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Potomac Insurance Company of Illinois, By Its Transferee, Onebeacon v. Pennsylvania Manufacturers' Association Insurance Company

April 13, 2012


On appeal from the Superior Court of New Jersey, Law Division, Burlington County, Docket No. L-2108-07.

The opinion of the court was delivered by: Waugh, J.A.D.



Argued Telephonically November 1, 2011

Before Judges Lihotz, Waugh, and St. John.

The opinion of the court was delivered by WAUGH, J.A.D.

Defendant Pennsylvania Manufacturers' Association Insurance Company (Pennsylvania) appeals from the Law Division's amended judgment in favor of plaintiff OneBeacon Insurance Company (OneBeacon).*fn1 The judgment included $84,618.76 to reimburse OneBeacon for Pennsylvania's share of defense costs incurred by OneBeacon in defending Aristone, Inc. (Aristone), in an underlying negligence action in which Aristone was a defendant. It also included an award of $74,308.97 in counsel fees to OneBeacon as the successful litigant in this action, pursuant to principles contained in Rule 4:42-9(a)(6). We affirm the judgment for the costs of defense in the underlying action, but reverse as to the counsel fees in this action.


We discern the following facts and procedural history from the record on appeal.


The Evesham Township Board of Education (Evesham) filed the underlying action in December 2001, alleging that several defendants were responsible for the negligent design and construction of one of its middle schools. Evesham's complaint alleged, in part, that there was continuous damage from water infiltration from the time the construction was completed in 1993 until the time its action was filed. Aristone, the general contractor for the project, was named as a defendant.

At different times between 1993 and 2003, Aristone was insured under standard commercial general liability policies issued by four carriers: Selective Way Insurance Company (Selective Way), OneBeacon, Pennyslvania, and Royal Insurance Company (Royal), each with coverage limits of $1 million. Pennsylvania insured Aristone through two one-year policies from 1993 to 1995. OneBeacon insured Aristone through a one-year policy for 1997 and for 1998.

After Evesham filed suit, Selective Way assumed Aristone's defense and appointed an attorney to defend Aristone. OneBeacon subsequently joined with Selective Way in providing Aristone's defense, and appointed the same attorney to defend Aristone on its behalf.

In October 2002, Pennsylvania disclaimed any obligation to defend or indemnify Aristone, asserting that Evesham's complaint either failed to state an occurrence under Aristone's policy or, if it did, that the claim was barred by the policy's business risk exclusion. Royal also disclaimed coverage under its policy.

The roof for the Evesham school was constructed by Ertle Roofing and Sheet Metal Works (Ertle), one of Aristone's subcontractors. The contract between Aristone and Ertle required Ertle to indemnify and hold Aristone harmless "against any claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from" Ertle's performance. Aristone filed a third-party complaint against Ertle in the underlying action, seeking indemnification under the terms of their contract.

Ertle was insured by Camden Fire Insurance Association (Camden), an affiliate of OneBeacon. In August 2003, Camden denied coverage to Aristone as an additional insured under Ertle's policy with Camden, contending that Ertle had not named Aristone as an additional insured as required by Camden's policy.

In June 2004, Aristone filed a declaratory judgment action against Pennsylvania and Royal, but not Camden. The complaint was signed by the attorney appointed by OneBeacon and Selective Way to represent Aristone. In November 2006, Aristone and Pennsylvania agreed to submit their dispute to arbitration before a retired judge.*fn2 In December 2006, the retired judge ruled that Pennsylvania was obligated to provide Aristone with coverage and to participate in the cost of the defense. He further determined that the resulting costs would be allocated pursuant to the Carter-Wallace formula.*fn3

In February 2007, Aristone and Pennsylvania agreed to a $150,000 settlement. Pennsylvania's attorney drafted the release and submitted it to Aristone's appointed attorney for review. He requested changes that will be discussed in more detail below. The release was executed on March 2, 2007.

Paragraph 1.1 of the release defines Aristone as including any and all persons, including corporations, "insured or claiming, or which in the future may claim, any right[,] title or interest in or under the [Pennsylvania] Policy." The release applied to all claims, and potential claims, that Aristone might have had against Pennsylvania, and specifically the following claims:

All claims against [Pennsylvania] for coverage arising out of the construction and alleged damages to the D[e]Masi School, including all damages alleged in the Evesham

Claim. All claims that have been brought against [Pennsylvania] or could have been brought against [Pennsylvania] in [the coverage] action [brought by Aristone].

Paragraph 5 of the release, entitled "Who is Bound," provides that in addition to Aristone, "[a]nyone who succeeds to [Aristone's] rights and responsibilities as defined by law is also bound." Paragraph 10 of the release, entitled "No Rights Conferred Upon Non-Parties," states:

This Agreement is intended to confer rights and benefits only on the signatories hereto and is not intended to confer any right or benefit upon any other person. No person other than the signatories hereto shall have any legally-enforceable right under this agreement.

Paragraph 16 and 16.1, involving indemnification, provides:

On condition precedent that [Pennsylvania] make the payments as described . . . above, Aristone agrees to defend and indemnify [Pennsylvania] against any claims, defense [sic] arising out of the Evesham Claim or the coverage action exclusive of claims by an insurance carrier as a claimant or as a true party in interest to a claim.

If the underlying settlement of the Evesham action should fail after the execution of this agreement by the parties, [Pennsylvania] shall continue to have an obligation consistent with the order of the arbitrator dated December 20, 2006 subject to all applicable limitations. In such event, [Pennsylvania] shall be entitled to a $150,000 . . . credit towards its total defense and indemnity obligation.

In March 2007, Evesham and Aristone settled the underlying action for $700,000. Aristone's third-party action against Ertle was not included in the settlement. However, in October 2008, in the context of an interlocutory appeal by Ertle, we held that Aristone's third-party action against Ertle was barred by the applicable statute of limitations. Evesham Twp. Bd. of Educ. v. Vitetta, No. A-4196-06 (App. Div. Oct. 30, 2008).


In June 2007, OneBeacon sent a demand letter to Pennsylvania and Royal, seeking reimbursement for their respective shares of the defense costs and expenses incurred in defending the underlying action. OneBeacon sought $105,773.70 from Pennsylvania, which it asserted was twenty percent of the overall defense costs in the underlying action. Neither Pennsylvania nor Royal agreed to reimburse OneBeacon in response to the demand letter.

In July 2007, OneBeacon filed suit against Pennsylvania and Royal, seeking reimbursement for their respective shares of the defense costs in the underlying action, as well as attorney's fees for the action.*fn4 Pennsylvania and Royal filed answers denying liability. In one of its affirmative defenses, Pennsylvania asserted that OneBeacon's claim was barred by its earlier settlement with Aristone.

In February 2008, OneBeacon filed a motion for summary judgment. Pennsylvania and Royal filed cross-motions for summary judgment in March. In support of its motion, OneBeacon submitted a certification from Matthew Adler, one of its claims consultants. Adler asserted that the release Aristone gave Pennsylvania as part of their settlement was not intended to release Pennsylvania from its obligation to reimburse OneBeacon for its proportionate share of the defense costs in the underlying action. Those costs, according to Adler, were paid by OneBeacon and Selective Way, rather than Aristone, and were excluded from the release. Adler claimed that OneBeacon and Selective Way shared the entire cost of the defense of Aristone in the underlying action, which totaled $528,868.54.

The motions were argued in April 2008. On June 12, the motion judge issued a written decision and entered orders denying all of the motions.*fn5 In denying the motions, the judge found that questions regarding the scope of the settlement between Aristone and Pennsylvania created issues of material fact, and ...

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