plaza in Voorhees,
New Jersey. CL&A marketed the Plaza and also drafted the
lease agreements between West Jersey and any tenants that
CL&A obtained. CL&A in turn received commissions for each
tenant that it obtained.
West Jersey dealt solely with Jason Wolf, a salesman for
CL&A who has a bachelor’s degree in Business Administration
with a concentration in Real Estate and Business Law and
additional training in commercial real estate leases. Wolf
2
The District Court had diversity jurisdiction pursuant to 28
U.S.C. § 1332. We have jurisdiction over the final judgment of
the District Court pursuant to 28 U.S.C. § 1291.
4
obtained as tenants Schaffer Medical Associates (“Dr.
Schaffer”) and Albert R. Franciscan, M.D. (“Dr. Franciscan”).
Wolf prepared leases for these tenants, but essential terms were
entered incorrectly–an operating expense term that should have
read $8.84 per square foot was entered at $0.00. Wolf reviewed
the leases but did not notice the errors. CL&A’s General
Counsel, George Gordon, also reviewed the leases but did not
notice the errors. Finally, Steven Shapiro, the managing
member of West Jersey, also did not notice the errors when he
reviewed and signed the leases.
At some point prior to July of 2000, Shapiro became
aware of these errors. He discussed the situation with Wolf,
who acknowledged the errors. On July 14, 2000, Wolf drafted
letters to the two tenants, informing them that a “mutual
mistake” had been made in their leases and proposing remedies.
In letters dated July 24, 2000, and August 25, 2000,
respectively, Dr. Schaffer and Dr. Franciscan denied that there
was a mutual mistake in their leases and rejected Wolf’s
proposed remedies. Dr. Schaffer’s letter also stated: “Any
further discussions regarding this matter should be directed to
our attorney.” At trial, the parties stipulated that “Mr. Gordon,
who’s the in-house counsel, knew about those letters, and he
knew about the response to those letters, and in essence he knew
everything that Mr. Wolf knew.”
On August 29, 2000, Gordon signed a “Real Estate Errors
and Omissions Liability Application” for a “claims made”
policy to be issued by Lloyds, effective for one year as of
5
November 4, 2000, with a retroactive date of November 4, 1992.
CL&A received the policy from Lloyds on December 18, 2000.
The policy stated that it would provide coverage for claims
“prior to the effective date of this insurance and subsequent to
the retroactive date . . . provided that the insured had no
knowledge of any suit, or any act or error or omission, which
might reasonably be expected to result in a claim or suit as of
the date of signing the application for this insurance.”
On January 10, 2001, West Jersey’s counsel sent a letter
to CL&A stating that West Jersey was going to seek legal relief
against all parties related to the leases, including CL&A. On
January 24, 2001, CL&A was served with a complaint from
West Jersey, and Gordon informed CL&A’s insurance broker
about the lawsuit. On February 14, 2001, Lloyds denied
CL&A’s claim for defense and indemnification in this litigation,
claiming that CL&A was “aware of issues or circumstances
which ‘might reasonably be expected to result in a claim or suit
as of the date of signing the application for this insurance.’”
CL&A answered West Jersey’s complaint and also filed
a counterclaim for lost commissions.3 CL&A and West Jersey
eventually settled. The loss to West Jersey resulting from the
3
CL&A’s counterclaim against West Jersey was based on the
theory that as the signatory of the lease, West Jersey was
responsible for the mistake, and therefore was also responsible
to CL&A for lost commissions.
6
mistake was estimated at $214,528.00, and CL&A assumed
$135,290.80 of this liability.4 CL&A also incurred $112,062.09
in attorneys’ fees.
On December 30, 2002, CL&A filed a complaint against
Lloyds in the District Court, seeking to recover the costs that it
had incurred in defending and settling the West Jersey litigation.
On April 18, 2005, the District Court conducted a bench trial.
During the bench trial, Gordon testified that “[m]ost landlords
and tenants most always settle their disputes.” He also testified
that he believed that letters of Dr. Schaffer’s kind were
“typically an invitation to negotiate.” Gordon acknowledged
that if the tenants maintained their position, “ultimately the
landlord would be suing the tenant.” Nonetheless, he
maintained that he did not have the “slightest inkling” that if and
when litigation ensued, CL&A would be pulled in as a party.
In its Memorandum and Order of June 8, 2005, the
District Court relied on a New Jersey Superior Court case,
Liebling v. Garden State Indemnity, 767 A.2d 515 (N.J. Super.
2001), in its construction of the policy exclusion.5 The District
4
West Jersey also agreed that it owed CL&A $247,398.00 in
lost commissions. West Jersey thus payed $112,107.20 to
CL&A as a result of the settlement.
5
The District Court also cited First American Title Ins. Co. v.
Lawson, 827 A.2d 230 (N.J. 2003), and apparently applied this
case in conjunction with Liebling when interpreting the policy
7
Court concluded that “[t]he first part of the question–whether
Gordon had information of any act, error, or omission within his
knowledge–is objective.” The District Court further concluded
that “[t]he second part–whether Gordon reasonably expected
this information to result in a lawsuit–is a subjective question
that sought to probe his state of mind.” Accordingly, the
District Court held that “whether the policy exclusion applies
here depends on what Gordon ‘in fact’ believed, and not on the
fact that he is an attorney or that he has significant real estate
lease experience.” The District Court then held that the
exclusion was not applicable because “the weight of the
evidence at trial indicates that Gordon honestly believed that a
legal claim was unlikely.”
Consequently, the District Court concluded that Lloyds’
denial of coverage was a breach of contract. The District Court
further found that CL&A’s settlement with West Jersey was
exclusion. The First American Court, however, solely
considered an insurer’s claim that on the basis of the doctrine of
equitable fraud, it was entitled to rescind a malpractice policy
with respect to all of the attorneys in a limited liability
partnership because of the managing partner’s knowing
misrepresentations in the insurance application and associated
warranties. See id. at 238-41. Lloyds did in fact raise a
rescission claim in the District Court, but it has not renewed that
issue on appeal. Accordingly, we do not find First American
instructive with respect to the issues actually presented in this
appeal.
8
reasonable and entered into in good faith, and that Lloyds had
accepted the amount of CL&A’s attorneys’ fees. Accordingly,
on June 8, 2005, the District Court entered judgment for CL&A
and in accordance with the terms of the insurance policy ordered
Lloyds to pay $247,352.89 (the liability CL&A had assumed for
West Jersey’s loss plus CL&A’s attorneys’ fees), less applicable
deductibles, to CL&A. Lloyds appealed.6
II.
In an appeal of a final judgment following a bench trial,
we exercise plenary review over the District Court’s conclusions
of law. Kosiba v. Merck and Co., 384 F.3d 58, 64 (3d Cir.
2004). Findings of fact shall not be set aside unless clearly
erroneous and due regard must be given to the trial court’s
judgment as to the credibility of the witnesses. Fed. R. Civ. P.
52(a). The construction of an unambiguous contract is a matter
of law and subject to plenary review. U & W Indus. Supply, Inc.
v. Martin Marietta Alumina, Inc., 34 F.3d 180, 185 (3d Cir.
6
In addition to contesting the District Court’s conclusions
with respect to the policy exclusion, Lloyds also argued on
appeal: (1) that a claim by West Jersey had actually been made
to CL&A prior to the effective date of the policy; and (2) that
CL&A had not satisfied its burden of proof with respect to
damages. Although we will vacate the District Court’s
judgment because it erred with respect to its construction of the
policy exclusion, we find no merit in either of Lloyd’s additional
arguments.
9
1994).
With respect to an issue of state law in a diversity case,
when there is no decision from the state’s highest court directly
on point, we are charged with predicting how that court would
resolve the question at issue. See Canal Ins. Co. v.
Underwriters at Lloyd’s London, 435 F.3d 431, 436 (3d Cir.
2006). When predicting how the state’s highest court would
resolve the issue, we must take into consideration: (1) what that
court has said in related areas; (2) the decisional law of the state
intermediate courts; (3) federal cases interpreting state law; and
(4) decisions from other jurisdictions that have discussed the
issue. See id. “Although lower state court decisions are not
controlling on an issue on which the highest court of the state
has not spoken, federal courts must attribute significant weight
to these decisions in the absence of any indication that the
highest state court would rule otherwise.” Wisniewski v. Johns-
Manville Corp., 759 F.2d 271, 273-74 (3d Cir. 1985).
III.
Several principles of New Jersey insurance law govern
this diversity case. Generally, “when interpreting an insurance
policy, courts should give the policy’s words their plain,
ordinary meaning.” NAV-ITS, Inc. v. Selective Ins. Co. of Am.,
869 A.2d 929, 933 (N.J. 2005) (internal quotation marks and
citation omitted). “If the policy language is clear, the policy
should be interpreted as written, [but] [i]f the policy is
ambiguous, the policy will be construed in favor of the insured.”
10
Id. (internal citations omitted).
Exclusions in an insurance policy should be narrowly
construed. Id. at 934 (citing Princeton Ins. Co. v. Chunmuang,
698 A.2d 9, 16 (N.J. 1997)). The insurer has the burden of
bringing the claim within the exclusion. Princeton Ins., 698
A.2d at 16-17. Nonetheless, “exclusions are presumptively
valid and will be given effect if ‘specific, plain, clear,
prominent, and not contrary to public policy.’” Id. at 17 (quoting
Doto v. Russo, 659 A.2d 1371, 1378 (N.J. 1995)); see also Am.
Motorists Ins. Co. v. L-C-A Sales Co., 713 A.2d 1007, 1013-14
(N.J. 1998) (finding that a policy exclusion precluded coverage
because it was “clear and unambiguous” and not contrary to
public policy).
New Jersey courts also “endeavor to interpret insurance
contracts to accord with the objectively reasonable expectations
of the insured.” See NAV-ITS, 869 A.2d at 934 (internal
quotation marks and citation omitted). The New Jersey
Supreme Court has “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.” See id. (internal citations omitted) (emphasis
added).
The New Jersey doctrine allowing the reasonable
expectations of the insured to override the plain meaning of a
policy in exceptional circumstances, while often stated, has
11
rarely been applied by the New Jersey Supreme Court.
Nonetheless, in Sparks v. St. Paul Insurance Co., 495 A.2d 406
(N.J. 1985), the New Jersey Supreme Court held that a clear
policy exclusion which did not “conform to the objectively
reasonable expectations of the insured” and which was
“violative of the public policy of [New Jersey]” could be
construed in a manner which varied from its plain terms. See id.
at 414-16.
In light of these decisions, we predict that the New Jersey
Supreme Court would hold that a clear and unambiguous policy
exclusion should be applied according to the plain language of
the exclusion unless it violates public policy as well as the
objectively reasonable expectations of the insured. In other
words, we hold that under New Jersey law, the “exceptional
circumstances” that might allow a court to construe a clear and
unambiguous policy exclusion in accordance with the
objectively reasonable expectations of the insured, rather than
in accordance with the plain language of the exclusion, arise
only when a literal application of the exclusion would also
violate public policy. Cf. Princeton Ins., 698 A.2d at 17; cf. also
Am. Motorists, 713 A.2d at 1013-14.
IV.
As a matter of law, we hold that the policy exclusion in
this case is clear and unambiguous, and that its plain language
mandates a subjective test for the first part of the necessary
inquiry and an objective test for the second part of the inquiry.
12
As an initial observation, such a test flows directly from the text
of the exclusion (“provided that the insured had no knowledge
of any suit, or any act or error or omission, which might
reasonably be expected to result in a claim or suit as of the date
of signing the application for this insurance”). The first
condition in the exclusion is satisfied if the insured had
knowledge of the relevant suit, act, error, or omission.
Accordingly, we conclude that this part of the exclusion depends
on the insured’s actual knowledge, or subjective awareness, of
the relevant suit, act, error, or omission. The second condition
in the exclusion, in contrast, is satisfied if the suit, act, error, or
omission might reasonably be expected to result in a claim or
suit. This language does not require that the insured actually
form such an expectation, and we conclude that this part of the
exclusion gives rise to an objective test: whether a reasonable
professional in the insured’s position might expect a claim or
suit to result.
These conclusions are supported by our analysis in Selko
v. Home Insurance Company, 139 F.3d 146 (3d Cir. 1998).7
The attorney malpractice policy in Selko stated that an act, error,
or omission that had occurred prior to the policy period would
be covered “provided that prior to the effective date of this
policy . . . the insured had no basis to believe that the insured
7
Although Selko was decided under Pennsylvania law, we
find our reasoning in that case instructive on the textual issues
in the present case.
13
had breached a professional duty.” Id. at 149 n.1. We held that
the “plain meaning” of this “basis to believe” clause gave rise to
a two-step inquiry: (1) the subjective question of whether the
insured knew of certain facts; and (2) the objective question of
whether a reasonable lawyer in possession of such facts would
have had a basis to believe that the insured breached a
professional duty. Id. at 151-52. We further held that this
“mixed standard . . . is not merely one of several possible
interpretations but is . . . the interpretation plainly signaled by
the contract language.” Id. at 152 n.3. In short, we held that this
mixed standard arose plainly and unambiguously from the
language of the exclusion.
Notably, in Selko this reformulation of the policy
exclusion into a two-part inquiry required an inferential step,
since the policy language itself contained a unitary clause (that
“the insured had no basis to believe that the insured had
breached a professional duty”). In the present case, no such
inferential step is required, because the structure and text of the
exclusion itself incorporates such a two-part inquiry.
Finally, we note that the New Jersey Superior Court’s
decision in Liebling, upon which the District Court relied,
specifically addressed our decision in Selko. Notably, the
Liebling court did not contradict our decision in Selko with
respect to what the plain language of such a policy exclusion
would require. The attorney malpractice policy in Liebling
provided that “[w]e do not insure here any claim . . . of which .
. . [a]ny insured, at the inception date of this contract, knew or
14
reasonably could have foreseen that any such act, error, or
omission might be expected to give rise to a claim otherwise
insured here.” 767 A.2d at 522. The Liebling court observed
that in Selko, we construed a “similarly worded exclusion[] as
creating an objective standard for denial of coverage . . . .” Id.
(citing Selko, 139 F.3d at 146). The Liebling court held that
“[r]eturning to the language of the exclusion discussed in Selko,
we acknowledge that the court’s interpretation is sound as a
matter of logic.” Id. at 523. Consequently, the Liebling court
endorsed our reasoning in Selko insofar as it was based on the
plain implications of the language of the exclusion.
The Liebling court, however, went on to reach a different
conclusion about the applicable test:
Nevertheless, we reject [the mixed test in Selko]
because it does not meet the reasonable
expectations of an attorney seeking the protection
afforded by malpractice insurance. That view
was eloquently articulated in Estate of Logan v.
Northwestern Nat. Cas. Co., 144 Wis. 2d 318, 424
N.W.2d 179 (1988), an opinion with which we
entirely agree.
Id. This passage implies that the Liebling court did not hold,
contra to Selko, that the language of the exclusion in Liebling
was ambiguous. Nor did the Liebling court hold that the
language of the exclusion had a different plain meaning than the
one we identified in Selko. Rather, the Liebling court apparently
15
relied in this passage on the New Jersey doctrine that in
exceptional circumstances, even the plain language of an
exclusion can be set aside if it is contrary to the objectively
reasonable expectations of the insured.
The Liebling court subsequently made its reliance on this
doctrine explicit. At the end of the section discussing the
exclusion, the court noted that the New Jersey Supreme Court
had stated that “‘[a]t times, even an unambiguous [insurance]
contract has been interpreted contrary to its plain meaning so as
to fulfill the reasonable expectations of the insured[.]’” Id. at
524 (citing Werner Indus., Inc. v. First State Ins. Co., 548 A.2d
188 (N.J. 1988)). The Liebling court then stated:
Based on that settled principle and the reasoning
of the Supreme Court of Wisconsin in Logan, we
hold that the “reasonably could have foreseen”
exclusion in Garden State’s policy shall be
deemed to mean that coverage may be denied
only if the insured knew or believed that there had
been a deviation from professional standards and
that based on all the known circumstances it was
likely that a malpractice claim would be made.
Id. Accordingly, the Liebling court’s reasoning depended on the
proposition that the exclusion should be interpreted in a manner
contrary to its plain meaning in order to fulfill the reasonable
expectations of the insured. We turn now to the application of
that doctrine to the exclusion in this case.
16
V.
In accord with our analysis of the decisions of the New
Jersey Supreme Court, and because the exclusion in this case
was clear and unambiguous, we must determine if applying the
exclusion according to its plain meaning would violate public
policy as well as the objectively reasonable expectations of the
insured.
A.
Both Sparks and a companion case, Zuckerman v.
National Union Fire Insurance Co., 495 A.2d 395 (N.J. 1985),8
considered the public policy implications of exclusions in
“claims made” insurance policies. In Zuckerman, the New
Jersey Supreme Court held that an attorney malpractice policy
that afforded “unlimited retroactive coverage, excluding only
those claims based on past conduct that the insured knew, or
could have reasonably foreseen, might lead to a claim or suit”
was reasonable9 and not a violation of public policy. See 495
A.2d at 403-05. The Zuckerman court reasoned:
The reasonableness of excluding claims based on
prior conduct that the insured could reasonably
have foreseen might serve as the basis for a future
8
The Liebling court did not cite or discuss Sparks or
Zuckerman.
9
This is not the same inquiry as to whether the objectively
reasonable expectations of the insured were fulfilled. That issue
did not arise in Zuckerman. See 495 A.2d at 403-04 (“There is
no suggestion that appellant’s reasonable expectations of
coverage were unfulfilled.”).
17
claim is apparent. The insurance company is
entitled to protect itself against the professional
who, recognizing his past error or omission,
rushes to purchase a “claims made” policy before
the error is discovered and a claim asserted
against him. This insurance company concern has
been termed the “moral hazard.”
Id. at 403 n.3 (citations omitted). Further noting that the scope
of the coverage was “consistent with the coverage customarily
provided by ‘claims made’ policies” and that “[t]he retroactive
coverage [was] substantially unrestricted,” the Zuckerman court
found “no considerations of public policy that would inhibit our
enforcement of the ‘claims made’ policy issued to the
appellant.” Id. at 404.
In Sparks, however, the New Jersey Supreme Court
found that a different exclusion in a “claims made” medical
malpractice policy did violate public policy. 495 A.2d at 414-
16. The Sparks court concluded that the exclusion in that case
rendered the policy at issue “substantially different from the
standard ‘claims made’ policy.” Id. at 414. Specifically, the
court observed that due to the terms of the exclusion:
During the first year that the policy was in force,
it provided no retroactive coverage for
occurrences prior to the effective date of the
policy. Thus, it afforded the insured only minimal
protection against professional liability claims.
Only claims asserted during the policy year, based
on negligence that occurred during the policy
year, and that were subsequently communicated
to the company during the policy year were under
18
the umbrella of coverage.
Id. at 414-15. The court further reasoned:
The realities of professional malpractice,
however, suggest that it would be the rare
instance in which an error occurred and was
discovered with sufficient time to report it to the
insurance company, all within a twelve-month
period. The victims of professional malpractice
are frequently unaware of any negligence until
their injury becomes manifest long after the error
or omission was committed.
Id. at 415. As a general principle of public policy, the court
concluded that “[b]ecause insurance contracts are contracts of
adhesion, the terms of which are not customarily bargained for,
courts have a special responsibility to prevent the marketing of
policies that provide unrealistic and inadequate coverage.” Id.
at 415. Accordingly, the court held that “[t]o enforce policies
that provide such unrealistically narrow coverage to
professionals, and, derivatively, to the public they serve, would
in our view cause the kind of broad injury to the public at large
contemplated by the doctrine that precludes the enforcement of
contracts that violate public policy.” Id.
Taken together, Zuckerman and Sparks imply that an
exclusion in a “claims made” policy which is properly designed
to prevent the “moral hazard” of a professional “recognizing his
past error or omission” and “rush[ing] to purchase a ‘claims
made’ policy before the error is discovered and a claim is
asserted against him” is reasonable and not a violation of public
policy. However, the policy must in fact provide retroactive
19
coverage, and therefore the terms of the exclusion cannot
operate as a complete bar to retroactive coverage.
In light of these principles, we hold that applying the
exclusion in the present case according to the mixed subjective-
objective standard arising under the exclusion’s plain language
would not constitute a violation of New Jersey public policy.
Again, although decided under Pennsylvania law, we find our
reasoning in Selko instructive on this issue.
Specifically, we explained in Selko why using an
objective standard for the second part of the inquiry was
reasonable in the context of a “claims made” policy:
It is reasonable for the insurer to refuse coverage
for claims based on preexisting but undisclosed
misconduct by an insured attorney. Nor is it
unreasonable to tie such an exclusion to an
even-handed “reasonable attorney” assessment,
rather than to speculation concerning the
individual attorney’s subjective understanding.
The latter approach, by rewarding the attorney
who is ignorant of the law, or by encouraging
disingenuous, after-the-fact justifications, could
result in totally capricious and unpredictable
outcomes. Under the mixed standard we believe
the Pennsylvania court would adopt, coverage
does not turn on psychoanalysis, yet the attorney
is not made accountable for matters he did not
know about, nor for known matters that would not
cause a reasonable attorney to foresee a claim.
139 F.3d at 152. This same reasoning can be applied to any
20
similar exclusion in a “claims made” professional liability
policy: an exclusion which depended on a subjective standard
for the second part of the inquiry would reward ignorance and
encourage professionals to engage in disingenuous statements
and after-the-fact justifications, which in turn would lead to
unpredictable outcomes.
Moreover, implicit in our reasoning in Selko was the
same concern for “moral hazards” as expressed by the New
Jersey Supreme Court in Zuckerman. In particular, a
professional who became subjectively aware of an error and
who then rushed to obtain a “claims made” policy might later
disingenuously assert that he or she was not subjectively aware
of the possibility that a claim or suit might arise from the error.
Notably, this moral hazard does not exist if the professional is
not subjectively aware that an error has occurred, because in that
case the professional would have no reason to anticipate a need
for professional liability insurance. Conversely, however, once
a professional is subjectively aware of an error, the professional
has an incentive to seek new or additional professional liability
insurance. This is true even if the professional does not know
whether or not the error may lead to an actual claim. Further,
even if in truth the professional was subjectively aware that the
error might lead to an actual claim, as we noted in Selko, under
a subjective standard the professional would have a greater hope
of disingenuously convincing a court that he or she was not
aware of the legal implications of the error.10
10
We note that the District Court’s finding with respect to
Gordon’s subjective belief about the likelihood of a claim
against CL&A depended heavily on Gordon’s own self-serving
testimony. We further note that although the District Court’s
determinations as to credibility are entitled to our deference, on
21
Accordingly, a policy exclusion which requires an
objective test for the second part of the necessary inquiry
constitutes a reasonable attempt by the insurer to limit this moral
hazard. Consequently, in light of the reasonable concerns of
insurers as expressed in Zuckerman, we predict that the New
Jersey Supreme Court would hold that a mixed subjective-
objective test, arising under an exclusion in a “claims made”
professional liability policy, does not violate New Jersey public
policy.
B.
Because we predict that a mixed subjective-objective test
arising under an exclusion in a “claims made” policy would not
violate New Jersey public policy, we further predict that the
New Jersey Supreme Court would hold that the extraordinary
circumstances in which the plain language of the exclusion
might give way to the objectively reasonable expectations of the
insured do not exist in this case. We further predict that in any
event, the New Jersey Supreme Court would also hold that a
mixed subjective-objective test does not violate the objectively
reasonable expectations of the insured.
The New Jersey Supreme Court in Sparks explained why
the basis of the record before us, we have significant doubts
about the plausibility of Gordon’s testimony. We note in
particular that Wolf, apparently with Gordon’s knowledge, had
perceived the need to offer a legal theory–“mutual
mistake”–which apparently was designed to shift partial
responsibility for CL&A’s drafting errors to the tenants.
22
the exclusion in that case, in addition to violating public policy,
also violated the reasonable expectations of medical
professionals because it in effect operated to entirely bar
retroactive claims. The Sparks court reasoned that absent
unusual circumstances, a medical professional could reasonably
opt for the prospective coverage provided by “occurrence”
policies (in which claims arising from an error which happened
during the policy period would be covered regardless of when
the error was actually discovered) or for the retroactive coverage
by “claims made” policies, but could not reasonably opt for a
policy which provided neither prospective nor retroactive
coverage. See 495 A.2d at 415. This reasoning is inapplicable
to the present case, because Lloyd’s policy generally provided
retroactive coverage.
As previously noted, however, the New Jersey Superior
Court in Liebling held that the mixed subjective-objective test
which we adopted in Selko would not meet the reasonable
expectations of the insured. Although we acknowledge that the
Superior Court’s decisions are entitled to substantial weight in
our prediction of New Jersey law, its decisions are not
controlling, and we conclude that in this instance, we have
sufficient indications that the New Jersey Supreme Court would
rule otherwise.11
11
We note that the New Jersey Supreme Court summarily
denied certification in Liebling. 782 A.2d 424 (N.J. 2001)
(table). We give no weight to this denial of certification because
the relevant legal conclusion in Liebling was not dispositive in
Liebling itself. Although the Liebling court held that the insurer
must show that the insured subjectively believed that it was
likely a claim would be made, the court also found that the
insured did in fact have such a subjective belief. See 767 A.2d
at 525. Moreover, the Liebling court found in the alternative
23
In its analysis of the reasonable expectations of the
insured, the Liebling court did not rely on Sparks, nor on any
other New Jersey cases, but rather on Logan, a Wisconsin
Supreme Court case. See 767 A.2d at 523-24. The attorney
malpractice policy in Logan allowed retroactive coverage
provided that before the policy’s effective date, “the Insured had
no basis to believe that the Insured had breached a professional
duty.” 424 N.W.2d at 185. The insurer in Logan argued that “a
claim should be excepted from coverage if the insured knew or
should have known that the insured had breached a professional
duty.” Id. at 186.
The Wisconsin Supreme Court reasoned that this
objective standard, as proposed by the insurer, would be
“inconsistent with the purpose of the policy and what an insured
would have understood the exception to provide.” Id.
Specifically, the Logan court held that “whether an insured had
a ‘basis to believe’ must be tested by whether the insured knew
or believed that the insured had committed a breach of his or her
that “no reasonable attorney [would] have felt secure from a
claim.” Id. Accordingly, a reversal by the New Jersey Supreme
Court with respect to the relevant point of law would not have
affected the Liebling court’s ultimate conclusion that the policy
exclusion did apply. Further, the Liebling court also held that
the insured was entitled to recission of the entire policy on the
ground of equitable fraud (due to the insured’s knowingly false
answer to an application question regarding the insured’s
awareness of possible claims). Id. Consequently, for multiple
reasons, a reversal on the relevant point of law would not have
led to a different outcome in Liebling, and therefore we decline
to attach any significance to the New Jersey Supreme Court’s
decision not to review the Superior Court’s judgment in that
case.
24
professional duty.” Id. In support of this holding, the Logan
court reasoned:
The difficulty with applying an objective standard
is apparent when examined in the context of a
hypothetical error or omission by an attorney. For
example, an attorney commits a breach of his or
her professional duty by not filing a suit within
the one year statute of limitations. The attorney
did not file within the year because he or she
believed erroneously that the statute of limitations
was three years. The statute was specific, and the
attorney should have known that the statute of
limitations was one year. Under an objective
standard, any subsequent policy would except
coverage for a claim based on failing to file the
suit within one year because, prior to the effective
date of the subsequent policy, the attorney should
have known that he or she had breached a
professional duty by failing to file the suit within
the one year statute of limitations. Thus, because
the attorney did not know the correct statute of
limitations, but should have known the correct
statute, the attorney not only committed a breach
of his or her professional duty, but he or she is
also denied insurance coverage.
Id. In short, the Logan court was noting that retroactive
coverage for professional errors would be illusory if such
coverage could be denied on the ground that a reasonable
professional would have known that the error had been
committed prior to obtaining the policy.
25
In that sense, however, the Logan court was addressing
only what we identified in Selko as the first part of the necessary
inquiry–whether the professional was subjectively aware of the
relevant error. In contrast, the hypothetical scenario considered
by the Logan court did not address the second part of the
inquiry–whether the error could reasonably be expected to result
in a claim. Accordingly, the concerns expressed by the Logan
court on the basis of this hypothetical scenario do not extend to
a case in which a professional is subjectively aware that he has
committed a professional error, and the only remaining question
is whether that error could be expected to result in a claim.
In applying Logan, the Liebling court failed to draw this
distinction. Rather, the Liebling court concluded:
Based on . . . the reasoning of the Supreme Court
of Wisconsin in Logan, we hold that the
“reasonably could have foreseen” exclusion in
[the] policy shall be deemed to mean that
coverage may be denied only if the insured knew
or believed that there had been a deviation from
professional standards and that based on all the
known circumstances it was likely that a
malpractice claim would be made.
767 A.2d at 524 (emphasis added). Once the insured is
subjectively aware that “there ha[s] been a deviation from
professional standards,” however, the concerns of the Wisconsin
Supreme Court in Logan are no longer applicable. In contrast,
the moral hazard identified by the New Jersey Supreme Court in
Zuckerman does become applicable at that point, because a
professional already has an incentive to seek new or additional
retroactive insurance once the professional is aware of the error,
26
and even if the professional is unsure whether a claim will
result.
In short, by extending the reasoning of the Logan court
to the second part of the necessary inquiry, the Liebling court
failed to give due regard to the reasonable purposes that can be
served by exclusions in “claims made” policies as explained by
the New Jersey Supreme Court in Zuckerman.12 Consequently,
we conclude that we have sufficient indications from the New
Jersey Supreme Court that it would hold, contra to Liebling, that
the mixed subjective-objective test arising under the plain
language of the exclusion in our case did not violate the
objectively reasonable expectations of the insured.
VI.
12
We note that the policy in Zuckerman excluded “only those
claims based on past conduct that the insured knew, or could
have reasonably foreseen, might lead to a claim or suit.” See
495 A.2d at 403. Although the Zuckerman court did not address
this issue, it appears to us that this exclusion gave rise to an
objective test, insofar as it excluded claims based on past
conduct that the insured “could have reasonably foreseen” might
lead to a claim. Indeed, the Zuckerman court used this same
formulation when addressing the reasonableness of such
exclusions. See id. at 403 n.3 (“The reasonableness of excluding
claims based on prior conduct that the insured could reasonably
have foreseen might serve as the basis for a future claim is
apparent.”). Accordingly, although the Zuckerman court did not
specifically address the reasonableness of an objective test for
the second part of the necessary inquiry, we find it notable that
the Zuckerman court approved what appears to us to be an
objective test.
27
In sum, we predict that the New Jersey Supreme Court
would hold that the mixed subjective-objective test arising from
the clear and unambiguous policy exclusion in our case violates
neither New Jersey public policy nor the objectively reasonable
expectations of the insured. Accordingly, we further predict that
the New Jersey Supreme Court would hold that this policy
exclusion should be applied according to its plain language.
Consequently, the District Court erred by holding that it should
apply an objective test to the first part of the inquiry and a
subjective test to the second part of the inquiry, because given
the plain language of the exclusion, the District Court should
have applied a subjective test to the first part of the inquiry and
an objective test to the second part of the inquiry.
Because the District Court’s dispositive reasoning
depended on its application of an erroneous test, we will vacate
the District Court’s judgment and remand for further
proceedings.13
13
We note that given the record before us, we have some
doubt about whether a triable issue remains after our holding.
In particular, in our view a reasonable professional in Gordon’s
position, with Gordon’s knowledge that CL&A had committed
the drafting error and that the tenants had rejected CL&A’s
“mutual mistake” theory, would have expected that a claim or
suit against CL&A might arise. Nonetheless, we will leave to
the District Court the decision as to whether it should grant
judgment as a matter of law in favor of Lloyds, or whether a
new trial conducted in light of the proper standard is warranted.
28