The New Jersey Supreme Court’s recent decision in Potomac Ins. Co. of Ill. v. Pa. Mfrs. Ass’n Ins. Co., No. 070756, 2013 N.J. LEXIS 847 (Sept. 16, 2013), is a mixed blessing for policyholders involved in construction defect litigation. The court clarified for the first time that the “continuous-trigger” theory of coverage applies to construction defect cases. That is good news for policyholders because it should lead to increased limits being made available to resolve construction defect claims. The court also held that, when the continuous trigger applies, insurers can assert a direct claim against a co-insurer for contribution to defense costs. That is good news for insurers. However, the court’s holding on contribution claims may inadvertently discourage early settlements or even put policyholders in the middle of a fight among insurers over their defense cost obligations. That is not good news for anyone.

Potomac’s facts are typical of a construction defect claim, alleging continuous property damage resulting from alleged faulty workmanship. In 1991, the Township of Evesham hired Roland Aristone, Inc., as the general contractor for the construction of its new middle school. Aristone completed the project in 1993. The following year, the school began to experience leaks and other damage related to a defect in the roof. In 2001, the school filed suit against Aristone for negligence and breach of contract. Aristone notified its insurers and demanded defense and indemnity coverage under its general liability policies.

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