Why it matters: The New Jersey Supreme Court recently ruled that a successful claimant including both an insured and a third-party beneficiary in a coverage case is entitled to recover attorneys’ fees under a New Jersey fee-shifting rule even without establishing that the insured was liable in the underlying action. In general, New Jersey adheres to the “American rule” and does not permit successful parties to a lawsuit to recover their attorneys’ fees, but will award them in certain circumstances as provided by Rule 4:42-9(a). One of those circumstances is for “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.” In a unanimous decision, the court ruled that because the trial court concluded that the complaint filed in the underlying action alleged claims that triggered the duty to defend the insured, or, as here, third-party beneficiary was a “successful claimant” entitled to recover counsel fees to enforce the payment of defense costs.

Detailed discussion: The insured, Keppler Mason Contractors, was sued by a business owner, Robert Occhifinto, for the allegedly faulty construction of an addition to a warehouse. Mercer Mutual Insurance Company defended Keppler under a reservation of rights. Mercer then filed a lawsuit seeking a declaration that it had no duty to provide coverage.

Mercer lost that coverage action and the court declared that Mercer was obligated to pay any adverse judgment or settlement against its insured in the underlying construction-defect case.

Occhifinto, the plaintiff in the underlying construction-defect case, stepped into the shoes of the insured, Keppler, as a third-party beneficiary to pursue the coverage claim because Keppler was, by that time, out of business.

In the underlying action, a jury found that Keppler was not liable. Although the masonry company breached its duty of care to Occhifinto, the jurors found that the breach was not a proximate cause of Occhifinto’s damages.

In the coverage action, Occhifinto then moved pursuant to New Jersey Rule 4:42-9(a)(6) to recover counsel fees incurred defending Keppler in Mercer’s declaratory judgment action. But the trial court denied the motion because the jury in the liability action found Keppler was not liable. An appellate court affirmed.

On appeal to the state’s highest court, Occhifinto argued that he was a “successful claimant” because the trial court ordered Mercer to defend—and, if necessary, indemnify—Keppler.

Emphasizing the purpose behind fee-shifting policy, the New Jersey Supreme Court sided with the policyholder.

New Jersey rules permit fee shifting in eight specific circumstances, including “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.” Fee shifting “discourages insurance companies from attempting to avoid their contractual obligations and force their insureds to expend counsel fees to establish the coverage for which they have already contracted,” the court explained.

The term “successful claimant” is “broadly defined” as a party that “succeed[s] on any significant issue in litigation which achieves some benefit the parties sought in bringing suit,” and may include a third-party beneficiary of a liability insurance policy such as Occhifinto, the court stated. “We authorize 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.’”

Having established the definition of a “successful claimant,” the court determined that the issue of a duty to defend is a coverage question. Because Occhifinto alleged claims that if proven would have fallen under the policy and the trial court found a duty to defend, counsel fees were recoverable regardless of the liability determination in the underlying case, the court held.

Reversing the denial of Occhifinto’s motion, the court remanded the case for a determination of the amount of counsel fees to be awarded.

To read the opinion in Occhifinto v. Olivo Construction Company, click here.