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.