USLR explained that approximately 50,000 square feet of the property's roof required replacement, 10,000 square feet of roof membrane was lost, and 15,000 square feet of the roof required new insulation.

On November 5, 2012, IIA requested that Hudson issue an advance to permit USLR to make temporary repairs to the property.

The following day, Hudson wired $100,000 to USLR for the repairs.

On December 3, 2012, Hudson's insurance adjuster requested an additional payment to make roof repairs to the property.

On December 13, 2012, Hudson wired $907,650 to USLR as further “payment for the roof damage” to the property.

On March 28, 2013, IIA advised Hudson that RAIT Partnership, L.P., was a mortgagee on the property and that RAIT sought to learn the status of USLR's insurance claim. In response, Hudson advised IIA that it had wired $100,000 and $907,650 to USLR. IIA advised Hudson that RAIT was “very upset” that the funds had been disbursed directly to USLR.

On April 3, 2013, IIA contacted the wholesale broker of the USLR policy and requested a “schedule of the mortgagees on the policy.” The wholesale broker subsequently advised IIA that Hudson had issued an April 3, 2013 endorsement to the policy adding RAIT as a mortgagee and additional insured. A box on the April 3, 2013 endorsement stated “Policy Changes Effective 7/30/12,” which was the inception date of the policy.

Thereafter, a dispute arose between RAIT and USLR concerning the insurance proceeds. RAIT claimed that USLR was obligated to remit the funds received from Hudson to RAIT under USLR's loan agreement with RAIT. The dispute was resolved by an amendment to their loan agreement, which provided that RAIT would be paid sums from USLR's sale of another property and settlement of a lease agreement with another party. It was agreed $1,190,345.69 would be paid to RAIT to bring USLR's loan payments current through August 1, 2013, and that $1,509,654.31 would be deposited into a USLR reserve account to be held by RAIT for various purposes, including the repair of the roof at USLR's East Brunswick property.

By April 2014, the roof repairs were complete with the cost paid by RAIT out of the USLR reserve.

RAIT sued Hudson in a New Jersey state court, asserting that Hudson had breached the insurance contract by disbursing the proceeds directly to USLR and thereby depriving RAIT of the opportunity to ensure that the proceeds were used to restore the property to its pre-loss condition. RAIT demanded judgment against Hudson for $907,650. RAIT did not assert any claims against USLR, IIA, the wholesale broker, or any of USLR's representatives.

Hudson moved for summary judgment, arguing that it had properly disbursed the insurance proceeds because USLR was the only named insured at the time the disbursements were made in November and December 2012.

RAIT argued that it was entitled to payment of the insurance proceeds based on the April 3, 2013 retroactive endorsement to the policy. It also asserted that there was an issue of fact concerning whether it was an additional named insured on the policy prior to Hudson's disbursement of the proceeds to USLR because it had received documents from IIA dated July 30, 2012 – a “Certificate of Liability Insurance” and “Evidence of Commercial Property Insurance” – listing it as a mortgagee and loss payee on the policy.

The trial court rejected RAIT's argument.

The trial court found that Hudson had properly disbursed the funds pursuant to the terms of the policy as it existed at the time the disbursements were made. The trial court found that RAIT's contention that the endorsement retroactively obligated Hudson to reimburse RAIT was not supported by law or logic. The trial court further found that it was undisputed that the roof had been fully repaired, the costs had been paid from the USLR monies held in the reserve, and USLR was current on its loan obligations to RAIT. The trial court, therefore, concluded that RAIT had not suffered damages as a result of Hudson's purported failure to make payments under the April 3, 2013 endorsement.

The trial court entered an order granting Hudson's motion for summary judgment, and RAIT appealed.

The Appellate Court's Decision

The appellate court affirmed.

In its decision, the appellate court found “no merit” to RAIT's contention that Hudson's November and December 2012 payments to USLR had violated the insurance policy because RAIT had been retroactively added as an insured in the April 2013 endorsement.

The appellate court explained that Hudson's obligation under the insurance policy was to provide coverage for the damage to USLR's property, and it ruled that Hudson had “fulfilled that obligation promptly and fully” by disbursing $1,107,650 to USLR as the only named insured on the policy at the time the disbursements had been made. The appellate court stated that although the endorsement later retroactively added RAIT to the policy, there was “no basis in the law” to conclude that Hudson then became obligated to pay a second and duplicative payment on a claim Hudson already had satisfied in accordance with the policy.

In the appellate court's opinion, the endorsement did not convert Hudson's “undisputed fulfillment of its obligations under the insurance policy in November and December 2012, into a breach of contract in April 2013.” Moreover, the appellate court added, acceptance of RAIT's argument would lead to the “absurd result” that Hudson would be obligated to twice cover the same loss under the policy.

The retroactivity urged by RAIT also would adversely affect the rights of a third party, USLR, because if Hudson were compelled to make a second payment for USLR's loss, it would be entitled to reimbursement from USLR for the sums previously paid, the appellate court pointed out. The appellate court, therefore, rejected RAIT's contention that the April 2013 endorsement provided a basis for its cause of action for breach of contract.

The appellate court also rejected RAIT's reliance on the documents provided by IIA that identified RAIT as a certificate holder and additional insured under the policy, explaining that they had been issued by the insurance broker, IIA, and not by Hudson. IIA's actions could not be imputed to Hudson, the appellate court stated, “[b]ecause a broker, unlike an agent, [was] not employed by the insurer.”

Moreover, the appellate court concluded, the documents expressly provided that they did not amend, extend, or alter the coverage provided by Hudson's insurance policy. Thus, IIA had made clear that the insurance policy, and not the documents, set forth the terms of Hudson's coverage and payment obligations.

The case is Rait Partnership, L.P. v. Hudson Specialty Ins. Co., No. A-5251-14T4 (N.J. App.Ct. April 19, 2017). Attorneys involved include: Kristofer B. Chiesa argued the cause for appellant (Sherman, Silverstein, Kohl, Rose & Podolsky, P.A., attorneys; Alan C. Milstein and Mr. Chiesa, on the briefs). Shaji M. Eapen argued the cause for respondent Hudson Specialty Insurance Company (Morgan Melhuish Abrutyn, attorneys; Mr. Eapen, of counsel and on the brief). Maxwell L. Billek argued the cause for respondent Independent Insurance Advisors, Inc. (Wilson, Elser, Moskowitz, Edelman & Dicker LLP, attorneys; Mr. Billek, on the brief).