What if you get sued for property damage that occurred progressively over the course of two years, and you had separate GL policies for each year? Do you get the benefit of coverage for both years, or just the first year? Well, if you're in New Jersey, you get coverage for both years, which generally will mean twice the limits, thanks to Potomac Ins. Co. of Ill., ex rel. One Beacon Insurance Company v. Pennsylvania Manufacturers Association Insurance Company, a case the New Jersey Supreme Court handed down earlier this week.
But what if one of the carriers provides a defense to the lawsuit, but the other refuses? Under One Beacon the carrier that provides a defense can sue the carrier that doesn't. Time will tell the effect of that. One danger might be that carriers become reluctant to settle with insureds in a continuous loss case because of the risk of later being sued for more money by a co-insurer. Alternatively, it may - as the New Jersey Supreme Court believes - promote early settlement, as an insurer that anticipates paying an allocated portion of defense costs may factor those costs into a potential resolution of the underlying claim and will be incentivized to seek earlier settlement.
In Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass'n Ins. Co., (A-2-12) (070756) (N.J. Sep. 16, 2013), Roland Aristone, Inc. ("Aristone") was hired as the general contractor to construct a new middle school. The school was completed in 1993, and almost immediately began experiencing leakage and other defects, primarily related to the roof. In 2001, the school sued Aristone for negligence and breach of contract due to continuous defects and resulting damages incurred at the school over the previous eight year period and continuing thereafter. Aristone notified its current and past insurance carriers of the claim (of which there were five) and sought defense and indemnification. For the first two years of claimed damages, July 1, 1993, through July 1, 1995, Aristone was insured by Pennsylvania Manufacturers Association ("PMA"). Between July 1, 1995, and July 1, 1996, Newark Insurance Company provided Aristone's insurance. From July 1, 1996, through July 1, 1997, Ariston was insured by Royal Insurance Company of America. From July 1, 1997, to July 1, 1998, OneBeacon provided Aristone's CGL coverage. Between July 1, 1998 and July 1, 2003, Aristone was insured with Selective Way Insurance Company ("Selective").
In response to the suit, OneBeacon and Selective paid for Aristone's defense costs on a 50/50 basis. In contrast, Royal and PMA disclaimed coverage.
Ultimately, after a declaratory judgment was filed by Aristone against PMA, PMA agreed to contribute $150,000 toward the resolution of Aristone's underlying dispute with the school in exchange for Aristone's release. The release was for all claims, "including, without limitation, any and all claims by Aristone concerning PMA's obligation to pay the attorneys' fees and costs incurred in defense" of the underlying litigation. Just a few days later, Aristone settled its dispute with the school for a total of $700,000. In addition to the $150,000 contributed by PMA, OneBeacon paid $150,000, Selective paid $260,000 and Royal paid $140,000.
After settlement, OneBeacon informed Royal and PMA that the defense costs shared by OneBeacon and Selective totaled $528,869. Invoking the "continuous trigger" methodology adopted by the New Jersey Supreme Court in Owens-Illinois Inc. v. United Ins. Co., 138 N.J. 437, 478-79 (N.J. 1994), OneBeacon proposed that defense costs be allocated based on each insurer's time on the risk in the following manner: fifty percent paid by Selective; ten percent paid by OneBeacon; twenty percent paid by PMA; and twenty percent paid by Royal/Newark. Royal and Newark declined to contribute to Aristone's defense costs.
OneBeacon then sought reimbursement of a portion of the defense costs in a direct action against PMA and Royal. The New Jersey Supreme Court found in favor of OneBeacon, holding that an insurer has a direct cause of action against its co-insurer for allocation of defense costs, even where the co-insurer has obtained a release for such costs from its insured. The court explained that recognizing such an action advances principles of fairness and economy. The court explained:
First, permitting such a claim creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources of insurers, litigants and the court. . . . .
Second, recognition of a direct claim by one insurer against another promotes early settlement. An insurer that anticipates paying an allocated portion of the policyholder's defense costs may factor those costs into a potential resolution of the underlying claim. . . . .
Third, the allocation of defense costs creates an additional incentive for individuals and businesses to purchase sufficient coverage every year. If each insurer's obligation to contribute to a defense is apportioned in accordance with the scope of its coverage . . . the policyholder is motivated to purchase coverage that is continuous, at a level commensurate to the policyholder's personal or business risks. . . . .
Fourth, the allocation of defense costs among all insurers that cover the risk, enforced by a right of contribution between the co-insurers of a common insured, serves the principle of fairness . . . .
Justice Anne Patterson wrote the opinion for a unanimous court.