Potomac Insurance Company of Illinois v. Pennsylvania Manufacturers’ Association Insurance Company(Superior Court of New Jersey, Appellate Division, April 13, 2012)
In a case of first impression, the Superior Court of New Jersey held that settlement with the insured of a contested coverage claim did not eliminate co-insurers rights to seek reimbursement for defense costs. In deciding the first case on the issue, the Superior Court adopted the California rule, allowing a direct right of action between co-insurers of the same risk on the basis of equitable contribution and not dependent on the insured’s rights.
The insured built a school property, which apparently suffered significant water intrusion over the years. When suit was finally brought, two of its insurers picked up the defense, while at least two other declined based on the business risk exclusions. As a result, the insured brought a declaratory judgment action, via an attorney assigned by one of the insurers defending it. At arbitration in the declaratory judgment action, the insured obtained a favorable ruling. Subsequently, the insured and disclaiming insurer settled for a lump sum. The settlement agreement went through several iterations before it was actually signed, and specifically excluded non-parties as “intended beneficiaries.” The other insurers were specifically excluded from mention in the settlement agreement.
After the settlement between the settling insurer and insured, one of the defending insurers commenced an action seeking defense costs. The insured and settling insurer disagreed about the intention of the settlement agreement, and whether it was intended to be binding on the insured’s other insurers.
The court recognized an insurer’s right of equitable contribution, separate from subrogation, and held that settlement was not a bar to the contribution claim. Although the insured could not seek more than to be made whole, if other insurers paid to make the insured whole they could seek contribution for defense or indemnity even if the insured could not pursue such insurers. The court also held that the insured’s release of its rights did not impact the insurer’s rights to seek contribution. With regard to the language of the actual settlement agreement, the court found that there was no meeting of the minds regarding whether the other insurers were barred from seeking contribution based on the divergent testimony regarding the settlement agreement’s negotiation and execution.
For a copy of this decision, click here.