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.