In Potomac Ins. v. PMA, the New Jersey Superior Court, Appellate Division, held that One Beacon Insurance Company (One Beacon) could institute an action seeking to recover defense costs from the Pennsylvania Manufacturers Association Insurance Company (PMA) for the defense of their mutual insured even though PMA settled with the insured. The Court further held that One Beacon was not, however, entitled to recovery of counsel fees pursuant to Rule 4:42-9(a)(6) based upon the doctrine of unclean hands.

In that case, the Evesham Township Board of Education brought suit against Aristone seeking recovery of damages in connection with a claim of negligent design and construction of one of its middle schools. The complaint alleged continuous damage from water infiltration from 1993 until the present time. Aristone was insured by Selective Way Insurance Company, One Beacon, PMA, and Royal Insurance Company during this time. Selective Way assumed the defense of Aristone and appointed an attorney to represent Aristone. One Beacon subsequently joined with Selective and appointed the same attorney to defend Aristone. PMA and Royal disclaimed coverage.

In 2004, Aristone filed a declaratory judgment action against PMA and Royal seeking defense and indemnity coverage in connection with the Evesham lawsuit. Aristone was represented in the declaratory judgment action by the same attorney appointed by One Beacon to defend Aristone in the underlying tort action. The coverage dispute was arbitrated and a settlement between PMA and Aristone was reached in February 2007. A release was prepared and, after several revisions by counsel for each party, executed on March 2, 2007.

Following settlement of the underlying action between Evesham and Aristone, One Beacon sent a demand letter to PMA and Royal seeking reimbursement for PMA and Royal’s pro-rata share of defense costs and expenses incurred in connection with defending the underlying action. Neither PMA or Royal agreed to reimburse One Beacon; and therefore, One Beacon filed suit seeking recovery of defense costs from PMA and Royal in July 2007. PMA argued that the release between Aristone and PMA precluded One Beacon from recovering defense costs from PMA. The trial judge found that the attorney appointed to defend Aristone was not acting on behalf of One Beacon at the time the release was drafted. Thus, One Beacon was not bound by the release because Aristone had no right to release PMA from any obligation that it may have had with respect to defense costs to other parties. One Beacon was awarded PMA’s share of defense costs from the underlying action and $74,308.97 in counsel fees for the declaratory judgment action.

PMA claimed that New Jersey does not permit an insurer to obtain contribution from a settling insurer under the apportionment doctrine in Owens-Illinois and Carer-Wallace. The Court noted that in Marshall v. Raritan Valley Disposal, 398 N.J. Super. 168, (App. Div. 2008), it had previously held that an insurer who has provided coverage may pursue a nonparticipating co-primary insurer for contribution. However, the issue of whether one insurer may pursue another for contribution where the second insurer has already settled with a common insured was an issue of first impression. The court concluded that One Beacon had a right to recover under the doctrine of equitable contribution. In so holding, the court relied upon the reasoning of the California Court of Appeals in Fireman’s Fund Ins. Co. v. Maryland Cas. Co., 77 Cal.Rptr. 2d, 296, 303-305 (Ct. App. 1998), as follows:

This right of equitable contribution belongs to each insurer individually. It is not based on any right of subrogation to the rights of the insured, and is not equivalent to “’standing in the shoes’” of the insured. Instead, the reciprocal contribution rights of coinsurers who insure the same risk are based on the equitable principle that the burden of indemnifying or defending the insured with whom each has independently contracted should be borne by all the insurance carriers together, with the loss equitably distributed among those who share liability for it in direct ratio to the proportion of each insurer’s coverage bears the total coverage provided by all insurance policies. “As a matter of equity, insurers of the ‘same risk’ may sue each other for contribution … This right is not a matter of contract, but flows’ ” from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.’ ” … The idea is that the insurers are ‘equally bound,’ so therefore they ‘all should contribute to the payment.’ …”Unlike subrogation, the right to equitable contribution exists independently of the rights of the insured…

Thus, the release between PMA and Aristone did not hinder One Beacon’s ability to pursue its separate and independent right of equitable contribution against PMA.

At the same time, the court held that One Beacon was barred from recovering counsel fees under Rule 4:42-9 (a)(6) under the doctrine of unclean hands. In so holding, the court reasoned that the attorneys for PMA and Aristone, who was being represented by counsel appointed by One Beacon, never attempted to discuss or resolve the issue of whether a settlement of the declaratory judgment action between Aristone and PMA would resolve any outstanding issues between One Beacon and PMA with respect to defense costs, and thus, they “knowingly paved the way for the present litigation.” The court further reasoned that the actions of counsel were inconsistent with the public policy behind the entire controversy doctrine. The court noted that the lawsuit between One Beacon and PMA could have been avoided if One Beacon had been joined as a party to the declaratory judgment action between Aristone and PMA.

What It Means to You

It is important to consider all potential issues that could be relevant before entering into a settlement agreement. Thought must be given not only to resolving the immediate claims, but also to any other potential claims that could arise. All parties that have or may have an interest in the suit should be joined to the litigation and included in any release. Additionally, terms of the release should be clear, concise, and carefully drafted to ensure consistency with other provisions of the release.