On September 16, 2013, the New Jersey Supreme Court answered many questions about coverage in construction defect cases in Potomac Insurance Company v. PMA 2013 N.J. Lexis 847. While there have been multiple Appellate Division decisions addressing the continuous trigger theory in construction defect cases, the Supreme Court confirmed that this theory of coverage applies to construction defect property damage cases. As a result, any time period there was “damage” until the time of manifestation would be triggered under this theory.
The Potomac case involved the Township of Evesham hiring a general contractor (Aristone) to construct a new middle school. The middle school was completed in 1993 and the building began to experience leaks the following year. In 2001 the school filed a claim against Aristone for negligence and breach of contract. Aristone demanded defense and indemnity under its CGL policies.
Aristone had multiple insurers over the years between when the construction began and the suit. Like a typical construction defect litigation claim, several of the insurers defended under a Reservation of Rights, and other disclaimed coverage. Aristone settled with PMA, one of its insurers who had denied coverage in exchange for a $150,000 release. A few days later Aristone and the school settled for a total of $700,000. After the settlement, one of the insurers defending Aristone advised PMA that it sought recovery of PMA’s portion of the defense bill of over $500,000 due to PMA’s years on the risk under the continuous trigger theory.
The Supreme Court found that the insurers allocation analysis followed the New Jersey Supreme Court decision in Owens-Illinois v United Insurance Group 138 N.J. 437 which applied the continuous trigger theory to progressive injury in the asbestos bodily injury context. Also drawing on the Owens-Illinois precedent, the Supreme Court found that the insurers should allocate defense costs for the construction defect claim. While many Appellate Division cases have addressed application of the continuous trigger theory to construction defect cases, the Potomac case approved and followed these decisions.
The second issue was whether PMA’s settlement with Aristone barred the non-settling insurers’ contribution claim for defense costs. The Court reasoned that the non-settling insurer was not a party to the settlement agreement between the general contractor and PMA and as a result the settlement did not bar the non-settling insurers’ contribution claim against PMA for defense costs.
The practical difficulty with this ruling is that it now will be difficult for insurance companies to settle directly with their insured in disputed coverage claims where other insurers are defending under a Reservation of Rights. Unless the insurance company can obtain a release where the policyholder agrees to defend and indemnify the settling insurance company for these allocation/contribution claims, the decision will have a chilling effect on the ability of insureds to resolve claims against some of their insurers. The practical impact of the decision is that it makes it very difficult for insurance companies to resolve their disputed coverage claims with their insureds for fear that they will be sued by another insurer who has assumed or defended the insured under a Reservation of Rights agreement.