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Satterfield and Pontikes Construction, Inc. v. United States Fire Insurance Co.

United States Court of Appeals, Fifth Circuit

August 2, 2018


          Appeal from the United States District Court for the Southern District of Texas

          Before CLEMENT, HIGGINSON, and HO, Circuit Judges.


         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.

         Facts and Proceedings

         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).[1]AGLIC's policy spanned from 2006-2007, and Amerisure's policies spanned from 2007-2011. AGLIC's policy had a per-occurrence limit of $1, 000, 000 and an aggregate limit of $2, 000, 000. S&P also purchased a second layer of insurance from U.S. Fire that would kick in only when the first layer of insurance was depleted. This policy had a $25, 000, 000 limit. S&P also required its subcontractors to purchase insurance and sign indemnity agreements to cover damage they caused to the project.

         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.[2]

         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, [3] $855, 000 for replacement of the courthouse roof, and $2, 417, 000 for fireproofing replacement, terrazzo/window repairs, and cleaning. The panel further awarded $430, 458 in prejudgment interest to Zapata County, $1, 500, 000 for reasonable attorney's fees, and some of the arbitration costs. In total, the final award was $8, 032, 367.74.[4]

         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 to the damages/liabilities they covered.

         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[5] sued U.S. Fire, claiming that the excess insurer breached its policy.[6] Amerisure intervened, seeking equitable subrogation for the amount that it contributed.

         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 S&P to recover from both the subcontractors and U.S. Fire for the same damages would result in double recovery and unjust enrichment.

         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., 612 F.3d 851 (5th Cir. 2010), for the proposition that "S&P cannot unilaterally allocate all of its settlement proceeds to uncovered losses in order to manufacture a covered loss." Drawing on principles from the case law, the district court placed a burden on S&P to demonstrate that the settlement proceeds could be allocated to the noncovered portions of U.S. Fire's policy. S&P was unable to show that any settlement proceeds (other than the $1, 750, 000 from the waterproofing subcontractor) could be allocated to the noncovered damages.

         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 ...

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