Taxpayers are on the hook for a $1.7 million settlement paid out to the town’s police chief after the elected officials breached a contract with the insurance company by “secretly” rehiring the chief after she was fired.

The New Jersey Superior Court’s Appellate Division upheld a previous judge’s ruling Monday, allowing the Municipal Excess Liability Joint Insurance Fund to not pay West Wildwood’s settlement and legal fees in a lawsuit involving the then-acting (and now current) police chief.

The Appellate Division also said the borough’s reasoning to appeal was “without sufficient merit to warrant further discussion in a written opinion.”

The case surrounds Jacquelyn Ferentz, a police officer who lives with West Wildwood Mayor Christopher Fox. Ferentz was appointed to be a police officer in the town in 2000 and reported to Fox’s brother, who was the police chief at the time. After a 2008 local election in which Fox did not participate in, Herbert Frederick, described as a political rival of Fox, was appointed to be the mayor and director of public safety for the small town.

After Fox’s brother had to take a leave of absence and eventually retire, Ferentz, who had risen to the rank of lieutenant, was tasked with the day-to-day responsibilities of chief, according to the Appellate Division’s ruling. Frederick was trying to make changes to the police department, and Ferentz did not approve, according to the case. She began to file complaints with Cape May County and the state, accusing the then-mayor of official misconduct.

Ferentz later filed a New Jersey Conscientious Employee Protection Act (CEPA) claim against West Wildwood and Frederick, saying Frederick had retaliated against her by conducting an internal investigation after she filed her misconduct complaints.

The insurance fund became involved after the CEPA complaint was filed and began defending the borough and Frederick. The following year, the internal affairs investigation of Ferentz was completed, claiming Ferentz had made false statements about the training of a law enforcement officer, used the titles of Acting Police Chief and Chief of Police without authorization, and had taken unauthorized absences. After an independent hearing officer presided over the case in July 2011, Ferentz was recommended for termination. The next month, she was fired. After being relieved of her duties, Ferentz filed a motion to challenge her dismissal.

In 2012, Christopher Fox ran for office and was named mayor. Without notifying the insurance fund, and with Fox abstaining from the vote, the commissioners voted to drop the disciplinary charges against Ferentz and rehired her to become the new police chief.

Prior to the vote, however, One of the attorneys for the insurance fund advised the town that it was required to work with the insurance fund and not to take any action that would hurt the fund’s defense against Ferentz’s CEPA claim. If it did so, the attorney advised, it could result in the insurance fund no longer covering to the town.

The town, however, claimed it was taking “corrective ‘governmental action’ to remedy a wrong they believed Frederick had done to Fox’s housemate, long-term friend, and close political ally.”

West Wildwood had negotiated a settlement with Ferentz that included back pay and other benefits from the time she was out of work, but the settlement did not address the CEPA claim.

Because of that, Ferentz was able to testify about the “hardships she allegedly suffered before she was reinstated," according to court documents.

“Once the Release was secretly agreed upon by Ferentz and the Borough, the Fund ‘was not able to present a defense that the suspension and termination (of Ferentz) was justified,’ ” the judge wrote.

A jury sided with her, and she was awarded $1,766,687.40 for damages, counsel fees, and costs and the fund withdrew its coverage of West Wildwood, stating the town violated the cooperation clause it had signed.

The borough appealed, however, Superior Court Judge James Pickering sided with the trial judge.

The lawsuit is not the only byproduct of the rehiring of Ferentz. In May, the Local Finance Board issued Fox multiple fines totaling almost $25,000 for alleged ethics violations, some of which were related to the handling of situations involving Ferentz. Fox is currently appealing the fines.

NJ Advance Media reached out to West Wildwood Mayor Christopher Fox and solicitor Marcus Karavan. However, our request were not immediately answered.

Chris Franklin can be reached at cfranklin@njadvancemedia.com. Follow him on Twitter @cfranklinnews or on Facebook. Have a tip? Tell us. nj.com/tips. Get the latest updates right in your inbox. Subscribe to NJ.com’s newsletters.