CHUTES, OR LADDERS? ~ ~ ~ OTHER INSURANCE CLAUSES AND ALTERNATIVE FORMS OF SETTLEMENTS

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1 CHUTES, OR LADDERS? ~ ~ ~ OTHER INSURANCE CLAUSES AND ALTERNATIVE FORMS OF SETTLEMENTS Copyright 2017 Robert P. Thavis STINSON LEONARD STREET LLP 150 South Fifth Street, Suite 2300 Minneapolis, Minnesota All Rights Reserved

2 DISCLAIMER These materials do not attempt to cover all potentially relevant aspects of the topics addressed, or necessarily set forth the most recent decisions on any particular topic. Rather, they are intended to provide attendees with a place to start in identifying and researching particular issues. The views set forth herein are not those of any panel member, firm or client. I. OTHER INSURANCE CLAUSES The purpose of other insurance clauses is to establish priority of coverages when more than one policy owes a duty. Some possible sources of other insurance include: (1) claims that implicate coverage under policies purchased by one insured covering multiple sequential policy period (i.e., CGL coverage for long-tail torts); (2) claims that implicate policies purchased by one insured providing overlapping coverage for the same policy period (i.e., when CGL and E&O coverage both triggered; (3) policies purchased by one insured for different policy periods and providing overlapping coverage (i.e., occurrence coverage covering year of occurrence and claims-made coverage covering year in which claim is brought; and (4) policies purchased by third parties covering an insured (i.e., as an additional insured). A. Named Insured s Policies 1. Other Insurance clauses establish priority by different methods, with three main categories: pro rata claims, excess clauses and escape clauses. Pro rata clauses acknowledge primary coverage, and accept joint responsibility when multiple policies cover. This insurance is primary... our obligations are not affected unless any other insurance is also primary. Then, we will share with all that other insurance. 2

3 2. Excess clauses accept primary coverage only when no other policies cover, and assert excess cover when any other policy also owes coverage. Examples include: (a) (b) (c) (d) This insurance is excess over any other insurance. If separate insurance has been purchased and is in effect at the time of the loss... the separate insurance will be considered primary insurance. The insurance provided by this policy will apply in excess of other collectible insurance. The insurance afforded by this policy shall be in excess of and shall not contribute with such other insurance. (e) The insurance afforded by this policy shall be excess insurance... whether such other insurance is stated to be primary, contributory, excess or contingent. 3. Escape clauses accept primary coverage only when no other policies cover, and extinguish all coverage when any other policy also owes coverage. Operative language typically provides that such insurance shall not apply if there is other coverage applicable... or if any other person... insured hereunder is covered by other valid insurance against a claim otherwise covered by this Policy, no insurance under this Policy shall be applicable to such claim. However, even those clauses can be given limited readings. See, e.g., Contrans, Inc. v. Ryder Truck Rental, Inc., 836 F.2d 163 (3d Cir. 1988). 4. There are multiple hybrid other insurance clauses, sometimes specifically designed to circumvent state statutes or case law. 3

4 5. State laws vary in interpreting other insurance clauses. Some states, such as Wisconsin, have legislated respecting other insurance clauses. Wisconsin statutes provide that other insurance clauses may be enforced if consistent, but if inconsistent, then each insurer is jointly and severally liable to policyholder, and insurers affix final responsibility inter se in a later contribution action. Wis. Stat Most states, however, rely on case law to determine whether and how to enforce other insurance clauses. Some states enforce clauses as written if consistent, but assign pro rata liability to policies with inconsistent clauses. Some states enforce clauses as written if consistent, but invalidate in favor of a judicial determination of closeness to the risk if inconsistent. 6. State law also differs widely on when clauses are deemed inconsistent. In an excess vs. escape match-up, some states decide the two clauses are not inconsistent, and that an escape clause trumps an excess clause. Other states decide the two clauses are not inconsistent, but that an excess clause trumps an escape clause. A third group of states decides that the two clauses are inconsistent, and either assigns pro rata responsibility, or analyzes proximity to risk. 7. In most states two competing excess clauses are deemed repugnant to one another, as are two competing escape clauses. In a few cases around the country, various versions of excess clauses which proclaim that they will remain excess over even other excess coverage ( i.e., whether such other insurance is stated to be primary, contributory, excess or contingent ) have sometimes, albeit inconsistently, been allowed to succeed. See, e.g., Grant v. North River Ins. Co., 453 F. Supp (N.D. Ind. 1978) (Ind. law); United Services Auto. Ass n v. Empire Fire & Marine Ins. Co., 134 Ariz. 64, 653 P.2d 712 (Ct. App. Div. 1, 1982); Aetna Cas. & Sur. Co. v. Beane, 385 So.2d 1087 (Fla. Dist. Ct. App. 4th Dist. 1980); Prudential Property & Cas. Ins. Co. v. New Hampshire Ins. Co., 164 N.J. Super. 184, 395 A.2d 923 (Law Div. 1978); American Transit Ins. Co. v. Continental Cas. Ins. 4

5 Co., 215 A.D.2d 342, 653 (2nd Dept. 1995); RLI Ins. Co. v. Hartford Accident & Indem. Co., 980 F.2d 120 (2nd Cir. 1992); USF&G Co. v. Hanover Ins. Co., 417 Mass. 651, 632 N.E.2d 402 (1994). Other courts simply recognize no distinction between two such competing excess clauses. Still, other courts have expressly found that such competing clauses are equivalent and repugnant, see, e.g., Macari v. Nationwide Mut. Ins. Co., 745 N.Y.S.2d 191 (App. Div. 2d Dep t 2002). 8. Even statutory intervention doesn t prevent a dispute over when clauses are inconsistent. Wisconsin falls within those jurisdictions enforcing a super excess over an excess clause. However, and while widely criticized, at least Wisconsin s battle of the draftsmen rulings affect only insurers, and not policyholders, given statutory protections rendering insurers jointly and severally liable to the policyholder, and leaving insurers to conduct the battle of the draftsmen. See Oelhafen v. Tower Ins. Co., 171 Wis.2d 532, 492 N.W.2d 321 (Wis. Ct. App. 1992); Schoenecker v. Haines, 88 Wis.2d 665, 277 N.W.2d 782 (Wis. 1979); Wis In most states, a pro rata vs. excess or pro rata vs. escape match-up will be found consistent. However, Minnesota and a few other states find virtually every other insurance provision inconsistent with, or repugnant to, any other even a combination of a pro rata clause and an excess clause. American Family Ins. Co. v. National Cas. Co., 515 N.W.2d 741 (Minn. Ct. App. 1994); CPT Corp. v. St. Paul Fire & Marine Ins. Co., 515 N.W.2d 747 (Minn. Ct. App. 1994). Minnesota, as an example, then requires the Court to determine which policy s core coverage is closer to the events giving rise to the claim, by considering [t]he primary policy risks upon which each policy s premiums were based and as determined by the primary function of each policy. American Family, 515 N.W.2d at 745. That analysis, in turn, rests on three inquiries: (i) which policy specifically described the accident-causing instrumentality (i.e., auto insurance is closest to an auto-crash-related loss); (ii) which premium is reflective of 5

6 the greater contemplated exposure (which can cut against the goal of identifying the policy with coverage closest to the risk a larger premium could instead justify a more expansive reading on a costly policy, and justify making that policy first-in-line even if its coverage is peripheral); and (iii) which policy contemplate[s] the risk and use of the accident-causing instrumentality with the greater specificity (i.e., a mover s policy and a general property policy both contemplate damage to moving property, but the mover s policy is arguably more specific than the general auto policy). Id.; Auto Owners Ins. Co. v. North Star Mut. Ins. Co., 281 N.W.2d 700 (Minn. 1979). However, even this system can still result in pro-rata allocation. See North Star Mut. Ins. Co. v. Midwest Family Mut. Ins. Co., 634 N.W.2d 216 (Minn. Ct. App. 2001), rev. denied (Dec. 19, 2001). B. Other Insurance and the Additional Insured 1. If an additional insured is covered under its own policy, and another s policy as an additional insured, or is covered as an additional insured under more than one policy, whose coverage triggers first? (a) Can coverage under the named insured s policy be primary as to the named insured, but excess as to additional insureds? Should the status of coverage as primary or excess depend on whether the contract specifies that the coverage provided shall be primary (especially if the policy says it only provides that scope of coverage which is required by the underlying contract)? Will that extend the battle of the draftsmen from insurers to the policyholders contracting with one another? 6

7 (b) (c) (d) Some insurers subjected to claims by additional insureds routinely argue either that the competition between the other insurance clauses in its policy and the additional insured s own policy govern the priority of those coverages. Other insurers argue that the priority of additional insured coverage is determined by whether the underlying indemnity contract expressly requires the additional insured coverage to be primary (under the theory that the coverage extends only as far as is required by the underlying contract). Predictably, a third set of insurers argue that the additional insured coverage is always primary. The answer depends in large measure on the method used to interpret other insurance clauses. Even within those subdivisions, however, uncertainty abounds. Courts generally seem to agree that the intent is for the additional insured coverage to be primary. However, decisions as to priority based on the policy language, or the language of the contract promising indemnity, have gone both ways, especially in states which attempt to reach a decision on priority based on the particulars of the other insurance clauses at issue, rather than on the closeness of each policy to the risk. Connecticut and Missouri decisions have found that the additional insured coverage is not necessarily primary, while Louisiana and California decisions have gone the other way. Both Illinois and New York have decisions on both sides of the issue. In an attempt to get away from the hyper-technical battles of the draftsmen, one New York decision has recognized (and made dispositive) the fact that making additional insured coverage excess would defeat the purpose of obtaining additional insured status, rejecting earlier contrary authority. See Pecker Iron Works of New York, Inc. v. Travelers Ins. Co., 99 N.Y.2d 391, 786 N.E.2d 863, 756 N.Y.S.2d 822 (Ct. App. N.Y. 2003). 7

8 (e) (f) Other courts have identified other approaches, in an attempt to avoid an unintended result. Both the Eighth Circuit, applying Arkansas law, and a Florida court, have identified a different way around the issue of competing other insurance clauses, by noting that the contractual liability coverage is independent of a policy s additional insured coverage, and provides an independent, and indisputably primary, source of coverage. Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002) (Ark. law); J Walters Contr., Inc. v. Gilman Paper Co., 620 So.2d 219 (Fla. App. 1 Dist. 1993). Although sharply criticized, and arguably since overruled, other decisions have recognized that the additional insured may be able to control whether its additional insured coverage is primary by the simple expedient of not tendering defense or indemnity under its own policy. See, e.g., Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App. 3d 70, 599 N.E.2d 1311, 175 Ill. Dec. 297 (1992); Hartford Acc. & Indem. Co. v. Gulf Ins. Co., 776 F.2d 1380 (7th Cir. 1985). This approach might also work, even where tender has been made, in cases where the additional insured s own negligence is alleged, and that negligence would be excluded from coverage under its own policy, leaving the additional insured coverage standing alone, at least as to that risk. And, of course, a more far-sighted additional insured can also alter its own policy before any loss to ensure that it will win the battle of the draftsmen. Given these machinations, a rule like Minnesota s based on who is closest to the risk begins to make more sense (at least if it concludes, as it should, that the policy closest to the risk is the additional insured coverage). However, Wisconsin s approach may make the most sense of all; let the policyholder collect from any insurer it chooses, and leave the battles over priority to the insurers. 8

9 II. SETTLEMENTS A. Pierringer Settlements 1 1. In Pierringer v. Hoger, 21 Wis.2d 183, 124 N.W.2d 106 (1963), the Wisconsin Supreme Court approved a form of settlement in which the plaintiff accepts a partial payment from one defendant, and releases that defendant from all future liability. In doing so, the plaintiff does not release co-defendants, but does promise to defend and indemnify the settling defendant from further liability, including from claims brought by the other defendants, and/or from liability that might be assigned to the settling defendant at trial. In practice, the plaintiff typically ends up reducing the amount of any judgment against other defendants by the amount of liability assigned to the settling defendant. 2. Pierringer settlements are commonly enough accepted that it is easier to note where courts have determined they may not be used. While not exhaustive, a quick check reveals that the Oregon Supreme Court held that a trial cannot determine the liability of parties not participating in the trial, Mills v. Brown, 303 Or. 223, 735 P.2d 603 (Or. 1987), and that the Supreme Court of Maine ruled Pierringer settlements unavailable if non-settling defendants objected. Petit v. Key BancShares of Maine, Inc., 614 A.2d 946 (Me. 1992). However, the court in In re Diet Drugs, 2000 WL (E.D. Pa. 2000), noted that the Petit decision was effectively overturned by the Maine legislature. Id. at 65, n. 24. See also 20 Wm. Mitchell L. Rev. 1, Peter B. Knapp, Keeping the Pierringer Promise: Fair Settlements and Fair Trials (1994). 3. A key component of the structure of a Pierringer settlement is that the plaintiff releases the settling defendant from all liability. That release, in turn, affects the status of third-party claims. Since the settling defendant 1 As noted, each of the forms of settlement addressed herein is referred to by various names, typically based on the name of the leading case addressing that form of settlement in that jurisdiction. 9

10 has been released, and indemnified, it cannot be held liable for more than its settlement amount. As a result, any third-party claims it may have against others, at least for more than its settlement payment, may be extinguished as well, although much of the case law in this area is badly flawed. B. Loy-Teigen Settlements 1. A Loy-Teigen settlement is an alternative intended to provide a means to eliminate some of the problem just noted with the Pierringer settlement. The key distinction between a Pierringer settlement and a Loy-Teigen settlement is that in a Loy-Teigen settlement the settling claimant does not release the settling defendant, but provides a covenant not to sue. In jurisdictions that recognize Loy-Teigen settlements, that distinction serves to preserve claims against higher-up insurers. Loy v. Bunderson, 107 Wis.2d 400, 320 N.W.2d 175 (Wis. 1982); Teigen v. Jelco of Wisconsin, Inc., 124 Wis.2d 1, 367 N.W.2d 806 (Wis. 1985). See, e.g., Balk v. Farmers Ins. Exch., 138 Wis. 2d 339, 405 N.W.2d 792 (Wis. Ct. App. 1987) (a Loy/Teigen settlement must credit against a non-settling insurer s liability and the sum actually paid by the settling insurer, and not the limits of the settling insurer s policy); Brandner v. Allstate Ins. Co., 181 Wis. 2d 1058, 512 N.W.2d 753, 761 (Wis. 1994). ( unlike a Pierringer release, a covenant not to sue preserves the plaintiff s entire cause of action against the nonsettling joint tortfeaser.... ) C. The Miller-Shugart Settlement 1. In a Miller-Shugart settlement a defendant in an underlying action confesses judgment to a plaintiff in a particular amount, and in exchange the plaintiff agrees to collect all, or some specified portion, of that judgment solely from insurance that may be available to the defendant, and not from the defendant himself. The plaintiff thereby steps into the shoes of the defendant in pursuing insurance coverage for the judgment in essence, trading the 10

11 underlying lawsuit for a coverage lawsuit. Miller v. Shugart, 316 N.W.2d 729, (Minn. 1982). 2. The court in Miller v. Shugart suggested that at least three conditions needed to have been met before a Miller-Shugart settlement could be enforced against an insurer, even if that insurer is found to owe coverage. (a) First, the insurer must have disclaimed at least indemnity, and arguably all, coverage. (i) (ii) (iii) In Miller v. Shugart, the insurer had actually commenced a declaratory judgment action, seeking a determination of no obligation to defend or indemnify, when the plaintiff and defendant in the other action agreed to a Miller-Shugart settlement. It may also be possible to use a Miller-Shugart settlement after an insurer has refused a policyholder s demand to pay a judgment within policy limits (or to contribute policy limits toward a payment in excess of policy limits). However, the option to negotiate a Miller-Shugart settlement may not be available if the insurer has only disclaimed indemnity coverage for a portion of the policyholder s potential liability. Rather, a Miller-Shugart settlement in that circumstance has been found to breach the policyholder s covenants to the insurer, which will void coverage if the breach is held to be both material and prejudicial to the insurer. Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323 (Minn. 1993). It may not be possible to target just one of multiple insurers in a Miller-Shugart settlement. In Koehnen v. Herald Fire Ins. Co., 89 F.3d 525 (8th Cir. 1996), a Miller- 11

12 Shugart settlement was deemed collusive because the insured was defended by one of two carriers, and the settlement provided that enforcement of the stipulated judgment could only be had against the second, nondefending carrier. (iv) (v) Other jurisdictions have crafted their own limitations. For example, California and Texas permit such agreements when the insurer has refused to defend, but not when a defense is being provided under reservation of rights. See, Sanchez v. Truck Ins. Exch., 21 Cal. App. 4th 1778 (Cal. App. 1994); Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th 782 (Cal. App. 1989); Whatly v. Dallas, 758 S.W.2d 301 (Tex. Ct. App. 1988); State Farm Cas. Co. v. Gandy, 925 S.W.2d 696, 39 Tex. Sup. Ct. J. 965 (1996). Other states have reached a similar result by refusing to extinguish the applicability of a policy s voluntary payments clause when a defense is being provided. See, e.g., Rogers v. Missouri Ins. Guar. Ass n, 841 F.2d 858 (8th Cir. 1988) (Missouri law); United Nat l Ins. Co. v. Jacobs, 754 F. Supp. 865 (M.D. Fla. 1990); Coil Anodizers, Inc. v. Wolverine Ins. Co., 327 N.W.2d 416 (Mich. App. 1982). Other states, such as Massachusetts and Ohio, have approved Miller-Shugart settlements when the insurer has refused to defend, but have not yet addressed whether such settlements are available if a defense is being provided. See, e.g., Blais v. Quincy Mut. Fire Ins. Co., 361 Mass. 68 (1972); Sanderson v. Ohio Edison Co., 69 Ohio St. 3d 582, 635 N.E.2d 19 (1994). However, courts in Illinois, Washington and Arizona have approved both varieties. See, Guillen v. Potomac Ins. Co., 203 Ill. 2d 141, 785 N.E.2d 1 (2003); In 12

13 re Ha 2003, Inc. v. Kelley, 310 B.R. 710 (N.D. Ill. 2004); Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wash. 2d 751, 58 P.3d 276 (2000); Chausee v. Maryland Cas. Co., 60 Wash. App. 504, 803 P.2d 1339 (Wash. Ct. App. 1991); Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969); United Servs. Auto Ass n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). (b) (c) The second condition that the Miller-Shugart court found significant was that the insurer was given notice that a Miller-Shugart settlement was being considered and negotiated. See also Morris. In other jurisdictions, notice will defeat a claim of prejudice to the insurer from a Miller-Shugart settlement negotiated notwithstanding the insurer s agreement to defend under reservation. See Nat l Am. Ins. Co. v. Certain Underwriters of Lloyd s of London, 93 F.3d 529 (9th Cir. 1996) (Cal. law); Hyatt Corp. v. Occidental First Cas. Co., 801 S.W.2d 382 (Mo. Ct. App. 1990). Third, virtually every court requires that the stipulated judgment amount, if challenged, must be found both non-collusive and reasonable, which has typically been described as a number within the range of potential judgment amounts that could be awarded at a trial. See, e.g., Damron, Morris, Sanchez, Blais, Sanderson, Guillen, Kelley, Vanport Homes, Chausee, Whatley, Gandy, Rogers, Jacobs, Coil Anodizers. 13

14 3. In some jurisdictions, including Arizona, it would appear that the existence of a judgment (stipulated or otherwise), combined with the possibility that the judgment could have risen out of a finding of derivative liability, may be sufficient predicate. Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 98 P.3d 572 (Ariz. App. Div ). Some have argued that Wood will not bar insurers from litigating coverage defenses based on exclusions, but will bar insurers from claiming that the insurance clause was never triggered. Either way, Wood constitutes an expansion of Minnesota s initial Miller-Shugart rule. See Buysse v. Baumann-Furrie & Co. v. St. Paul Fire & Marine Ins. Co., 448 N.W.2d 865, 872 (Minn. 1989). 4. In other jurisdictions, the issue may be litigated, but the burden will be on the insurer to establish that the stipulated judgment was larger than the liability (or potential liability) of the third-party subcontractors and suppliers. See, e.g., Valley Bancorporation v. Auto Owners Ins. Co., 212 Wis. 2d 609, 569 N.W.2d 345 (Wis. Ct. App. 1997). This result would also be in keeping with the tenets of the larger settlement rule. 2 D. Be Aware That in Some Jurisdictions the Insurer May Seek a Meadowbrook Settlement 1. The Minnesota Supreme Court decided in 1997 that an insurer may settle covered claims, and then withdraw defense, without policyholder consent. Meadowbrook v. Tower Ins. Co, 559 N.W.2d 411 (Minn. 1997). 2. Under Meadowbrook an insurer can settle only covered expenses to the policyholder, leaving uncovered exposure unsettled, and still pull its defense of the underlying action. 2 The larger settlement rule, developed in the 1995 decisions of Caterpillar, Inc. v. Great American Ins. Co., 62 F.3d 955 (7th Cir. 1995), and Nordstrom, Inc. v. Chubb & Sons, Inc., 54 F.3d 1424 (9th Cir. 1995), arose in the Directors and Officers Coverage context, but courts have begun to apply the same analysis and methodology more broadly. See infra. 14

15 3. Defense counsel cannot facilitate such a settlement, since that would violate counsel s duty to the insured defendant. 4. [C]ounsel who undertakes to represent a policyholder owes to the policyholder the same underwriting and single allegiance that counsel would owe to the client if retained and paid by the insured rather than the insurer. [citations omitted] Buysse v. Baumann-Furne & Co., 448 N.W.2d 865, 872 n.3 (Minn. 1989). E. Analysis Which Settlement to Choose? 1. Miller Shugart Settlements (a) (b) (c) From the perspective of the plaintiff, the benefits of a Miller- Shugart settlement include the ability to obtain a judgment quickly, and without ever needing to establish underlying liability, or the particulars of the plaintiff s damage claim. However, the plaintiff will still need to enforce the judgment against the insurer, and any error along the way can imperil that determination. From the perspective of the policyholder defendant, it can settle out of the underlying litigation without payment (or a payment of only that portion of the judgment expressly set forth in the Miller-Shugart settlement). However, it will be conceding liability, and will be consenting to the plaintiff drawing down its insurance coverage to the full extent of the stipulated unpaid judgment. Finally, a defendant also faces the risk that if the Miller-Shugart settlement is invalidated, the underlying litigation will be reinstated. However, for the most part, a Miller-Shugart option, if available, will be something for a defendant to seriously consider. From the perspective of the insurer, there is very little good news in a Miller-Shugart settlement. It will have lost the option of defending the case on the merits, and the consequent pressures that puts on the 15

16 plaintiff in settlement. Instead, the stakes of the coverage fight will have been heightened by the existence of a specific, and typically generous, judgment amount. If the insurer does succeed in invalidating a Miller-Shugart settlement, it still will have a policy potentially covering a policyholder which is once again back in litigation. Finally, the fact of the stipulated judgment may impair its coverage defenses. (d) Even without a Miller-Shugart settlement, issues of proof can be more complex in multi-party litigation. However, those issues can multiply when a Miller-Shugart settlement is added into the mix. For example, if a plaintiff and defendant reach a Miller-Shugart settlement of $10 million, and the settlement withstands challenges to the nature and process of the settlement, there will also be the question of the insurer s policy defenses. Those defenses likely will require the settlement plaintiff to provide the settlement defendant s right to coverage. (i) First, will the stipulated damage amount in the Miller- Shugart settlement be accepted as the damage number for purposes of claims against other parties, or other insurers, or will evidence of particular damages specific to others need to be introduced in order to establish coverage for that dollar amount? If the latter, it would appear that the advantages to the plaintiff, from a Miller-Shugart settlement, of not having to establish liability, and not having to establish particular damage numbers, would evaporate, because the plaintiff would still have to establish both liability and specific damages in order to establish an entitlement to coverage for those amounts. If the former, however, the advantages of a stipulated judgment would remain. One significant factor may be whether the insurer has defended the policyholder, 16

17 or has refused a defense, which in some jurisdictions will bar an insurer from asserting coverage defenses. (ii) Second, will the plaintiff, standing in the shoes of the settling defendant, need to establish actual liability of the settling defendant in order to establish a right to insurance coverage, or simply establish that the judgment stipulated to could have arisen, if a trial had been held. Again, establishing that the stipulated judgment was possible, rather than probable, will have a significant impact on the benefits provided by a Miller-Shugart settlement. 2. Pierringer Settlements (a) One typical way in which a Pierringer settlement might be used in a multi-party dispute would be in a construction context, where, for example, an owner sues a general contractor, and the general contractor adds its subcontractors as third party defendants. If the owner is unable to settle with the general and instead seeks to settle directly with just some subcontractors, a Pierringer release will protect the settling subcontractor from further liability, including liability that could arise if the owner pursued claims against the general contractor to judgment, and the general contractor prevailed on a third-party claim against the settling subcontractor. In that circumstance, the owner essentially takes the risk that the settlement sum will be less than the liability ultimately assigned to the settling third-party defendant, since the owner s judgment against the general contractor will be reduced by the amount the general contractor can pass on to the settling subcontractor. 17

18 (b) (c) Another context in which a Pierringer settlement might be negotiated in this scenario, however, would be if a general contractor believed it was entitled to coverage under both its own policies, and/or as an additional insured under the policies of one or more of its subcontractors. There, the general contractor is settling with one of the insurers before knowing its full liability, before knowing its entitlement to coverage for that liability, or before knowing how much of its liability should be assigned to that particular settling insurer. Since in each of those circumstances the ultimate liability of the settling insurer, and the non-settling insurers, is unknown, the settling insurer will likely seek protection from claims for contribution or indemnity brought against it by non-settling insurers asserting that its settlement payment did not cover its share of ultimate liability. In a Pierringer settlement, releasing a settling insurer can require the settling general contractor to offset against his claim not just the amount received in the settlement, but potentially that insurer s full (but unpaid) policy limits. (i) For example, if the general contractor seeks coverage for a $4.75 million liability from a total of five potential insurers, each with $1 million in coverage limits, and all insurance is ultimately found to be available, then the insured will be made whole. However, if the general contractor enters into a Pierringer settlement with one insurer, say for $400,000 of that insurer s $1 million limit, the nature of the Pierringer release will require that, at the point that the settling insurer s coverage is ultimately found to incept, the contractor must credit the settling insurer s full $1 million in policy limits against its claim. 18

19 (ii) (iii) Thus, if the settling insurer s policy was ultimately found to owe coverage for the amount of loss between $3 million and $4 million, the settling general contractor could collect total policy limits of $3 million from the first three insurers, but would then need to reduce his claim by the full $1 million in policy limits of the settling insurer, leaving only $750,000 of unsatisfied claim to assert against the fifth $1 million of remaining coverage. The settling general contractor would end up collecting only $4.15 million of his $4.75 million total liability. If several policies were found obligated to contribute equally toward the general contractor s loss, whether as a result of application of a continuous trigger over multiple policy years, or the interplay of competing other insurance clauses, then the general contractor s position could worsen. If, for example, the general contractor s loss was only $1.5 million, and each of the five policies was found to share equally in that loss, no insurer s limits would be exhausted. Rather, each insurer would be required to pay $300,000. However, under the posited Pierringer settlement, the general contractor s $1.5 million insurance claim could be reduced, not by the $300,000 that the settling insurer owed, or even the $400,000 that the policyholder received from the settling insurer, but rather by the full $1 million of the settling insurer s policy limits. That would leave the general contractor, who started with more than adequate (albeit contested) total insurance, unreimbursed for $600,000 in loss, and each of the non-settling insurers liable for only $125,000 instead of $300,

20 3. Loy-Teigen Settlements (a) (b) (c) Loy-Teigen settlement is an alternative intended to provide a means to eliminate some of the problem just noted with the Pierringer settlement. The key distinction between a Pierringer settlement and a Loy-Teigen settlement is that in a Loy-Teigen settlement the settling claimant does not release the settling defendant, but provides a covenant not to sue. Loy, Teigen. Had our hypothetical settling general contractor used a Loy-Teigen settlement, rather than a Pierringer, he would have not released, but covenanted not to sue, the settling insurer. Since the settling insurer would not have been released, that settling insurer s full policy limits would need not have been applied to reduce the general contractor s claim. See, e.g., Balk v. Farmers Ins. Exch.; Brandner v. Allstate Ins. Co. When the total claim exceeds the limits of coverage provided by the settling insurer, as in our first example above, the result would likely be no different under a Pierringer or a Loy-Teigen settlement. The general contractor would be entitled to collect $1 million each from the first three insurers, be required to credit the full $1 million policy limit of the settling insurer even though it received only $400,000, and therefore be limited to a $750,000 claim against the policy providing the coverage from between $4-5 million. One potentially significant distinction between a Pierringer and a Loy-Teigen settlement even in this context, however, is the allocation of the risk of insolvency of the settling insurer. Other insurance clauses, as well as some allocation and drop-down rules, typically apply only to solvent insurers. If the settling insurer later becomes insolvent, then its insolvency might eliminate its obligation to provide the $1 million in coverage between the $3 million and $4 million mark. In that circumstance, the general contractor should 20

21 only have to credit against his claim the $400,000 actually received, and not the full $1 million of the insolvent insurer s policy limits. (d) The biggest difference arises in the second scenario, however. In the second example above, the legal liability of each insurer was equal; it was only because the settling insurer had been released that its full $1 million limit needed to be credited against the general contractor s claim. Under a Loy-Teigen settlement, no such release would have been given, but rather only a covenant not to sue to collect more from the settling insurer, regardless of the determination of that settling insurer s ultimate liability. Once the settling insurer s ultimate liability was established at $300,000, then looking at it in hindsight, the policyholder would have covenanted not to sue the settling insurer for its $300,000 of liability in exchange for a payment of $400,000. While protections against double recovery may require that the general contractor credit the full $400,000 received from the settling insurer, under a Loy/Teigen settlement the general contractor would not have to offset against his claim the remaining unpaid $600,000 in unpaid policy limits of the settling insurer. Instead, the general contractor would be fully compensated for his loss, with each non-settling insurer contributing $275,