FEDERAL COURT DENIES INSURER’S MSJ IN DISPUTE FROM SETTLEMENT OF CONSTRUCTION DEFECT SUIT

Last week, a federal judge in Houston denied a motion for summary judgment filed by a general contractor’s excess insurer against another excess insurer following a dispute arising from the settlement of a construction defects suit by an apartment complex against the general contractor. Colony Ins. Co. v. First Mercury Ins. Co., No. H-18-3429, 2020 WL 5658662  (S.D. Tex., Sept. 22, 2020) involved a dispute between two of the general contractor’s excess insurers regarding whether one insurer, Colony Insurance Company (“Colony”), was entitled to recovery of part of the settlement that it alleged the other excess insurer, First Mercury Insurance Company (“First Mercury”) should have paid.

In 2015, an apartment complex sued a general contractor for alleged construction defects. First Mercury was one of the general contractor’s primary insurers and also served as an excess insurer. The general contractor’s attorneys tendered the claim to First Mercury and Colony as the general contractor’s excess insurers.

In August 2017, the parties mediated the claims. The general contractor’s own experts calculated that the general contractor was liable for over $2.7 million in repair costs.  First Mercury and the other primary insurer contributed $500,000 each to the settlement out of the primary layer. Colony therefore determined an additional $1.7 million was needed to settle the case, requested First Mercury contribute to that part of the settlement from the excess policies in effect, and told First Mercury that if it was forced to fund the remainder of the settlement alone it would seek reimbursement in a separate lawsuit. First Mercury denied coverage and refused to contribute arguing no one presented it any evidence that the policy applied.

Colony argued it was entitled to subrogation because First Mercury breached its duty to indemnify the general contractor in the underlying suit.  Conversely, First Mercury claimed Colony had no right to reimbursement simply because Colony was “unhappy with the amount it chose to pay,” classifying the payment as a voluntary business decision.

Based on a review of the applicable law and facts, and in addition to distinguishing Mid-Continent v. Liberty Mut. Ins. Co. from the facts of this case, U.S. Magistrate Judge Peter Bray found fact issues existed as to whether First Mercury was obligated to pay under the excess policies and whether any exclusion in the policies applied.