The New Jersey Supreme Court, in Potomac Insurance Co. v. Pennsylvania Manufacturers Association Insurance Co., has, for the first time, addressed the issue of whether an insurer, with an obligation to indemnify and defend its insured, has a direct claim for contribution against a co-insurer for defense costs arising from litigation for continuous property damage. The court also addressed the ancillary issue as to whether or not such a claim is extinguished when the common insured gives up its claims against one of the co-insurers in a Release that is negotiated and signed only by the insured and that co-insurer.

The court answered these questions, respectively, yes and no.

Litigation was instituted by the Township of Evesham against a contractor, Aristone, who had been engaged to construct a middle school. The school had experienced various defects, primarily related to the roofing system. After being sued, the contractor notified its insurance carriers of the claim and broadly demanded that they indemnify and defend it.

One of its insurers, One Beacon Insurance Company, paid half of Aristone?s legal fees and defense expenses. Pennsylvania Manufacturers Insurance Company (?PMA?), which also insured Aristone, (for different effective dates) 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 a portion of Aristone?s underlying settlement with the Township. At that point, Aristone released its claims against PMA. PMA had not paid any of the underlying defense costs.

After the underlying litigation was resolved, One Beacon Insurance Company filed suit against PMA seeking reimbursement for the costs of Aristone?s defense.

PMA continued to refuse to contribute to the underlying defense and argued that the Release it had obtained from Aristone barred One Beacon Insurance Company?s Complaint seeking such a remedy.

The trial court sided with One Beacon Insurance Company, finding that it had preserved its right to seek contribution against the common co-insurers of Aristone since it had not participated in the Release issued by Aristone to PMA.

PMA appealed this decision, and the Appellate Division affirmed it. The matter was then brought to the New Jersey Supreme Court for final review.

In its opinion, the court expressly held that an insurer has the right to assert its own direct claim against a common co-insurer for defense costs incurred in underlying litigation when the claims manifest from damages that had occurred over a period of several years and applicable policies. The court made reference to the previously adopted ?continuous trigger? theory, which holds that progressive indivisible injury or damages arising from exposure to continuing conditions may be treated as an ?occurrence? within each of the years of successive CGL policies. Since multiple insurance policies are implicated by the continuous trigger theory, the court felt it equitable and foreseeable that disputes between the various implicated carriers could be the subject of direct claims between them. It cited various public policy justifications, such as the presumption that permitting claims for allocation of defense costs would create a strong incentive for a prompt and proactive involvement by all responsible carriers, thereby being more efficient in the long run.

The court then spent somewhat less time on the ancillary question regarding PMA?s defense that the Release entered into with its insured insulated it from any additional claim being asserted by co-insurers. As a matter of simple contract law, the court found that the Release was binding only upon the parties who had negotiated and signed it and could not function to restrict the rights of One Beacon Insurance Company, who had had no involvement in its creation.

The opinion, although novel in the sense that the issue had not been addressed in a prior opinion, does not break any radical ground and would certainly seem to be in accord with reasonable and equitable practice.

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