The New Jersey Appellate Division in William H. Hall Co. v. Harleysville Ins. Co. of NJ (October 13, 2009) reversed and remanded a trial court’s decision in a declaratory judgment action following summary judgment motions made by the parties. A copy of the decision can be found here. The Appellate Division found that the trial court erred by apportioning the insured’s defense costs incurred in an underlying action by comparing the damages claimed for the covered versus the non-covered claims. The Appellate Division held that the proper method of apportionment requires the trial court to apportion defense costs based on the reasonable value of the legal services rendered in defending the covered versus non-covered claims.

The insured sold clothes dryers, four of which caught fire damaging its customer’s clothes. The customer filed suit against the insured and the dryers’ manufacturer seeking the return of the money paid for the dryers and reimbursement of money paid to cover the damaged clothes.

The insurer issued a liability insurance policy that required it to indemnify and defend the insured for third-party personal injury and property damage claims arising out of an “occurrence” as defined in the policy. The insurer denied coverage on the grounds that the customer’s claim against the Insured was not as a result of an “occurrence” as defined in the policy. The insured commenced a declaratory judgment action.

The parties both moved for summary judgment. At oral argument, the parties agreed that the customer’s claim for replacement costs of the dryers, repairs to the dryers, and costs of investigating the cause of the fires was not covered under the policy, but that the claim for reimbursement of monies paid for loss of clothing was covered under the policy. The primary issue presented to the trial court, therefore, concerned the extent of the insurer’s obligation to reimburse its insured for the defense costs incurred in the underlying action.

The trial court found that (1) the insurer was only obligated to indemnify the insured against claims for damaged clothing asserted by the insured’s customers in a third-party liability action, and (2) that the insurer was obligated to reimburse the insured for 10% of the costs of defending the underlying action from November 2007 until final resolution of the underlying action. In so ruling, the court reasoned that the alleged damages subject to indemnification under the policy were relatively minor as compared to the non-covered damages. The Insured appealed from that part of the order that limited the insurer’s obligation to reimburse only 10% of its defense costs.

The Appellate Division found the insured’s argument that the claim for damages to its customer’s laundry could not be parsed from the other damage claims contained in the underlying complaint to be without merit.

The Court did, however, agree with the insured “that apportionment should have been based on the claims asserted, covered and non-covered, and on the legal services rendered in defending each of the claims, not the claimed damages divorced from the legal services performed,” and failure to do so could result in an apportionment of defense costs contrary to NJ Supreme Court precedent.

Accordingly, the Appellate Division reversed and remanded the issue of apportionment of the defense costs with the direction that the insured’s counsel file an itemized statement of legal services for the trial court's consideration. The trial court was directed to make a determination whether defense costs for covered and non-covered claims are capable of apportionment and, if so, to apportion the defense costs based on the reasonable value of the legal services rendered in defending the respective claims and any other factors the court deems relevant.