No Allocation Of Settlement Responsibility To Non-Defendants Released As Part Of Settlement
July, 2011
When an insured reaches a settlement, the settlement sometimes includes claims for which insurance coverage is provided and those for which it is not. In such a case, a court may be required to allocate the settlement payment as among covered and non-covered claims for purposes of determining the insurer’s payment obligation. A similar type of allocation may have to be made when multiple entities are involved in a settlement, where some entities have insurance coverage and some do not, or, alternatively, where the entities have coverage with different insurers. A recent case in the United States District Court for the Northern District of Illinois involves such an allocation among entities, where the court’s task was complicated by the fact that some of the entities to which releases were given as part of the settlement, had not been named as defendants in the underlying litigation. United States Fidelity and Guaranty Co. v. Shorenstein Realty Services, L.P., No. 07 C 3179, 2011 WL 1814340 (N.D. Ill. May 11, 2011).
Facts
Four of several entities (“Shorenstein entities”) affiliated with SRI Michigan Avenue Venture, LLC (“SRI LLC”), were sued as the result of an accident at the John Hancock Center in 2002. SRI LLC was the owner of the property involved in the accident, and Shorenstein Realty Services, L.P. (“Shorenstein LP”) was manager. The Shorenstein entities had direct primary liability coverage with Hartford in the amount of $1 million, and excess coverage with National Union in the amount of $25 million.
In addition, certain of the Shorenstein entities were additional insureds under a liability policy issued by United States Fidelity and Guaranty Co. (USF&G) to Eckland Consultants, and under a policy issued by American Motorists Insurance (AMICO) to McGinnis Chen & Associates. After the filing of the underlying litigation, the Shorenstein entities and National Union selectively tendered to USF&G and AMICO. AMICO originally agreed to defend under a reservation, but subsequently refused to indemnify. USF&G refused to defend or indemnify.
National Union ultimately paid about $7.6 million to settle the underlying lawsuit. Even though only four Shorenstein entities were named as defendants, eight were listed in the settlement agreement and released by the underlying plaintiffs.
In this subsequent coverage litigation brought by USF&G, the parties filed cross summary judgment motions to decide which Shorenstein entities were covered under the USF&G and AMICO policies and how the settlement amount paid by National Union should be allocated among the insurers. Judge Elaine E. Bucklo granted the motion in part of the Shorenstein entities and National Union, and denied the motions of USF&G and AMICO.
Analysis
Entities Considered for Allocation
Bucklo first addressed the question of which Shorenstein entities were actually at risk in the underlying litigation and whose interests therefore should be considered for purposes of allocating the settlement payment.
Shorenstein and National Union argued that only two of the four named defendants – the owner SRI LLC, and manager Shorenstein LP – were actually at risk of liability and were the only two parties truly released by the settlement agreement. This position was based in part on deposition testimony of a Shorenstein witness that, while the underlying claim was brought against four entities, the underlying plaintiffs’ attorney never suggested that anyone but the owner and manager bore any liability.
Shorenstein and National Union further pointed out that, once the settlement agreement was drafted, the underlying plaintiffs’ attorney stated that he did not care which entities were included in the agreement, and that all eight Shorenstein entities were added to be “as overly-inclusive as possible.”
USF&G countered that, with all eight entities having been listed in the settlement agreement, all eight were potentially liable to the plaintiffs. AMICO argued that the four entities named as defendants were the only ones at risk and that could possibly trigger coverage.
Bucklo turned to Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357 (7th Cir. 1990), for guidance. In that case the Seventh Circuit applied the “larger settlement rule” in dicta, to the effect that whether the inclusion of non-insureds in a settlement affected an allocation among insurers depended on whether their inclusion caused the settlement to be larger than it would have been but for the misfeasance of the non-insureds.
Taking the Harbor Insurance dicta into account, Bucklo concluded that the addition of the four Shorenstein entities that were not named as defendants in the underlying suit, did not increase the amount of the settlement and that they therefore should not be considered in the allocation analysis.
Bucklo further found that all four defendants in the underlying lawsuit were potentially liable and should be considered for allocation purposes. She reached this conclusion based on Home Ins. Co. v. Cincinnati Ins. Co., 821 N.E.2d 269 (Ill. 2004), in which the Court stated that where a case settles prior to trial, the underlying plaintiffs are presumed to have been able to prevail on all their theories of liability.
Identification of Insured Parties
Bucklo next considered which Shorenstein entities were actually insured under the USF&G and AMICO policies. One issue was the fact that the AMICO policy extended coverage to, among others, the “owner” and the “owner’s agent.” Although SRI LLC was the owner of the property in question, there was no indication in the AMICO policy to which of many Shorenstein entities “owner’s agent” referred to. She therefore concluded that, while the property manager, Shorenstein LP, was an insured under the USF&G policy, it was not an insured under the AMICO policy.
The more significant identification issue had to do with the owner, SRI LLC. The owner had been identified in the underlying complaint as “SRI LLP,” not LLC, and the LLP designation also had been used in the settlement agreement. USF&G and AMICO therefore argued that they provided no coverage for the settling “LLP” entity.
Bucklo said that their position would carry more weight if a similarly-named LLP entity actually existed. Since it did not, however, she concluded that no real confusion existed and that both USF&G and AMICO policies extended coverage to SRI LLC which was mis-identified in the settlement documentation as an LLP.
The Targeted Tender
USF&G and AMICO contested the targeted tender in part on the ground that it had been “orchestrated by” National Union and on the further ground that the Shorenstein entities had not “deactivated” their coverage with National Union. Bucklo rejected both arguments. She noted the lack of any authority for the position that an insured must make its decision to target tender independent of any influence by the insurer not targeted. She also said that the fact that Shorenstein kept National Union on “stand by” and ready to step in should the other insurers refuse, would not negate the selective tender.
The Allocation
Finally, with respect to the allocation itself, Bucklo determined that USF&G insured two of the four defendants involved in the settlement, the owner and manager, while AMICO insured just one, the owner. Bucklo divided the $7.6 million settlement by four, deriving a total of about $1.9 million per settling defendant. She then stated that the entire $1.9 million amount allocated to the manager, Shorenstein LP, would be paid by USF&G. The $1.9 million amount allocated to the owner, SRI LLC, would be divided equally between USF&G and AMICO. She thus found that USF&G owed National Union about $2.8 million, while AMICO owed about $959,000.
Learning Points
(1) Settling defendants are presumed liable for purposes of allocating their settlement shares among potentially responsible insurers.
(2) The settlement shares of non-defendants are disregarded for allocation purposes in the absence of evidence that their inclusion in the settlement increased the amount of the settlement.
(3) A targeted tender is not defeated by virtue of its being “orchestrated” by an insurer or by virtue of the fact that the non-targeted insurer is kept on “stand by.”
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