New Jersey Supreme Court Addresses Inter-Insurer Contribution Rights

In a case of first impression, the Supreme Court of New Jersey, in its recent decision in Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturer’s Association Ins. Co., 2013 N.J. LEXIS 847 (N.J. Sept. 16, 2013), had occasion to consider the novel issue of whether an “insurer with an obligation to indemnify and defend an insured has a direct claim for contribution against its co-insurer for defense costs arising from continuous property damage litigation.”
The Potomac decision arose out of an underlying construction defect case brought against Roland Aristone, Inc. (“Aristone”).  Aristone had been hired in 1991 by the Township of Evesham to serve as the general contractor with respect to the construction of a new middle school. In December 2001, Evasham brought suit against Aristone for alleged construction defects, primarily relating to the school’s roof. Aristone was insured by five different primary layer general liability insurers during the relevant ten year triggered period: Pennsylvania Manufacturers’ Insurance Company (“PMA”) for two years, Newark Insurance Company (“Newark”) for one year, Royal Insurance Company (“Royal”) for one year, OneBeacon Insurance Company (“OneBeacon”) for one year and Selective Way Insurance Company (“Selective”) for five years. Selective and OneBeacon agreed from the outset to provide Aristone with a defense in the underlying lawsuit, whereas PMA and Royal/Newark (apparently related companies) denied coverage, thereby prompting Aristone to file suit against those insurers. PMA eventually settled with Aristone for $150,000 to be used toward Aristone’s settlement of the underlying suit. In return, Aristone agreed to release PMA from all claims associated with the underlying action. Days later, the underlying suit was settled for $700,000, with OneBeacon paying $150,000, Selective paying $260,000 and Royal paying $140,000.
Unresolved by the settlement with Evesham was allocation of defense costs. OneBeacon and Selective paid a combined $528,868 in legal fees and expenses in defending Aristone through resolution of the case. OneBeacon subsequently demanded that PMA and Royal contribute their proper share of defense costs. Specifically, OneBeacon argued that under New Jersey law regarding allocation of defense costs for matters involving a continuous trigger, as set forth in cases such as Owens-Illinois Inc. v. United Insurance Co., 138 N.J. 437 (1994), and Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998), the proper allocation of costs, based on the number of years that each insurer was on the risk, was that 50% of total defense costs should be allocated to Selective, 10% should be allocated to OneBeacon, 20% should be allocated to PMA and the remaining 20% should be allocated to Royal/Newark. While Royal/Newark ultimately settled with OneBeacon, PMA rejected OneBeacon’s demand, arguing among other things, that its release with Aristone precluded OneBeacon’s right to contribution for defense costs. The matter later was the subject of a three day bench trial that eventually concluded in OneBeacon’s favor. The trial court agreed that PMA’s settlement with Aristone did not preclude OneBeacon’s contribution claim for defense costs, and thus assigned PMA an allocated share of costs consistent with the approach outlined in Carter-Wallace. On appeal, the New Jersey Appellate Division acknowledged the lack of New Jersey case law addressing OneBeacon’s right to recover defense costs from PMA. The court nevertheless relied on California case law, in particular the decision in Fireman's Fund Insurance Co. v. Maryland Casualty Co., 77 Cal. Rptr. 2d 296 (Ct. App. 1998), for the proposition that a coinsurer has a direct right of action against another for defense costs arising out of the same risk.
On appeal to the Supreme Court of New Jersey, PMA argued that the Appellate Division created a novel cause of action by permitting an insurance company that had already settled with its insured to be sued for a share of defense costs by a co-insurer. OneBeacon, on the other hand, argued that the decision by the Appellate Division was consistent with decades of New Jersey case law concerning allocation of costs in matters involving a continuous trigger.
In considering the issue, which it acknowledged was novel, the Supreme Court revisited its decision in Owens-Illinois wherein it adopted a continuous trigger theory for cases involving progressive or individual injury, and wherein it established a pro rata methodology for allocating loss among multiple insurers during the triggered period based on policy limits and years on the risk. The court noted that its decision in Owens-Illinois “envisioned the litigation of direct claims between co-insurers to ensure that the policyholder's losses would be equitably allocated among its carriers.” While Owens-Illinois and its progeny concerned allocation of indemnity amounts among insurers and their respective insured, the court reasoned that it should also apply in the context of claims for reimbursement of defense costs:
We concur with the Appellate Division that recognizing an insurer's cause of action for contribution against a co-insurer for allocation of defense costs comports with Owens-Illinois and its progeny. Although the Court in Owens-Illinois considered an issue not raised by this case -- co-insurers' obligations to indemnify their common insured -- it envisioned a judicial determination of "the portion allocable [to each carrier] for defense and indemnity costs."… The Court recognized in Owens-Illinois that the insurer's obligation to indemnify the policyholder may engender contribution claims between insurers that share the same insured, independent of any right of subrogation to the claims of the insured.… Like the obligation to indemnify the insured addressed in Owens-Illinois and Carter-Wallace, the obligation of successive insurers to pay the policyholder's defense costs can be readily determined by equitable allocation. Absent a right of contribution, a carrier that pays defense costs as they are incurred might alone bear a burden that should be shared. An inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy.
The court found several justifications for its holding. Allowing such a contribution claim, explained the court, fosters a “strong incentive for prompt and proactive involvement of all responsible carriers.” The court also reasoned that the right to contribution may promote early settlement and create an incentive for insureds to purchase sufficient coverage in every year. Perhaps just as important to the court is that permitting a contribution claim under the circumstances “serves the principle of fairness recognized in Owens-Illinois.” In this connection, the court noted that: 
… an insurer that refuses to share the burden of a policyholder's defense is rewarded for its recalcitrance, at its co-insurer's expense, unless the insurer who pays more than its share of the costs has an effective remedy. Recognition of an insurer's contribution claim against its co-insurer serves "the demands of simple justice."… In short, an insurer's direct claim for allocation, asserted by an insurer that pays a disproportionate amount of the defense costs against other insurers of the same policyholder, promotes the principles underlying this Court's decisions in Owens-Illinois and Carter-Wallace.

Topics:  Contribution Claims, Indemnification, Insurers, Property Damage, Triggering Event

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Construction Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Traub Lieberman Straus & Shrewsberry LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »