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Potomac Insurance Co. of Illinois v. Pennsylvania Manufacturers' Association Insurance Co.

Supreme Court of New Jersey

September 16, 2013


Argued April 30, 2013

On certification to the Superior Court, Appellate Division, whose opinion is reported at 425 N.J.Super. 305 (2012).

James P. Lisovicz argued the cause for appellant (Coughlin Duffy, attorneys; Mr. Lisovicz, Timothy P. Smith, Joseph C. Amoroso, and Brooks H. Leonard, on the briefs).

Elliott Abrutyn argued the cause for respondent (Morgan Melhuish Abrutyn, attorneys; Mr. Abrutyn and James L. Melhuish, on the brief).

PATTERSON, J., writing for a unanimous Court.

In this appeal, the Court considers the novel question 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 Court also considers whether such a claim is extinguished when the insured gives up its claims against the co-insurer in a release negotiated and signed only by the insured and the co-insurer.

On October 1, 1991, the Township of Evesham retained Roland Aristone, Inc. (Aristone) to serve as the general contractor for construction of a new middle school. Following construction, the school experienced various defects primarily related to the roof. On December 20, 2001, Evesham filed a negligence and breach of contract action against Aristone. Aristone notified its insurance carriers of the claim and demanded that they indemnify and defend it.

For the first two years of the relevant period, Aristone was insured under commercial general liability (CGL) policies issued by Pennsylvania Manufacturers' Insurance Company (PMA), which provided coverage for defense costs and indemnity. PMA agreed to pay all expenses incurred with respect to any claim or suit it defended. Four other insurance companies, Newark Insurance Company (Newark), Royal Insurance Company (Royal), OneBeacon Insurance Company (OneBeacon), and Selective Way Insurance Company (Selective) also provided coverage to Aristone during portions of the relevant period.

As the Evesham action proceeded, Selective and OneBeacon paid Aristone's legal fees and defense costs. PMA and Royal disclaimed any obligation to indemnify or defend, prompting Aristone to file a declaratory judgment action against them on June 3, 2004. Ultimately, Aristone and PMA settled on March 2, 2007, with PMA agreeing to contribute $150, 000 toward resolution of Aristone's dispute with Evesham in exchange for PMA's release from all claims, including claims for defense fees and costs. Three days later, Aristone settled with Evesham for $700, 000, including the $150, 000 paid by PMA, $150, 000 from OneBeacon, $260, 000 from Selective, and $140, 000 from Royal. On June 20, 2007, OneBeacon informed Royal and PMA that the defense costs it had shared with Selective totaled $528, 868.54. Invoking the "continuous trigger" methodology of Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), OneBeacon proposed that PMA and Royal each pay twenty percent of the defense costs. They refused, and this litigation followed.

Royal settled with OneBeacon, but PMA argued that the release it obtained from Aristone barred OneBeacon's complaint. The trial court found that PMA knew that OneBeacon would not be a party to its settlement with Aristone. OneBeacon's only participation in the settlement was the payment of Aristone's legal fees, but it never agreed to give up its right to sue PMA for a share of the defense costs. The court concluded that OneBeacon preserved its contribution claim against the co-insurers, and the $700, 000 settlement represented only indemnity payments. It apportioned the defense costs using the formula set forth in Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998), allocating sixteen percent of the costs to PMA.

PMA appealed, and the Appellate Division affirmed. Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass'n Ins. Co., 425 N.J.Super. 305 (App. Div. 2012). Since the issue was novel in New Jersey, the panel relied on a California case which recognized a direct right of action by one insurer against a co-insurer for defense costs. Applying California law and the "continuous trigger" methodology of Owens-Illinois, the panel found that OneBeacon had a direct claim against PMA for allocation of defense costs. It also rejected PMA's contention that its release with Aristone barred OneBeacon's claim. The Court granted PMA's petition for certification. 212 N.J. 105 (2012).


OneBeacon's contribution claim was valid because an insurer may assert, against a co-insurer, a claim for defense costs incurred in litigation arising from property damage manifested over a period of several years, during which the policyholder is insured by successive carriers. The release negotiated between Aristone and PMA had no bearing on OneBeacon's contribution claim against PMA because OneBeacon was not a party to the release.

1. In answering the question of whether an insurer can seek contribution for defense costs from a co-insurer in the context of property damage litigation, the Court derives its analysis from the principles it expressed in Owens-Illinois. There, the Court adopted the "continuous trigger" theory for personal injury and property damage claims, stating that progressive indivisible injury or damage arising from exposure to injurious conditions may be treated as an occurrence within each of the years of a CGL policy. Consistent with public policy and principles of fairness, the Court used a pro rata formula to distribute responsibility among the multiple insurers, allocating losses on the basis of the extent of the risk assumed. When multiple insurance policies are implicated by the continuous trigger analysis, the Court envisioned the litigation of direct claims between co-insurers to ensure the equitable allocation of the policyholder's losses. The principles established in Owens-Illinois have been consistently applied to a variety of disputes between policyholders, insurers, and co-insurers. (pp. 16-21)

2. Recognizing an insurer's cause of action for contribution against a co-insurer for allocation of defense costs comports with the principles of Owens-Illinois. Like the obligation to indemnify, the obligation of successive insurers to pay the policyholder's defense costs can be ascertained by equitable allocation. Permitting claims for allocation of defense costs creates a strong incentive for prompt and proactive involvement by all responsible carriers, thereby promoting the efficient use of resources. Additionally, the potential for such claims promotes early settlement, which will conserve resources and promote New Jersey's policy in favor of dispute resolution. In such cases, fairness demands that a co-insurer's responsibility to pay for its share of defense costs ceases at the time it settles. Allocation of defense costs also creates an incentive for individuals and businesses to purchase sufficient continuous coverage, and serves the principle of fairness recognized in Owens-Illinois. Although the California law on which the Appellate Division relied employs a different allocation method than that used in New Jersey, a contribution claim for defense costs is compatible with New Jersey's method as well. Thus, OneBeacon was properly permitted to assert a direct claim against PMA for contribution of a portion of the defense costs. In light of the continuous property damage spanning a period during which PMA provided coverage, PMA's obligation to defend and indemnify the common insured, and OneBeacon's payment in excess of its share of the defense costs, the trial court properly allocated sixteen percent of the defense costs to PMA. (pp. 21-28)

3. With respect to Aristone's settlement with PMA, the language of the release, in which OneBeacon played no role, does not provide support for the notion that OneBeacon intended to waive its right of contribution against PMA. Although it extinguished Aristone's claims against PMA for attorneys' fees and costs, it did not prohibit OneBeacon from seeking contribution against PMA on its own behalf. There was no meeting of the minds between OneBeacon and PMA regarding disposition of the contribution claim. Thus, OneBeacon's contribution claim was not barred or limited by the release between Aristone and PMA. (pp. 28-30)

The judgment of the Appellate Division is AFFIRMED.

CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN and HOENS; and JUDGE RODRÍGUEZ (temporarily assigned) join in JUSTICE PATTERSON's opinion. JUDGE CUFF (temporarily assigned) did not participate.



In this insurance coverage litigation, arising from a construction dispute, we address the allocation of defense costs incurred by the common insured of several carriers. We consider, for the first time, whether one insurer with an obligation to indemnify and defend the insured has a direct claim for contribution against its co-insurer for defense costs arising from continuous property damage litigation. We also consider whether such a claim was extinguished when the insured gave up its claims against the co-insurer in a release negotiated and signed only by the insured and the co-insurer.

The dispute arose from construction litigation brought by the Township of Evesham (Evesham) against a contractor, Roland Aristone Inc. (Aristone), for property damage. Although plaintiff, OneBeacon Insurance Company (OneBeacon) paid half of Aristone's legal fees and defense expenses, Pennsylvania Manufacturers' Insurance Company (PMA), which also insured Aristone, initially disclaimed coverage and did not pay any of Aristone's defense costs. After a declaratory judgment action filed by Aristone against PMA was settled, PMA contributed to a portion of Aristone's settlement with Evesham, and Aristone released its claims against PMA.

This action was filed by OneBeacon against PMA and an additional insurer seeking reimbursement for the cost of Aristone's defense. The trial court found in OneBeacon's favor, recognizing a direct right of action by the insurer against its co-insurers for defense costs. Given the limited scope of the release, which was signed by Aristone but not by OneBeacon, the trial court rejected PMA's argument that Aristone's release of PMA had extinguished OneBeacon's contribution ...

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