Potomac Insurance Co. of Illinois v. Pennsylvania Manufacturers' Association Ins. Co., A-2 September Term 2012; Supreme Court; opinion by Patterson, J.; decided September 16, 2013. On certification to the Appellate Division, 425 N.J. Super. 305 (App. Div. 2012). [Sat below: Judges Lihotz, Waugh and St. John in the Appellate Division; Judge Fratto in the Law Division.] DDS No. 23-1-1332 [34 pp.]

The township of Evesham retained Roland Aristone Inc. as the general contractor for the construction of a new middle school. Beginning in its first year of use, the school experienced leaks and other defects, principally related to the roof. As a result, Evesham filed an action asserting claims for negligence and breach of contract against Aristone.

Aristone notified the five carriers that provided commercial general liability coverage during the period of the claim, seeking defense and indemnification. These were Potomac Insurance Company of Illinois, Newark Insurance Company, Royal Insurance Company of America, OneBeacon Insurance Company (as the transferee of Potomac), and Selective Way Insurance Company.

Selective and OneBeacon paid Aristone's legal fees and other defense costs. When PMA and Royal disclaimed any obligation to indemnify or defend, Aristone filed a declaratory judgment action against them. That action ended in a settlement whereby PMA agreed to contribute $150,000 toward resolution of Aristone's underlying dispute with Evesham in exchange for Aristone's release.

Aristone settled with Evesham for $700,000, to which all the insurers contributed. However, the settlement left unresolved the issue of the defense costs incurred by Selective and OneBeacon. Invoking the "continuous trigger" methodology of Owens-Illinois Inc. v. United Insurance Co., 138 N.J. 437 (1994), OneBeacon sought 20 percent contributions from both PMA and Royal, which were refused. This litigation followed.

The trial court recognized a direct right of action by OneBeacon against its co-insurers for defense costs. It rejected PMA's argument that Aristone's release of PMA had extinguished OneBeacon's contribution claim.

The Appellate Division affirmed, reasoning that recognizing OneBeacon's right of contribution against its co-insurer comports with the apportionment method adopted in Owens-Illinois. It also affirmed the trial court's holding that OneBeacon's claim was not extinguished by the release negotiated by Aristone and PMA.

PMA's petition for certification was granted.

Held: In light of each insurer's obligation to indemnify and defend Aristone for a portion of the period in which the continuing property damage occurred, the trial court properly held that OneBeacon has a contribution claim against PMA. Allocation of defense costs here serves important objectives articulated in Owens-Illinois. Also, the trial court correctly found that the release negotiated by Aristone and PMA had no effect on OneBeacon's claim for contribution against PMA because OneBeacon was not a party to that release.

The court says its analysis is derived in large measure from the principles expressed in Owens-Illinois, which adopted the "continuous trigger" theory to determine what constitutes an occurrence for both personal injury and property damage claims. Under that theory, when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy.

Having adopted that analysis, and premised on public policy and principles of fairness, the court decided on a pro rata formula to allocate responsibility among the multiple insurers of a single insured under which losses are allocated to the carriers on the basis of the extent of the risk assumed.

Owens-Illinois held that when multiple insurance policies are implicated by the continuous-trigger analysis, all affected insurers must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs. Thus, the court envisioned the litigation of direct claims between co-insurers to ensure that the policyholder's losses would be equitably allocated among its carriers. The court says it and the Appellate Division have applied the principles of Owens-Illinois in various settings.

The court says recognizing an insurer's cause of action for contribution against a co-insurer for allocation of defense costs comports with Owens-Illinois and its progeny. Moreover, the governing principles on which Owens-Illinois relied warrant the recognition of a claim for allocation of defense costs. Permitting such a claim creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources; promotes early settlement; creates an additional incentive for individuals and businesses to purchase sufficient coverage every year; and serves the principle of fairness recognized in Owens-Illinois.

The court concludes that OneBeacon was properly permitted to assert a direct claim against PMA for contribution of a portion of the defense costs paid on Aristone's behalf. Given the continuous property damage that spanned a period during which PMA provided coverage, PMA's obligation to defend as well as indemnify the parties' common insured, and OneBeacon's payment in excess of its share of the defense costs, the trial court properly allocated 16 percent of the defense costs to PMA.

The court also affirms the rejection of PMA's contention that its release with Aristone barred OneBeacon's contribution claim. It says the language of the release, in which OneBeacon played no role, does not support the notion that OneBeacon intended to waive its right of contribution against PMA. Thus, OneBeacon's contribution claim against PMA was not barred or limited by the release between PMA and Aristone.

Chief Justice Rabner, Justices LaVecchia, Albin and Hoens and Judge Rodriguez, temporarily assigned, join in Justice Patterson's opinion. Judge Cuff, temporarily assigned, did not participate.

For appellant — James P. Lisovicz (Coughlin Duffy; Lisovicz, Timothy P. Smith, Joseph C. Amoroso and Brooks H. Leonard on the briefs). For respondent — Elliott Abrutyn (Morgan Melhuish Abrutyn; Abrutyn and James L. Melhuish on the brief).