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New Jersey Supreme Court Upholds Fee Shifting Claim Even When Underlying Case Ends With Defense Verdict

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In a recent decision, the New Jersey Supreme Court upheld a fee-shifting claim against an insurance carrier ordered to defend a third-party beneficiary of its insured’s policy, even when the underlying liability case ended in a jury verdict of no liability. Occhifinto v. Olivo Construction Co., No. A-77-13, 073174 (N.J. Sup. Ct., May 7, 2015).

Robert Occhifinto, a factory owner, contracted with Olivo Construction to expand his factory space. Olivo contracted with Keppler, a masonry subcontractor, to pour the concrete for the new second floor. According to Olivo, a few months after construction was completed, the second floor concrete slab began to crack, rendering the building unsafe for occupancy. Occhifinto filed a complaint against Keppler.

Keppler was defended by Mercer Mutual Insurance Company under a reservation of rights, and Mercer ultimately filed a declaratory judgment action seeking an order that it had no duty to defend or indemnify Keppler in the liability action. Occhifinto (presumably after receiving an assignment of Keppler’s rights under the policy) defended the declaratory judgment action, and moved for summary judgment (while the underlying liability action was ongoing). The trial judge granted Occhifinto’s motion for summary judgment (in the declaratory judgment action), and held that Mercer was obligated to defend and indemnify Keppler. The underlying liability action, however, ended with a jury verdict in Keppler’s favor.

New Jersey traditionally follows the “American Rule,” which generally prohibits the recovery of counsel fees by the prevailing party. This rule, however, has several exceptions, one of which being that counsel fees may be awarded in favor of a successful claimant in a declaratory judgment action seeking coverage under an insurance policy. Accordingly, following the trial in the liability action, Occhifinto (on behalf of Keppler) moved for counsel fees incurred while defending Keppler in Mercer’s declaratory judgment action. The trial court denied Occhifinto’s motion, holding that as the jury in the liability action had returned a no-cause verdict, Occhifinto was not a “successful claimant” entitled to counsel fees. The Appellate Division affirmed, and the matter was certified to the New Jersey Supreme Court.

The New Jersey Supreme Court reversed, holding that Occhifinto was indeed a “successful claimant,” (notwithstanding the unsuccessful jury verdict in the liability action), by virtue of the trial court’s order that Mercer had a duty to defend Keppler. Citing long-standing New Jersey law, the Supreme Court held that a party to a declaratory judgment action qualifies as a successful claimant when the insurance carrier’s duty to defend is proven, regardless of the carrier’s duty to indemnify. Rejecting Mercer’s argument that it had recognized its duty to indemnify (by assigning counsel and defending under a reservation of rights), the Supreme Court noted that Mercer’s declaratory judgment action had sought an order that it was not obligated to defend Keppler, and had also sought an adjournment of the liability action so as to afford Keppler time to retain its own counsel.

The Supreme Court also noted that while the decision to award counsel fees is an exercise of the trial court’s discretion, the trial court’s decision denying counsel fees was not a product of its discretion, but of its erroneous interpretation of the law which led to its conclusion that Occhifinto was not a successful claimant in the declaratory judgment action, and thus remanded the matter for a determination of the amount of counsel fees to be awarded.