N.J.: Insurer Has Direct Claim for Contribution against Co-Insurer for Defense Costs Arising from Continuous Property Damage Litigation

September 27, 2013 | Insurance Coverage

The New Jersey Supreme Court has ruled that an insurance carrier 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 decided that the contribution claim was not extinguished when the insured gave up its claims against the co-insurer in a release that was negotiated and signed only by the insured and the co-insurer.

The Case

A New Jersey town sued a contractor for property damage. OneBeacon Insurance Company paid half of the contractor’s legal fees and defense expenses. Pennsylvania Manufacturers’ Insurance Company (“PMA”), which also insured the contractor, initially disclaimed coverage and did not pay any of the contractor’s defense costs. After a declaratory judgment action filed by the contractor against PMA was settled, PMA contributed to a portion of the contractor’s settlement with the town, and the contractor released its claims against PMA.

OneBeacon sued PMA, seeking reimbursement for the cost of the contractor’s defense. The trial court found in OneBeacon’s favor, recognizing a direct right of action by OneBeacon against PMA for defense costs. The trial court also rejected PMA’s argument that the contractor’s release of PMA had extinguished OneBeacon’s contribution claim. An intermediate appellate court affirmed, and the case reached the New Jersey Supreme Court.

The New Jersey Supreme Court’s Decision

The court affirmed.

The court first held that, in light of each insurer’s obligation to indemnify and defend the contractor for a portion of the period in which the continuing property damage had occurred, the trial court properly had determined that OneBeacon had a contribution claim against PMA. According to the court, absent a right of contribution in these circumstances, a carrier that paid defense costs as they were incurred “might alone bear a burden that should be shared.” 

Among other things, the court also said that permitting a contribution claim created a strong incentive for prompt and proactive involvement by all responsible carriers and promoted the “efficient use of resources” of insurers, litigants, and the court. It reasoned that if a carrier anticipated that it would be responsible for a portion of the defense costs, the carrier was “more likely to invest in a vigorous defense.”  Moreover, the court said, recognition of a direct claim by one insurer against another promoted early settlement.

The court further ruled that the release negotiated by the contractor and PMA had no effect on OneBeacon’s claim for contribution against PMA because OneBeacon was not a party to that release.

The case is Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturers’ Association Ins. Co., No.070756 (N.J. Sept. 16, 2013).

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