New Jersey Supreme Court Addresses Inter-Insurer Contribution Rights

by Traub Lieberman Straus & Shrewsberry LLP
Contact

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.

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

Written by:

Traub Lieberman Straus & Shrewsberry LLP
Contact
more
less

Traub Lieberman Straus & Shrewsberry LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!