Insurer Need Not Indemnify for Settlement that Did Not Involve Payment of “Money Damages”

July 31, 2011 | Insurance Coverage

After extensive litigation and negotiations, the Passaic Valley Sewerage Commission (“PVSC”) and Spectraserv, Inc., entered into a settlement agreement providing for the transfer of assets and other consideration from PVSC to Spectraserv. The settlement included the entry of a consent order resolving notices of violation that PVSC had issued to Spectraserv; PVSC’s agreement to accept, treat, and dispose of sludge from one of Spectraserv’s contracting parties; and PVSC’s agreement to assign certain of its rights under another contract to Spectraserv. PVSC sought indemnification for its “loss” – the value of the settlement – under a Public Entity Management Liability policy. PVSC asserted that the settlement could be valued and, as such, it could quantify the settlement as money damages. Indeed, its expert valued the settlement at an amount between $5,963,661 and $17,180,728. The insurer argued that it had no obligation to indemnify PSVS absent its payment of “money damages.” A New Jersey trial level court and an intermediate appellate court agreed with the insurer, and the dispute reached the New Jersey Supreme Court.

The insurer argued that the policy language was narrowly drafted and clear: loss was defined as “money damages,” which meant “the payment of money.” The settlement negotiated between PVSC and Spectraserv was not “money.” PVSC suggested a broader interpretation of the same language, suggesting that “loss” was the surrender of “assets of value.” According to PVSC, the term “money damages” did not require a “cash payment” and it was entitled to indemnification and a hearing to determine the value of the loss it had suffered in connection with the Spectraserv settlement.

The court decided that the definition of “loss” as “money damages,” and the definition of “money damages” as “monetary compensation for past harms or injuries,” did not encompasses the value of the services rendered and assets surrendered by PVSC in the settlement. The court concluded that the policy’s exclusion section lent further support to its view that the insurer had not intended to indemnify for this type of “business arrangement,” observing that the exclusion section proscribed coverage for any form of injunction or equitable relief and any relief other than money damages.

The case is Passaic Valley Sewerage Commissioners v. St. Paul Fire and Marine Ins. Co., No. 065793 (N.J. June 21, 2011).

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Reprinted with permission.  All rights reserved.

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