New Jersey Supreme Court finds that a “successful claimant” can recover attorneys fees under a fee-shifting court rule even without establishing liability in the underlying action

In Occhifinto v. Olivo Constr. Co., No. A-77-13 (0731745) (N.J. May 7, 2015), the New Jersey Supreme Court found that a third-party claimant can be awarded attorneys fees under a New Jersey fee-shifting court rule for successfully defending against an insurer’s disclaimer of coverage, even though the claimant was unsuccessful in establishing liability of the insured in the underlying litigation. In doing so, the Court determined that “a party to a declaratory judgment action qualifies as a successful claimant when the insurance carrier’s duty to defend is proven, even if there is no duty to indemnify.”

Plaintiff Occhifinto, the owner and operator of a nutritional supplement factory, sued Keppler, an insured subcontractor, for damages due to negligent construction in the expansion of that factory. Keppler’s insurer agreed to provide a defense, but reserved its rights to disclaim coverage and brought a declaratory judgment action before the underlying liability action had commenced. Because Keppler was no longer in business, Occhifinto stepped into Keppler’s shoes as a third party beneficiary and successfully defended the declaratory judgment action, obtaining a ruling on summary judgment that there was coverage and that the insurer was obligated to indemnify Keppler in the event of liability. Occhifinto’s request for attorneys fees was consolidated into the underlying liability action, where the jury found insufficient proximate cause to establish Keppler’s liability. The trial judge thus denied Occhifinto’s claim for attorneys fees, ruling that in light of the jury’s finding as to no liability, Occhifinto was not a “successful claimant” because he had not secured indemnity coverage. The Appellate Division affirmed, but the Supreme Court granted certification to review and reversed.

The Supreme Court recognized that although New Jersey courts traditionally follow the “American Rule” in allocating attorneys fees, where each side typically bears its own fees, New Jersey policy does permit fee shifting in certain situations. Here, Rule 4:42-9(a)(6) of the Rules Governing the Courts of the State of New Jersey allows attorneys fees to be awarded “[i]n an action upon a liability or indemnity policy of insurance, in favor of a successful claimant” (emphasis added). The Court noted that the term “successful claimant” is broadly defined by the courts, and “may include a party in a negligence action who, like plaintiff, is a third-party beneficiary of a liability insurance policy and litigates a coverage question against the defendant’s insurance carrier.” The Court further noted that under the Rule, a “successful claimant” is one who “obtain[s] a favorable adjudication on the merits on a coverage question as the result of an expenditure of [counsel] fees” (citation omitted).

The Court reiterated a prior ruling that “an insurer’s duty to defend is determined by the nature of the claims alleged in the complaint and not the merits of those claims.” The Court also stated that, since the duty to defend is a coverage question, “a party who confirms an insurance carrier’s duty to defend qualifies as a successful claimant even if there is no award of damages requiring indemnification.” Here, the trial court’s determination that the insurer may have a duty to indemnify Keppler “had the practical result of enforcing [the insurer’s] duty to defend,” and Occhifinto had therefore “succeeded in the declaratory judgment action by forcing [the insurer] to continue to defend Keppler in the liability action.” The Court thus concluded that “Occhifinto was a successful claimant entitled to counsel fees pursuant to Rule 4:42-9(a)(6),” notwithstanding the lack of Keppler’s liability or covered indemnity, and remanded the matter to the trial court for determination of the amount of such fees.

Insurers should continue to be mindful of the Supreme Court’s views of Rule 4:42-9(a)(6) when contemplating prosecuting or defending coverage actions in New Jersey.