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September 2013

New Jersey Court Approves Direct Suits Among Carriers to Share Defense Costs

The New Jersey Supreme Court recently ruled that one insurer can file a direct claim against another insurer for recovery of defense costs and legal fees.  

In a property damage dispute in which an insured received coverage from multiple insurers on a consecutive basis, the trial court ruled that an insurer that failed to provide defense costs can be subject to a contribution claim for reimbursement of defense costs by co-insurers that already contributed to the defense.  The New Jersey Supreme Court, in Potomac Insurance Company of Illinois v. Pennsylvania Manufacturers Association Insurance Co., allowed such a contribution claim to prevent an inequitable allocation of defense costs.  The trial court also awarded fees for the litigation costs to obtain reimbursement of defense costs.  The Appellate Division sustained the trial court’s ruling, but dismissed the award for reimbursement.  In affirming the judgment of the Appellate Division, the New Jersey Supreme Court held that allocation of defense costs among multiple insurers that provided continuous coverage serves the objective of conserving parties’ resources, fostering prompt resolution of litigation and allowing an equitable allocation of the cost of litigation to all responsible carriers. 

In 1981, the Township of Evesham hired Roland Arisone, Inc. to serve as the general contractor for a multimillion-dollar school construction project.  After the construction project ended, the township found defects in the work performed by Roland Arisone.  The township sued Roland Arisone for negligence and breach of contract.  Roland Arisone -- insured by Pennsylvania Manufacturers Association Insurance Co., Newark Insurance Co., Royal Insurance Co., OneBeacon Insurance Co. and Selective Way Insurance Co. -- said the insurance carriers were placed on notice regarding Roland Arisone’s demand for defense and indemnity.  As litigation began, One Beacon and Selective paid legal fees and defense costs.  Pennsylvania Manufacturers and Royal Insurance disclaimed, which prompted a separate declaratory judgment action that ultimately settled.  As part of that settlement, Roland Arisone agreed to release Pennsylvania Manufacturers from all claims for defense fees and costs in exchange for $150,000 toward settlement of the negligence/breach of contract claims. 

After the underlying matter settled between the Township of Evesham and Roland Arisone, the legal fees paid by OneBeacon and Selective totaled $528,868.54.  One Beacon, the transferee of the named plaintiff, Potomac Insurance Company of Illinois, sought a percentage of defense costs from Pennsylvania Manufacturers and Royal Insurance.  After Royal Insurance agreed to an allocation, OneBeacon sought defense costs from Pennsylvania Manufacturers as it was the only carrier that did not contribute toward the defense of the co-insured.  Pennsylvania Manufacturers relied upon the settlement agreement with Roland Arisone in support of its claim that it would not pay a share of the defense fees. 

The trial court held that Pennsylvania Manufacturers knew that OneBeacon was not part of the settlement agreement with Roland Arisone and therefore the settlement could only be for indemnity payments since OneBeacon, or any carrier, never waived its contribution claims against Pennsylvania Manufacturers.  While the settlement agreement ended Roland Arisone’s right to recover for defense costs, the other insurance carriers still had a claim for contribution. 

After finding that the settlement agreement did not bar any claims for contribution against Pennsylvania Manufacturers by co-insurers, the New Jersey Supreme Court also ruled, in a case of first impression, that an insurer may bring a claim of contribution against its co-insurer for defense costs that arise from continuous property damage litigation.  The Appellate Division relied on a California case, Fireman’s Fund Insurance Co. v. Maryland Casualty Co., which allowed for a direct right of action by one insurer of a common insured against another insurer for defense costs from the same risk.  The ruling in Fireman’s Fund combined with the court’s opinion that defense costs should be allocated by a formula set forth in Carter-Wallace, Inc. v. Admiral Insurance Co., a familiar allocation method in New Jersey used for personal injury and property damage claims, led to this decision.  The Carter-Wallace allocation, also known as the “continuous trigger theory,” is a pro rata formula that distributes losses among insurers based on the extent of the risk assumed.  When the continuous trigger theory is utilized, the court allows insurers to file suit against other co-insurers to allow the judiciary to determine the equitable allocation of losses. The application of this allocation allowed the New Jersey Supreme Court to affirm the order that Pennsylvania Manufacturers pay 16 percent of the defense costs, which totaled $84,618. 

Finally, the New Jersey Supreme Court relied upon another familiar New Jersey case, Owens-Illinois, Inc. v. United Insurance Co.  The rationale found in Owens-Illinois -- that spreading risk is more efficient on a conceptual basis than placing the entire loss on one insurer -- also applied to defense cost allocation among co-insurers, according to the New Jersey Supreme Court.  The equitable principles found in Owens-Illinois that are now applicable as it relates to the payment of defense costs among continuous co-insurers will certainly alter insurers’ decisions regarding when to pay for a defense.

Justice Anne M. Patterson delivered the Sept. 16 opinion of the New Jersey Supreme Court. 

Click here for the opinion. 

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

Insurance

Scott V. Heck
Elizabeth F. Lorell



Insurance

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