Fee Dispute Hotline
(312) 907-7275

Assisting with High-Stakes Attorney Fee Disputes

The NALFA

News Blog

Expand Fee-Shifting in Insurance Coverage Disputes in New Jersey

October 28, 2014 | Posted in : Coverage of Fees, Defense Fees / Costs, Fee Entitlement / Recoverability, Fee Shifting, Prevailing Party Issues

A recent New Jersey Law Journal editorial, “Fee-Shifting in Insurance Disputes Should Be Expanded,” discusses the history and the current state of affairs of attorney fee recovery in insurance coverage disputes in the state of New Jersey.

The current and long-standing attorney fee rule, known as the American Rule, is that prevailing litigants must pay their own attorney fees and are not entitled to charge their attorney fees to the adversary.  That rule is followed in New Jersey upon the judicially expressed thought that “sound judicial administration will be best advanced if litigants bear their own counsel fees.”

As early as 1966, our Supreme Court in Gerhardt v. Continental Ins. Cos. noted that when our court rules were originally adopted, they embraced this view “except in those few situations specially designated” in the rules of the court.  Since 1966 transfer of fees, as it is known, have mushroomed in many instances as the result of rules and statutes promulgated or enacted to satisfy particular considerations.

In 1971, the Supreme Court amended R.4:42-9(a)(6) to provide that no fee for services shall be allowed in the taxed cost or otherwise except: “in an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.”  The purpose of the amended rule was to prompt careful consideration by the insurer of its policy terms and, if warranted, to encourage it to provide defense and indemnification of the insured. 

If, however, the insurer fails to agree to defend or indemnify its insured when obligated to do so, the insured may obtain fees from the insurer in prosecuting a successful policy action so that the insured is made whole with any financial loss occasioned by the insurer’s misinterpretation or misapplication of its own policy.  Such a suit against the insurer for coverage is known as a third-party action, that is, one required because of claims by a third party for whom the defense or indemnification is the contractual obligation of the insurer.

Our cases have uniformly held that the court rule does not apply to a first-party action against the insurer that is a direct action in which the insured seeking to recover benefits or reimbursement for its own loss, successfully litigates that claim against the insurer.  The only exception to the direct action bar attorney fees is when the insured is successful in enforcing an action for personal injury protection benefits to which the insured is entitled but the insurer has refused to pay.

The dichotomy of viewpoints on this fee issue, between successful first-party actions and successful third-party actions, has in the past been discussed at Judicial Conferences and the subject of a recommendation by the Supreme Court Civil Practice Committee to allow first-party attorney awards against the insurer.  Nevertheless, except for the personal injury protection, the rule remains clear that attorney fees to be paid by the insurer may be awarded only in third-party actions where the insured establishes the right of defense or indemnification.

It has been stated many times that the rule authorizing attorney fee awards in defense and indemnification cases was “promulgated to discourage groundless disclaimers and to provide equitably to an insured the benefits of the insurance contract without the necessity of obtaining a judicial determination that the insured, in fact, is entitled to such protection.”  We know that policies of insurance, although contracts whose enforcement is sought by a contract action, are treated in a more consumer-friendly judicial atmosphere than other contracts because of the inability of insureds to negotiate the terms of the policy and because of the important social context within which such contracts are written.

The arguments of fee awards in first-party actions has over the years been that the court wants to discourage groundless disclaimers, the third-party rationale should hold true for direct claims against the insurer.  Then in neither instance will the insured be short-changed by payment of attorney fees necessitated by the insurer’s failure to reasonably carry out the terms of its policy.

This issue came to the forefront most recently during oral argument before the New Jersey Supreme Court on Sept. 9 in the cases Badiali v. New Jersey Manufacturers Insurance Group and Wadeer v. New Jersey Manufacturers Insurance Group, each involving issues arising under an uninsured motorist policy.  Each case arose in a separate factual complex and presented different issues, but each was similar in the claims by insureds that their insurer has acted contrary to the terms of its policies and its obligations under the law.  If the Court were to rule in favor of the insureds, the question was whether and, if so, how insureds might be made whole for their attorney fees, which in the Badiali case far exceeded the amount at issue for each party.

In the course of oral arguments, members of the Court questioned whether attorney fees should not be awarded a successful insured in a first-party suit in order to provide the same insurer encouragement as in third-party action and for the same reasons.  One Justice, addressing the practical difficulty of obtaining counsel in legitimate cases of small value, indicated that “a real simple fix” would be to amend R.4:42-9(a)(6) to include first-party cases where there is no other incentive for the insurer to “raise its game” and settle promptly, fairly and reasonably, rather than to require litigation.

The combination of a fiduciary obligation of insurers to their insureds and the important social benefit of insurance coverage to our society, suggests to us that the Court would be, as it has been in the past, an instrument of social justice by, at the least in the context of insured and underinsured motorist claims, if it authorized payment of the insured’s attorney fees if the insured is the “successful claimant” in such a policy suit.  Defending what constitutes “successful claimant” presents a difficult question, but one we believe the Court can answer to provide the necessary guidance for future application.