Underwriting Is a Risk Taking Exercise – Car Crusher Not a Trailer

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the condition of the applicant’s property. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. The case that follows shows what happens when the underwriter fails to get the facts needed to make a wise discrimination in the risk selected.

Plaintiff First Mercury Insurance Company appealed from portions of orders denying its motion for summary judgment and granting summary judgment to defendant Harleysville Insurance Company. First Mercury also appealed from an order entered on June 26, 2012, awarding counsel fees and costs to defendant Cholish Salvage, Inc., and an order entered on September 28, 2012, denying reconsideration. In First Mercury Insurance Company v. Cholish Salvage, Inc., A-1028-12T4, A-1163-12T4 (N.J.Super.App.Div. 11/12/2013) [enhanced version available to lexis.com subscribers], a New Jersey appellate court resolved the dispute over which insurer, if any, was obligated to defend and indemnify Cholish.

FACTS

Cholish is engaged in the business of salvage and recycling, and purchases used cars from junkyards to be resold as scrap metal. Before transporting the cars, Cholish often brings one of its portable car-crushing machines to the junkyards to compress the cars.

The portable car crusher in question is owned by Cholish and was manufactured by Overbuilt, Inc. It is comprised of a flat base with two sidewalls, a back wall, and is equipped with hydraulic crushing plates powered by a diesel engine. The car crusher is not independently mobile. It is fitted with eight wheels and can only be moved by being towed by another vehicle. It was licensed, although not required, to avoid fighting unnecessary citations from officers who did not recognize what it was.

Cholish transported the car crusher to a junkyard in Bayville, where it was used to compress several cars. A Cholish employee noticed that a hydraulic plate was not functioning properly and arrangements were made to transport the crusher to Cam Co. Hydraulics (“Camco”) for inspection. A Camco employee requested that “a couple [of] cars” be left inside the car crusher so that operation of the plates could be observed. After Cholish completed work at the junk yard, Leonard Cholish asked Tony Copeland, a truck driver employed by Porchtown Recyclers, Inc., to transport the car crusher to Camco. Before Copeland left, two small cars were placed inside the machine.

On June 4, 2008, before leaving the junkyard, Copeland failed to lower the hydraulic crushing plate completely. Using a Porchtown truck, Copeland towed the car crusher onto the southbound lane of the Garden State Parkway. When Copeland attempted to pass under the Lacey Road overpass in Lacey Township, the top arm of the car crusher struck the bottom of the overpass, causing the machine to become wedged underneath the overpass. The height of the car crusher with the two cars inside was approximately seventeen feet; the bottom of the overpass was fifteen feet above the roadway.

The overpass was extensively damaged and debris from the collision struck a nearby vehicle. Approximately eighty gallons of hydraulic fluid spilled onto the roadway, requiring environmental cleanup by a hazardous materials unit. The cleanup took several hours and involved eight tow trucks and other heavy equipment.

The New Jersey Turnpike Authority (“NJTA”) and Garden State Parkway sued Cholish and other defendants seeking damages for the cost of repairs to the Lacey Road overpass. The NJTA filed an amended complaint that sought $5.6 million in damages.

THE COVERAGE ACTIONS

First Mercury filed a declaratory judgment complaint against Cholish and Harleysville, seeking a declaration that Harleysville was obligated to defend and indemnify Cholish with respect to the NJTA suit. First Mercury also sought a declaration that Harleysville was obligated to reimburse First Mercury for past defense costs.

Porchtown filed a declaratory judgment action against Harleysville seeking coverage from Harleysville, arguing the crusher was a “covered auto” under the policy and that Copeland was a permissive user of the car crusher.

Star filed a complaint in the Porchtown action, alleging Porchtown was entitled to coverage under both the Harleysville and First Mercury policies. All the relevant suits were consolidated for discovery purposes.

First Mercury, Harleysville, Star, and Cholish each filed motions or cross-motions for summary judgment. The motion court ruled that the car crusher was “mobile equipment” and not a “motor vehicle” under both the Harleysville Auto policy and the First Mercury policy. As a result, the motion court ruled that Cholish was entitled to coverage under the First Mercury policy only, and that Star alone was obligated to provide coverage to Porchtown. Accordingly, the motion court denied First Mercury’s motion for summary judgment in the First Mercury coverage action, granted Harleysville’s and Cholish’s cross-motions for summary judgment, and dismissed First Mercury’s claims against them with prejudice. The motion court also granted Harleysville’s cross-motion for summary judgment in the Porchtown coverage action, denied Star’s cross-motion, and dismissed the claims against Harleysville with prejudice.

The motion court awarded Cholish counsel fees and costs from First Mercury. The underlying NJTA action settled for $4.325 million. Star agreed to pay $3.4 million and First Mercury agreed to pay $925,000.

ANALYSIS

First Mercury attempts to avoid coverage by arguing the car crusher is a semitrailer and is therefore excluded under its policy. Neither the First Mercury nor the Harleysville policy defines semitrailer. New Jersey’s motor vehicle and traffic statutes define semitrailer as “every vehicle with or without motive power, other than a pole trailer, designed for carrying persons or property and for being drawn by a motor vehicle and so constructed that some part of its weight and that of its load rests upon or is carried by another vehicle.”

Although the car crusher has large truck tires and is designed to be drawn by a motor vehicle, it was not designed for carrying persons or property. That is reinforced by the machine’s Operating and Safety Manual, which provides: “Never move crusher unless the crushing chamber is completely empty and the crusher lid is in the closed position and “DO NOT move the crusher unless the crushing chamber is completely empty and the lid is in the down position.” Although the car crusher happened to be carrying two cars at the time of the accident, it was clearly not designed to carry cargo.

The court concluded that the Legislature clearly intended the definition of a “motor vehicle” to encompass vehicles that are self-propelled by motors. By including a separate definition for motor vehicle the Legislature plainly understood the difference between vehicles with a motor and vehicles without a motor. The car crusher does not have a motor and must be towed by another vehicle. Moreover, by including the definition for “motor-drawn vehicle, ” the Legislature distinguished between vehicles that are self-propelled by motor and vehicles that are not independently mobile and must be drawn by a separate motor vehicle. Looking at the plain language of the statute the car crusher is not a “motor vehicle.”

Cholish’s cross-motion included an application for fees. The court found no error in the decision of the motion judge to allow Cholish to supplement its application with an affidavit for services and no abuse of its discretion in determining the affidavit was fair and reasonable. The affidavit sufficiently detailed the work performed and by whom. The request for counsel fees was reasonable, as Cholish had to protect its own interest to retain coverage. Cholish had to hire an attorney and enter the lawsuit to ensure it was provided coverage by one of the parties.

The trial court did not err in its award of counsel fees. There was no procedural error because the application for fees was submitted prior to the final judgment and the affidavit of services was timely submitted thereafter. The trial court did not abuse its discretion in accepting the affidavit, as it was detailed and reasonable.

ZALMA OPINION

This case is an example of the need for thorough well informed underwriting when dealing with a business that is out of the ordinary. The insurers involved could have save the litigation and a great deal of money but recognizing that Cholish used unusual equipment like a movable car crusher. Had the underwriter know enough about Cholish and its equipment it could have issued an endorsement defining the car crusher as a vehicle, a semi trailer or mobile equipment. Since it did not it left to the court the obligation to define the terms used to provide as much coverage as it was willing to provide.

Underwriting is making the decision which risks the insurer is willing to take and which risks the insurer is not willing to take. To do that task properly it is necessary to know enough about the insured to properly evaluate the risks the insurer was asked to take. Every insured is different and few fit into a cookie cutter pattern. The underwriters failed to recognize a major risk and clarify the policy to explain the intent.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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