Court Upholds Dismissal of Corrections Officer Who Could Not Possess Firearm

By: Ralph R. Smith, 3rd, Esq.

In the recent case of In re: Frazier, 435 N.J. Super. 1 (App. Div. 2014), the New Jersey Superior Court- Appellate Division had to decide whether a public employee who was disqualified from possessing a gun could lose his public employment where a condition of that employment included carrying a firearm. The Court ultimately ruled in the affirmative that a public employee who was required to carry a firearm as part of his essential job duties could indeed be discharged if that employee was disqualified from carrying a firearm under New Jersey gun laws.

In 2004, the Legislature had passed an amendment to New Jersey’s gun law (N.J.S.A. 2C:39-7(b) (2)).  It was the state analogue to an earlier amendment to the federal Gun Control Act known as the Lautenberg Amendment. (18 U.S.C. Section 9229(g)(9)) The Amendment to New Jersey’s gun law (like the Lautenberg Amendment) barred anyone convicted of certain qualifying domestic violence offenses from possessing a firearm.

Plaintiff was a corrections officer. In 1999, he was arrested on a domestic violence charge.  Although indicted on more serious charges, plaintiff eventually pleaded guilty to a disorderly persons offense involving domestic violence in 2000.  Thereafter, plaintiff was served with a Preliminary Notice of Discipline (‘PND’) by the New Jersey Department of Corrections, seeking his removal from public employment due to his disqualification from carrying a gun under Federal gun laws.  Plaintiff was ultimately removed from his corrections officer position, and after filing two appeals in state court, and having his removal overturned where other subsequently issued PND’s for the same domestic violence offense were challenged, was again cited for disciplinary removal after New Jersey passed its own version of the Lautenberg Amendment in 2004.

Noting the long and arduous procedural history of the case, the Appellate Division on this third appeal of plaintiff’s removal from service was unwilling to grant plaintiff another reprieve from the loss of his job.  The Court rejected plaintiff’s argument that he was being subjected to an ex post facto law in violation of the United States and New Jersey Constitutions, holding that the law was not retroactive because it only drew its applicability based upon events that already occurred – it did not make certain conduct illegal retroactive after the event.  Also rejected were allegations that the DOC violated New Jersey’s entire controversy doctrine because it waited too long to issue the last PND. In sum, while the Appellate Division was critical of the lack of efficiency in how the case was litigated over the years, it was nevertheless unwilling to ignore the clear legislative intent of the 2004 amendment that was designed to expand New Jersey’s gun law to prohibit the possession of a firearm by any person, without exception, convicted at any time of a disorderly persons offense involving domestic violence.

The decision in this case is certainly a major victory for public employers, as it recognized the employer’s right to remove a public employee where that employee is unable to perform an essential job requirement such as carrying a firearm.  Therefore, it is reasonable to anticipate that in future cases where similar types of disqualifications occur that impact upon a public employee’s ability to meet certain core job requirements, that similar discharges will likely be upheld under the rationale of In re: Frazier.

Failing to Train Officers in Conflict De-Escalation May Constitute Sect. 1983 Violation

By: Betsy G. Ramos, Esq.

The plaintiff Lawrence Thomas sustained an attack at the hands of other inmates at the Cumberland County Correctional Facility. The attack occurred after a several minute long verbal argument between Thomas and a group of inmates in the presence of correction officers. In Thomas v. Cumberland County, 2014 U.S App. LEXIS 6668 (3rd. Cir. 2014), Thomas sued Cumberland County for, among other things, their failure to train corrections officers in conflict de-escalation and intervention techniques. While the District Court granted summary judgment in the County’s favor on the failure to train claim, the Third Circuit reversed.

Thomas had developed a reputation as a bully. He had been bartering for food and a group of 12 inmates had gathered outside his cell. The inmates were angry with Thomas, believing he had stolen food. A fight ensued and Thomas suffered an eye injury that left him blind in one eye. Allegedly, the officers knew a fight was about to happen but took no action to stop the argument before the violence commenced.

The sole issue on appeal was whether the County was liable under section 1983 for its failure to provide pre-service training on conflict de-escalation and intervention techniques. A municipality cannot be held liable for unconstitutional acts of its employees on a theory of respondeat superior. A plaintiff seeking to hold a municipality liable under section 1983 must demonstrate that the violation of rights was caused by the municipality’s policy or custom.

Where the policy or custom concerns a failure to train, liability requires a showing that the failure amounts to deliberate indifference to the rights of persons with whom those employees will come into contact. The deficiency in training must have caused the constitutional violation.

Here the relevant policy was the County’s decision not to provide conflict de-escalation and intervention training as part of a pre-service training for its corrections officers. The alleged constitutional violation stems from the officers’ failure to take reasonable measures to protect prisoners from the violence of other inmates.

The court focused on whether the failure to provide this training amounted to deliberate indifference and whether this deficiency caused Thomas’ injury. Fights regularly occurred at the prison and, thus, were relevant to whether his injury was a highly predictable failure to train on de-escalation techniques. Thus, the court found that a reasonable jury could conclude based upon the frequency of fights and the volatile nature of the prison that without de-escalation training, it was likely the situation would recur and that the county’s failure showed deliberate indifference.

Further, the court found that there was  a causal connection between this failure to train and Thomas’ injury. One of the officers could have stopped the argument before the violence broke out. As a result of these findings, the Third Circuit vacated the summary judgment granted by the District Court and remanded this claim back to the trial court for trial.

Shareholders Geaney and Walls Address Central Jersey Claims Association

Mt. Laurel, NJ – – Capehart Scatchard Executive Committee Member, John H. Geaney, Esq. and Shareholder Thomas J. Walls, Jr. recently addressed the Central Jersey Claims Association at their monthly meeting.  In his presentation, Mr. Geaney presented Case Scenarios on Workers’ Compensation on Compensability.  In his presentation, Mr. Walls presented a legal case update on recent workers’ compensation decisions.

Significant New Jersey Liability Litigation Cases December 2013 – May 2014

By: Betsy G. Ramos, Esq. & Charles F. Holmgren, Esq.

AppealsSessner v. Merck Sharp & Dohme Corp., 2014 N.J. Super. LEXIS (App. Div. April 23, 2014). On the eve of the issuance of a comprehensive opinion on the issues raised on appeal, the respondent’s counsel advised the court that a settlement had been reached. The court later learned it had been reached 4 months previously but that counsel had failed to notify the court. The Appellate Division publicly chastised counsel and considered imposing sanctions against them for wasting the judicial resources of the court.

Civil Procedure (ex parte request for default judgment)Midland Funding LLC v. Albern, 433 N.J. Super. 494 (App. Div. 2013). Plaintiff filed a complaint to which the defendant filed a motion to dismiss. The defendant never filed an answer. The plaintiff’s subsequent ex parte request for default from the court’s clerk was procedurally improper because the motion to dismiss was evidence of the defendant’s defense of the action. Thus, the defendant was entitled to notice before a default could be entered.

Condominiums (standing to file suit)Port Liberte II Condo. Assoc. v. New Liberty Residential Urban Renewal Co., LLC, 435 N.J. Super. 51 (App. Div. 2014). In a suit against builders for various construction defects to a condominium association’s property, the condominium association’s failure to get the pre-approval of its unit owners, as required by the association’s by-laws, did not present grounds for the builders to argue the association had no standing. A subsequent vote of the unit owners permitted the association to ratify the suit.

ContributionCherilus v. Federal Express, 87 A.3d 269 (App. Div. 2014).  The defendant attempted to pursue a contribution claim against a co-defendant after the case was settled with the defendant and dismissed by stipulation of dismissal. Because there was no payment of settlement money to the plaintiff, the court found that there was no viable claim for contribution against the co-defendant.

Insurance (duty to defend an excess insurance policy)Johnson v. Plasser Amer. Corp., 2014 N.J. Super. Unpub. LEXIS 372 (App. Div. February 26, 2014). An attorney sought his fees from an excess insurance policy for representing the insured. The court held the excess insurer was not required to contribute to the defense of the insured as long as the primary insurer is required to defend; only the exhaustion of the underlying carrier’s coverage limits would trigger the excess carrier’s obligation.

Insurance (exclusions)Weaver v. Nat’l Gen. Ins. Co., 2014 N.J. Super. Unpub. LEXIS 96 (App. Div. January 16, 2014). An individual injured in an Italy auto accident could not recover under her household’s automobile insurance policy because the geographic coverage area in the unambiguous language of the policy’s General Provisions clearly set forth the coverage area. The PIP and UM endorsements only altered the policy to the extent of the language in the endorsements, which did not include an element specific to the territorial coverage area.

JurisdictionBaanyan Software Services, Inc. v. Kuncha, 433 N.J. Super. 466 (App. Div. 2013).  Plaintiff employer attempted to sue its Illinois based employee for breach of contract in New Jersey. The court found that the employee lacked the minimum contacts with New Jersey to be subject to suit in this state and dismissed the suit based upon the lack of jurisdiction.

Legal Malpractice (duty owed to an adverse party)Innes v. Marzano-Lesnevich, 87 A.3d 775 (App. Div. 2014). The plaintiff-father sued the defendant-law firm, which represented his former wife, for permitting her access to their daughter’s passport in breach of an agreement not to do so. The court held that an attorney has a duty to a non-client where the attorney had a reason to foresee the specific harm which could occur, and, here, it was foreseeable if the mother obtained the daughter’s passport she would take her overseas.

Medical Malpractice (rescission)DeMarco v. Stoddard, 434 N.J. Super. 352 (App. Div. 2014).  JUA of Rhode Island rescinded the malpractice policy issued to Dr. Stoddard due to his misrepresentation of the nature and location of his practice. Despite false information in his application for insurance and renewals, the court found that the carrier was required to provide coverage for the minimum amount required by NJ law.

Medical Malpractice (statutory duty to report suspected child abuse)L.A. v. D.Y.F.S., 2014 N.J. LEXIS 458 (April 23, 2014). Under the circumstances, the information available to a doctor and hospital staff who treated a child for the ingestion of a household cosmetic, without more, was insufficient to find the doctor and his staff behaved unreasonably in failing to report an incident of suspected abuse. Subsequent evidence of abuse and a D.Y.F.S. investigation cannot influence the circumstances the doctor and his staff faced.

Negligence (duty of private utility company)McGlynn v. State of New Jersey, 434 N.J. Super. 23 (App. Div. 2014).  The court considered whether a private utility company could be held responsible for the death of the plaintiff which was caused by a tree falling on the plaintiff’s car as it passed by. The tree was located within the utility’s right of way. The court found that the utility company had no duty of care to maintain vegetation within its right of way for the benefit of passing motorists.

Negligence (mode of operation)Prioleau v. Kentucky Fried Chicken, Inc., 434 N.J. Super. 558 (App. Div. 2014).  Plaintiff fell on water/grease at a KFC. The trial judge charged the jury with the mode of operation rule. The Appellate Division found that it was error to charge this rule just because KFC was a fast food restaurant. To merit this charge, there must be causal link between the manner in which the business conducted its business and the alleged hazard.

Offer of Judgment (attorneys fees) Feliciano v. Faldetta, 434 N.J. Super. 543 (App. Div. 2014).  The court found that the defendant was not entitled to any reduction in the attorneys fee award for the contingent fee to be paid to the plaintiff. However, it also denied the application of the plaintiff’s attorney for a fee enhancement.

PIPArtwell v. Sea Scape Landscaping, LLC, 2014 N.J. Super. Unpub. LEXIS (App. Div. March 27, 2014).  PIP carrier failed to seek reimbursement from another insurance carrier for PIP benefits paid pursuant to N.J.S.A. 39:6A-9.1 within 2 years of its insured’s filing of a claim. The court found that although it filed a cross-claim against the other carrier, because the cross-claim was filed after the 2 year time period, neither the principle of “relation back” or equitable tolling of the limitations period applied and the claim was barred.

Products Liability (duty to warn)Hughes v. A.W. Chesterton Co., 2014 N.J. Super. LEXIS 54 (App. Div. April 23, 2014).  Court considered whether a manufacturer had a duty to warn that component parts, which will be regularly replaced as part of routine maintenance, contained asbestos. The court determined that such a duty should be imposed. However, the plaintiff was unable to prove causation and, hence, the suit was dismissed.

Tort Claims Act (liability of school)Robinson v. Vivirito, 217 N.J. 199 (2014).  The Court considered whether a school principal and the school could be liable to a third party passing through school grounds on off hours and is bitten by a neighboring dog. The Court found that the principal had no duty to protect against the attack under the Tort Claims Act.

UM/UIM James v. NJM, 216 N.J. 552 (2014).  Court considered the retroactivity of N.J.S.A. 17:28-1.1(f) which prohibits the use of step-down provisions in an employer’s commercial motor vehicle policy to provide less UM or UIM coverage for employees than which is provided to the “named insureds” on the policy. The Court found that the law should be applied prospectively only.

Workers’ Compensation (employee status)Estate of Kotsovska v. Liebman, 433 N.J. Super. 537 (App. Div. 2013).  In this wrongful death claim, the issue to be decided by the court was whether the Law Division or the Division of Workers Compensation should decide whether the plaintiff’s decedent, a home health aide, was an employee or an independent contractor. The court found that the matter should have been transferred to the Division for this determination.

Workers’ Compensation (employer’s premises)Hersh v. Morris County, 217 N.J. 236 (2014). The plaintiff was injured while crossing a public street while walking from a private parking garage, paid for by her employer, to her employer’s premises. The plaintiff sought workers’ compensation benefits for her injuries. The Supreme Court held that because the county did not control the garage or any part of her path to the employer’s premises, her injury was not on its premises and the claim was not compensable.

Shareholder William R. Burns Joins Capehart’s Regulatory and Government Affairs Department

Mt. Laurel, NJ – Capehart Scatchard is pleased to announce that William R. Burns, has recently joined the firm as a Regulatory and Government Affairs Group Shareholder in the Trenton Office. He represents private and public sector clients with regard to issues involving state and local government. His areas of practice include environmental law, municipal government, land use, including Pinelands development, municipal land use approvals, and condemnation and civil and criminal litigation.

He received his J.D. from the University of Richmond and B.A. degree in Political Science from Gettysburg College. Mr. Burns is Certified by the New Jersey Supreme Court as a Criminal Trial Attorney and is admitted to practice law in New Jersey and New York.

Mr. Burns is an active pediatric cancer advocate, founder of #SAVEJOSH and a member of the Coalition Against Childhood Cancer (CAC2). He currently serves an Executive Board Member/Director of the Boy Scouts of America, Jersey Shore Council. Mr. Burns is a member of the Burlington County Bar Association and Mercer County Bar Association where he serves as a Committee Chair.

Insurance Carrier Barred From Seeking Reimbursement of PIP Benefits After Failing to Demand Arbitration Within 2 Years

By: Gina M. Zippilli, Esq.

Personal Injury Protection insurance (“PIP”) is part of New Jersey’s no-fault motor vehicle insurance system and is the primary source of coverage for the medical bills of people injured in motor vehicle collisions.  New Jersey requires motorists to carry PIP as part of their motor vehicle insurance policy. The no-fault legislation from which PIP derives is designed to provide a minimum amount of protection to the public for injuries caused by automobiles.  In New Jersey, PIP carriers have no subrogation rights against tortfeasors who injure their insureds.  Under certain circumstances though, they have a direct statutory right of action to be reimbursed for benefits paid.  The time and method by which to do so is limited and specific, however.  This was the lesson unfortunately learned the hard way in Artwell v. Sea Scape Landscaping, LLC, 2014 N.J. Super. Unpub. LEXIS 679, a case decided on March 27, 2014.

The facts in Artwell are simple.  Artwell was a passenger in a parked car that was struck by a commercial vehicle.  In January 2010, Artwell, who had suffered injuries in the collision, submitted a PIP claim to her insurance carrier, Metropolitan.  The next month, Metropolitan wrote to Farm Family, the carrier for the commercial vehicle, inquiring as to the status of reimbursement.  Farm Family immediately denied coverage, which resulted in Metropolitan informing Farm Family of its right to reimbursement under the provisions of the NJ No-Fault PIP law.  That correspondence went unanswered.  In December 2011, Artwell sued both carriers.  In April 2012, more than two years after Artwell first submitted her PIP claim to Metropolitan, Metropolitan answered the complaint and asserted a cross-claim for reimbursement against Farm Family. Farm Family ultimately settled its claim with Artwell and raised the statute of limitations as a defense to Metropolitan’s reimbursement claim.

As properly noted by the Appellate Division, the PIP statute provides two, and only two, means of securing reimbursement for PIP payments: agreement between the parties and arbitration.  The statute further provides that an insurer has within “two years of the filing of the claim” to recover payments.  The Artwell court made clear that the statute begins to run from the date of filing of the formal PIP application, which in this case was January 2010.  Equally important, the court reinforced that that a formal request for arbitration was required.  Thus, the letters to Farm Family were insufficient and Metropolitan’s cross-claim, which would have been construed as a formal demand, was filed outside the two year period.

Plaintiff Must Reasonably Identify an Apologizing Employee in Order for His Declaration to Satisfy the Admission of Party Opponent Hearsay Exception

By: Charles F. Holmgren, Esq.

Upon witnessing a slip-and-fall or other injury-causing accident sustained in their place of employment, an employee will often want to apologize and/or offer an explanation for the accident. Of course, any such explanation, when made out of court, is hearsay, but may likely satisfy the Admission of a Party Opponent exception to the hearsay rule under Pa. R.E. 803(25). However, as emphasized in the Superior Court case of Harris v. Toys R’ Us-Penn, Inc., 2005 Pa. Super 201, 880 A.2d 1270 (2005), the proponent of the employee’s apology must reasonably identify the declarant as an employee in order for the Admission of a Party Opponent exception to apply.

The Court in Harris held that the failure of the plaintiff to provide reasonably identifying information about an individual they believed to be an employee who apologized for his mistake was not sufficient to establish the individual as an employee in order for the Admission of a Party Opponent exception to the hearsay rule to apply.

The plaintiff in Harris alleged she sustained significant injuries to her head, neck and back when a 10-pound toy truck fell from a shelf approximately 18 inches above the plaintiff’s head onto her, knocking her to the floor. The plaintiff stated that the alleged declarant approached her shortly thereafter and, in the presence of her daughter, apologized and stated that he had just placed the toy truck on the shelf after showing it to another customer and that he had not placed it back on the shelf correctly. In the course of her deposition, the plaintiff could only recall the purported employee’s height as being “maybe five-seven,” and as being “on the thin side.” Her daughter, although able to identify the individual as a male wearing a shirt that said Toys R’ Us, did not provide any more information as to the declarant’s identity.

At trial, Toys R’ Us filed a motion in limine to prevent the admission of the apologizing statement into evidence as hearsay. The trial court granted the motion and refused to enter the statement into evidence. Toys R’ Us obtained a jury verdict. After a post-trial motion, the plaintiff appealed to the Superior Court that the trial court abused its discretion in refusing to admit the statement of the unidentified employee.

The Superior Court disagreed with the plaintiff. In looking at Pa. R.E. 803(25)(D), the Court required the plaintiff, as the proponent of the statement, to show that the unidentified employee, as the delcarant of the statement, was an employee of Toys R’ Us, that he made the statement while employed by them and that the statement concerned a matter within the scope of his employment. Beyond an approximate height and a characterization of him as thin, the Court found that the plaintiff provided no information about the declarant. Due to the “incomplete and confusing” testimony as to the employee’s identification, the Court could not find enough evidence to establish that the trial court had abused its discretion in refusing to admit the hearsay statement as evidence.

As shown in Harris, though the good-hearted and well-intended apologies of an employee as a result of a business invitee’s injury can hamper the defense’s case, an inquiry into the plaintiff’s recollection of the apologizer’s identity at a deposition can reveal a lack of knowledge as to that identity that may, in the end, benefit the defense’s position.

Increased Liability Exposure to Commercial Tenants Despite Contractual Protections from Landlord

By: Kali A. Hira, Esq.

Pursuant to well established New Jersey law regarding premises liability, duties owed to invitees of commercial tenants and land owners are often contractually determined through detailed lease agreements.  The commercial lease agreement often assigns control over specific areas of the property to either the tenant or the landlord.  With the assignment of control comes the obligation to keep the designated areas free of hazardous conditions and the liability exposure for failure to do so.  Recently there has been a significant shift in the weight that courts afford the contractual agreements between commercial tenants and landowners.

In the 2013 New Jersey Appellate Division case of William Nielsen v. Wal-Mart Store #2171 and Nassau Shopping Center Condominium Association, 429 N.J. Super. 251 (App. Div.), certif. denied, 213 N.J. 535 (2013), the Appellate Division upheld the trial court’s determination that liability could be assigned to defendant commercial tenant for a hazardous condition in a common area contractually under the control of the developer.

The plaintiff in this matter was the employee of an independent contractor retained by defendant tenant Walmart to exterminate pests.  In the course of setting traps, plaintiff was walking around the exterior of the Walmart store when he fell as a result of loose sand and gravel between a grassy area and an asphalted area.  There was no dispute that plaintiff’s fall did not occur within the boundaries of the Walmart store. In the underlying action, Walmart, who had failed to timely file a third party action against the developer, filed a motion for summary judgment arguing that because plaintiff’s fall occurred outside the boundaries of its unit and Walmart had not contractually agreed to maintain or repair the area in question, it could not be held liable.  The trial court denied summary judgment and a jury verdict found Walmart negligent and awarded plaintiffs over half a million dollars in damages.

Walmart appealed the trial court’s determination, arguing that it had no duty to warn of a hazardous condition in an area that the developer was contractually bound to repair and maintain and that the trial court erred in failing to distinguish between the duty owed towards conditions on and off a tenant’s premises.

Creating a new precedent in New Jersey, the Appellate Division affirmed the trial court’s decision and significantly limited the value of contractual protections afforded to commercial tenants.  The Appellate Division stated, “The notion that a land occupier’s duty of care extends only as far as the boundaries of its property — the ostensible central thesis of Walmart’s argument — is simply out of step with the modern course of the common law… Simply because Walmart owns only the building from which it conducts its business and not the abutting perimeter or other common elements should not alone determine the duty it owes to its invitees.”

The Appellate Division, in offering the greatest protection possible to customers and other business invitees while dismissing the protections afforded tenants via contractual lease agreements reasoned, “That Walmart had not contractually agreed to maintain or repair the area where plaintiff was injured is simply one factor to be considered in determining whether a duty of care should be imposed. In our view, this factor carries little weight…plaintiff as well as others invited to make foreseeable uses of the premises should not be limited by these contractual arrangements.  We find the private contractual arrangement of duties between unit owner and developer to have little weight because, otherwise, a commercial…tenant could blithely turn a blind eye to any defects or hazards in common areas not owned by the unit owner or tenant but foreseeably used by their invitees and passersby.”

Based upon the reasoning in Nielsen v. Wal-Mart Store #2171, commercial tenants defending against premises liability claims would be well served by actively and diligently inspecting the common area contractually controlled and maintained by landlords and documenting any complaints.  The New Jersey courts are eroding the contractual insulation of commercial tenants in favor of expanding the protections of the business invitee.

Court of Appeals Holds Insurance Broker Liable Due to “Special Relationship” with Insured

A New York Perspective

By: Alyson L. Knipe, Esq.

A recent decision by the New York Court of Appeals is likely to pave the way for increased litigation against insurance brokers.  Generally, insurance brokers and agents do not have a duty to give advice to clients regarding how much insurance coverage is appropriate.  However, when there is a “special relationship” between insurance brokers and clients, New York holds that brokers may be liable for failing to advise on additional coverage.

In Deborah Voss v. The Netherlands Insurance Company, (2014 NY Slip Op 01259), an insured sued her insurance broker for negligently failing to procure sufficient business interruption coverage when her business grew. The plaintiff operated a number of businesses, and in 2004 she sought insurance coverage relating to her businesses from CH Insurance Brokerage Services Company (“CH”).  The CH representative requested sales figures and other pertinent information in order to calculate the appropriate level of business interruption coverage.  Further, the broker represented that he would continue to reassess and revisit the coverage needs as the plaintiff’s business expanded.  CH recommended a policy with Netherlands Insurance Company that included a $75,000 per incident business interruption coverage.

Two years later, the plaintiff purchased a new premises and opened two additional business entities in the same building.  After discussing the new move and businesses with CH, Plaintiff renewed her policy with the same business interruption limit for the new location and additional entities.

In March 2007, plaintiff discovered a roof leak that disrupted operations. A roofing company was retained to replace the roof and a month later the new roof failed, requiring the business entities to again close for various periods of time.  In the meantime, plaintiff met with another representative from CH to discuss coverage. The CH broker proposed reducing the business interruption coverage to $30,000, and the plaintiff renewed the policy with the $30,000 coverage limit.

Almost a year later, the roof failed for a third time, resulting in substantial damage to the building and further disruption of her businesses.  Along with suing Netherlands and the her roofing contractor, plaintiff sued CH alleging that she had a special relationship with CH and that it negligently secured inadequate business interruption coverage.  CH moved for summary judgment arguing that no such special relationship existed and therefore, it was not liable for failing to obtain higher coverage limits.  The trial and Appellate Courts agreed and granted the summary judgment motion.

However, the New York Court of Appeals reversed, holding that there was a question of fact regarding whether a “special relationship” between the parties existed, as the evidence suggested the insured relied on the expertise of the broker.

The Court of Appeals identified three exceptional situations that give rise to a special relationship triggering an additional duty of advisement: (1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specifically relied on by the insured.

Therefore, under the ordinary broker-client relationship, brokers have a common law duty to obtain the coverage their clients request within a reasonable time or to inform them of their inability to do so.  There is no continuing duty to advise, guide or direct a client to obtain additional coverage.  However, a client may prevail in a negligence action for failing to procure the requested coverage where a “special relationship” exists between itself and the broker.

Issues to Consider for Prospective Franchise Owners

By: Vincent T. Cieslik, Esq.

Our firm and attorneys have represented franchisees in litigation with their franchisors for years.  The franchise style of business, from the franchisor’s point of view, is all about standardization in contracts, services, and products.  The franchisor wants and needs uniformity across the board.

Before singing a franchise agreement you should consult with a lawyer.  Franchise agreements are typically lengthy, boilerplate agreements, which are slanted heavily in favor of the franchise and against the franchisee.  Does the agreement leave you susceptible to lost market share or profits down the road due to new technology or service/product innovations that the franchise may impose without your input or consent?  You should find out early in the process how the system works, how pricing is handled, whether the franchisor will assist you in obtaining the best possible price or terms for goods and services, and whether the franchisor makes money in other parts of the system that may create a situation in which their interests are not aligned with yours.

While the franchisor wants standardization and uniformity, from the franchisee’s perspective, it often requires flexibility to meet the demands of the local market, to adjust to swings in the economy, and to take advantage of new trends in business and the industry.  Rigid adherence to boilerplate language in a standard agreement is often simply unrealistic.  Considering that most franchise agreements are signed without any actual negotiation, and are provided to small business people on a “take it or leave it basis,” the franchisee has to do all they can to protect their own interests on a regular basis.

For starters, communication is key.  The franchisee needs to communicate with the home office about issues that arise in business that are affecting operations and profitability.  Informing the franchisor after you have already incurred large losses, or after you have failed to meet established standards, is dealing from a position of weakness.  Identifying a problem up front so that you can allow the home office to assist you with an issue puts you in a position of strength, because your proactive approach may build good will with the franchise, and even if the franchise refuses to assist you, you have contemporaneously documented their failure to do so.

Communication with other franchisees is also important.  You and your counsel may have relationships with other franchisees in neighboring markets.  Communicating with them to see if they share the same issues and concerns may give you the ability to approach the franchise as a group.  You may be able to press for changes or oppose new changes in the franchise system through a unified voice, charging that the corporate issues unfairly or severely affect your franchises. Open lines of communication allow you to learn what is going on in nearby markets, to ascertain whether other franchises are treated similarly, and to take advantage of concessions that are possibly being made for others.

The phrase “it’s easier to apologize than ask for permission” often comes to mind.  Franchisees need to remember that they need to look out for themselves, and must make decisions that serve their own best interests.  If they have crucial decisions to make that will impact their franchise agreement, they will likely need to consult with counsel to see if the rewards outweigh the risks of a potential franchise agreement violation.  Conferring with counsel also allows you to leverage your position efficiently, particularly if you are a good producer, by facilitating negotiation if you must ask for permission, or by pushing back against an angry franchise representative if you need to act first and ask for forgiveness later.

Documentation, documentation, documentation.  You absolutely need to document your conversations with your franchise representative, and given the ubiquity of email, this is easier than ever. You don’t know what conversation or discussion you have today, may impact a dispute with the franchise later. Emails regarding unfavorable market news, thanking a representative for listening to you talk about an issue, or even asking for additional meetings if problems are not being addressed are all important to document.

Once a case heads to court, such emails often assist your counsel in explaining what was happening months or years ago.  They may help your counsel “tell the tale” of how you brought legitimate concerns to your franchise representative, and demonstrate whether they did all they could to assist you with your problem.  A judge may be more sympathetic to your plight if he or she understands that you raised your concerns and the franchise either ignored you, or acted in its own self-interest to harm your business or profitability.  Emails and letters will help verify your side of the story.

Franchisees also need to be wary of the impact of new and competing business lines offered by the franchisor.  Do these new lines impact sales and/or territorial rights?  Complaints and concerns need to be raised in a timely fashion, well before the new and competing business lines actually and substantially impact profitability.  You may have the ability to oppose the entry of these new lines and products into your territory.  You may need to go to court to protect yourself and your rights.  You should be aware of a trend in the courts which allows the franchisee to assert that the franchisor’s business decisions wronged them, under the “implied covenant of good faith and fair dealing.”  These decisions provide that the franchisee can collect damages, even if the letter of the agreement allowed the franchisor to make these decisions, because the franchisor’s decisions adversely impacted the profits that the franchisee reasonably expected, or drastically changed the business model from what the franchisee expected when he or she got involved.