Under New Jersey law, a party is barred from commencing multiple litigations arising out of a single event or transaction. This is because of something known as the entire controversy doctrine, which “requires joinder in one action of all legal and equitable claims related to a single underlying transaction.” Manhattan Woods Golf Club, Inc. v. Arai, 312 N.J. Super. 573, 577 (App. Div.), certif. denied, 156 N.J. 411 (1998). It is an equitable doctrine that is based on “the principle that the adjudication of a legal controversy should occur in one litigation in only one court; accordingly, all parties involved in a litigation should at the very least present in that proceeding all of their claims and defenses that are related to the underlying controversy.” Cogdell v. Hosp. Center at Orange, 116 N.J. 7, 15 (1989).
One exception to its application is that “[t]he doctrine does not apply to bar component claims either unknown, unarisen or unaccrued at the time of the original action.” Pressler & Verniero, Current N.J. Court Rules, Comment 3.3 to R. 4:30A (Gann 2013). In order words, the doctrine “should not be viewed as encouraging or requiring the filing of premature or unaccrued claims.” K-Land Corp. No. 28 v. Landis Sewage Authority, 173 N.J. 59, (2002).
Recently, in Brake v. Martin, No. L-5233-12, 2014 WL 3510898 (App. Div. July 17, 2014), the New Jersey Appellate Division had occasion to consider the entire controversy doctrine in connection with a subrogation claim. As a general rule, when an insurance company reimburses its insured for damages sustained by the insured, the insurance company becomes “subrogated” to the rights of its insured and may commence an action against the party responsible for causing the insured’s damages (i.e., “the wrongdoer”). It is often said that the insurer “stands in the shoes” of its insured once it pays a claim. However, the insurer becomes subrogated to the rights of its insured only to the extent of its payment to the insured. If the insured sustained other unreimbursed damages, it retains the right to proceed against the wrongdoer in connection with those damages. Of course, in doing so, the insured must make sure it does not prejudice the insurer’s subrogation rights.
In Brake, the insureds, Dennis and Sheryl Brake, made a claim with their insurer, State Farm Fire & Casualty Company (“State Farm”), after discovering water leaking into their home. The water leak led to the development of mold inside the home. After paying the Brakes $9,500 to repair the damage, State Farm commenced a subrogation action in September 2011 against the contractor that built the home. The contractor, in turn, commenced an action against its subcontractors. The claims asserted in the subrogation claim were based solely on the property damage to the Brakes’ home. The plaintiff in the subrogation action was identified as “Dennis Brake and Sheryl Brake by their subrogee State Farm Fire & Casualty Company.”
Prior to commencement of the subrogation action, the insureds had retained an environmental consultant to prepare a report concerning the presence of mold in the home. The report noted that the type of mold spores that were observed “have the ability to cause adverse health effects such as pulmonary difficulty, ear, nose and lung infection, and allergic reactions.” Id. at *1.
The subrogation action ultimately was settled in August 2012. In connection with the settlement, the parties entered into a release. The Brakes and State Farm were named in the release, which was signed by State Farm on behalf of the Brakes.
In July 2012, shortly before the subrogation action was settled, the Brakes filed a separate action against several defendants associated with the construction and prior ownership of the house. The Brakes asserted numerous claims against the defendants, including claims for personal injuries based on Sheryl Brake’s exposure to mold. Several of the defendants moved to dismiss the action based on the entire controversy doctrine.
The claims were all based on the same events that gave rise to the subrogation claim. For the most part, the only real difference was that the Brakes asserted a claim for personal injuries allegedly sustained by Sheryl Brake.
The trial judge granted the motion to dismiss based on application of the entire controversy doctrine and the Brakes appealed. On appeal, the Brakes argued that the entire controversy doctrine should not have been applied to the personal injury claim. The Brakes did not contest the applicability of the entire controversy doctrine to the other claims.
The Appellate Division reversed the trial court’s decision. The court held that there was not sufficient evidence in the record “to conclude . . . that the Brakes had sufficient knowledge in 2010 or 2011 to have had had a fair opportunity to initiate a personal injury claim as part of the State Farm subrogation litigation, which involved property damage.” Id. at *4. In order for a claim to be barred by the entire controversy doctrine, it must be shown that the claimant had a fair and reasonable opportunity to litigate that claim in the other action. The court went on to note that the determination as to whether to apply the doctrine is based on “judicial fairness.” Id.
The court summarized its holding as follows:
Based upon our review of the record in light of the applicable law, we have concluded that a remand is necessary for an evidentiary hearing, which need not be overly lengthy, to address the issue of whether the Brakes had, or reasonably should have had, sufficient knowledge and time to take the steps necessary to add a claim based on Sheryl Brake’s personal injuries to the then pending property-damage subrogation action, which was brought and controlled by counsel for its insurance carrier rather than themselves. With the resulting fuller record and the required focus on judicial fairness, the remand judge can consider how best to exercise the judicial discretion inherent in this equitable doctrine. Of course, the focus on judicial fairness must include fairness to the defendants as well as the Brakes.
Id. The court made it clear “that the reversal is limited solely to the issue of whether the personal injury claim, as opposed to the expanded property damage claims, should be barred by the entire controversy doctrine.”
Based on the court’s holding, an insured that has sustained both property damage and personal injuries runs the risk of losing any rights it may have to sue for any unreimbursed loss if the insurer commences a subrogation action against the potentially responsible parties. Whether the insured’s rights will be lost will depend on whether the insured had “sufficient knowledge and time” to add any additional claims to the subrogation action.
Rather than run the risk of having the claims barred, it is in the insured’s best interest to request that any potential claims (of which he or she is aware) be added at the outset. In addition, should any claims arise during the pendency of the subrogation action, a motion to amend the pleadings to assert the new claim should be made. As noted by the Appellate Division, “if during the pendency of litigation, a constituent claim arises which is part of the entire controversy, the claimant must seek leave to file a supplemental pleading thereby submitting to judicial discretion the determination of whether the claim should be joined in that action or reserved for a subsequent suit, and if the claimant fails to so move, be will ordinarily be barred from raising the claim in a subsequent suit.” McNally. v. Providence Wash. Ins. Co., 304 N.J. Super. 83, 92 (App. Div. 1997).
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