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 importantÑand favorableÑto 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 4:42-9(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 4:42-9(a)(6) is procedural, New Jersey state courts will always apply the rule and 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 ForeignSubstantive Law
Du-Wel Products, Inc. v. United States Fire Insurance Company 10 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....'"11 The 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 JerseySubstantive Law
Federal courts apply state procedural rules sparingly and only under very limited circumstances.12 Nevertheless, the 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 SittingIn Diversity Should ApplyRule 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 4:42-9(a)(6) applied even though Pennsylvania substantive law controlled.16 Refusing to affirm the application of New Jersey's procedural Rule 4:42-9(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 Du-Wel 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 ConsiderRule 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.
1 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).
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.
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.
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.