Co-Insurer’s Contribution Claim for Defense Costs Upheld by New Jersey Supreme Court

The New Jersey Supreme Court recently held that insurers can sue co-insurers to recoup defense costs.  In Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass’n. Ins. Co. (A-2-12) (September 16, 2013), the Township of Evesham (“Evesham”) sued its contractor, Roland Aristone, Inc. (“Aristone”), for property damage caused by construction defects.  OneBeacon Insurance Co. (“OneBeacon”) and another insurer paid Aristone’s defense costs in the underlying litigation.  Although Pennsylvania Manufacturers’ Insurance Company (“PMA”) did not contribute to Aristone’s defense  costs, PMA settled with Aristone whereby Aristone released its claims against PMA.

Aristone settled the underlying litigation with Evesham.  OneBeacon subsequently sued PMA seeking reimbursement from PMA for PMA’s share of defense costs.  PMA asserted that its settlement with Aristone barred OneBeacon’s complaint.

After a trial, the lower court ruled that the release between PMA and Aristone did not include OneBeacon, and that OneBeacon did not release its right to sue PMA for contribution to defense costs incurred by OneBeacon in the underlying lawsuit.  The trial court apportioned defense costs between PMA and OneBeacon in accordance with the allocation scheme articulated in Owens-Illinois  and Carter-Wallace.

The Appellate Division affirmed the trial court’s decision, and the New Jersey Supreme Court granted PMA’s petition for certification.  The Supreme Court ruled in favor of OneBeacon.  While acknowledging that this was a novel issue, the Court concluded that OneBeacon’s contribution suit was consistent with Owens-Illinois, which established that progressive damage occurring over a number of years must be allocated among all insurers based their assumed risk.

The Court recognized that allowing an insurer to seek contribution for defense costs from co-insurers is not only equitable but also promotes early settlement and creates an incentive for businesses to purchase sufficient insurance.  In addition, the Court concurred with the trial court that the release between Aristone and PMA did not waive OneBeacon’s right of contribution.

This was the first time the New Jersey Supreme Court applied the Owens-Illinois continuous trigger theory to construction defect cases.  While this decision encourages global settlements, it may also have a negative effect.  If an insured is unable to reach a global settlement, any individual settlement could require the insured to indemnify the insurer from claims by other co-insurers.  Although the decision could have mixed results, it provides a useful framework by which defense costs are allocated among insurers of a common insured, and allows insurers to overpay in a settlement knowing that they can then pursue other non-settling insurers for their fair share of defense costs.