Insurance Services – Coverage & Bad Faith Litigation

For many years, the rule of law governing claims for contractual indemnification in New Jersey has been well-established under the so-called “Azurak” rule, which requires that, in order for a party to be indemnified for its own negligence, the agreement upon which the claim is based must explicitly and unambiguously say so. This rule has been applied in dozens of decisions in New Jersey, all of which stemmed from “third-party” claims—meaning matters in which the party seeking indemnification was sued by an outside person or entity (such as an injured plaintiff).

On May 30, 2024, the Supreme Court of New Jersey handed down its opinion in Boyle v. Huff. There, the court examined the indemnification issue in the slightly different context of a “first-party” claim, as the individual seeking to be indemnified (Patrick Boyle) filed suit against the entity from which he sought indemnification (the Ocean Club Condominium). While the court concluded that such an indemnification could exist under New Jersey law, it held that the provision at issue, as set forth in the Condominium Association’s bylaws, was ambiguous and, thus, was to be construed against Boyle. As such, the court held that Boyle was not entitled to be indemnified under the particular facts of his claim.

By way of background, Boyle and his wife were owners of a unit in the Ocean Club Condominium in Atlantic City. The Board of the Condominium Association appointed Boyle to the Board, though the relationship between Boyle and his fellow trustees deteriorated over financial “errors and anomalies” that Boyle believed he had uncovered. After the Board removed Boyle as a trustee, he filed a lawsuit against the Trustees who ousted him, claiming the process by which he was expelled was inappropriate. During the course of the litigation, Boyle amended his complaint to assert a claim for indemnification under the bylaws of the Association.

Both the trial court and the Appellate Division concluded that Boyle was entitled to indemnification under the applicable provision of the bylaws. However, the Supreme Court of New Jersey reversed. In so holding, the unanimous opinion, which is written by Justice Michael Noriega, began with a review of the general body of New Jersey case law on indemnification issues. Under this case law, indemnification provisions are strictly construed against the indemnitee (the party seeking indemnification), both because of the requirement that the shifting of liability via indemnification can only be accomplished via “express and unequivocal language,” and the “American Rule,” which holds that parties are typically obligated to pay their own attorney’s fees.

Examining the language of the indemnification clause in the Association’s bylaws, the Supreme Court concluded that the provision was ambiguous when read as a whole. Although the court acknowledged that the key language calling for indemnification may have met the strict test for the shifting of fees, the panel ultimately determined that the entirety of the provision indicated an intent to apply only to third-party claims by unit owners against trustees, as opposed to first-party claims, such as Boyle’s. As such, the court found that the provision was ambiguous as to whether indemnification could be permitted in a first-party claim and, given the interpretive requirements of New Jersey law, that Boyle was not entitled to have his substantial legal fees reimbursed.

The court also explicitly held that indemnification in first-party matters is permissible under New Jersey law. In so finding, the court expressly overruled any previous decisions to the contrary. In short, the opinion holds that “indemnification may also apply to first-party claims if that is the clear intent of the parties as expressed by their deliberate word choices when drafting contracts. Those word choices will govern whether an indemnification supports a first- or third-party claim for damages.”

Moving forward, the decision by the Supreme Court of New Jersey will likely yield more claims for indemnification in first-party matters and may lead to more discussions about the process of drafting agreements that include provisions that may give rise to such claims. We will continue to monitor cases analyzing the indemnification issue in all contexts. 

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^{Legal Update for Insurance Services, May 30, 2024, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note to tamontemuro@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2024 Marshall Dennehey. All Rights Reserved.}