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Guarantee v. United States Fire Insurance Co.

United States District Court, S.D. Texas, Houston Division

June 1, 2017

AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY and SATTERFIELD & PONTIKES CONSTRUCTION, INC. Plaintiffs,
v.
UNITED STATES FIRE INSURANCE COMPANY Defendant.

          MEMORANDUM AND OPINION

          Lee H. Rosenthal, Chief United States District Judge

         Satterfield & Pontikes Construction, Inc. (S&P) contracted to build a courthouse in Zapata County, Texas. Various problems came to light in the years following the building's completion, culminating in a roughly $8 million arbitration award against S&P and in favor of Zapata County. The current lawsuit is about who will be left holding the bag as between S&P, two primary insurers-American Guarantee and Amerisure-and an excess insurer-US Fire. The parties filed cross-motions for summary judgment, responses, and replies, (Docket Entries No. 47, 51, 57, 84, 86, 87, 89, 90, 91, 92), and the court heard oral argument on the motions. At oral argument, the court told the parties its tentative rulings on each issue and encouraged the parties to explore settlement before the court made final rulings. American Guarantee (AGLIC) filed a supplemental brief, to which U.S. Fire responded. (Docket Entries No. 103, 107). The court heard additional argument after the parties advised the court that they had not been able to settle.

         The summary judgment motions present two core disputes. One dispute pits S&P and its primary insurers against the excess insurer, U.S. Fire. The other is a dispute between Amerisure and AGLIC over how to allocate costs within the primary insurance layer.

         Based on the briefs, the summary judgment record, the arguments, and the applicable law, the court rules as follows:

(1) in the dispute between S&P, AGLIC, and Amerisure on the one hand and U.S. Fire on the other, U.S. Fire prevails and S&P takes nothing; and
(2) in the dispute between AGLIC and Amerisure, AGLIC's motion is granted in substantial part and Amerisure's motion is denied in substantial part.
The reasons for these rulings are explained in detail below.

         I. Background

         S&P was the prime contractor for the construction of a courthouse for Zapata County, Texas. AGLIC wrote S&P's commercial general liability policy in 2006-2007, and Amerisure wrote S&P's commercial general liability for 2007-2011. (Docket Entry No. 47 at 8). Both policies had a per-occurrence limit of $1, 000, 000 and an aggregate limit of $2, 000, 000. (Id.). U.S. Fire wrote S&P's excess policy, which had a $25, 000, 000 per occurrence and aggregate limit. (Id. at 8-9). The U.S. Fire policy contained a “Fungi and Bacteria Exclusion” barring coverage for any “property damage” resulting from exposure to fungi, including mold, or bacteria. (Docket Entry No. 47-15, Ex. C-1 at 35).[1]

         Zapata County was dissatisfied with S&P's construction work on the courthouse, and it eventually sued. S&P invoked AGLIC's 2006-07 commercial general liability policy to provide coverage. (Docket Entry No. 47 at 7). AGLIC provided a defense. (Docket Entry No. 47-5, Ex. A at 1 ¶ 3). The suit went to arbitration. The arbitration panel found in favor of the County. The panel found

that S&P failed to build the courthouse in a good and workmanlike manner, in accordance with the proper standards of care and in accordance with the plans and specifications. S&P also failed to properly supervise its subcontractors. S&P's failures to perform resulted in monetary damages to Zapata as set forth below. The Panel further finds that the courthouse suffered physical harm and damage as a result of S&P's failures to perform.

(Docket Entry No. 47-10, Ex. B-1 at 8). The total award, including postjudgment interest, was $8, 063, 641.78. The arbitration award was set out in categories based on the “phases” of remedial work the County had to do to repair the courthouse's problems. The award was as follows:

- $2, 800, 000 for Phase I (primarily reconstruction of the courthouse dome and mold remediation throughout the courthouse building);
- $855, 000 for Phase II (primarily replacement of the courthouse roof and repairs to the roof flashing);
- $2, 417, 000 for Phase III, subdivided as follows:
$1, 000, 000 for fireproofing replacement;
$150, 000 for repair and replacement of terrazzo flooring;
$563, 000 for window repairs;
$30, 000 for HVAC cleaning and sealing;
$100, 000 for professional services associated with the Phase III repairs;
$574, 000 for “Mark ups” related to professional services to carry out the repairs.
- $1, 500, 000 in attorney's fees; - $430, 458 in prejudgment interest; and
- $29, 909.74 in administrative costs relating to the arbitration.

(Id. at 9-12). The County secured a judgment to enforce the arbitration award. (Docket Entry No. 47-11, Ex. B-2).

         S&P's subcontractors were parties to the arbitration until S&P entered into settlement agreements with those subcontractors. (Docket Entry No. 47-10, Ex. B-1 at 2-3). The total value of those settlements was $4, 492, 500. (Docket Entry No. 87 at 10; Docket Entry No. 47 at 7).

         S&P also sought coverage from its insurers. U.S. Fire refused to issue coverage. In a letter to the interested parties, U.S. Fire outlined its positions that: (1) the Fungi and Bacteria Exclusion barred coverage for a large portion of all three phases of the award, which, it claimed, flowed primarily from mold damage; and (2) the assessments above the approximately $6 million in actual damages-including for attorney's fees, prejudgment interest, arbitration expenses, and the like-were “supplemental payments” under the policy terms of the primary layer of insurance, and did not count against the primary policy limits. (Docket Entry No. 87-1, Ex. A-8 at 31-38). Therefore, U.S. Fire argued, the value of claims potentially covered under its policy was significantly lower than the combined value of the $4.5 million in subcontractor settlements and $1.5 million of the primary layer. (Id. at 38-39). U.S. Fire also argued that the arbitrators had found that there were multiple “occurrences” within the meanings of the primary policies, and so the primary layer of insurance was not exhausted even if the full property damage award was covered. (Id. at 39-41).

         S&P satisfied the arbitration-award judgment with a combination of: the $4, 492, 500 in subcontractor settlements, approximately $2 million from AGLIC, approximately $1.1 million from Amerisure, and approximately $440, 000 from S&P itself. (Docket Entry No. 87 at 10, Docket Entry No. 47 at 7).

         AGLIC paid subject to a reservation of rights that emphasized that it was involuntarily paying amounts greater than its per-occurrence limit in order to protect S&P's interests. AGLIC left open its asserted right to recoup the overpayment. (Docket Entry No. 47-4, Ex. A-2) (AGLIC reservation-of-rights letter).

         Although Amerisure characterized its payment as a “loan” to S&P, it made the loan on the condition that it would not seek repayment from S&P. Instead, it could only seek payment from insurance companies that insured S&P but had not paid anything toward the judgment-which appears to mean only U.S. Fire. (Docket Entry No. 76-15, Ex. E-19) (loan agreement).

         This action was administratively closed pending the outcome of the arbitration. (Docket Entry No. 14). After the award was paid, it was reopened. (Docket Entry No. 19). AGLIC and S&P filed an amended complaint seeking reimbursement or contribution from U.S. Fire for their payments. (Docket Entry No. 22). The allegations include: (1) a request for declaratory judgment that the arbitration award concerned only one “occurrence” and therefore AGLIC owed $1, 000, 000 and U.S. Fire owed the rest; (2) a breach of contract claim based on U.S. Fire's failure to pay under its excess policy; and (3) a bad-faith claim under § 541 of the Texas Insurance Code. AGLIC alternatively alleges that it is entitled to reimbursement from Amerisure for part of the amount that it paid for the judgment. AGLIC asks only for a ruling that reallocation is possible, not for a specific amount. AGLIC concedes that the specific amount of damage properly allocated to each policy period is a disputed fact question.

         Amerisure filed a complaint in intervention. (Docket Entry No. 31). The Amerisure complaint alleges that its policy was not triggered at all, because S&P selected the AGLIC and U.S. Fire policies for 2006 to 2007 to provide coverage and those amounts together cover the final award. Amerisure also alleges that the damage to the courthouse was a “known loss” excluded from policy coverage because S&P knew about the problems with the courthouse when Amerisure issued the policy. Amerisure argues that it is entitled to contractual and equitable ...


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