As the old adage goes, “the devil is in the details.” Insurance policy terms do not always apply in ways that policyholders expect. For this reason, it is imperative to understand how coverages, definitions and exclusions work together to avoid surprise gaps in coverage. The Fifth Circuit found a coverage gap in a recent case holding that settlement contributions from co-defendants met an excess policy’s broad definition of “Other Insurance,” preventing the policyholder from securing coverage for a significant part of its losses.
In Satterfield and Pontikes Construction, Inc. v. United States Fire Insurance Co., the Fifth Circuit affirmed summary judgment in favor of a general contractor’s excess liability insurer. The general contractor oversaw a courthouse construction project in Texas that went awry, forcing the county government to pay for mold remediation, dome reconstruction and roof replacement. Ultimately, an arbitration panel awarded over $8 million in reconstruction and repair costs, prejudgment interest, attorney’s fees and arbitration costs to the county government because the general contractor “failed to build the courthouse in a good and workmanlike manner” and “failed to properly supervise its subcontractors.”
In the arbitration proceeding, the general contractor sought contribution from its subcontractors, third parties, commercial general liability insurers, and its excess liability insurer. The general contractor entered into settlement agreements with all but the excess liability insurer, leaving the general contractor responsible for over $400,000 in losses. The general contractor sought coverage from its excess liability insurer for the outstanding $400,000.
The excess liability insurer argued that it did not owe anything because the general contractor had failed to meet its burden of showing that the portion of its loss not compensated by the settling first-layer insurer and subcontractors was within the excess policy’s coverage. Specifically, the mold remediation award, attorney’s fees award, prejudgment interest and the arbitration fees were not covered damages under either the commercial general liability or excess liability policies. Once those costs, along with the $1 million limit for one of the commercial general liability policies, were factored in, only $2.5 million out of the initial $8 million was even potentially recoverable from the excess liability insurer.
However, the subcontractors had already settled with the general contractor for approximately $4.5 million. And, the general contractor policyholder failed to establish whether the proceeds of the subcontractor settlements applied to covered or non-covered damages under the insurance policies. The excess insurer contended that over $2.7 million of the $4.5 million in subcontractor settlement contributions applied to covered losses. The general contractor, by contrast, argued that the subcontractor contributions were not “Other Insurance” within the meaning of the excess liability policy and therefore should not be counted in calculating the excess insurer’s liability.
The Fifth Circuit agreed with the excess insurer that the subcontractor settlement contributions were “Other Insurance.” The excess policy broadly defined “Other Insurance” as “any type of Self-Insurance or other mechanism by which an Insured arranges for funding of legal liability for which this policy also provides coverage.” The court, characterizing the definition as “very broad,” held that the general contractor’s indemnity agreement with its subcontractors was “Other Insurance” based on the plain language of the policy.
The general contractor argued that it was entitled to allocate the subcontractor settlement proceeds to the portion of its losses not covered by insurance (mold remediation, the attorney’s fee award, etc.), reserving the remaining losses for its insurance carriers to pay. But the court held that the policyholder had the burden to show that the subcontractor settlement proceeds were actually allocated to non-covered damages. The court concluded that if the policyholder could not meet its burden, the settlement proceeds would first satisfy the covered damages (meaning that the excess policy would not be triggered). Even though the excess liability insurer had previously agreed in writing that the policyholder could reasonably settle with the subcontractors, that did not mean the insurer granted permission to allocate all of the settlement proceeds to non-covered damages.
In addition, the Fifth Circuit cited two public policy reasons for siding with the insurer: 1) the policyholder had no shortfall in covered damages for the excess insurer to pay; and 2) allowing the policyholder to recover from both the subcontractors and the excess insurer for the same damages would result in double recovery and unjust enrichment.
This case provides two valuable lessons for policyholders. First, when digging into the details of a policy, the terms can apply in unexpected ways. In Satterfield and Pontikes Construction, Inc.’s policy, the broad definition of “Other Insurance” was read to include contributions from non-insurers, and thus ended up defeating its claim for excess liability coverage. In the wake of Satterfield and Pontikes, well-advised policyholders will be alert to the implications of this language, and may be able to negotiate a clarifying endorsement. Second, when negotiating settlements, policyholders need to be aware of how they can impact insurance coverage. Here, an agreement to allocate the settlements with the subcontractors would have saved the policyholder hundreds of thousands of dollars in uninsured losses and likely the costs of disputing this issue, as well.