We previously posted about Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturers Assoc. Ins., where the Appellate Division found that an insurer can pursue another carrier of a common insured for contribution to defense costs despite settlement by one insurer of the insured’s claim.  Now, the  New Jersey Supreme Court has upheld the decision allowing a claim of contribution as between two insurers sharing in the defense costs of a common insured.

The underlying case involves a claim by the Evesham Board of Education against its general contractor, Aristone, for allegedly defective construction in the building of the school.  Because the loss spanned a number of years, Aristone was insured by multiple carriers.

One of those carriers, Pennsylvania Manufacturers Association (PMA) disclaimed coverage, leading to a separate declaratory judgment action between Aristone and PMA.  PMA settled with Aristone for what it considered to be its share of defense costs and indemnity, in exchange for a release from its insured.

The settlement of the DJ prompted a settlement of the underlying case with the Board of Education.  But the carriers that had provided a defense, including One Beacon, looked to PMA to contribute to the defense costs. Taking the position that the settlement agreement with the insured shielded it from any claims of contribution for defense costs from any of the other insurers, PMA refused to pay, resulting in this litigation.

In upholding the Appellate Division’s ruling awarding a share of defense costs to OneBeacon by PMA, the Supreme Court determined the terms of PMA’s settlement with the insured did not consider or extinguish OneBeacon’s right to assert a claim for contribution.   Of note was the fact that One Beacon was not a party to the PMA settlement agreement with the insured, and the language of the agreement did not address One Beacon’s contribution rights.

In a case of first impression for the Supreme Court, the Court highlighted several public policy issues:  the value in conservation of financial resources and efficient dispute resolution, as well as the incentive for carriers to actively participate in litigation involving an insured.   It seemed apparent that the Court would have preferred that the insurers handled this matter globally rather than with parallel litigation.

Thanks to Emily Kidder for her contribution to this post.  If you would like more information, please write to Mike Bono.