Insurer of Common Insured Entitled to Contribution of Defense Costs From Other Carrier

Recently, the New Jersey Appellate Division addressed the question of whether an insurer can pursue another insurer of a common insured for defense cost contribution when that second insurer had already settled with the insured. Where the insurers both provided primary coverage for the loss, the carrier who paid the costs of the defense had an equitable right to contribution separate and apart from subrogation. This right is not extinguished even by a settlement with the insured.

 In Potomac Insurance Company v. Pennsylvania Manufacturers’ Association Insurance Company, the issue arose out of a claim for continuous damage from water infiltration into a public school over a period of eight years. The insured general contractor had insurance policies with several insurers over that time period. When it was sued by the Board of Education, Pennsylvania Manufacturers issued a denial letter. Potomac undertook the insured’s defense and ultimately brokered a settlement with the Board of Education. In the meantime, the defense counsel filed a declaratory judgment action against Pennsylvania Manufacturers on behalf of the insured.

 Pennsylvania Manufacturers and the insured settled for $150,000 that was applied to the overall settlement with the Board of Education. Potomac’s appointed defense counsel for the insured negotiated the settlement agreement with Pennsylvania Manufacturers.

 During the coverage litigation, that latter agreement became a critical issue. Significantly, Potomac was not a party to the agreement. Moreover, the agreement, which was initially drafted by Pennsylvania Manufacturers, included negotiated language that was subject to varying interpretations as to whether Potomac’s right to contribution for defense costs was extinguished. As a result, the court found that the ambiguous contract did not reflect a meeting of the minds. Moreover, since Potomac had a separate right to contribution, the agreement did not defeat its claim for contribution of defense costs for the underlying litigation.

 On one last issue, the Appellate Division reversed an award of attorney fees related to the insurer’s declaratory action. Since the plaintiff insurer failed to bring the coverage claim in its name within the declaratory judgment action filed on behalf of the insured, it violated the entire controversy doctrine. Had it pursued its claim in the same action, the subsequent litigation would have been avoided. The award of attorney’s fees to a successful litigant on a liability policy is an equitable remedy, which the court deemed unavailable where the insurer violated this doctrine and, thus, had unclean hands.

For more information email Denise Ricci at dricci@wcmlaw.com.