New Jersey Court Approves Direct Suits Among Carriers to Share Defense Costs

The New Jersey Supreme Court recently ruled, in a case of first impression, that an insurer may bring a contribution claim against a co-insurer for defense costs that arise from continuous property damage litigation.

In Potomac Insurance Company of Illinois v. Pennsylvania Manufacturers Association Insurance Co., Potomac sought reimbursement from PMA for a portion of defense costs Potomac spent to defend a mutual insured in underlying construction defect litigation.  PMA had previously denied coverage and reached a settlement with the insured in a separate declaratory judgment action.  However, PMA did not contribute to the defense. PMA rejected Potomac’s subsequent request for reimbursement of PMA’s allocated share of defense costs (using Carter-Wallace allocation under New Jersey law), arguing that it obtained a full release from the insured as part of their settlement.

On Sept. 16, the New Jersey Supreme Court affirmed the trial court’s ruling that PMA could not unilaterally extinguish the rights of co-insureds to contribution claims for defense costs through a separate settlement with the insured.  The court also ruled for the first time that an insurer could seek contribution from a co-insurer for defense costs, and that the allocation principles for continuous trigger claims announced in Owens-Illinois and Carter-Wallace are equally applicable to defense costs.

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