Client Alerts
October 31, 2018

Boo-Ware of Settlement Boo Boos

Stites & Harbison Client Alert, October 31, 2018

by Stites & Harbison, PLLC

In Satterfield & Pontikes Construction, Inc. v. United States Fire Insurance Company, 2018 U.S. App. LEXIS 21488, the general contractor, Satterfield & Pontikes Construction, Inc. (“S&P”), purchased two (2) insurance policies for a project involving construction of the Zapata County Courthouse in Texas. The first policy was for general commercial liability insurance and the second policy was for excess insurance through U.S. Fire Insurance Company (“U.S. Fire”). The first policy had a limit of $2 million and the second a limit of $25 million. Both policies contained similar exclusions related to mold damage and U.S. Fire’s policy also excluded damages related to legal costs. Further, S&P required its subcontractors on the project to sign indemnity agreements on behalf of S&P for damage caused by the subcontractors.

During the project Zapata County was not satisfied with S&P’s work. Zapata County eventually sued S&P for damages which included mold remediation and recovery of attorney’s fees. Zapata County was awarded damages totaling over $8 million during arbitration – including $2.8 million for mold remediation and $2 million for attorney’s fees, among other damages.

In an attempt to satisfy this award, S&P entered into settlement agreements with several of its subcontractors for the total amount $4.5 million. S&P then turned to its own insurance to pay the remaining $3.5 million. S&P’s general commercial insurer paid the $2 million policy limit. Subsequently, to S&P’s surprise, U.S. Fire refused the claim for the remaining $1.5 million under the excess policy. U.S. Fire contended that S&P would be obtaining a double recovery as to the covered costs under U.S. Fire’s policy should U.S. Fire pay the $1.5 million claim. More specifically, U.S. Fire estimated its covered damages to be approximately $2.5 million of the $8 million award. U.S. Fire reasoned that the monies paid by the subcontractors were more than adequate to satisfy this covered amount of $2.5 million which would be due under the excess policy.

S&P sued U.S. Fire for breach of contract among other claims. S&P’s claims against U.S. Fire were dismissed on summary judgment by the district court. The district court held that S&P could not unilaterally allocate its settlement proceeds obtained from the subcontractors to pay for uncovered costs (such as mold remediation and attorney’s fees) so that U.S. Fire was responsible for paying the covered losses under the excess policy. S&P appealed the district court’s decision to the Fifth Circuit Court of Appeals. Upon appeal, S&P argued that it had the right to allocate the subcontractor settlements to pay either covered or uncovered damages under U.S. Fire’s policy. S&P also argued that the subcontractor settlements were not the product of S&P’s insurance coverage thus should not be considered “other insurance” as to entitle U.S. Fire to a coverage offset for its excess policy.

The Court of Appeals did not agree with S&P’s arguments and found that S&P did not offer any evidence as to why the subcontractors’ settlements were meant to fill the gaps in the excess insurance coverage for the mold damages and legal fees. The Court of Appeals affirmed the district court’s decision that S&P could not unilaterally allocate all of its settlement proceeds to uncovered losses to “manufacture” a covered loss under U.S. Fire’s policy. Next the Court of Appeals looked to the definitional language contained in U.S. Fire’s policy to determine what should be deemed “other insurance” with regard to the settlements off-setting U.S. Fire’s coverage under the excess policy. U.S. Fire’s policy defined “Underlying Insurance” as “any type of self-insurance or other mechanism by an insured arranged for funding of legal liability for which this policy also provides coverage.” The Court of Appeals found that the language contained in U.S. Fire’s policy pertaining to “other insurance” was very broad as to include the indemnity agreements of S&P’s subcontractors. Accordingly, the Court of Appeals held that the subcontractors’ settlements could be used to offset coverage by U.S. Fire under the excess policy. In the end, U.S. Fire was not responsible for paying S&P the $1.5 million under the excess policy.

So, what are the lessons to be learned from Satterfield & Pontikes Construction, Inc.? First, contractors should be careful about failing to obtain coverage for a portion of the risks that are likely to come along with construction projects such as mold remediation and legal expenses. It goes without saying, but if certain damages are excluded from a policy then insurers will not be on the hook for such coverage. This rule is the overarching theme in Satterfield & Pontikes Construction, Inc. Second, contractors should read the language contained within their insurance policies which defines “other insurance.” Is the language so broad as to be interpreted to include monies obtained under indemnity agreements from third parties such as the U.S. Fire policy? Insurance companies will undoubtedly use the Satterfield & Pontikes Construction, Inc. opinion to argue that such funds recovered under an indemnity agreement constitutes “other insurance” to offset their coverage. And finally, contractors (and their legal counsel) should exercise caution when allocating settlements from third parties to pay an arbitration award or court judgment. As stated in Satterfield & Pontikes Construction, Inc., contractors have the burden of properly allocating settlement proceeds between either covered and non-covered damages. Accordingly, it is best practice to have a settling party tender its settlement agreement which allocates that party’s settlement credits.

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Construction Drafting, Reviewing & Negotiating Construction Contracts