New Jersey Supreme Court Rules in Favor of Attorneys’ Fees for Successful Claimant in D.J. Action – Even in Absence of Any Indemnity Obligation

The New Jersey Supreme Court has ruled that a claimant who prevailed against an insurance carrier in a declaratory judgment action seeking coverage and defense of the underlying liability action, but who did not prevail in the liability action itself, was a “prevailing party” entitled to recover counsel fees under New Jersey law.

The Case

The claimant sued a contractor for alleged defective construction of an addition to his warehouse. In that action, the contractor was defended by its insurance carrier, Mercer Mutual Insurance Company, under a reservation of rights. Before trial in the liability action, Mercer filed an action for a declaratory judgment challenging its obligation to defend and indemnify the contractor in the liability action.

The claimant, on the contractor’s behalf, contested the claims raised by Mercer and filed counterclaims asserting that Mercer had a duty to defend and indemnify the contractor under the policy.  It also asserted that Mercer was obligated for the counsel fees the claimant incurred in defending the declaratory judgment action.

In the declaratory judgment action, the trial court held that Mercer was potentially required to indemnify the contractor for the claims in the underlying action. The trial court, therefore, denied Mercer’s motion for summary judgment and granted partial summary judgment to the claimant, reserving the claim for counsel fees until conclusion of the liability action.

The liability action proceeded to trial, and the jury found that the contractor had breached its duty of care but had not proximately caused the damages to the warehouse. Therefore, it awarded no damages against the contractor. After trial, the claimant moved to collect counsel fees from Mercer pursuant to the New Jersey rule that authorizes trial courts to award counsel fees in “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.”

The trial court denied the claimant’s motion, holding that he was not a successful claimant because the contractor was not found liable for damages in the liability action.

An intermediate appellate court affirmed, and the case reached the New Jersey Supreme Court.

The New Jersey Supreme Court’s Decision

The court reversed, concluding that the claimant was “successful” and, therefore, entitled to counsel fees.

In its decision, the court decided that a successful claimant may include a party in a negligence action who was a third-party beneficiary of a liability insurance policy and who litigated a coverage question against a defendant’s insurance carrier. The court said that it authorized trial courts to award counsel fees in favor of third-party beneficiaries of insurance contracts because “an insurer’s refusal to provide liability coverage may also, as a practical matter, preclude an innocent injured party from being able to recover for the injury.”

The court specifically rejected the trial court’s conclusion denying the claimant’s motion based on the assumption that success under the rule was “contingent upon the securing of indemnity coverage.”

Rather, the court ruled, by forcing Mercer to defend the contractor in the liability action, the claimant “obtain[ed] a favorable adjudication on the merits on a coverage question as the result of the expenditure of [counsel] fees.” Thus, the court concluded, the claimant was a successful claimant entitled to counsel fees.

The case is Occhifinto v. Olivo Construction Co., No. A-77-13 (N.J. May 7, 2015).

Rivkin Comment

One could question whether the claimant really prevailed.  It’s true that the claimant defeated the insurer’s attempt to get clear of the duty to defend, but did the claimant really benefit from that victory?  With counsel in place, the insured went on to defeat claimant in the underlying suit.  The claimant recovered nothing on its claim against the insured, and received no monetary benefit from its victory against the insurer.  What the claimant really secured was the opportunity for indemnity, which in the court’s view was sufficient to allow for the recovery of attorneys’ fees.