Labor Day has just passed as I write this, and this summer (that went by too quickly) was a busy one for the New Jersey appellate courts, insurance-wise. The New Jersey Supremes, for example, dealt with a question often posed by our clients in construction defect cases: Namely, can a claimant proceed directly against a defendant’s insurance company? (That is, sue the defendant’s insurance company directly instead of, or in addition to, suing the defendant?) In fact, as I was working over the holiday (ugh) I got a call from a potential client whose general contractor messed up her house pretty badly, and whose homeowners’ carrier is giving her a hard time about paying for the damage, which includes water infiltration and mold as the result of the GC’s shoddy work. (Why was I talking to a prospective client on Labor Day? Because, when you own your own firm, every day is “Labor Day”.) She asked whether she could sue the GC’s insurance carrier directly, since she didn’t think the GC had any money.
The answer, at least in New Jersey, is generally no. The new Supreme Court decision is Ross v. Lowitz. The facts: Home heating oil leaked from a neighbor’s underground storage tank onto the property of John and Pamela Ross. In addition to suing the current and former owners of the neighboring property, the Rosses also sued the insurance companies who provided homeowners’ coverage to the former owners of the neighboring property, for bad faith in not resolving the loss fully. The Rosses argued that they were third-party beneficiaries under the neighbors’ policies, and therefore were entitled to bring a direct claim.
But the Court disagreed, writing: “It is a fundamental premise of contract law that a third party is deemed to be a beneficiary of a contract only if the contracting parties so intended when they entered into their agreement. Here, there is no suggestion in the record that the parties to the insurance contract at issue had any intention to make plaintiffs, then the neighbors of the insured, a third-party beneficiary of their agreements. Nor does migration of oil from [the neighbors’] property to plaintiffs’ residence retroactively confer third-party beneficiary status on plaintiffs. The insurer’s duty of good faith and fair dealing in this case extended to their insured, not to plaintiffs.”
To the extent that the neighbors’ liability coverage (as opposed to first-party coverage) is implicated, though, this doesn’t make sense. Of course the purpose of liability insurance is to confer a benefit upon an injured third-party. I guess with the Court really meant to say was, unless there is specific intent to confer a benefit on a specific claimant, then third-party beneficiary status does not exist.
The coverage aspect of the Ross case only dealt with the question of whether a third party could sue for bad faith. It remains to be seen how the case will be applied in other contexts. Generally, until now, a claimant would have to take a judgment against a defendant in a specified amount, prove that the defendant is insolvent and cannot pay the judgment, and then request permission from the trial court to pursue the defendant’s liability carrier directly.
You can read the Ross case here.
Another case that came down this summer is 213-15 76th Street Condo Assn. v. Scottsdale Ins. Co. , a federal court decision that stemmed from a Superstorm Sandy related first-party wind damage claim. The case involved the question of whether recovery of attorneys’ fees is permitted in first-party cases in New Jersey. The policyholder argued that discovery “might” show that the insurance company acted in bad faith in handling the claim, and that attorney’s fees should be allowed as damages in bad faith cases. The (quirky) rule in New Jersey (R.4:42-9) is that attorneys’ fees are recoverable by a successful claimant in a third-party (liability) coverage lawsuit, but not specifically in a first-party case.
The Court basically punted, writing: “Under New Jersey law, counsel fees may be awarded when an insurer refuses to indemnify or defend its insured’s third-party liability to another, but an insured who brings direct suit against his insurer for coverage is not entitled to a fee award… Plaintiff asserts that a bad faith claim would support its request for attorneys’ fees, [but] the complaint does not contain any allegations that defendant acted in bad faith… There is no basis for plaintiffs request for attorneys’ fees at this time.” (Emphasis added.)
I’m not sure why defense counsel would waste time filing a motion to strike a claim for attorneys’ fees before an application for attorneys’ fees is actually made, but I guess nothing succeeds like success. Presumably the carrier felt that striking the claim for attorneys’ fees would reduce the settlement value of the case from the plaintiff’s perspective.
You can read the 213-15 76th Street case here.