On June 5, 2009, in response to the appeal filed by Myron Corporation, a New Jersey appellate court held that Atlantic Mutual Insurance Corp. was responsible for Myron’s counsel fees incurred in fending off Atlantic’s Illinois declaratory judgment action pursuant to NJ Rule 4:42-9(a)(6). The coverage dispute centered on defense coverage for numerous cases filed against Myron, alleging that junk faxes sent by Myron violated the Telephone Consumer Protection Act (“TCPA”). Atlantic defended Myron in the cases under a reservation of rights. After the Seventh Circuit ruled that insurance coverage was not available for TCPA claims in an unrelated case [Am. States Ins. Co. v. Capital Assoc. of Jackson County, Inc.], Atlantic decided it was a good time to file a DJ action against Myron in Illinois federal court.
The problem with this brilliant strategy was that, as the Illinois court wrote, dismissing the case: “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.” Once in the hands of a New Jersey court, Atlantic lost. The court held that Atlantic owed a defense to Myron for the TCPA cases. The parties then settled, except on the issue of whether Myron was entitled to counsel fees for both the New Jersey and Illinois insurance coverage litigations under NJ Rule 4:42-9(a)(6).
Things didn’t improve for Atlantic on appeal:
We agree with Myron that, unless the insured can recover its counsel fees for out-of-state litigation in this situation, an insurer could wear down the insured financially through forum-shopping. In this case, there is no doubt that Atlantic filed its action in Illinois to take advantage of a favorable Seventh Circuit ruling on coverage. While this may have been good legal strategy from Atlantic’s point of view, it imposed costs on Myron to fight its way out of what the Illinois court found was an inappropriate forum, and to get the case back into an appropriate venue.
Myron v. Atlantic Mutual, ___ N.J.Super. ____, slip op. at pp. 12-13 (App. Div. June 5, 2009). Myron sought approximately $160,000 in legal fees and costs it incurred in defending against Atlantic’s Illinois federal court declaratory judgment actions, which had been denied by the NJ trial judge.
In its reversal of the trial court, the Appellate Division cited with approval the prior decision in Liberty Village Associates v. West American Insurance Co., 308 N.J. Super. 393. 406 (App. Div.), cert. denied, 154 N.J. 609 (1988), which held:
The theory is that one covered by a policy is entitled to the full protection provided by the coverage, and that benefit should not be diluted by the insured’s need to pay counsel fees in order to secure its rights under the policy. Under New Jersey jurisprudence, even if an insurer files a declaratory judgment action in good faith to contest its obligation to cover a claim, it must pay the insured’s legal fees if it loses.
The court then expanded its holding by finding that, “In addition to harming the insured, an insurer’s refusal to provide liability coverage may also, as a practical matter, preclude an innocent injured party from being able to recover for the injury. Hence, third-party beneficiaries may also sue an insurer to establish coverage and may recover counsel fees if successful.”
The appellate court noted that after successfully fending off Atlantic’s effort to litigate the coverage issue in Illinois federal court, Myron litigated the merits of the coverage issue in New Jersey and obtained a favorable result. Its right to counsel fees, according to the court, therefore stemmed from its success in the New Jersey litigation. Finally, the court addressed Atlantic’s claim that Myron was not a “successful claimant” under the rule. According to the Appellate Division, once the insured obtained a favorable determination on the coverage issue, it was entitled to recover its counsel fees, wherever those fees were incurred.
It is not uncommon for corporations headquartered in one state to face law suits filed in multiple jurisdictions throughout the United States, and to have insurance with a company headquartered in another state. As such, it is not uncommon for coverage actions to begin with a race to the courthouse as the parties seek the most favorable forum. Thanks to the New Jersey Appellate Division, however, insurers can no longer rest assured that such a strategy is without a significant down-side. New Jersey enacted Court Rule 4:42-9(a)(6) to ensure that policyholders received the full benefit of the bargain, and that insurers could not simply wear down the insured. The Myron decision serves those laudable goals well.