Exhaustion Occurs Through A Settlement Agreement
January 19, 2011
The 7th U.S. Circuit Court of Appeals, applying Indiana law, recently held that, for purposes of triggering excess coverage, underlying policies could be exhausted through a settlement agreement between the insureds and underlying carriers whereby the underlying carriers agreed to pay 75 percent of their limits and the insureds agreed to pay the remainder. Trinity Homes LLC v. Ohio Casualty Insurance Co., 2010 WL 5174967 (7th Cir. Dec. 22, 2010).
The insureds, referred to in the court's opinion as Beazer, were represented by King & Spalding of Atlanta. Norris, Choplin & Schroeder of Indianapolis and Gardner & Rans of South Bend, Ind. represented the insurers.
Underlying facts
Beazer was in the home-building business and it warranted that its homes would be free of defects caused by shoddy workmanship. It used subcontractors for the actual home construction. Unfortunately, due to faulty workmanship, a number of homes were plagued with structural problems. The defects allowed water to enter the homes, resulting in physical damage to the residences and health problems for the occupants.
Beginning in 2002, some 13 lawsuits were brought against Beazer, including class actions. Beazer tendered these to its various carriers. Each policy covered Beazer's liability resulting from "property damage" caused by an "occurrence."
All of the carriers denied coverage and Beazer brought suit claiming breach of the insurance contracts. During the pendency of the litigation most of the primary CGL carriers settled for at least 75 percent of the relevant policy limit. Each settlement agreement provided that Beazer would be responsible for the remainder of the limit.
"Occurrence" issue
One CGL carrier, however, Ohio Casualty, refused to settle claiming that damage to a home arising from faulty subcontractor work was not "property damage" caused by an "occurrence" within the meaning of the policy. Following cross summary judgment motions, the district court agreed.
Specifically, the district court found that, under Indiana law, "property damage" did not include damage done to the home itself. It further held that, even if there were "property damage" there was no "occurrence," defined as an "accident," because the ordinary consequences of faulty workmanship did not constitute an "accident" within coverage.
Exhaustion issue
In addition, Beazer tendered to its umbrella carrier, Cincinnati Insurance. The Cincinnati policy provided coverage for damages in excess of the "underlying insurance," which included the policies listed in a schedule to the policy and the insurance available to the insured under all other insurance policies applicable to the "occurrence." It further provided that, once the limits of the "underlying insurance" were exhausted by the payment of claims, the Cincinnati policy would continue in force as "underlying insurance."
With respect to the Cincinnati umbrella policy, the district court held that all relevant CGL policies must be unavailable via exhaustion or a denial of coverage before Cincinnati's policy is triggered. It further held that the settling insurers' CGL policies were not exhausted as the full limits were not paid out by the CGL insurers. It also found that the evidence submitted by Beazer via affidavit was not sufficient to show that two CGL policies were unavailable.
The district court thus granted summary judgment in favor of the insurers and against Beazer; Beazer brought this appeal.
Disposition re "occurrence"
In an opinion by Judge Michael S. Kanne, the 7th Circuit reversed. He first addressed the district court's decision with respect to whether an "occurrence" and "property damage" were present for purposes of the Ohio Casualty policy. He noted that, following the district court's grant of summary judgment for Ohio Casualty, the Indiana Supreme Court weighed in on the issue in Sheehan Construction Co. v. Continental Casualty Co., 935 N.E.2d 160 (Ind. 2010).
In Sheehan, a homebuilder was sued for damages caused by faulty subcontractor work and sought coverage under a CGL policy similar to Ohio Casualty's. The court there clarified that a standard CGL policy does cover damage to a home's structure resulting from shoddy subcontractor work unless the subcontractor work was intentionally faulty.
Based on Sheehan, Kanne found that the summary judgment in favor for Ohio Casualty had to be reversed and the case remanded with instructions for the district court to determine the applicability of any of the policy's exclusions.
Disposition re exhaustion
Kanne then turned to the exhaustion issue involving the Cincinnati Insurance policy. He agreed generally with the district court's holding that all of Beazer's CGL policies had to be unavailable before the umbrella policy was triggered, but disagreed that the unavailability requirement meant that the CGL limits had to be exhausted by insurer payout alone.
Specifically, according to Kanne, the Cincinnati policy did not clearly provide that the full limit must be paid out by the CGL insurer alone, but rather was susceptible to the meaning that exhaustion could occur where the primary insurer paid a large percentage of the total limit and the insured took responsibility for the remainder.
Kanne contrasted the language in the Cincinnati policy with that of policies in other cases, relied on by Cincinnati, which used different policy language and did require payment of the full CGL policy limit by the insurer. He also cited to still other cases, such as Koppers Co. v. Aetna Casualty & Surety Co., 98 F.3d 1440 (3d Cir. 1996), interpreting language similar to Cincinnati's and holding that the kind of settlement reached by Beazer "functionally exhausted" the underlying policies.
Kanne thus characterized the Cincinnati policy as ambiguous and construed the exhaustion requirement in favor of Beazer. He also said that Cincinnati's interpretation could have a chilling effect on settlements reached between an insured and CGL carriers and that, so long as Cincinnati was not required to drop down and pay the remainder of the CGL limits after settlement, Kanne's construction of the policy would not have a punitive effect on Cincinnati.
Finally, with respect to whether Beazer put forth sufficient evidence to establish the unavailability of two CGL policies, Kanne found that the affidavit of its vice president attesting to the circumstances under which the two policies were unavailable was not overly self-serving or conclusory, but provided sufficient detail going to the unavailability of the two policies.
The court, therefore, reversed the district court judgment and remanded.
Key points per Kanne
(a) Faulty work performed by an insured's subcontractor may constitute an "occurrence" and "property damage" in Indiana.
(b) Depending on policy language, exhaustion of an underlying policy, triggering excess coverage, may occur even when an insured pays a portion of the underlying limit.
(c) The unavailability of primary coverage, for purposes of triggering excess, may be established by the insured's own affidavit.
