Potomac Ins. Co. of Ill., v. Pa. Manufacturers' Ass'n Ins. Co.

Decision Date16 September 2013
Citation73 A.3d 465,215 N.J. 409
PartiesPOTOMAC INSURANCE COMPANY OF ILLINOIS, by its transferee, ONEBEACON INSURANCE COMPANY, Plaintiff–Respondent, v. PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY, Defendant–Appellant, and Newark Insurance Company and Royal Insurance Company, Defendants.
CourtNew Jersey Supreme Court

OPINION TEXT STARTS HERE

James P. Lisovicz argued the cause for appellant (Coughlin Duffy, attorneys; Mr. Lisovicz, Timothy P. Smith, Joseph C. Amoroso, and Brooks H. Leonard, Morristown, on the briefs).

Elliott Abrutyn argued the cause for respondent (Morgan Melhuish Abrutyn, attorneys; Mr. Abrutyn and James L. Melhuish, Livingston, on the brief).

Justice PATTERSON delivered the opinion of the Court.

In this insurance coverage litigation, arising from a construction dispute, we address the allocation of defense costs incurred by the common insured of several carriers. We consider, for the first time, whether one insurer with an obligation to indemnify and defend the insured has a direct claim for contribution against its co-insurer for defense costs arising from continuous property damage litigation. We also consider whether such a claim was extinguished when the insured gave up its claims against the co-insurerin a release negotiated and signed only by the insured and the co-insurer.

The dispute arose from construction litigation brought by the Township of Evesham (Evesham) against a contractor, Roland Aristone Inc. (Aristone), for property damage. Although plaintiff, OneBeacon Insurance Company (OneBeacon) paid half of Aristone's legal fees and defense expenses, Pennsylvania Manufacturers' Insurance Company (PMA), which also insured Aristone, 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 to a portion of Aristone's settlement with Evesham, and Aristone released its claims against PMA.

This action was filed by OneBeacon against PMA and an additional insurer seeking reimbursement for the cost of Aristone's defense. The trial court found in OneBeacon's favor, recognizing a direct right of action by the insurer against its co-insurers for defense costs. Given the limited scope of the release, which was signed by Aristone but not by OneBeacon, the trial court rejected PMA's argument that Aristone's release of PMA had extinguished OneBeacon's contribution claim. The court allocated Aristone's defense costs among the insurers and entered judgment in OneBeacon's favor against PMA.

The Appellate Division affirmed the portion of the trial court's decision allocating defense costs among the several insurers. Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass'n Ins. Co., 425 N.J.Super. 305, 329, 41 A.3d 586 (App.Div.2012). The panel relied on a leading California appellate case and New Jersey law, reasoning that its recognition of the insurer's right of contribution against its co-insurer comports with the apportionment method adopted by this Court in Owens–Illinois Inc. v. United Insurance Co., 138 N.J. 437, 475–76, 650 A.2d 974 (1994), and Carter–Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312, 325–28, 712 A.2d 1116 (1998). Potomac, supra, 425 N.J.Super. at 320–24, 41 A.3d 586. It recognized OneBeacon's claim for contributionagainst PMA and affirmed the trial court's holding that OneBeacon's claim was not extinguished by the release negotiated by Aristone and PMA.

We hold that, 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 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. We further affirm the finding of the trial court, also affirmed by the Appellate Division, 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.

Accordingly, we affirm the judgment of the Appellate Division.

I.

In an agreement dated October 1, 1991, Evesham retained Aristone to serve as the general contractor in the construction of a new middle school, the DeMasi School, for the sum of $14,566,000. On November 11, 1991, Aristone entered into a subcontract with Ertle Roofing and Sheet Metal Works (Ertle) for the installation of the school's roof and related construction. The contract between Aristone and Ertle required Ertle to indemnify and hold harmless Aristone and others “from and against claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from” Ertle's performance of the contract. The indemnity agreement covered any “claim, damage, loss or expense ... attributable to ... injury to or destruction of tangible property other than the [roof and related materials installed by Ertle] including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions” of Ertle, its subcontractors or their employees.

The construction of the DeMasi School took place over approximately two years and was completed in 1993. Beginning in its first year of use, the school experienced leakage and other defects, principally related to the roof. On December 20, 2001, Evesham filed an action in which it asserted claims for negligence and breach of contract against Aristone, the project architect, and the construction manager, and sought enforcement of a surety's obligation on a performance bond. Evesham sought compensatory damages, including remediation costs that were yet to be incurred, as well as attorneys' fees and other relief.

Evesham's negligence and breach of contract action prompted Aristone to notify its five insurance carriers of the claim and to demand that the carriers indemnify and defend it. For the first two years of the relevant period, July 1, 1993, through July 1, 1995, Aristone was insured under two consecutive commercial general liability (CGL) policies issued by PMA, which provided coverage for defense costs as well as indemnity. The CGL policies between Aristone and PMA provided that PMA had “the right and duty to defend any ‘suit’ seeking ... damages.” In addition, PMA agreed to “pay, with respect to any claim or ‘suit’ [it] defend[ed,] ... [a]ll expenses [PMA] incur[red].” In a section entitled “Other Insurance,” and subtitled “Method of Sharing,” PMA agreed that [i]f all of the other insurance permits contribution by equal shares, [it would] follow this method also.” PMA acknowledged in this section that [u]nder this approach each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.” Nowhere in this section, however, did the contract specify whether the “Method of Sharing” encompassed legal fees in addition to the insured's covered loss.

In addition to PMA, other insurance carriers provided coverage to Aristone during portions of the relevant period. Between July 1, 1995, and July 1, 1996, Newark Insurance Company (Newark) insured Aristone under a CGL policy. During the period between July 1, 1996, and July 1, 1997, Royal Insurance Company of America (Royal) insured Aristone under a CGL policy. 1 For the period from July 1, 1997, to July 1, 1998, OneBeacon, as the transferee of Potomac Insurance Company of Illinois (Potomac), insured Aristone under a CGL policy. Between July 1, 1998, and July 1, 2003, Selective Way Insurance Company (Selective) insured Aristone under five CGL policies. Each policy had a coverage limit of $1,000,000 per occurrence.

Selective and OneBeacon paid Aristone's legal fees and other defense costs as Evesham's action against Aristone proceeded.2 In contrast to Selective and OneBeacon, PMA and Royal disclaimed any obligation to indemnify or defend Aristone, citing language in their respective policies.

The position taken by PMA and Royal prompted Aristone to file a declaratory judgment action against them on June 3, 2004. Aristone and PMA agreed to arbitrate their dispute. While the arbitrator's decision was pending, Aristone offered to settle its dispute with PMA for $270,000. That amount represented what Aristone “perceive[d] to be PMA's indemnity and retroactive defense obligations.” The parties, however, were unable to agree on settlement terms. The arbitrator found that PMA had a duty under its policies to cover Aristone and share in Aristone's litigation costs.3 The arbitrator issued an award allocating a portion of those costs to PMA.

The arbitrator's award triggered settlement discussions between Aristone and PMA, eventually resulting in an agreement. PMA agreed to contribute $150,000 toward the resolution of Aristone's underlying dispute with Evesham in exchange for Aristone's release. Counsel for PMA and Aristone agreed upon the terms of the release, which was executed on March 2, 2007. In that document, which was not negotiated or signed by any of Aristone's insurers other than PMA, Aristone released PMA from 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 Evesham action.

Three days after Aristone signed the release, it settled its litigation with Evesham for a total of $700,000. In addition to the $150,000 contributed by PMA on Evesham's behalf, OneBeacon paid $150,000, Selective paid $260,000 and Royal paid $140,000.

The settlement of the underlying action between Aristone and...

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