New Jersey District Court Orders Insurance Company to Pay Attorneys' Fees Incurred by Insureds in Environmental Coverage Dispute

August 8, 2010
Client Alert Newsletter August 2010

Recently, the District Court of New Jersey ordered United States Liability Insurance Company ("USLI") to pay attorneys' fees incurred by its insureds, Becky and Stephen Baughman, during an environmental coverage dispute. Baughman v. United States Liability Ins. Co.

In 2006, the Baughmans were forced to close their daycare center because the building had been contaminated with mercury by a former tenant. Subsequently, several state court actions were brought against the Baughmans and others, primarily seeking medical monitoring on behalf of children exposed to mercury at the site. Following USLI's denial of coverage under the Baughmans' comprehensive general liability ("CGL") policy, the Baughmans filed an action asserting, inter alia, claims for breach of contract. Last year, the District Court held that the Baughmans were entitled to coverage for the state court actions because these actions sought "damages" for "bodily injury" as defined in the CGL policy and because the absolute environmental exclusion contained in the policy applied only to "traditional environmental pollution," not indoor contamination like that at issue in the underlying state court actions.

The Baughmans subsequently filed a motion for the assessment of attorneys' fees incurred during the coverage dispute, and the District Court ordered USLI to pay over $200,000 in fees (plus another $80,000 in fees incurred by the Baughmans in defending the underlying state court actions). The Court held that the Baughmans were entitled to attorneys' fees under New Jersey Court Rule 4:42-9(a)(6), which expressly provides that a successful claimant may recover fees in an action upon a liability or indemnity policy of insurance. The Court rejected USLI's good faith defense, concluding that the absence of bad faith and the existence of complex legal issues are not grounds to deny the award of attorneys' fees and that the assessment of fees was necessary to ensure that the insureds received the full benefit of their coverage. Although the Court slightly reduced the lodestar amount of attorneys' fees requested by the Baughmans, it applied a thirty-five percent enhancement to the lodestar in light of the complexity of the case and risk that the attorneys, who took the case on a contingency basis, would not receive any payment.

Coupled with the District Court's decision last year that an absolute environmental exclusion does not apply to indoor contamination, the Court’s award of attorneys' fees to the insureds – notwithstanding USLI's alleged good faith denial of coverage in the face of a complex legal scenario – will certainly impact the generally broad scope of defenses to coverage available to insurers under New Jersey law.