Storch Engineers v. State of New Jersey

A-5760-97T5 (N.J. Super. App. Div. 1999) (Unpublished)
  • Opinion Date: March 25, 1999

CONTRACTS; REASONABLENESS—Although a governmental regulation may not directly apply to define a term in a contract, it may be used as guidance to determine what is reasonable.

In a set of contracts between a state agency and a consulting firm, the consulting firm was entitled to receive its allowable costs, including indirect costs, such as insurance expenses. At issue in this appeal was the allowability of self-insurance costs with respect to environmental risks. The contracts required the consulting firm to procure professional liability insurance. When the insurance industry introduced exclusions relating to asbestos, pollution, and hazardous materials in such policies, the consulting firm decided to self-insure. It set up a reserve for this contingent liability and annually transferred what it felt to be an appropriate amount on its books. The parties agreed that the concept of recovering a self-insurance provision was acceptable, but disputed the method by which the charges were calculated and implemented. In the view of the lower court, what was in question was the reasonableness of the charges. In addition, since self-insurance decisions are completely internal, the burden was placed on the consulting firm to establish the reasonableness of the allocation. After trial, the lower court held that the consulting firm was not entitled to any reimbursement because it could not show a rational basis by which it determined its self-insurance costs. It appeared that the figure it used was based upon anticipated premiums which had been predicted by an industry trade organization, in connection with the creation of a captive insurance company. That plan never reached fruition. The Appellate Division agreed with the lower court, especially where the lower court used federal government guidelines for self-insurance plans applicable to plans with a cost of $200,000 or more, although this particular plan did not have that high a cost. While the consulting firm correctly argued to the Appellate Division that the federal regulations did not apply to a plan under $200,000, the Court held that its non-applicability did not mean that the rationale of those government regulations could not be considered and employed to offer guidance in determining what is reasonable under the circumstances.