The New Jersey Supreme Court has made it easier for insurance companies to seek reimbursement for defense costs when there are multiple carriers attached to a common event.
In a case of first impression, the court ruled on Monday that one insurer can file a direct claim against another involved in the same action, even though that second insurer initially declined to provide any defense costs.
Permitting a direct claim creates a "strong incentive" for the active involvement of all the involved carriers and will lead to the efficient use of all parties' resources and promote early settlement, the court wrote in Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturers Association Ins. Co. "If a carrier anticipates that it will be responsible for a portion of the defense costs, it is more likely to invest in a vigorous defense."
Allowing one insurer to seek reimbursement also creates an incentive for policyholders to maintain coverage in that they will be reassured that they will be afforded a defense. Additionally, direct claims will promote fairness among co-insurers.
"An inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy," the court said.
The ruling stems from two earlier ones — Owens-Illinois v. United Insurance, 138 N.J. 437 (1994), and Carter-Wallace v. Admiral Insurance, 154 N.J. 312 (1998) — that adopted the "continuous trigger" doctrine, in which liability can be apportioned among various insurers who provided coverage during a given time.
"Allocation of defense costs in the circumstances here serves important objectives articulated by this Court in Owens-Illinois and Carter-Wallace: conservation of the parties' resources, fostering of a prompt and fair resolution of litigation, creation of incentives for policyholders to maintain coverage, and fair and equitable allocation of the cost of litigation to all responsible carriers," Justice Anne Patterson wrote.
The case has its origin in 1991, when the Evesham Board of Education hired Roland Aristone Inc. to be the general contractor in a $14.5 million school construction project. Because of faults in the building of the school, the district filed a lawsuit against Aristone in 2001.
OneBeacon Ins. Co., the transferee of Potomac Ins. Co. of Illinois, provided coverage for Aristone during that 10-year period, as did Pennsylvania Manufacturers Association Ins. Co. (PMA), Selective Ins. Co. and Royal Ins. Co.
Although PMA initially refused to provide a defense or coverage, it eventually reached a settlement with Evesham and agreed to pay $150,000. The settlement agreement said PMA was absolved of any defense costs.
Eventually, the other carriers settled as well: Selective for $260,000, OneBeacon for $150,000 and Royal for $140,000.
OneBeacon and Selective had shared defense costs. After the settlements were reached, OneBeacon said defense costs were $528,848. It asked PMA and Royal to each pay 20 percent. Royal agreed but PMA refused, saying its settlement agreement with Evesham shielded it from having to pay costs.
Superior Court Judge John Fratto sided with OneBeacon and ordered PMA to pay 16 percent, or $84,618, of the cost of defending Aristone. He also ordered PMA to pay OneBeacon an additional $74,308 to cover what OneBeacon spent in going after reimbursement.
The Appellate Division affirmed the reimbursement ruling, but overturned the additional award. PMA appealed to the Supreme Court.
The court also rejected PMA's argument that its agreement with Evesham relieved it of any obligation to pay defense costs.
"The language of the release, in which OneBeacon played no role, does not provide support for the notion that OneBeacon intended to waive its right of contribution against PMA," Patterson said.
Neither OneBeacon's attorney, Elliott Abrutyn, of Livingston's Morgan Melhuish Abrutyn, nor PMA's lawyer, James Lisovicz, of Coughlin Duffy in Morristown, returned calls.