Settling complex insurance claims involving multiple carriers can be like playing three-dimensional chess. (Since I can’t even play one-dimensional chess, that means it’s really difficult.) I once had a multimillion-dollar environmental insurance coverage settlement fall apart because one of the participating carriers would not assume an extra 1% of the coverage, despite (or perhaps because of) pressure from the other carriers in the case to do so. That was frustrating. Equally frustrating is when one carrier does the right thing and steps up to defend the policyholder, and the other carriers drag their heels on contributing an equitable amount.
Such was the scenario in the recent New Jersey Supreme Court case of Potomac Ins. Co. v. Pennsylvania Manufacturers’ Association Ins. Co. This case involved the question of insurance coverage for construction defects. The policyholder, Roland Aristone, Inc., was general contractor on a middle school construction project, and was sued by the township for faulty workmanship done by subcontractors. Several insurance companies had sold policies to Aristone during the relevant period. One of them, OneBeacon, stepped up to fund part of the defense. (I know what you may be thinking. An insurance company willingly steps up to provide a defense in a construction defect case? It’s possible that Aristone’s policies contained the subcontractor exception to the “your work” exclusion. That’s not clear from the opinion.)
One of Aristone’s other carriers, PMA, refused to contribute to the defense, but did contribute to a settlement with the township on Aristone’s behalf (following an arbitration between Aristone and PMA). OneBeacon then sued PMA for a proportionate amount of defense costs. PMA essentially defended the OneBeacon suit on two separate grounds. First, that there was no right to contribution between coinsurers. Second, that (A) Aristone had given PMA a release, and (B) since OneBeacon could only make a claim against PMA to the extent that OneBeacon succeeded to Aristone’s rights, OneBeacon had no recourse.
The Supreme Court ruled against PMA. On the first question, the Court opined that New Jersey’s public policy favoring cost-effective resolution of disputes mandated in favor of finding a right of contribution between coinsurers. The Court wrote: “Absent a right of contribution, a carrier that pays defense costs as they are incurred might alone bear a burden that should be shared. An inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy. Moreover, the governing principles upon which the Court relied in [the allocation decisions of Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994) and Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998)] warrant the recognition of a claim for allocation of defense costs…[P]ermitting such a claim creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources of insurers, litigants and the court. 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. With the collective resources of a litigant’s insurers available at the early stages of a case, meritless claims can be challenged by motion and substantial claims can be more effectively defended.”
As I was reading this, I thought about how much simpler life was in the pre-Owens-Illinois, pre-Carter-Wallace era. In those days, if multiple policies were triggered, the policyholder simply selected one of them to provide defense and indemnity, leaving the selected carrier a right over against the other carriers. The policyholder was protected, and the other carriers worked things out among themselves. In Owens-Illinois and Carter-Wallace, the Court determined that this “pick-and-choose” methodology was inequitable to the insurance company that was chosen in the initial instance. Now, with the Court’s new ruling in Potomac, I’m left wondering why. If a right to contribution among carriers clearly exists, and if we’re concerned with the efficient administration of insurance dollars and judicial resources, doesn’t the old way make much more sense just from a cost standpoint? Then again, what do I know?
On the second point – the release – the Court held that a release between a policyholder and a carrier does not necessarily extinguish a second carrier’s right to contribution, writing: “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. The release recites that ‘Aristone and PMA’ – and no other party – ‘wish to resolve fully and finally all aspects of the…dispute.’ Moreover, the definition of the releasing party, Aristone, does not purport to include OneBeacon, or any other entity providing insurance to Aristone for the [township’s] claim.”
Although ostensibly a dispute between insurance carriers, the Potomac case is important for policyholders because it contains potential pitfalls when settling multi-carrier claims. For one thing, you obviously need to be very careful about the terms of any release with Carrier A. If you give away Carrier B’s right to contribution, Carrier B may claim that any settlement with you by Carrier B must be reduced by a proportionate amount. In addition, the fact that a right to contribution exists might, in some circumstances, be used by a policyholder to create incentive for a particular carrier to settle, or even to assume a larger proportion of the underlying defense then it might otherwise be inclined to do.
By the way, the Potomac case is also of interest because it expressly recognizes that a “continuous trigger” can apply in construction defect claims.
You can read the full decision here.