Even if You Lose You May Win (Attorneys’ Fees That Is)

In New Jersey, if a policyholder is required to sue its insurance company for coverage, Court Rule R.4:42-9 allows a policyholder to recover attorneys’ fees if it is successful in obtaining coverage.  The purpose of this rule is to discourage insurance companies from attempting to avoid their contractual obligation and force their insured to expend counsel fees to establish coverage for which they already paid premiums.  In Occhifinto v. Olivo Construction Company, the New Jersey Supreme Court recently addressed whether a party who was successful in obtaining a declaratory judgment requiring an insurance company to provide coverage in the underlying lawsuit would be able to recoup legal fees even though it did not prevail in the underlying lawsuit.

In Occhifinto, Robert Occhifinto brought a lawsuit against Robert Klepper Mason Contractors, LLC (“Klepper”) and others for defective construction of an addition to a warehouse. Klepper was defended by its insurance company, Mercer Mutual Insurance Company (“Mercer Mutual”). Mercer Mutual subsequently filed a declaratory judgment action challenging its obligation to provide coverage to Klepper in the underlying lawsuit. Occhifinto, on Klepper’s behalf, opposed the insurance company’s action, arguing that Mercer Mutual was required to provide coverage to Klepper. The trial court ruled that Mercer Mutual was required to indemnify Klepper for any covered damages assessed in the underlying lawsuit.

The underlying lawsuit proceeded to trial and the jury found that Klepper was not liable for any damages incurred by Occhifinto as a result of the defective construction. Occhifinto subsequently sought to collect counsel fees it incurred in opposing, on behalf of Klepper, Mercer Mutual’ s lawsuit to deny coverage to Klepper. Occhifinto sought recovery of counsel fees pursuant to the court rule, R.4:42-9(a)(6), which provides that a court may award counsel fees in “an action upon liability or indemnity policy for insurance in favor of a successful claimant.” The trial court denied Occhifinto’s motion and the Appellate Division affirmed. The New Jersey Supreme Court granted certification to determine the issue of whether Occhifinto was entitled to counsel fees under the Court Rules.

Occhifinto contended that he was a successful claimant because the trial court required Mercer Mutual to defend and, if necessary, indemnify Klepper.  Mercer Mutual contended that to be a successful claimant, Occhifinto was required to prevail in the underlying lawsuit against Klepper.

The Supreme Court noted that the case hinged on the definition of a “successful claimant.”  In previewing prior cases interpreting this definition, the Court noted in the case Schmidt v. Smith, 294 N.J. Super. 569 (App. Div. 1996), aff’d, 155 N.J. 44 (1998), the Appellate Division ruled that an insured who obtained defense coverage was entitled to attorneys’  fees under the rule, even if it was later determined that the insured was not entitled to indemnification.  The Court noted that the trial court determined that the insurance company, Mercer Mutual, was obligated to indemnify Klepper if damages were assessed.  Consequently, the Court concluded that Occhifinto did obtain a favorable ruling on the coverage question.  Therefore, Occhifinto was a “successful claimant” entitled to recover attorneys’ fees in opposing,   on behalf of Klepper, the lawsuit filed by Mercer Mutual to deny coverage to Klepper.

The Court Rules provide an insured with leverage in negotiating with insurance companies to obtain coverage.  With the decision in Occhifinto, insurance companies are now faced with the prospect of facing additional and perhaps more vigorous and costly challenges to their decision to deny coverage.  Third parties who are not covered by a policy, but stand to benefit if an insured is provided coverage under a policy of insurance, may now step in and litigate against the insurance company to obtain coverage and recover legal fees even if the third party does not ultimately prevail in the underlying lawsuit.