Satterfield and Pontikes Construction, Inc. (S&P), a general construction contractor, sued United States Fire Insurance Company (U.S. Fire), its secondary insurance provider, after U.S. Fire refused to cover damages S&P incurred when a courthouse construction project went awry. U.S. Fire argued that it could not determine whether the funds S&P recovered from subcontractors of the courthouse project went to damages covered under U.S. Fire's policy because S&P failed to allocate those proceeds when settling with the subcontractors. If the subcontractor settlements were used to pay for damages covered under U.S. Fire's policy, then allowing S&P to collect under U.S. Fire's policy would result in double recovery and unjust enrichment. The district court granted summary judgment in favor of U.S. Fire after it determined that S&P failed to meet its burden to show allocation of the settlement proceeds between covered and noncovered damages. We affirm.
S&P was hired as the general contractor for a courthouse building project by Zapata County, Texas. S&P, in turn, hired numerous subcontractors to perform various roles for the construction. The project was large and required several years of work.
S&P purchased two "layers" of insurance to cover potential liabilities that could arise from the project. The first layer comprised commercial general liability insurance policies from American Guarantee and Liability Insurance Company (AGLIC) and Amerisure Mutual Insurance Company (Amerisure).
But S&P's coverage was not all-inclusive. The policy it purchased from U.S. Fire barred coverage for any "property damage" resulting from exposure to fungi, including mold, or bacteria. AGLIC's policy contained similar exclusions. And U.S. Fire's policy did not cover attorney's fees or other legal costs.
The project did not go well. Zapata County eventually terminated S&P and retained new contractors to complete the construction. Zapata County sued S&P, and the parties arbitrated their dispute.
The arbitration panel found that "S&P failed to build the courthouse in a good and workmanlike manner." "S&P also failed to properly supervise its subcontractors." And because of S&P's failures, "the courthouse suffered physical harm and damage."
Determining that the damage S&P caused required significant repairs, the arbitration panel awarded Zapata County $2,800,000 for mold remediation and dome reconstruction,
S&P included its subcontractors in the arbitration, seeking money pursuant to the indemnification clauses in the subcontracts. S&P informed U.S. Fire of its efforts to settle with the subcontractors, and U.S. Fire said in an email that it would not object to any "reasonable settlement." S&P then entered into settlement agreements with fifteen subcontractors and two third parties, collecting $4,492,500 for its efforts. These settlements were complete releases of liability, but the agreements did not allocate the proceeds of the settlements
Of course, the $4,492,500 was not nearly sufficient to cover the $8,032,367.74 arbitration award. S&P was obliged to draw on its insurance policies to make up the $3,571,141.78 shortfall. S&P chose the AGLIC policy (which covered liabilities from 2006-2007) to cover the damages. AGLIC paid $1,985,604.63 to help satisfy the award, which it claimed was an amount in excess of its obligations under the policy. But AGLIC's money in conjunction with the subcontractor settlements-which together totaled $6,478,104.63-failed to cover the arbitration award. S&P turned to U.S. Fire, its excess insurance provider, to cover the remainder. U.S. Fire paid nothing, arguing that the first layer of insurance for covered damages had not been completely exhausted. Amerisure-although it believed U.S. Fire was obligated to pay the shortfall-paid $1,146,405.10 to help satisfy the arbitration award. Despite these payments from AGLIC and Amerisure, S&P was required to spend $439,131.98 to satisfy the balance of the award.
S&P and AGLIC
Both sides moved for summary judgment. S&P's argument was simple: U.S. Fire, as its second layer insurance provider, was required to make up the shortfall after the first layer of insurance was exhausted. Approximately $4,500,000 of the $8,000,000 award that S&P owed to Zapata County was satisfied by the subcontractors. And AGLIC should have paid roughly $1,500,000 of the arbitration award ($1,000,000 for one occurrence plus prejudgment interest, post-judgment interest, and other fees). That left a shortfall of roughly $2,000,000 that U.S. Fire should have paid.
U.S. Fire contended that S&P's argument ignores that not all of the damages awarded by the arbitration panel were covered under its insurance policy-including the mold remediation award ($2,800,000), the attorney's fees award ($1,500,000), the prejudgment interest award ($202,320.53), and the arbitration fees ($29,909.74). Once these sums, along with AGLIC's $1,000,000 first layer of insurance, are removed from the $8,000,000 arbitration award, then no more than $2,500,000 was potentially recoverable from U.S. Fire.
Of course, simply because roughly $2,500,000 of the damages were covered under its policy does not mean that U.S. Fire believed that it was obligated to pay that amount. After determining which damages were potentially covered, U.S. Fire looked to the $4,492,500 subcontractor settlement award and considered whether the proceeds applied to covered or noncovered damages under its policy. The waterproofing subcontractor, whose work probably caused the mold damage, paid $1,750,000 to settle S&P's claims against it. U.S. Fire stipulated that this amount could be allocated to the uninsured mold damages. So $1,750,000 of the $4,492,500 subcontractor settlement award applied to the noncovered damages. U.S. Fire contended that the remaining $2,742,500 of the subcontractor settlement award applied to the covered damages that S&P sought to recover from U.S. Fire. That amount was greater than the $2,531,411.51 of potentially covered damages, and so there was no shortfall for U.S. Fire to pay. Allowing
Before the district court, S&P initially contended that it was entitled to allocate its subcontractor settlement money however it liked. S&P repeatedly emphasized that its subcontractor settlements were not allocated or earmarked for specific building damage. So the settlements could either go to the damages that were covered under U.S. Fire's policy or they could go to the noncovered damages (mold, attorney's fees, etc.). Eventually, S&P changed its position and argued that the subcontractor settlements were allocated between covered and noncovered damages.
The district court granted summary judgment in favor of U.S. Fire, reasoning: "S&P chose not to insure a substantial portion of the risk it carried ... [and now] seeks to leave its insurers on the hook for risks they did not agree to insure. This theory is not only lacking in case support, it would produce an unfair result." The district court relied heavily on a case that the parties did not cite or discuss, RSR Corp. v. International Insurance Co. ,
Although S&P eventually attempted to demonstrate that the record indicated close connections between many of the subcontractor settlements and damages not covered by U.S. Fire's policy in supplemental briefing, the district court found these contentions unpersuasive and untimely. It concluded that S&P had failed to raise a factual dispute capable of frustrating an award of summary judgment to U.S. Fire.
STANDARD OF REVIEW
We review an award of summary judgment de novo, applying the same standard as the district court. Cooper Indus., Ltd. v. Nat'l Union Fire Ins. Co. ,
DISCUSSION
I. The Subcontractor Settlements Are "Other Insurance"
The most fundamental argument S&P makes on appeal is that because the subcontractor settlements were not the product of insurance coverage, U.S. Fire is not entitled to use them to offset amounts covered by its own policy to prevent double recovery. U.S. Fire's policy provides coverage for property damages caused by an occurrence in excess of the
1. [W]ith respect to any "Occurrence" that is covered by "Underlying Insurance" or "Other Insurance," the total of the applicable limits of "Underlying Insurance" or "Other Insurance"; or
2. [W]ith respect to any "Occurrence" that is not covered by "Underlying Insurance" or "Other Insurance," the amount of the Self-Insured Retention stated in Item 4.(f) of the Declarations.
"Underlying Insurance" is essentially the primary layer of insurance (here the AGLIC policy). "Other Insurance" is defined in the policy 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."
S&P characterizes the subcontractor settlements as the products of "contractual risk transfer mechanisms." It defines "contractual risk transfer" as "[t]he use of contractual obligations such as indemnity and exculpatory agreements, waivers of recovery rights, and insurance requirements to pass along to others, but would otherwise be one's own risk of loss."
In RSR Corp. v. International Insurance Co. , this court encountered a similar question.
RSR then sued International Insurance Co.-who had issued successive layers of insurance policies to RSR-seeking payment to cover RSR's approximately $13,000,000 of remaining liability.
On appeal, RSR argued before this court that the district court's award of summary judgment to International was inappropriate because International's insurance policy, which barred recovery when costs had already been recouped under "other insurance," did not apply to the settlement proceeds from the GLC insurers.
The district court here, after reviewing RSR , said S&P's argument that the subcontractor indemnity agreements were not insurance agreements is a "distinction ... without a difference." In both the present action and RSR , "the insured suffered a partially covered loss, received a bucket of undifferentiated money to cover the loss, and then tried to recover on an excess policy, arguing that it did not have to apply the settlement money to the covered loss." Acknowledging that the RSR court stressed that the settlements were with other insurance companies, the district court reasoned that this was "not relevant when, as here, the US Fire policy is clearly an excess policy."
The reasoning of RSR , though helpful, does not track perfectly onto the present dispute. There the question was whether the settlements with the first layer insurance providers technically counted as "other insurance" under the excess insurer's policy.
The plain language of the policy allows us to affirm the district court's summary judgment order. An indemnity agreement falls under the plain language of the "Other Insurance" provision of U.S. Fire's policy-which is very broad-because it is a "mechanism by which an Insured arranges for funding of legal liabilities for which [U.S. Fire's] policy also provides coverage." And, under the reasoning of RSR , settlement proceeds resulting from an indemnity agreement also count as "Other Insurance."
S&P provides no persuasive authority supporting its contention that subcontractor indemnification agreements are, by their nature, meant principally to fill gaps in insurance coverage (and therefore do not fall into the policy language here because the indemnity agreements would cover legal liabilities that U.S. Fire's coverage did not). The most S&P offers in support of this contention is one case from the Florida Supreme Court suggesting that an indemnity clause is a "hedge[ ]" as to risk retained by the insured contractor. Intervest Constr. of Jax, Inc. v. General Fidelity Ins. Co. ,
And S&P has offered no good reason to think that these particular indemnity agreements were meant first and foremost to fill gaps in its excess insurance coverage (i.e., to cover mold damages and legal fees). S&P cites language from the subcontracts stating: "The maintenance of the Insurance referred to in this Subcontract
Reversing the district court's summary judgment in favor of U.S. Fire is not appropriate on this ground.
II. S&P's Burden to Allocate
S&P argues that the district court erred when it placed the burden on S&P to show that the subcontractor settlements were allocated to either covered or noncovered damages under U.S. Fire's policy. In S&P's view, it had the right to allocate the settlement proceeds to the damages not covered by U.S. Fire's policy.
S&P supports its contention that it had the right to allocate however it wished by analogizing to the "actual injury" rule from Texas law. Under this rule, when damage to an insured occurs during the period covered by separate and distinct insurance policies, all of the policies are triggered and the insured may collect from the policy with the highest coverage limit. See Lennar Corp. v. Markel Am. Ins. Co. ,
The district court rejected S&P's proposal to extend the actual injury rule, explaining that the actual injury rule "is not applicable here. The issue here is whether an insured can round up general settlements from its subcontractors, unilaterally decide that they will be allocated to uncovered damages, and then go after the insurers that would cover the damages if the loss was properly allocated to that policy." Instead, the district court observed that "Texas courts generally put the burden on the insured to identify the portion of a liability or loss that was produced by a covered condition." (citing Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co. ,
To justify placing a burden on S&P to show that the subcontractor settlement proceeds were allocated between covered and noncovered damages under U.S. Fire's policy, the district court again turned to RSR . After discussing whether a settlement payment could be other insurance, the RSR court was asked to decide "whether or not the CGL settlements compensated RSR fully for its Harbor Island liabilities." RSR ,
If the CGL settlements only partially covered RSR's liabilities, then International's policy would serve as excess insurance for the uncovered portion.
The RSR court relied upon one Texas Supreme Court case in particular when concluding that Texas law placed the burden on RSR to allocate the settlement proceeds. Acknowledging that Mobil Oil Corp. v. Ellender ,
The issue the Texas Supreme Court had to decide on appeal was how the settlement with the other defendants affected the jury's verdict. Of particular importance was the question of "which side bore the burden of allocating the settlement amounts between actual and punitive damages." RSR ,
The linchpin of that court's reasoning was its concern that a litigant who is not party to the settlement had "almost no ability to prove which part of the settlement amount represented actual damages. Nonsettling parties should not be penalized for events over which they have no control."
The RSR court found Ellender analogous. "International should not be penalized for the fact that no allocations were made. Nor should RSR be rewarded for failing to track each of its liabilities diligently through to the end of its negotiations." RSR ,
The district court here found the RSR court's analysis (and, by extension, the Texas Supreme Court's reasoning in Ellender ) to be analogous and persuasive, so it held that S&P bore the burden to allocate its settlements with its subcontractors between covered and noncovered damages under U.S. Fire's policy. S&P protested that the RSR / Ellender rule should not apply because, unlike in those cases, U.S. Fire had knowledge of the settlements and was regularly informed of the arbitration proceedings. U.S. Fire even informed S&P that it would not object to any "reasonable
On appeal, S&P continues to press its argument that the RSR / Ellender rule does not apply, especially because U.S. Fire consented to the settlement. U.S. Fire responds that by consenting to the settlement, it did not forfeit "rights to insist upon a proper allocation of settlement proceeds." And U.S. Fire never agreed that the settlement funds could be applied solely to uncovered losses under the policy.
The reasoning of the district court is persuasive. And we found no Texas case that casts doubt on either Ellender or the district court's conclusion that Texas law places the burden of proof on S&P to show that it properly allocated the settlement proceeds between covered and noncovered damages. On the contrary, Texas Supreme Court cases have reaffirmed this principle. See, e.g. , Utts v. Short ,
S&P bears the burden to show that the subcontractor settlement proceeds were properly allocated to either covered or noncovered damages. If S&P cannot meet that burden, under the reasoning of RSR and Ellender , then we must assume that all of the settlement proceeds went first to satisfy the covered damages under U.S. Fire's policy. Although U.S. Fire agreed that S&P could reasonably settle its claims with the subcontractors, that does not mean U.S. Fire granted S&P permission to allocate all of those settlement proceeds to noncovered damages. And, as the district court noted, U.S. Fire did not have power to structure the settlements to attribute the proceeds to one kind of damages or another. The district court did not err by placing the burden on S&P.
III. Allocation of the Settlement Proceeds
We need not consider whether S&P raised a fact issue regarding whether it allocated the settlement proceeds between covered and noncovered damages. Although S&P attempted to raise that issue before the district court in a supplemental brief, the district court found that argument untimely and unpersuasive on the merits. ("Summary judgment is not an iterative process, with the parties presenting new arguments and evidence in piecemeal fashion, after learning that their initial strategy did not pan out.").
Whether the district court was correct is not a question that we need to decide because S&P only raised the issue of whether it adequately allocated in its reply brief. ("While not the type of detailed allocation to which U.S. Fire believed it was entitled, at all times, S&P made it clear that the Subcontractor Settlements were made up of the excluded
The district court did not err granting summary judgment in favor of U.S. Fire or denying summary judgment to S&P and Amerisure.
CONCLUSION
We AFFIRM the district court's order awarding summary judgment to U.S. Fire and denying S&P and Amerisure's motion for summary judgment.
Notes
S&P also purchased insurance from Zurich American Insurance Company.
Under Texas law these costs are not damages. See In re Nalle Plastics Family Ltd. P'ship ,
Although the arbitration award divides this amount between mold remediation and reconstruction of the courthouse's dome, both parties attribute the award entirely to damage caused by mold not covered by U.S. Fire's policy. The district court noted that the arbitrators did not allocate the award between these damages.
By the time S&P paid the award, the post judgment interest had increased it to $8,063,641.78.
AGLIC originally joined this appeal, but has since dismissed it.
The parties filed many other claims against each other that are not relevant to this appeal.
Awarding summary judgment to U.S. Fire led the district court to conclude many of the other issues were moot, including: S&P's claim for bad-faith damages under the Texas Insurance Code and common law, whether the underlying arbitration award stemmed from one occurrence or from multiple occurrences, and U.S. Fire's argument that the "Your Product" exclusion in its policy bars coverage.
To support this proposition, S&P cites IRMI.com.
The district court further explained that its reasoning is consistent with other portions of RSR and Texas case law.