NJ Court Clarifies Policyholders' Right to Recover Out-of-State Coverage Counsel Fees

A successful policyholder may recover counsel fees in certain circumstances. Oftentimes, the counsel fees are awarded in the same insurance coverage proceeding in which they are incurred. But, what happens when some of the successful policyholder's fees are incurred in a competing, out-of-state coverage action? According to the New Jersey Supreme Court in Myron Corp. v. Atlantic Mutual Insurance Co., __ N.J. __, 2010 N.J. LEXIS 700 (July 27, 2010), a policyholder's right to recover counsel fees extends even to those fees incurred defending against an insurer-initiated, out-of-state declaratory judgment action.

Policyholders' Right to Coverage Counsel Fees

New Jersey's fee-shifting rule, R. 4:42-9(a)(6), provides that a “successful claimant” may recover counsel fees “[i]n an action upon a liability or indemnity policy of insurance.” New Jersey courts have discretion in awarding coverage counsel fees. See Helton v. Prudential Prop. & Cas. Ins. Co., 205 N.J. Super. 196, 200 (App. Div. 1985). A court may, for example, deny an award of attorney fees when the policyholder has made material misrepresentations in procuring the liability insurance policies at issue, contributing to the necessity of litigation. See Felicetta v. Commercial Union Ins. Co., 117 N.J. Super. 524, 528-30 (App. Div. 1971). New Jersey courts have awarded counsel fees under the Rule to policyholders entitled to a defense, but not entitled to indemnification, under a liability policy. See, e.g., Schmidt v. Smith, 294 N.J. Super. 569, 591 (App. Div. 1996), aff'd, 155 N.J. 44 (1998). They also have allowed for counsel fees incurred by a policyholder defending itself in a declaratory judgment action among insurers over which carrier is liable for a claim. See N.J. Mfrs. Ins. Co. v. Consolidated Mut. Ins. Co., 124 N.J. Super. 598 (Law Div. 1973).

The fee-shifting rule's impetus is to prevent liability insurers from effectively shirking their coverage obligations to those policyholders unwilling to invest in coverage litigation to compel their liability carrier to meet its contractual obligations. New Jersey courts seek to “discourage groundless disclaimers and to provide more 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.” Sears Mortgage Corp. v. Rose, 134 N.J. 326, 356 (1993) (quoting Guarantee Ins. Co. v. Saltman, 217 N.J. Super. 604, 610 (App. Div. 1987)). The courts also seek to ensure that innocent third-party claimants can recover for injuries caused by policyholders. See Shore Orthopaedic Group, LLC v. Equitable Life Assurance Soc'y of the U.S., 397 N.J. Super. 614, 625 (App. Div. 2008), aff'd, 199 N.J. 310 (2009).

New Jersey's approach is not unique. A number of states award policyholders their counsel fees incurred in pursuing insurance coverage from insurers that wrongfully deny their claims. See, e.g., Koch v. Prudential Ins. Co. of Am., 470 P.2d 756, 759-760, 205 Kan. 561, 564-566 (Kan. 1970) (awarding attorney's fees unless under statute insurer has “just cause or excuse” in refusing to pay loss); Union Mut. Fire Ins. Co. v. Town of Topsham, 441 A.2d 1012, 1019 (Me. 1982) (awarding coverage counsel fees for declaratory judgment action brought by insurer that refused to provide a defense in bad faith). The standards permitting such awards vary. Some courts allow fees as consequential damages flowing from an insurer's breach of its duty to defend. See, e.g., U.S. Fire Ins. Co. v. Green Bay Packaging, Inc., 66 F. Supp. 2d 987, 998 (E.D. Wis. 1999). Others hold that they are covered by the “Supplemental Payments” provisions of the relevant insurance policies. See e.g., State Farm Fire & Cas. Co. v. Sigman, 508 N.W.2d 323, 325-27 (N.D. 1993); Olympic S.S. Co. v. Centennial Ins. Co., 117 Wash. 2d 37, 51-52, 811 P.2d 673, 680-681 (1991). Still others allow them, but only when expressly provided for by contract or statute. See, e.g., Hurst Co. v. Bituminous Ins. Cos., 1998 Tenn. App. LEXIS 344, at *18-19 (Tenn. Ct. App. May 28, 1998); City of Virginia Beach v. Aetna Cas. & Sur. Co., 426 F.Supp. 821, 827 (E.D. Va. 1976).

Myron v. Atlantic Clarifies Application of Fee-Shifting Rules

It is against this backdrop that the New Jersey courts recently considered whether the state's fee-shifting rule applies to coverage counsel fees expended in an out-of-state action. In Myron, Myron Corporation (“Myron”), a New Jersey-based vendor of business promotional products, was sued in a class action by claimants alleging that Myron's unsolicited “junk faxes” violated the Telephone Consumer Protection Act (“TCPA”) and the Illinois Consumer Fraud and Deceptive Business Practices Act. Myron tendered the class action complaint, along with several other TCPA-related claims, to its commercial general liability insurer, Atlantic Mutual Insurance Corporation (“Atlantic”).

Atlantic initially accepted Myron's defense under a reservation of rights. When the Seventh Circuit later issued a decision in another matter denying insurance coverage for TCPA claims, Atlantic filed a federal lawsuit in Illinois federal court seeking a declaration that its insurance policy did not cover Myron's TCPA-related claims. The lawsuit was initially dismissed for lack of diversity jurisdiction because the amount in controversy was less than the statutorily mandated $75,000. Shortly after its dismissal, Atlantic found additional underlying defense invoices totaling in excess of $75,000 and successfully refiled its federal coverage action. Myron filed its own declaratory judgment action in state court in New Jersey, which was dismissed without prejudice, pending the resolution of Atlantic's earlier-filed federal lawsuit. Myron then filed a motion to stay the Illinois federal action under the doctrine of abstention. The federal court granted the motion because New Jersey, not Illinois, had the more substantial interest in the coverage issue. The court reasoned that the TCPA cases against Myron were national and not concentrated in any one state; the insurance coverage dispute had no nexus to the federal courts of Illinois; and the policyholder was a New Jersey company seeking coverage under an insurance policy issued in New Jersey. The Illinois federal court concluded that it had “no real connection to the parties' insurance dispute, while the alternative forum in New Jersey has a strong connection.” Myron Corp. v. Atl. Mut. Ins. Co., 407 N.J. Super. 302, 308 (App. Div. 2009), aff'd, __ N.J. __, 2010 N.J. LEXIS 700 (July 27, 2000) (internal quotations omitted).

Myron then refiled its declaratory judgment action in New Jersey, where the trial court determined that Atlantic had a duty to defend Myron in the underlying class action lawsuit, but deferred a decision on the indemnity issue pending the outcome of the underlying action. Myron and its insurer then settled their coverage disputes, except for Myron's claims for $160,000 in coverage counsel fees incurred in the Illinois federal declaratory judgment actions.

The trial court denied Myron's application for recovery of its counsel fees under R. 4:42-9(a)(6). The trial judge reasoned that Atlantic's coverage action had been brought in federal court in Illinois and was distinct from both the underlying lawsuit and the New Jersey coverage litigation. Id. at 309. The trial judge further concluded that the New Jersey Supreme Court did not intend to apply R. 4:42-9(a)(6) “extraterritorially.” Id. He also reasoned that because Illinois has no analogue to R. 4:42-9(a)(6), Myron would not have been able to collect counsel fees had it prevailed in the Illinois coverage case filed by the carrier, unless the federal court had applied New Jersey law to the fee issue. Id.

On appeal, the Appellate Division reversed the trial court's decision, holding that pursuant to R. 4:42-9(a)(6), Myron was entitled to recover the attorney fees associated with the Illinois federal court coverage actions. Id. at 310-17. The court acknowledged that no New Jersey decisions have addressed the application of the rule to coverage counsel fees incurred in out-of-state litigation. Id. at 310. Thus, the court looked to a Washington State Court of Appeals Case, Fluke Corp. v. Hartford Accident & Indemnity Co., 102 Wash. App. 237, 7 P.3d 825 (2000), aff'd, 145 Wash. 2d 137, 34 P.3d 809 (2001), which dealt with a similar issue. There, Fluke Corporation (“Fluke”), a Washington-based company, sought coverage for a California malicious prosecution action under an insurance policy that was issued in Washington. The insurer, Hartford, had filed a declaratory judgment action in California, which was dismissed in favor of Fluke's earlier-filed Washington coverage action, in which Fluke ultimately prevailed.

Like New Jersey, Washington allows a policyholder to recover fees if it prevails against its insurer in a coverage action. See Olympic S.S. Co. v. Centennial Ins. Co., 117 Wash. 2d 37, 53, 811 P.2d 673, 681 (1991). The Washington appellate court affirmed the trial court's award of counsel fees that Fluke incurred in litigating the California declaratory judgment action brought by Hartford. The court reasoned that under Washington law, a policyholder “is entitled to recover fees for legal action the insured is compelled to assume to obtain the full benefit of promised coverage.” Fluke, 7 P.3d at 834. Thus, the counsel fees that Fluke incurred in defending the California declaratory judgment action brought by Hartford “were necessarily incurred in an effort to establish insurance coverage.” Id. at 835 (internal quotation marks omitted).

Consistent with the Washington appellate court's reasoning in Fluke, the New Jersey Appellate Division held that awarding coverage counsel fees incurred in the Illinois federal lawsuit was consistent with the policy underlying R. 4:42-9(a)(6) ' namely offering the full measure of a liability insurance policy's protection under the Rule, undiluted by coverage counsel fees and costs. See Myron, 407 N.J. Super. at 312. The court emphasized that “unless the insured can recover its counsel fees for out-of-state litigation ' an insurer could wear down the insured financially through forum shopping.” Id. at 312. Thus, “[r]equiring Myron to absorb the cost of the Illinois litigation would 'dilute' Myron's right to obtain the benefits of the Atlantic policy without having to pay litigation expenses to establish coverage.” Id. (citing Liberty Vill. Assocs. v. W. Am. Ins. Co., 308 N.J. Super. 393, 406 (App. Div. 1998); Sears Mortgage Corp. v. Rose, 134 N.J. 326, 356 (1993)).

The court rejected Atlantic's argument that even if the Illinois federal court had applied New Jersey's substantive insurance coverage law, it would have applied the procedural law of Illinois to an application for counsel fees and rejected such relief. According to Atlantic, Myron's counsel fees would have been disallowed under Illinois law, which requires an insured to prove that the insurer acted with malice or bad faith to secure such amounts. Id. at 311. Similarly, the court rejected Atlantic's argument that Myron was not a “successful” claimant in the Illinois coverage dispute. The court reasoned that “after successfully fending off Atlantic's effort to litigate the coverage issue in Illinois, Myron litigated the merits of the coverage issue in New Jersey and obtained a favorable result. Its right to counsel fees stems from its success in the New Jersey litigation.” Id. at 312.

The court further opined that its holding was consistent with New Jersey's “entire controversy” doctrine because “the Illinois litigation was an integral part of the entire controversy over coverage, and can fairly be characterized for purposes of Rule 4:42-9(a)(6) as part of the same 'action' in which Myron prevailed.” Id.; see also R. 4:30A (New Jersey Court Rule codifying the entire controversy doctrine).

The New Jersey Supreme Court recently agreed and summarily affirmed the Appellate Division's application of Rule 4:42-9(a)(6) to the out-of-state coverage dispute. The court apparently rejected the lone dissenter's reasoning that the court's decision somehow violated New Jersey's strong public policy against fee shifting, and that Myron was not a “successful claimant” because the coverage action made its way to New Jersey via the federal court's discretionary abstention doctrine, which simply stayed the Illinois federal action. The court likewise effectively rejected the dissent's concerns that its holding would either: lead to policyholders now litigating coverage questions elsewhere to move their cases, if successful, to New Jersey to take advantage of its fee-shifting rule; or do violence to the important concept of comity among states. Myron, __ N.J. at __, 2010 N.J. LEXIS 700, at *17-19 (Rivera-Soto, J., dissenting).

Critique of Myron's Dissent

The dissenting opinion, however, clings too tightly to New Jersey's public policy against fee shifting, and loses sight of the Rule providing exceptions to it. Indeed, the Rule allows a prevailing policyholder to recover fees in certain actions upon liability insurance policies. R. 4:42-9(6). The competing, albeit ultimately stayed, Illinois coverage action was part and parcel of the policyholder's efforts to obtain full coverage under its liability insurance policy. Thus, the holding in Myron does no harm to the “American Rule” against fee shifting, but merely clarifies an existing exception to it.

The dissent also raises concern that policyholders, upon successfully litigating their coverage questions elsewhere, will move their cases to New Jersey to take advantage of the holding in Myron. It offers no basis for this concern and, indeed, this did not happen in Myron. The Illinois federal court in Myron abstained before it made any substantive insurance coverage rulings. Thus, the policyholder's New Jersey action was seemingly motivated by nothing more nefarious than the fact that New Jersey was a more appropriate forum for resolving the coverage dispute.

In granting Myron's abstention motion, the Illinois federal court acknowledged that the case involved state law issues of insurance coverage. Myron, 407 N.J. Super. at 308. Thus, the dissent's concern for the continued vitality of principles of comity is misplaced. The Illinois federal court reasoned that “out of all the possible options, a New Jersey court has the greatest interest in resolving an insurance coverage dispute arising from policies which appear to have been issued in New Jersey to a New Jersey corporation with its principal place of business in New Jersey.” Id. Allowing a New Jersey policyholder to recover fees ' 1) where it is based, and 2) under the rules of the forum with the greatest interest in the coverage suit filed against it by its insurer ' does not compromise fundamental principles of interstate comity.

Conclusion

Myron is a thoughtful decision, which serves the important public policy goal ' shared by many states ' of allowing policyholders to recover counsel fees without being worn down financially by their insurance company's forum shopping and other legal maneuvering. Moreover, and more importantly, the decision provides policyholders in New Jersey and elsewhere with strong support for recovery of coverage counsel fees, when wrongly forced to defend a carrier's competing, out-of-state declaratory judgment action.

Sherilyn Pastor, a member of this newsletter's Board of Editors, is a partner in, and Practice Group Leader of, McCarter & English LLP's Insurance Coverage Group. Gregory Horowitz also is a partner and Stephanie Platzman-Diamant is an associate in the Group. This publication is not intended to provide legal advice. Issues relating to insurance coverage and litigation are fact specific, and their resolution will depend on the facts involved and the law governing the disputes, which varies from state to state. The views expressed in this publication are not necessarily those of McCarter & English or its clients.

A successful policyholder may recover counsel fees in certain circumstances. Oftentimes, the counsel fees are awarded in the same insurance coverage proceeding in which they are incurred. But, what happens when some of the successful policyholder's fees are incurred in a competing, out-of-state coverage action? According to the New Jersey Supreme Court in Myron Corp. v. Atlantic Mutual Insurance Co. , __ N.J. __, 2010 N.J. LEXIS 700 (July 27, 2010), a policyholder's right to recover counsel fees extends even to those fees incurred defending against an insurer-initiated, out-of-state declaratory judgment action.

Policyholders' Right to Coverage Counsel Fees

New Jersey's fee-shifting rule, R. 4:42-9(a)(6), provides that a “successful claimant” may recover counsel fees “[i]n an action upon a liability or indemnity policy of insurance.” New Jersey courts have discretion in awarding coverage counsel fees. See Helton v. Prudential Prop. & Cas. Ins. Co. , 205 N.J. Super. 196, 200 (App. Div. 1985). A court may, for example, deny an award of attorney fees when the policyholder has made material misrepresentations in procuring the liability insurance policies at issue, contributing to the necessity of litigation. See Felicetta v. Commercial Union Ins. Co. , 117 N.J. Super. 524, 528-30 (App. Div. 1971). New Jersey courts have awarded counsel fees under the Rule to policyholders entitled to a defense, but not entitled to indemnification, under a liability policy. See, e.g., Schmidt v. Smith , 294 N.J. Super. 569, 591 (App. Div. 1996), aff'd , 155 N.J. 44 (1998). They also have allowed for counsel fees incurred by a policyholder defending itself in a declaratory judgment action among insurers over which carrier is liable for a claim. See N.J. Mfrs. Ins. Co. v. Consolidated Mut. Ins. Co., 124 N.J. Super. 598 (Law Div. 1973).

The fee-shifting rule's impetus is to prevent liability insurers from effectively shirking their coverage obligations to those policyholders unwilling to invest in coverage litigation to compel their liability carrier to meet its contractual obligations. New Jersey courts seek to “discourage groundless disclaimers and to provide more 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.” Sears Mortgage Corp. v. Rose , 134 N.J. 326, 356 (1993) (quoting Guarantee Ins. Co. v. Saltman , 217 N.J. Super. 604, 610 (App. Div. 1987)). The courts also seek to ensure that innocent third-party claimants can recover for injuries caused by policyholders. See Shore Orthopaedic Group, LLC v. Equitable Life Assurance Soc'y of the U.S. , 397 N.J. Super. 614, 625 (App. Div. 2008), aff'd , 199 N.J. 310 (2009).

New Jersey's approach is not unique. A number of states award policyholders their counsel fees incurred in pursuing insurance coverage from insurers that wrongfully deny their claims. See, e.g., Koch v. Prudential Ins. Co. of Am. , 470 P.2d 756, 759-760, 205 Kan. 561, 564-566 (Kan. 1970) (awarding attorney's fees unless under statute insurer has “just cause or excuse” in refusing to pay loss); Union Mut. Fire Ins. Co. v. Town of Topsham , 441 A.2d 1012, 1019 (Me. 1982) (awarding coverage counsel fees for declaratory judgment action brought by insurer that refused to provide a defense in bad faith). The standards permitting such awards vary. Some courts allow fees as consequential damages flowing from an insurer's breach of its duty to defend. See, e.g., U.S. Fire Ins. Co. v. Green Bay Packaging, Inc., 66 F. Supp. 2d 987, 998 (E.D. Wis. 1999). Others hold that they are covered by the “Supplemental Payments” provisions of the relevant insurance policies. See e.g., State Farm Fire & Cas. Co. v. Sigman , 508 N.W.2d 323, 325-27 (N.D. 1993); Olympic S.S. Co. v. Centennial Ins. Co. , 117 Wash. 2d 37, 51-52, 811 P.2d 673, 680-681 (1991). Still others allow them, but only when expressly provided for by contract or statute. See, e.g., Hurst Co. v. Bituminous Ins. Cos., 1998 Tenn. App. LEXIS 344, at *18-19 (Tenn. Ct. App. May 28, 1998); City of Virginia Beach v. Aetna Cas. & Sur. Co. , 426 F.Supp. 821, 827 (E.D. Va. 1976).

Myron v. Atlantic Clarifies Application of Fee-Shifting Rules

It is against this backdrop that the New Jersey courts recently considered whether the state's fee-shifting rule applies to coverage counsel fees expended in an out-of-state action. In Myron, Myron Corporation (“Myron”), a New Jersey-based vendor of business promotional products, was sued in a class action by claimants alleging that Myron's unsolicited “junk faxes” violated the Telephone Consumer Protection Act (“TCPA”) and the Illinois Consumer Fraud and Deceptive Business Practices Act. Myron tendered the class action complaint, along with several other TCPA-related claims, to its commercial general liability insurer, Atlantic Mutual Insurance Corporation (“Atlantic”).

Atlantic initially accepted Myron's defense under a reservation of rights. When the Seventh Circuit later issued a decision in another matter denying insurance coverage for TCPA claims, Atlantic filed a federal lawsuit in Illinois federal court seeking a declaration that its insurance policy did not cover Myron's TCPA-related claims. The lawsuit was initially dismissed for lack of diversity jurisdiction because the amount in controversy was less than the statutorily mandated $75,000. Shortly after its dismissal, Atlantic found additional underlying defense invoices totaling in excess of $75,000 and successfully refiled its federal coverage action. Myron filed its own declaratory judgment action in state court in New Jersey, which was dismissed without prejudice, pending the resolution of Atlantic's earlier-filed federal lawsuit. Myron then filed a motion to stay the Illinois federal action under the doctrine of abstention. The federal court granted the motion because New Jersey, not Illinois, had the more substantial interest in the coverage issue. The court reasoned that the TCPA cases against Myron were national and not concentrated in any one state; the insurance coverage dispute had no nexus to the federal courts of Illinois; and the policyholder was a New Jersey company seeking coverage under an insurance policy issued in New Jersey. The Illinois federal court concluded that it had “no real connection to the parties' insurance dispute, while the alternative forum in New Jersey has a strong connection.” Myron Corp. v. Atl. Mut. Ins. Co. , 407 N.J. Super. 302, 308 (App. Div. 2009), aff'd , __ N.J. __, 2010 N.J. LEXIS 700 (July 27, 2000) (internal quotations omitted).

Myron then refiled its declaratory judgment action in New Jersey, where the trial court determined that Atlantic had a duty to defend Myron in the underlying class action lawsuit, but deferred a decision on the indemnity issue pending the outcome of the underlying action. Myron and its insurer then settled their coverage disputes, except for Myron's claims for $160,000 in coverage counsel fees incurred in the Illinois federal declaratory judgment actions.

The trial court denied Myron's application for recovery of its counsel fees under R. 4:42-9(a)(6). The trial judge reasoned that Atlantic's coverage action had been brought in federal court in Illinois and was distinct from both the underlying lawsuit and the New Jersey coverage litigation. Id. at 309. The trial judge further concluded that the New Jersey Supreme Court did not intend to apply R. 4:42-9(a)(6) “extraterritorially.” Id. He also reasoned that because Illinois has no analogue to R. 4:42-9(a)(6), Myron would not have been able to collect counsel fees had it prevailed in the Illinois coverage case filed by the carrier, unless the federal court had applied New Jersey law to the fee issue. Id.

On appeal, the Appellate Division reversed the trial court's decision, holding that pursuant to R. 4:42-9(a)(6), Myron was entitled to recover the attorney fees associated with the Illinois federal court coverage actions. Id. at 310-17. The court acknowledged that no New Jersey decisions have addressed the application of the rule to coverage counsel fees incurred in out-of-state litigation. Id. at 310. Thus, the court looked to a Washington State Court of Appeals Case, Fluke Corp. v. Hartford Accident & Indemnity Co. , 102 Wash. App. 237, 7 P.3d 825 (2000), aff'd , 145 Wash. 2d 137, 34 P.3d 809 (2001), which dealt with a similar issue. There, Fluke Corporation (“Fluke”), a Washington-based company, sought coverage for a California malicious prosecution action under an insurance policy that was issued in Washington. The insurer, Hartford, had filed a declaratory judgment action in California, which was dismissed in favor of Fluke's earlier-filed Washington coverage action, in which Fluke ultimately prevailed.

Like New Jersey, Washington allows a policyholder to recover fees if it prevails against its insurer in a coverage action. See Olympic S.S. Co. v. Centennial Ins. Co. , 117 Wash. 2d 37, 53, 811 P.2d 673, 681 (1991). The Washington appellate court affirmed the trial court's award of counsel fees that Fluke incurred in litigating the California declaratory judgment action brought by Hartford. The court reasoned that under Washington law, a policyholder “is entitled to recover fees for legal action the insured is compelled to assume to obtain the full benefit of promised coverage.” Fluke, 7 P.3d at 834. Thus, the counsel fees that Fluke incurred in defending the California declaratory judgment action brought by Hartford “were necessarily incurred in an effort to establish insurance coverage.” Id. at 835 (internal quotation marks omitted).

Consistent with the Washington appellate court's reasoning in Fluke, the New Jersey Appellate Division held that awarding coverage counsel fees incurred in the Illinois federal lawsuit was consistent with the policy underlying R. 4:42-9(a)(6) ' namely offering the full measure of a liability insurance policy's protection under the Rule, undiluted by coverage counsel fees and costs. See Myron, 407 N.J. Super. at 312. The court emphasized that “unless the insured can recover its counsel fees for out-of-state litigation ' an insurer could wear down the insured financially through forum shopping.” Id. at 312. Thus, “[r]equiring Myron to absorb the cost of the Illinois litigation would 'dilute' Myron's right to obtain the benefits of the Atlantic policy without having to pay litigation expenses to establish coverage.” Id. (citing Liberty Vill. Assocs. v. W. Am. Ins. Co. , 308 N.J. Super. 393, 406 (App. Div. 1998); Sears Mortgage Corp. v. Rose , 134 N.J. 326, 356 (1993)).

The court rejected Atlantic's argument that even if the Illinois federal court had applied New Jersey's substantive insurance coverage law, it would have applied the procedural law of Illinois to an application for counsel fees and rejected such relief. According to Atlantic, Myron's counsel fees would have been disallowed under Illinois law, which requires an insured to prove that the insurer acted with malice or bad faith to secure such amounts. Id. at 311. Similarly, the court rejected Atlantic's argument that Myron was not a “successful” claimant in the Illinois coverage dispute. The court reasoned that “after successfully fending off Atlantic's effort to litigate the coverage issue in Illinois, Myron litigated the merits of the coverage issue in New Jersey and obtained a favorable result. Its right to counsel fees stems from its success in the New Jersey litigation.” Id. at 312.

The court further opined that its holding was consistent with New Jersey's “entire controversy” doctrine because “the Illinois litigation was an integral part of the entire controversy over coverage, and can fairly be characterized for purposes of Rule 4:42-9(a)(6) as part of the same 'action' in which Myron prevailed.” Id.; see also R. 4:30A (New Jersey Court Rule codifying the entire controversy doctrine).

The New Jersey Supreme Court recently agreed and summarily affirmed the Appellate Division's application of Rule 4:42-9(a)(6) to the out-of-state coverage dispute. The court apparently rejected the lone dissenter's reasoning that the court's decision somehow violated New Jersey's strong public policy against fee shifting, and that Myron was not a “successful claimant” because the coverage action made its way to New Jersey via the federal court's discretionary abstention doctrine, which simply stayed the Illinois federal action. The court likewise effectively rejected the dissent's concerns that its holding would either: lead to policyholders now litigating coverage questions elsewhere to move their cases, if successful, to New Jersey to take advantage of its fee-shifting rule; or do violence to the important concept of comity among states. Myron, __ N.J. at __, 2010 N.J. LEXIS 700, at *17-19 (Rivera-Soto, J., dissenting).

Critique of Myron's Dissent

The dissenting opinion, however, clings too tightly to New Jersey's public policy against fee shifting, and loses sight of the Rule providing exceptions to it. Indeed, the Rule allows a prevailing policyholder to recover fees in certain actions upon liability insurance policies. R. 4:42-9(6). The competing, albeit ultimately stayed, Illinois coverage action was part and parcel of the policyholder's efforts to obtain full coverage under its liability insurance policy. Thus, the holding in Myron does no harm to the “American Rule” against fee shifting, but merely clarifies an existing exception to it.

The dissent also raises concern that policyholders, upon successfully litigating their coverage questions elsewhere, will move their cases to New Jersey to take advantage of the holding in Myron. It offers no basis for this concern and, indeed, this did not happen in Myron. The Illinois federal court in Myron abstained before it made any substantive insurance coverage rulings. Thus, the policyholder's New Jersey action was seemingly motivated by nothing more nefarious than the fact that New Jersey was a more appropriate forum for resolving the coverage dispute.

In granting Myron's abstention motion, the Illinois federal court acknowledged that the case involved state law issues of insurance coverage. Myron, 407 N.J. Super. at 308. Thus, the dissent's concern for the continued vitality of principles of comity is misplaced. The Illinois federal court reasoned that “out of all the possible options, a New Jersey court has the greatest interest in resolving an insurance coverage dispute arising from policies which appear to have been issued in New Jersey to a New Jersey corporation with its principal place of business in New Jersey.” Id. Allowing a New Jersey policyholder to recover fees ' 1) where it is based, and 2) under the rules of the forum with the greatest interest in the coverage suit filed against it by its insurer ' does not compromise fundamental principles of interstate comity.

Conclusion

Myron is a thoughtful decision, which serves the important public policy goal ' shared by many states ' of allowing policyholders to recover counsel fees without being worn down financially by their insurance company's forum shopping and other legal maneuvering. Moreover, and more importantly, the decision provides policyholders in New Jersey and elsewhere with strong support for recovery of coverage counsel fees, when wrongly forced to defend a carrier's competing, out-of-state declaratory judgment action.

Sherilyn Pastor, a member of this newsletter's Board of Editors, is a partner in, and Practice Group Leader of, McCarter & English LLP's Insurance Coverage Group. Gregory Horowitz also is a partner and Stephanie Platzman-Diamant is an associate in the Group. This publication is not intended to provide legal advice. Issues relating to insurance coverage and litigation are fact specific, and their resolution will depend on the facts involved and the law governing the disputes, which varies from state to state. The views expressed in this publication are not necessarily those of McCarter & English or its clients.