The Need to Be Specific and Precise in Drafting Settling Agreements

The case of Bituminous Casualty Corp. v. Hartford Casualty Insurance Corp., 2013 WL 452374 (D. Colo. February 6, 2013) is instructive as an example of both the confusion and resulting escalation of litigation that can result from a lack of clarity in settlement negotiations. This is particularly true where parties settle outside of their insurance coverage, and/or without notifying their insurer(s), which have denied coverage.

The case involved coverage litigation following settlement of a multi-party construction defect case involving the Rivergate multi-family residential development in Durango, Colorado. The condominium owners association sued, among others, the developer (Rivergate Lofts Partners, hereafter “RLP”) and the general contractor (Genex Construction, LLC, hereafter “Genex”).  This follow-on case involved the insurers for RLP (“Hartford”) and Genex (“Bituminous”).  The coverage dispute was complicated by the Bituminous allegations that Hartford insured Genex in its alleged role as a manager for RLP, as part of Hartford’s insurance of RLP more generally.

The underlying facts were that Hartford denied insurance coverage and defense to Genex/Bituminous. The underlying construction defect case went to mediation, with the COA, RLP, and Genex all in attendance with their respective insurer representatives, and coverage counsel.  While the evolving facts of that mediation were later disputed as to their motives, intentions, and the contemporaneous knowledge of the parties, the facts reflected in documents were fairly clear.

Before multi-party mediation, Bituminous had tendered the defense of Genex to Hartford for purposes of its management role, and Hartford denied insurance coverage to Bituminous/Genex for all purposes. Litigation followed, in which it was alleged by the COA that Genex was an alter ego of RLP for purposes of numerous roles that Genex performed in the course of construction.

At mediation, Bituminous agreed to pay $6.9 million to have Genex (and its principal, “Kneller”) released from any liability under the Bituminous insurance policy, including the alleged role of Genex and its principal as alter egos of RPL. Notably, this settlement did not settle the underlying case, and was only a “policy release” between Bituminous and its named insured. Under this policy release settlement, Genex and Kneller assigned to Bituminous their “rights or claims” in any way connected to the (ongoing) COA litigation and the project generally. While it was claimed in the coverage case that the facts of Bituminous/Genex’s settlement/assignment of claims was communicated to Hartford, that state of Hartford’s knowledge was later vehemently disputed.  

Within a short period of time later, Hartford settled all of the separate COA claims against RPL and entered into a further settlement agreement between itself and its named insured, RLP.  Most important to this coverage/contribution case, Genex was included as a releasing party in this Hartford release, and putatively released Hartford from all claims involving the case. This Hartford release was later in time than Genex’s release of Bituminous that arguably assigned those same claims to Bituminous.  What followed was a battle of escalating allegations between the insurers involving the two Genex “settlement” documents – one with Bituminous, and a later one with Hartford.

Each of the Bituminous and Hartford policies for the respective parties contained similar provisions that transferred the insured’s’ rights to recover settlement amounts paid by the respective insurers. In short, when a party settled its claims, there was a right of potential subrogation granted to the paying insurer.  This became metaphysically (if not concretely) problematic when Bituminous settled insurance coverage of alter ego claims with Genex that were arguably also insured by Hartford. 

When Bituminous later filed suit against Hartford, it initially claimed equitable contribution against Hartford under the co-existing Hartford policy for the alleged benefit of Genex.  When Hartford answered the complaint and argued the (later) release by Genex of all potential claims against Hartford, Bituminous added tort claims against Hartford to their suit.  Those further claims included: intentional interference with the contract of Bituminous and Genex; civil conspiracy; and damages from the wrong of another. 

In the meantime, the underlying construction defects case went to jury trial between Genex/Bituminous and RLP and the jury allocated the amount of $1 million of the Bituminous settlement with the COA as representing Genex’s liability as the manager of the project for RLP.   The decision issued in this opinion addressed Hartford’s motion to dismiss, which became a motion for summary judgment after affidavits were submitted to oppose the motion.

The first of the claims dealt with by the court was the Bituminous’ claim for tortious interference with contract.  Because of conflicting affidavits from counsel for the parties, and based on the inferences available from the very documents of release between Hartford and Genex, the court determined there to be a conflict of interest which precluded summary judgment.  While the facts of intentional interference with contract were not indisputably proven by such evidence, the court found that there was a triable claim on this issue, based on what was characterized as admissible “constructive knowledge” of the insurance contract terms between Bituminous and Genex.  Interestingly, this constructive knowledge was inferred by the court primarily on the basis of the undisputed fact that Hartford was told of the Bituminous-Genex settlement, even if the terms were not explicitly communicated.  In other words (not used by the court), Hartford’s knowledge of a settlement put it on inquiry notice about the terms of that same settlement – without actual knowledge of detailed notice of the terms of the agreement.

In a further discussion, the court noted that Section 773 of the Restatement (Second) of Torts required that the actions of Hartford required affirmative proof of its “good faith,” in acting to protect its own legal interests when it settled with Genex.  The court held that within the context of the summary judgment motion, there was sufficient evidence to allow a finding that the Hartford did not meet the “good faith” requirement that was pled as an affirmative defense to the Bituminous tort claim.

The court noted in its separate discussion of Hartford’s motion to dismiss the Bituminous civil conspiracy claim that this claim was derivative of the above-discussed interference with contract claim. The court denied the motion partially for that reason, but also because there were disputed issues of fact concerning the “wrongful act” requirement of the claim. The wrongful act alleged by Bituminous was Hartford’s act of settlement with Genex.  Under its previous discussion, the court had determined that this could be a wrong that would potentially serve as the foundation for a triable case. In the analysis of the court, the (potential, triable) wrong was the interference with the insurance contract between Bituminous and Genex (to which Hartford was not a party), even though Genex was a party to both the Bituminous insurance contract and the Hartford settlement agreement. 

In the last section of its opinion, the court analyzed the third Bituminous claim for “damages resulting from the wrong of another.”  The court agreed with Hartford that this claim was not a separate cause of action recognized under Colorado law. The case relied upon by Bituminous in making this claim was one which recognized the recoverability of attorneys’ fees in some contexts, but the court held that it was not an independent claim for relief.

This case presents a number of complexities that may not soon occur again in a single matter. However, it presents a cautionary tale for parties and insurers involved in (among other things) denials of coverage, additional insured issues, and settling claims that are assigned by contract or by settlement agreement.  One would do well to survey the landscape of potential problem scenarios for this purpose before either (1) denying defense or coverage to a colorable insured; and/or (2) settling with a party that has claimed coverage, but which has given a policy release to its own primary insurer.   Mistakes in this regard will potentially be followed by tort litigation against and/or between insurers.  Note: the attorneys involved in the denial and/or settlement transactions may become witnesses, which is seldom a desirable result.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

Settlement Payment May Preclude Finding of Policy Exhaustion: Scottsdale v. National Union

In the last year, the U.S. District Court for the District of Colorado found that a settlement payment from an excess insurance carrier to another primary insurance carrier precluded a finding of vertical exhaustion sufficient to trigger the primary carrier’s duty to indemnify.  See Scottsdale Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, 2012 WL 6004087 (D. Colo. 2012).  The Scottsdale case arose out of the construction of a 507-unit apartment complex in Arapahoe County, Colorado in which a number of defects became apparent during construction.  As a result, the owner of the project sued the general contractor and/or the construction manager, seeking to recover more than $22 million for various construction deficiencies.  Id. at *1. 

The general contractor was insured under policies issued by several carriers.  Scottsdale Insurance Co. (“Scottsdale”) and National Union Fire Ins. Co. (“National Union) provided umbrella coverage, and CNA and American Zurich Ins. Co. (“Zurich”) provided primary insurance under commercial general liability policies.  About five years later, the construction defect case settled for $8.5 million dollars.  The settlement was funded by CNA, Scottsdale, and Zurich.  CNA contributed $4 million, Scottsdale contributed $4,350,000, Zurich contributed $75,000, and the insured contributed $75,000.  National Union did not contribute to the settlement.  In a related agreement, Scottsdale agreed to pay CNA $500,000 to facilitate the resolution of related coverage disputes involving CNA. 

Subsequently, Scottsdale commenced a declaratory judgment action against National Union seeking reimbursement for at least $2,283,911 of the funds Scottsdale paid to settle the construction defect action.  Scottsdale asserted four claims for relief, including equitable contribution and contractual subrogation.  National Union answered, denied liability, and eventually moved for summary judgment.  According to National Union, Scottsdale could not show that the primary insurance policies underlying the National Union umbrella policies had been fully exhausted.  Id. at *2.  National Union argued that Scottsdale payment of $500,000 precluded Scottsdale from showing that the policy limits under a certain CNA policy had been fully exhausted.  National Union characterized Scottsdale’s $500,000 payment as replenishment of policy limits under the CNA policy limits.  Although Scottsdale attempted to argue that the $500,000 payment applied to only one CNA policy, the court disagreed. 

In commenting on testimony offered by a Scottsdale representative limiting that payment to a certain CNA policy, the court stated “[t]his evidence does not satisfy Scottsdale’s evidentiary burden with respect to the exhaustion requirement.”   Id. at *3.  Notably, the court indicated that the relevant factual inquiry is how CNA allocated the $500,000, and that Scottsdale had not presented any evidence on that subject.  As a result, the court found that Scottsdale’s response lacked the requisite evidentiary support to preclude summary judgment on the question of vertical exhaustion.  The court granted National Union’s motion for summary judgment, dismissed all of Scottsdale’s claims, and awarded National Union its costs.  The takeaway from this case is to be extremely cautious when considering the possibility of settlement with one of several potential carriers who may be liable for defense and/or indemnity.  You may be impairing and/or precluding coverage.                

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

A New Trend Emerging Regarding the Definition of Ongoing Operations: Jaynes Corp. v. ASIC

The term “ongoing operations” has appeared in construction insurance policies for many years.  Here in Colorado, that phrase has had a particular meaning when applied to an insurer’s coverage of liability arising out of an insured’s work, i.e. liability arising during an insured’s work on a specific project.  The case of Jaynes Corporation v. American Safety Indemnity Company illustrates a new trend in other jurisdictions where courts are loosening the coverage application of an “ongoing operations” clause.

In December 2012, in U.S. District Court in Nevada, Judge Miranda M. Du ruled on cross motions for summary judgment filed by Jaynes Corporation (“Jaynes”) and American Safety Indemnity Company (“ASIC”).  ASIC’s argument that the “ongoing operations” provision precludes coverage for Jaynes is the pertinent issue to this article.

The background facts of the case are pretty standard for construction litigation. A subcontractor entered into written agreement with Jaynes, the general contractor, for site concrete work at a residential housing project.  In the contract, the subcontractor agreed to name Jaynes as an additional insured on policies issued by ASIC.  The damages in the original construction litigation, between the homeowners association and the developer, were alleged to have occurred during the policy periods.  The subcontractor performed its work on the project in 2003 and 2004.

ASIC asserted that the “ongoing operations” provision in the policies, issued to the subcontractor, precludes coverage for the construction defect claims in the underlying lawsuit because those claims involved completed operations.  ASIC argued that the claims involved completed work and not works in progress.  Jaynes countered-argued that the “ongoing operations” provision does not restrict coverage to damage that occurred during the subcontractor’s ongoing operations, but it also covers claims for damages that occurred after completed operations but was caused by ongoing operations.

Judge Du discarded ASIC’s arguments and agreed with Jaynes, determining that the “ongoing operations” clause applies to damage on work performed by the subcontractor caused by its ongoing operations.  Judge Du cited two cases, from Arizona and California, which analyzed similar “ongoing operations” clauses.  Those two cases, Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co., 426 Fed.Appx. 506 (9^th Cir. 2011) and McMillin Construction Services, L.P. v. Arch Specialty Insurance Co., 2012 WL 243321 (S.D. Cal. Jan. 25, 2012), determined that the policies at issue covered liability performed by a subcontract caused by that subcontractor’s ongoing operations.  In those cases, the specific language, “arising out of,” in the “ongoing operations” clause was vital to the courts’ rulings.

Judge Du noted that Nevada courts, like those of Arizona for Tri-Star and California for McMillan, review insurance policy terms from the perspective of a layman not trained in law or insurance, and the contract language viewed in its plain, ordinary, popular meaning.  Judge Du found compelling the Tri-Star’s Court’s discussion of the phrase “arising out of,” “this language does not state that injury must occur, or liability must arise, during the name insured’s ongoing operations, but rather requires only that the liability arise “out of” the ongoing operations.”   Tri-Star, 426 Fed.Appx. at 510 (9^th Cir. 2011).

Judge Du also addressed ASIC’s arguments and supportive cases contrary to Tri-Star and McMillan.  One of the cases ASIC cited was a Colorado case, Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309 (Colo. App. 2007).  Judge Du stated that those contrary cases relied not on the plain language of the provisions at issue, i.e. “ongoing operations,” but rather, the drafting history of the clause by the insurance company.  Judge Du went further stating that such history lessons are not persuasive in the face of the plain language of the “ongoing operations” clause.  Judge Du then let the Tri-Star case speak for her one more time:

Such evidence might be persuasive if the controversy . . . were between two insurers, or if it suggested that the language reflected the mutual intent of the parties. This evidence is wholly lacking here. Indeed, . . . the only court to construe the additional insured endorsement, without reference to the industry’s drafting history, held that it provided coverage for damages occurring after the completion of operations.

Tri-Star, 426 Fed.Appx. at 512 (9^th Cir. 2011).

The Weitz case has a similar factual background to the Jaynes case: A general contractor, sued by a homeowner, brought an action against an insurer that issued a policy to a subcontractor to which the general contractor was an additional insured.  The district court granted the insurer’s summary judgment motion asserting that coverage was limited to “ongoing operations” and there was no coverage for claims arising out of subcontractor’s completed work or operations.  Weitz, the general contractor, appealed the order and the Colorado Court of Appeals affirmed the district court’s ruling.

In coming to its decision, the Colorado Court of Appeals found persuasive an analysis of the ISO’s history of drafting the additional insured endorsement (CG 20 10 1993) in another case.  The Weitz court found their construction of the phrase and the coverage it affords to be in line with the views of commentators addressing the history of the ongoing operations clause.  Ultimately, the Weitz court found that no ambiguity existed and the “ongoing operations” clause would not cover any work that had been previously completed.

The analysis by the Weitz court is exactly what Judge Du found unpersuasive as it failed to dissect the plain language of the clause, instead relying on the history of the clause within the insurance industry.  While the Jaynes case is not authority in Colorado, the fact is a trend is emerging in courts of neighboring jurisdictions and soon Colorado courts may be faced with a similar analysis.  We have to wait and see if Weitz will be challenged soon.  Using these mounting cases as support for an extension of coverage under the “ongoing operations” clause seems imminent in Colorado courts.


For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.