The New Jersey Supreme Court has held that a third-party claimant who steps into the insured’s shoes to establish a liability insurer’s duty to defend is entitled to its attorneys’ fees under New Jersey law, even if the claimant does not ultimately recover from the insured. Occhifinto v. Olivo Construction Co., Case No. A-77-13, 07-13, 0717 (N.J. May 7, 2015).

The owner of a nutritional supplement factory filed a negligence lawsuit against the masonry subcontractor that poured the factory’s concrete floor. The subcontractor’s general liability insurer initially agreed to provide a defense, subject to a reservation of rights. The insurer then filed suit against the subcontractor in the same trial court, seeking a declaration that it had no duty to defend or indemnify the insured. The factory owner defended the coverage action on behalf of the insured subcontractor and filed a counterclaim, alleging that the insurer owed defense and indemnity coverage and also was required to pay the factory owner’s fees incurred in connection with defending the coverage action on the insured’s behalf, pursuant to New Jersey Rule 4:42-9(a). After the parties filed cross-motions for summary judgment, the trial court held that the carrier owed defense and indemnity coverage, but deferred a determination on fees. Following trial in the underlying suit, the jury found that the insured subcontractor was not liable for the factory owner’s alleged damages. The trial court then denied the factory owner’s motion for attorneys’ fees incurred in the coverage action, concluding that the owner was not a prevailing party because “success” is “contingent upon the securing of indemnity coverage.”  New Jersey’s intermediate appellate court affirmed.

On appeal, the New Jersey Supreme Court reversed. The court held that New Jersey Rule 4:42-9(a) provides for fees to any “successful claimant,” defined to mean any party who “obtain[s] a favorable adjudication on the merits on a coverage question as the result of the expenditure of [counsel] fees.” The court held that a third-party claimant who litigates a coverage question against a defendant’s liability insurer may be a “successful claimant” for purposes of the statute 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 also held that the duty to defend is a “coverage question” within the meaning of the rule, even if there ultimately is no award of damages that requires indemnification. In other words, a third-party claimant is entitled to its attorneys’ fees where the insurer’s duty to defend is established, even if there is no duty to indemnify. The court reasoned that its holding was consistent with the purpose of Rule 4:42-9(a), which seeks to discourage insurers from filing declaratory judgment actions to avoid their contractual obligations to provide coverage.