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The Metropolitan Corporate Counsel
February 2005
Win Coverage, Recover Attorneys’ Fees In New Jersey
Donald W. Kiel
and Robert F. Pawlowski
KIRKPATRICK & LOCKHART
NICHOLSON GRAHAM LLP
American Law Generally Forbids
Awarding Attorneys’ Fees
American common law mirrors English common law in many respects.
However, they are polar opposites when
it comes to the awarding of attorneys’
fees to a successful litigant. Under
American common law, the prevailing
litigant ordinarily is not permitted to
recover attorneys’ fees from the losing
party.1 This is known as the “American
Rule.” 2 In contrast, under English common law, the prevailing party is permitted to recover attorneys’ fees from the
losing party.3 This is known as the
“English Rule.” 4
A New Jersey Exception To The
American Rule: Rule 4:42-9(a)(6)
The American Rule is not absolute as
American courts recognize a number of
exceptions to the “American Rule.” For
example, American courts will enforce
the award of attorneys’ fees if legislated
by rule or statute.5 This exception is
very important—and favorable—to policyholders suing their insurance companies under liability or indemnity
insurance policies in New Jersey courts.
Pursuant to New Jersey Court Rule
4:42-9(a)(6), “[n]o fee for legal services
shall be allowed in the taxed costs or
otherwise, except...in an action upon a
liability or indemnity policy of insurance, in favor of a successful
claimant.” 6 Therefore, a policyholder
that prevails against its insurance company, and wins indemnity or liability
insurance coverage, may be awarded
attorneys’ fees by a New Jersey state
court applying New Jersey law.7
While the application of Rule 4:429(a)(6) is straightforward in cases filed
in New Jersey state court applying New
Jersey law, issues arise in cases filed in
federal court and in cases applying the
substantive law of a state other than
New Jersey. Application of the rule will
depend upon whether the presiding
court interprets the rule to be procedural
or substantive and, in the case of a federal court action, whether jurisdiction is
based on “diversity of citizenship.” 8
New Jersey state and federal courts
will apply the procedural law of the
forum, and, according to New Jersey
choice of law rules, the substantive law
of the state with the greatest interest in
the outcome of the litigation to the
extent it differs from New Jersey law.9
Theoretically, therefore, if Rule 4:429(a)(6) is procedural, New Jersey state
courts will always apply the rule and
Donald W. Kiel is a Partner and Robert
F. Pawlowski is an Associate in the
insurance coverage practice group at
the Newark, New Jersey office of Kirkpatrick & Lockhart Nicholson Graham
LLP.
Donald W. Kiel
New Jersey federal courts will never
apply the rule. If, on the other hand,
Rule 4:42-9(a)(6) is substantive, theoretically, both New Jersey state and federal courts will only apply the rule if
applying New Jersey substantive law.
What about in practice? Is Rule
4:42-9(a)(6) substantive or procedural?
Do state and federal courts strictly
enforce the general rules espoused
above? New Jersey state and federal
courts have considered and ruled upon
arguments in favor of and against the
application of Rule 4:42-9(a)(6) in the
various situations listed above. New
Jersey’s state court rulings are not
always consistent with New Jersey’s
federal courts concerning the issue.
What has been consistent is that these
rulings are policyholder-friendly.
Rule 4:42-9(a)(6) Is Applied As
Procedural By New Jersey State
Courts Applying Foreign
Substantive Law
Du-Wel Products, Inc. v. United
States Fire Insurance Company10 was
an insurance coverage declaratory judgment action filed in New Jersey state
court. In Du-Wel, the New Jersey
Appellate Division ruled that although
Michigan substantive law applied to
insurance policy interpretation issues,
Rule 4:42-9(a)(6) was procedural and
applied to permit the award of counsel
fees to the prevailing policyholder. The
court reasoned that “the subject of
counsel fees, despite its substantive dollar impact on litigants, ‘has been consistently held to be one of practice and
procedure....’” 11The result of this ruling, which is binding precedent on New
Jersey trial level courts, is that any policyholder who successfully sues its
insurance company for liability or
indemnity insurance coverage may
recover its attorneys’ fees in New Jersey
state court, regardless of whether New
Jersey or another state’s substantive law
applies.
New Jersey Federal Courts Sitting In
Diversity Apply Rule 4:42-9(a)(6)
When Applying New Jersey
Substantive Law
Federal courts apply state procedural
rules sparingly and only under very limited circumstances.12 Nevertheless, the
Robert F. Pawlowski
United States Court of Appeals for the
Third Circuit repeatedly has held that
“[s]tate rules concerning the award or
denial of attorneys’ fees are to be applied
in cases where federal jurisdiction is
based on diversity....” 13 This is so
because while procedural in nature, such
rules substantively affect the outcome of
the litigation.14 Therefore, trial courts in
the New Jersey Federal District Court
have awarded attorneys’ fees to a successful policyholder in an insurance
coverage action applying New Jersey
law pursuant to Rule 4:42-9(a)(6).15
New Jersey Federal Courts Sitting
In Diversity Should Apply
Rule 4:42-9(a)(6) When Applying
Foreign Substantive Law
In First State Underwriters Agency of
New England Reinsurance Corporation
v. Travelers Insurance Company, the
Third Circuit reversed the New Jersey
District Court’s ruling that Rule 4:429(a)(6) applied even though Pennsylvania substantive law controlled. 1 6
Refusing to affirm the application of
New Jersey’s procedural Rule 4:429(a)(6), in a case governed by Pennsylvania substantive law, the court noted
that there was “no New Jersey case law
that would suggest that the New Jersey
courts would dissect [the policyholder’s]
insurance claim and thereafter apply
New Jersey law only to the attorney’s
fees aspect of the claim.” 17 The court
continued, “[w]e think that the New Jersey courts would consider New Jersey
Court Rule 4:42-9(a)(6) as an integral
part of its insurance law and apply that
body of law to the dispute in toto or not
at all.18
The reasoning of the Third Circuit’s
ruling in First State is belied by the subsequent Du-Wel decision. There, the
New Jersey Appellate Division did in
fact dissect the policyholder’s insurance
claim by applying Michigan law to the
insurance dispute and, thereafter, applying New Jersey law only to the attorneys’ fees aspect of the claim. Du-Wel
illustrates the significance New Jersey
courts place on public policy considerations underlying the promulgation of
Rule 4:42-9(a)(6) and the importance of
its enforcement.19 As a result of the DuWel decision, New Jersey federal courts
sitting in diversity now should apply
Rule 4:42-9(a)(6) regardless of the
applicable substantive law.
Policyholders Should Consider
Rule 4:42-9(a)(6) When Deciding
Where To File Suit
To be sure, the award of attorneys’
fees under Rule 4:42-9(a)(6) is one of a
few narrow exceptions to the “American Rule” which always have been “rigorously enforced lest they grow to
consume the general rule itself.” 20
While Rule 4:42-9(a)(6) is an exception
to the “American Rule,” policyholders
who file suit in New Jersey must
demonstrate at least some minimal connection to the state. That being said,
policyholders with jurisdiction properly
grounded in New Jersey should consider carefully the implications of Rule
4:42-9(a)(6) before filing suit elsewhere.
Alyeska Pipeline Service Company v. Wilderness
Society, 421 U.S. 240, 247, 95 S. Ct. 1612, 1616
(1975).
2 In re Niles, 176 N.J. 282, 293-294, 823 A.2d 1, 7
(2003) (“New Jersey has a strong policy against the
shifting of counsel fees.”).
3 Sears v. Baccaglio, 60 Cal. App. 4th 1136, 1144,
70 Cal. Rptr. 2d 769, 774 (1998).
4 Id.
5 Mighty Midgets, Inc. v. Centennial Insurance
Company, 47 N.Y.2d 12, 22 (1979).
6 “The purpose of the rule is to ‘provide to an
insured the benefits of the insurance contract without the necessity of obtaining a judicial determination that the insured is in fact entitled to such
protection.” NL Industries, Inc. v. Commercial Union
Ins. Co., 828 F. Supp. 1154, 1167 (D.N.J. 1993)
(quoting Molyneaux v. Molyneaux, 230 N.J. Super.
169, 181, 553 A.2d 49, 54 (App. Div. 1989)).
7 Other states that allow the shifting of attorneys’
fees to a prevailing policyholder, like New York, do
so on a more limited basis. See U.S. Underwriters
Insurance Company v. City Club Hotel, LLC, et al,
2004 WL 2902402 (2004 N.Y. Slip Op. 09321, New
York Court of Appeals, December 16, 2004) (under
New York law, a prevailing policyholder may recover
its fees incurred in defending a declaratory judgment action filed by its insurance company, but may
not recover the costs of prosecuting an action
against its insurance company).
8 For a federal court to have jurisdiction over a matter of state law, the litigants must be citizens of different states. 28 U.S.C.A. § 1332.
9 North Bergen Rex Transport, Inc. v. Trailer Leasing Company, 158 N.J. 561, 569, 730 A.2d 843, 848
(1999); Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58
S. Ct. 817, 822 (1938).
10 236 N.J. Super. 349, 362-363, 565 A.2d 1113,
1120 (App. Div. 1989), certif. den. 121 N.J. 617, 583
A.2d 316 (1990).
11 Id. at 362-363, 1120 (quoting Busik v. Levine, 63
N.J. 351, 372-373, 307 A.2d 571, 582 (1973)).
12 Kearny Barge Co. v. Global Ins. Co., 943 F. Supp.
441, 462 (D.N.J. 1996).
13 McAdam v. Dean Witter Reynolds, Inc., 896 F.2d
750, 775 n. 47 (3d Cir. 1990) (citing Montgomery
Ward & Co. v. Pacific Indem. Co., 557 F.2d 51, 56
(3d Cir. 1977); contrast Kearny Barge, 943 F. Supp.
at 463 (refusing to apply Rule 4:42-9(a)(6) in action
where jurisdiction is based on admiralty rather than
diversity).
14 Kearny Barge, 943 F. Supp. at 462 (citing Erie
304 U.S. 64, 58 S. Ct. 817).
15 See NL Industries, 828 F. Supp. at 1167 (federal
court sitting in diversity and applying New Jersey
substantive law found the matter to be “an example
of exactly the type of behavior that R. 4:42-9(a)(6) is
designed to deter”); see also McAdam, 896 F.2d
750; Montgomery Ward, 557 F.2d 51.
16 803 F.2d 1308, 1316-1317 (3d Cir. 1986).
17 Id at 1317.
18 Id.
19 The importance of public policy considerations
was recognized by the New Jersey District Court in
First State, 803 F.2d at 1316.
20 McAdam, 896 F. 2d at 775 (quoting Van Horn v.
City of Trenton, 80 N.J. 528, 538, 404 A. 2d 615,
620 (1979).
21 Du-Wel, 236 N.J. Super. at 363, 565 A.2d at
1120.
1
Please email the authors at dkiel@klng.com or rpawlowski@klng.com with questions about this article.