Satterfield & Pontikes Constr., Inc. v. United States Fire Ins. Co., 2018 U.S. App. LEXIS 21488 (5th Cir. Aug. 2, 2018)

This case arises out of an excess insurance provider’s refusal to cover damages incurred by the insured general contractor after it was terminated from a construction project.  Satterfield & Pontikes Construction, Inc. (“S&P”) served as general contractor for the Zapata County courthouse project and purchased two layers of insurance to cover potential liabilities: commercial general liability insurance and excess insurance.  Excess insurance, provided by United States Fire Insurance Company (“Excess Carrier”), would apply when the first layer was exhausted.  S&P also required its subcontractors to purchase insurance and execute indemnity agreements to cover damages they caused to the project.
During the project, Zapata County terminated S&P and filed suit to recover the damages it incurred to complete and correct S&P’s work.  At arbitration, Zapata County was awarded over $8 million in damages, fees, and costs.  S&P covered over $4 million of the award through settlement agreements it executed with its subcontractors—which did not specifically allocate the proceeds to the damages or liabilities they covered—and nearly $3 million from its commercial general liability insurance providers.  S&P sought to obtain coverage for the balance of the award from its Excess Carrier, but the Excess Carrier refused to pay any amount, arguing that the first layer of insurance had not been completely exhausted.  S&P filed suit for breach of the policy, arguing that its Excess Carrier was obligated to make up the shortfall of the arbitration award.  The Excess Carrier argued that not all of the damages awarded at arbitration were covered under its policy (such as mold, attorney’s fees, and prejudgment interest) and that those that may have been covered were likely satisfied by the subcontractor settlements.
The district court granted the Excess Carrier summary judgment, holding that S&P could not unilaterally allocate all of its settlement proceeds to uncovered losses in order to manufacture a covered loss.  The district court placed upon S&P the burden of demonstrating that the settlement proceeds could be properly allocated to the non-covered portions of the excess policy and held that S&P had failed to meet this burden.

The Fifth Circuit affirmed, holding that (i) the subcontractor settlement proceeds constituted “other insurance”  which could offset the amounts covered by the excess insurance policy, and (ii) that S&P bore—and failed to satisfy—the burden of properly allocating the settlement proceeds to covered and non-covered losses.

The Court first held that the plain language of the excess policy allowed it to count the subcontractor agreements as “Other Insurance.”  The Court explained that “Underlying Insurance” as used in the excess policy referred to S&P’s commercial general liability insurance and that the excess policy defined “Other Insurance” as “any type of … mechanism by which an Insured arranges for funding of legal liability for which this policy also provides coverage.”  Based upon this definition, the Court held that the subcontractor indemnity agreements and settlement proceeds arising thereunder constituted “Other Insurance” under the excess insurance policy.

The Court also affirmed the district court’s decision regarding allocation, rejecting S&P’s argument that the court erred by placing the burden of allocation upon S&P.  The district court had explained that under Texas law, the insured generally bears the burden of identifying the portion of a loss that was produced by a covered condition.  After surveying Texas Supreme Court precedent, the Fifth Circuit agreed: a settling plaintiff has the burden of showing it properly allocated the settlement proceeds between covered and non-covered damages.  The Court therefore held that S&P bore the burden of showing that the subcontractor settlement proceeds were properly allocated to either covered or non-covered damages and because S&P could not meet this burden, the Court could assume that all of the subcontractor settlement proceeds went first to satisfying the damages covered under the excess insurance policy.

Based on these holdings, the Fifth Circuit affirmed the district court’s grant of summary judgment to the Excess Carrier.

To view the full text of the court’s decision, courtesy of Lexis®, click here.