New Jersey Supreme Court Rules that Claimants are Entitled to Fee Shifting in Coverage Cases

New Jersey Supreme Court Rules that Claimants are Entitled to Fee Shifting in Coverage Cases
Insurance Alert May 2015

On May 7, 2015, the New Jersey Supreme Court issued a decision in Occhifinto v. Olivo Construction Company, regarding the scope of New Jersey’s fee shifting provision in third party coverage cases. 

Rule 4:42-9(a)(6) authorizes an award of counsel fees in “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.”  The Court ruled that a “successful claimant” includes a claimant that obtained a favorable ruling that the insurer must indemnify the insured under the policy – even where the insured is ultimately found not liable for any amount the insurer must indemnify.

The facts of the case are not unusual.  The claimant, Occhifinto, hired Olivo Construction Company as the general contractor in connection with a construction project for the expansion of a warehouse.  Olivo hired Keppler as the masonry subcontractor, responsible for pouring the second story concrete floor.  Several months after completion, the floor began to fracture.  Occhifinto sued Keppler and other entities for construction defects.  Keppler’s insurer, Mercer Insurance Company, agreed to defend Keppler in the underlying action under a reservation of rights.  Mercer then filed a declaratory judgment action before the underlying action began, seeking a ruling that it had no duty to defend or indemnify Keppler.  Occhifinto defended Keppler’s interests in the declaratory judgment action, and filed a counterclaim against Mercer seeking a ruling that Mercer had to defend and indemnify Keppler, and pay Occhifinto’s counsel fees in defending the declaratory judgment action.  The trial court ruled that Mercer owed a duty to indemnify Keppler in the underlying action.  The trial court deferred ruling on the fee application until after resolution of the underlying liability action.  

At the conclusion of the liability trial, the jury found Keppler not liable, and thus there was no judgment or settlement that Mercer had to indemnify.  The trial court then ruled that Occhifinto was not a “successful claimant” under Rule 4:42-9(a)(6) because Mercer ultimately did not pay indemnity on behalf of Keppler. The Appellate Division affirmed, but the Supreme Court reversed.  It held that “a party who obtains a favorable adjudication on the merits on a coverage question as the result of the expenditure of counsel fees is a successful claimant under Rule 4:42-9(a)(6),” and may include a party in a negligence action who, like plaintiff, is a third-party beneficiary of a liability insurance policy.  This aspect of the decision is not controversial in that other New Jersey decisions have awarded fees under Rule 4:42-9(a)(6) where, for instance, insurers successfully bring declaratory judgment actions against other insurers of a mutual insured.  The Court then ruled that a party may be a successful claimant if it obtains a favorable ruling on the duty to defend, even if there is no duty to indemnify the insured.  The Court concluded that the trial court’s determination that Mercer may have a duty to indemnify Keppler “had the practical result” of enforcing Mercer’s duty to defend, even though Mercer was already defending Keppler under a reservation of rights.  The Court noted that Mercer sought a declaratory ruling that it had no further duty to defend Keppler, and Occhifinto succeeded on that i ssue.  Importantly, the Court’s ruling is limited to the issue of Occhifinto’s right to counsel fees, and did not address in any significant way the substantive coverage issue, or whether the trial court properly ruled that Mercer owed coverage to Keppler.  

Occhifinto v. Olivo Construction Company is thus significant for insurers of New Jersey policyholders. Insurers should be aware if they initiate declaratory judgment actions in New Jersey and lose on the issue of defense or indemnity, they may be responsible to pay the counsel fees incurred by the successful party under Rule 4:42-9(a)(6), regardless of whether the successful party is the insured, the claimant, or any other interested party.

A copy of the decision may be downloaded here.

If you have any questions about this decision, please contact any one of our Insurance Partners: Brian O’DonnellLance KalikGlenn CurvingMichael O’MullanCaroline BrizzolaraAnthony Zarillo