Plaintiff Robert Occhifinto (Occhifinto) filed suit against defendant Robert S. Keppler Mason Contractors, LLC (Keppler) and others, seeking damages for alleged defective construction of an addition to his warehouse (the liability action). He claimed that the defendants’ negligence caused the addition’s concrete floor to fracture and fail. In the liability action, Keppler was defended by its insurance carrier, Mercer Mutual Insurance Company (Mercer), under a reservation-of-rights agreement. Before trial in the liability action, Mercer filed an action for a declaratory judgment, challenging its obligation to provide coverage and to defend Keppler in the liability action which Occhifinto opposed on Keppler’s behalf. The trial court found that Mercer was required to indemnify Keppler for damages that were covered by the insurance policy.

The liability action proceeded to trial and the jury found that Keppler breached its duty of care but did not proximately cause the failure of the warehouse floor. Thus, the jury awarded no damages against Keppler. After the trial, Occhifinto moved to collect counsel fees from Mercer as a successful claimant in an action upon a liability or indemnity policy of insurance. The trial court found that Occhifinto was not a successful claimant because Keppler was not found liable for the damages in the liability action. The Supreme Court disagreed.

On appeal to the Supreme Court, Occhifinto argued that he was a successful claimant because the trial court’s ruling required Mercer to defend Keppler and to potentially indemnify it. On the other hand, Mercer argued that to be a successful claimant, Occhifinto had to prevail in the liability action. It further claimed that because it was already defending Keppler under a reservation of rights, the only issue decided in the declaratory judgment action was whether Mercer was contractually obligated to indemnify Keppler for Occhifinto’s claims. Thus, Mercer claimed that the duty to defend was never at issue and that Occhifinto had to show he succeeded in securing indemnity coverage to be a successful claimant.

The Supreme Court looked to the historical background against which fees are awarded to successful claimants. Traditionally, New Jersey follows the American Rule which prohibits recovery of fees by a prevailing party against the losing party. Despite a strong public policy against fee shifting, New Jersey does allow an award of counsel fees under certain circumstances. Occhifinto was relying on one of the eight circumstances allowed under Rule 4:42-9(a) in making his claim, in particular when the party seeking fees is a “successful claimant” in “an action upon a liability or indemnity policy of insurance. See, R.4:42-9(a)(6). The Supreme Court noted New Jersey’s longstanding and sweeping definition of a “successful claimant” in a declaratory judgment action as one who has succeeded on any significant issue in the litigation that achieves some benefit to the parties bringing the action. Moreover, the duty to defend is a coverage question. Prior appellate decisions had determined that success in a declaratory judgment action could be a finding that a duty to defend was owed even if there is no award of damages requiring indemnification, especially since the duty to defend is determined by the nature of the claims alleged in the complaint, and not the merits of those claims.

What It Means to You

In this case, the Supreme Court found that the trial court’s ruling on the issue of Occhifinto’s counsel fees was not an application of its discretion, but rather a misinterpretation of this prevailing law. The Supreme Court stated that the ruling denying the fee request was based on the mistaken interpretation of the law that Occhifinto had to prevail in the underlying action in order to be a successful claimant. While the trial court did not specifically address Mercer’s duty to defend, by finding that it may have a duty to indemnify Keppler, it effectively enforced Mercer’s duty to provide a defense. The Supreme Court noted that Mercer’s argument that the duty to defend was never an issue, belied the statements made in its pleadings and its tactical decision to attempt a stay of the underlying matter pending the resolution of the declaratory action in what the court perceived as a clear attempt to allow Keppler to get new counsel should Mercer’s position prove correct, relieving it of its duty to Keppler altogether.

The outcome would have been different had the trial court simply refused to award fees in its discretion, rather than on its misperception of what constituted a successful claimant, as the Supreme Court noted that Rule 4:42-9 does still allow for an exercise of same.