Here’s an interesting situation that recently came up. A general contractor (Aristone) got sued in a construction defect case involving continuous water damage to a building over several policy periods, involving several insurance companies. One of Aristone’s carriers – OneBeacon – stepped up to provide a defense. Another – Pennsylvania Manufacturers – took a “no pay” position, but agreed to go to binding arbitration with Aristone on the coverage dispute. Aristone won the arbitration against Pennsylvania as to coverage, and Pennsylvania then agreed to settle the insurance claim with Aristone for $150,000. In exchange for the payment, Aristone executed a general release in Pennsylvania’s favor, encompassing “[a]ll claims that have been brought against [Pennsylvania] or could have been brought against [Pennsylvania] in [the coverage] action brought by Aristone.” The release stated that it applied to Aristone and “[a]nyone who succeeds to [Aristone’s] rights and responsibilities.”
Later, OneBeacon filed suit against Pennsylvania, seeking reimbursement for Pennsylvania’s supposed allocated share of defense costs ($105,773.50, according to OneBeacon). Interestingly, the attorney who brought the coverage suit against Pennsylvania was the lawyer who had been previously appointed by OneBeacon to defend Aristone in the underlying suit (and who had negotiated the release with Pennsylvania on Aristone’s behalf). In response to OneBeacon’s suit, Pennsylvania naturally argued that OneBeacon’s claim was barred by Pennsylvania’s earlier settlement with Aristone.
The New Jersey Appellate Division, citing California authority, disagreed, writing: “Where two or more insurers independently provide primary insurance on the same risk for which they are both liable for any loss to the same insured, the insurance carrier who pays the loss or defends the lawsuit against the insured is entitled to equitable contribution from the other insurer or insurers…As a corollary to this principle, we hold that one insurer’s settlement with the insured is not a bar to a separate action against that other insurer or insurers for equitable contribution or indemnity.”
As to the effectiveness of the release, the Court wrote: “Because OneBeacon had an independent, rather than a derivative, right to contribution, Aristone’s release of its rights, like the settlement itself, did not, by itself, extinguish OneBeacon’s right to seek contribution.” (Emphasis added.) But the Court went on to hold that this specific release, by its terms, was ambiguous as to whether the parties actually intended to bar a future claim by OneBeacon against Pennsylvania for contribution. After criticizing the lawyers who drafted the release and who seem to have intentionally left it ambiguous, the Court ruled that the interpretation of the release would be an issue for trial.
The policyholder, Aristone, seems to have made out all right in this case – it got a full defense as well as a $150,000 payment against the claim. (It’s not clear whether the $150,000 was for a total policy buyback, which would raise its own set of separate issues, but that’s a subject for another post). But it seems that OneBeacon may have found itself in trouble here because of its failure to clarify the coverage picture up front as required by the New Jersey Supremes in Owens-Illinois v. United Ins. Co., 138 N.J. 437, 479 (1994). There, the Court specifically stated: “Insurers whose policies are triggered by an injury during a policy period 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.”
Put another way, in a recent article in Claims Magazine, Ken Brownlee wrote: “When the auditor is reviewing a claim in litigation for declaratory relief, he or she should look for evidence that the adjuster sat down and reviewed the policy with the insured, seeking advance agreement that the coverage did not apply or applied to only part of the claim. If that is missing, the file was not well adjusted.”
I can easily imagine situations where, because of ambiguity as to who was covering what, Aristone would not have made out as well. What if, for example, OneBeacon had argued that it was entitled to attach the $150,000 settlement payment from Pennsylvania on equitable grounds, to contribute to the defense costs? (That may have been difficult to do here, because OneBeacon’s own appointed defense lawyer negotiated the release on Aristone’s behalf, but just suppose.) That’s why the idea of intentionally leaving settlement documents ambiguous makes me very nervous. I don’t know what specific provisions were in the release relating to contribution, but I’d have wanted some sort of protective language or indemnity agreement to deal with the possibility that someone would later want to attach the settlement funds paid to the policyholder.
One last item of interest: Insurance companies frequently disclaim coverage for construction defect claims based upon the so-called “business risk” exclusions (such as the “your work” exclusion). Here, it seems that OneBeacon did not do so.
The full citation for the Aristone case is Potomac Ins. Co. of Illinois v. Penn. Mfrs. Ins. Co., Docket No. A-3164-09T2 (N.J. App. Div. Apr. 13, 2012), and the full decision is here.