As a general rule, the prevailing party in a litigation is not entitled to recover attorney’s fees from the losing party. This is known as “the American rule.” There are, however, several exceptions to this rule. One such exception is that attorney’s fees may be recoverable “[i]n an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.” See N.J. Ct. R. 4:42-9(a)(6). Application of the Rule 4:42-9(a)(c) “exception” has been limited to claims under a third-party liability policy. Thus, attorney’s fees are not recoverable in an action seeking coverage for first-party claims or uninsured motorist (“UM”) or underinsured motorist (“UIM”) claims.
The New Jersey Supreme Court recently considered application of Rule 4:42-9(a)(c) in Occhifinto v. Olivo Construction Co., LLC, 2015 WL 2095767 (N.J. May 7, 2015). On its face, the decision does not seem to signify a significant change in the law. Certain language used by the New Jersey Supreme Court, however, could significantly expand the reach of Rule 4:42-9(a)(c). Indeed, just twelve days after the decision was issued, the Appellate Division gave the Court’s decision a broad reading in Essex Insurance Company v. Newark Builders, Inc., 2015 WL 2360114 (App. Div. May 19, 2015).
The plaintiff in Occhifinto, Robert Occhifinto, commenced an action against various contractors and subcontractors, including Robert S. Keppler Mason Contractors, LLC, alleging faulty workmanship in connection with the construction of an addition to his warehouse. Keppler was insured by Mercer Mutual Insurance Company. Mercer initially agreed to defend Keppler under a reservation of rights agreement. However, Mercer later commenced a declaratory judgment action, seeking a ruling that it had no obligation to defend or indemnify Keppler. It also named Occhifinto as a defendant in that action. Although it sued Keppler in the underlying action, Occhifinto actually defended the declaratory judgment action on behalf of Keppler. Occhifinto filed an answer and counter-claim against Mercer, seeking a declaration that Mercer was obligated to provide a defense and indemnification to Keppler in the underlying action.
The trial court ruled that Mercer was obligated to continue to provide a defense to Keppler. In addition, the court ruled that Mercer was required to indemnify Keppler in the event the jury found Keppler liable. The trial judge reserved decision, however, on the issue of whether Occhifinto was entitled to an award of attorney’s fees.
The underlying action subsequently proceeded to trial. The jury concluded that Keppler breached its duty of care to Occhifinto, but that the breach did not proximately cause any damage to Occhifinto. Arguing that it nonetheless was a “successful claimant” in the declaratory judgment action, Occhifinto moved for an award of attorney’s fees pursuant to Rule 4:42-9(a)(c). The trial court denied the motion, holding that Occhifinto was not a successful claimant because Keppler was not found liable for any damages. Specifically, the trial court held “that Occhifinto was not a ‘successful claimant’ because success under the rule ‘is contingent upon the securing of indemnity coverage’.” Id. at *2. The Appellate Division affirmed the trial court’s ruling. On further appeal, however, the New Jersey Supreme Court reversed.
The Court began its analysis by noting that “[t]he 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’.” Id. at *3 (citations omitted). According to the Court, a party that achieves a favorable ruling on a coverage question is a successful claimant under the rule. Noting “that the duty to defend is a ‘coverage question,’ if the complaint alleges claims that would, if proven, fall under the policy,” the Court concluded that Occhifinto was a successful claimant under the rule. The Court observed 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.” Id. at *5.
Had Keppler defended itself in the declaratory judgment action, there would have been no question that it would have been entitled to an award of attorney’s fees because the trial court ruled that Mercer was obligated to defend Keppler and Mercer was therefore obligated to pay Keppler’s attorney’s fees. The difference in Occhifinto was that the insured was being defended by a third party who was not entitled to coverage under the policy. Generally, an injured party has no right to bring a “direct” action against another tortfeasor’s insurer. However, in this case, although very unusual, the party seeking an award of attorney’s fees (Occhifinto) was actually sued by the insurer (Mercer) and provided a defense to the insured (Keppler). Moreover, the expenditure of attorney’s fees by Occhifinto on behalf of Keppler resulted in a finding that Mercer was obligated to provide a defense to Keppler. Thus, Occhifinto was a “successful claimant” in that he secured a defense under the policy for Keppler. Consequently, under well-established precedent, the Court could have simply awarded attorney’s fees to Occhifinto.
Unfortunately, however, the Court arguably went further than it had to. Specifically, the Court observed that “[a] successful claimant under Rule 4:42-9(a)(6) 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 a defendant’s insurance carrier.” Id. at *3. Later on in the opinion the Court once again referred to Occhifinto as a “third-party beneficiary” of Keppler’s insurance policy. Id. at *5. The Court considered Occhifinto a third-party beneficiary under the policy even though his right to recover under the policy was contingent upon him first recovering a judgment against Keppler and then having Keppler fail to satisfy the judgment.
As noted, twelve days after the Court issued its decision, the Appellate Division had occasion to determine whether attorney’s fees should be awarded to an injured party in connection with an action arising out of a construction accident. The injured party in that case, Essex Insurance Company v. Newark Builders, Inc., 2015 WL 2360114 (App. Div. May 19, 2015), Carlos Ferreira, sued the general contractor and a subcontractor on the project, claiming he was injured as a result of their negligence. At the time he was injured, Ferreira was working for another subcontractor.
The general contractor, D&J Home Builders, L.L.C., sought coverage as an additional insured under the policy of insurance issued to the subcontractor, Newark Builders, Inc. Newark was insured by Essex Insurance Company. Essex refused to provide coverage to D&J or Newark. It subsequently filed a declaratory judgment action, naming, among others, D&J, Newark, and Ferreira as parties.
The court held that Essex had a duty to defend and indemnify both Newark and D&J. It also awarded attorney’s fees in favor of Newark, D&J, and Ferreira. As to Ferreira, the court observed that under the holding in Occhifinto, Ferreira was a third-party beneficiary of the Essex policy. Id. at *7. The Appellate Division went on to note that “[w]hile he was not obligated to take part in the coverage action, Ferreira’s attorney’s appropriately participated in order to advocate for policy coverage to ensure prompt and full payment of the personal injury judgment.” Id. at *7. However, there was no mention in the decision of either insured being judgment proof. Thus, there did not appear to be any reason to suspect that Ferreira would not receive full payment of any judgment he obtained.
Moreover, in Essex both insureds retained counsel to represent their interests and obtain coverage. Thus, there really was no need for Ferreira’s counsel to participate in the declaratory judgment action. In Occhifinto, in contrast, the injured party defended the case on behalf of the insured and it does not appear that the insured retained its own counsel to defend it in the declaratory judgment action. Thus, the facts of Essex are very different from the facts of Occhifinto.
In reaching its conclusion, the Essex court broadly interpret the Occhifinto court’s comments that an injured party is a third-party beneficiary of a tortfeasor’s liability insurance policy. It is possible that a court could read the Occhifinto decision even more broadly to mean that an injured party is entitled to commence a direct action against an insurer that provided coverage to a potentially responsible party. It is unlikely, however, that this is what the Court intended because such a ruling would represent a significant change in existing law. As noted, an injured party has no right to bring a “direct” action against another tortfeasor’s insurer. It must first obtain a judgment against the insured and only when the judgment remains unsatisfied may it sue the insurer directly.
In both Occhifinto and Essex the insurers sued the injured parties in addition to its insured. Thus, neither court had occasion to determine whether the injured party could have sued the insurers directly. Nonetheless, it presumably will take some time before the full scope of the Occhifinto decision becomes more clearly defined. Until that time, insurers presumably will avoid naming the injured party as a defendant in a declaratory judgment action in an effort to avoid having to pay attorney’s fees to multiple parties.
© William D. Wilson and NJInsuranceBlog.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.