Policyholders representing general contractors and developers frequently urge defending carriers to “pay and chase” – in other words, settle with the owner (“pay”) and then subrogate against the subcontractors or design professionals whose work caused the alleged damage (“chase”) to get reimbursed for the settlement with the owners. Many carriers are increasingly leery of this approach, and unfortunately a new decision from the Court of Appeals is likely to further dampen their enthusiasm. In Montara Owners Ass’n v. LaNoue Development, the developer’s carrier (Zurich) agreed to pay and chase, paying $4 million to resolve the developer’s liability. Zurich settled with almost all subcontractors, but proceeded to trial against one, Advanced Construction (“Advanced”) (referred to in the decision as Sharabarin, the name of the “dba” owner).
At trial Advanced succeeded on a directed verdict motion to reduce the total amount that LaNoue could seek in damages by knocking out two chunks from Zurich’s subrogation right: 1) amounts that Zurich had been reimbursed by settling subcontractors; 2) an amount that Zurich had paid in settlement out of a policy that pre-dated Advanced’s construction work on the project. Advanced’s argument as to #1 was essentially that Zurich could not get a double recovery; its argument on #2 was that because it could not have caused property damage during that early Zurich policy period, there was no subrogation right for that period. LaNoue (Zurich) argued that subrogation merely puts the carrier in the insured’s shoes, and does not impose any additional burdens of proof on a subrogating carrier.
The Court of Appeals reversed the directed verdict on #1, holding that property damage caused by other subcontractors, for which those subcontractors paid to settle, had nothing to do with the claims against Advanced, and since there was no overlap, the trial court should not have pretended that there was a concern about “double recovery.” But the Court of Appeals upheld the #2 reduction, for the policy period prior to Advanced’s work, “because Sharabarin could not have been responsible for covered losses during that timeframe.”
As all insurance professionals know, carrier allocations of indemnity payments that are made from multiple policies are idiosyncratic and usually have nothing to do with the amount of property damage that actually occurred in any particular policy period. That issue often comes up in litigation over prior exhaustion of policies: a carrier will claim that a policy was exhausted in prior litigation and that therefore no defense was owed, but policyholder counsel can often establish that the allocation of losses to the policy in question was arbitrary, that the insured was not consulted, and that the policy was in fact no exhausted at all. Indeed it appears that in this case Zurich put in evidence that the amount that it allocated to the earliest, pre-Advanced policy was arbitrary. It is unclear why the Court of Appeals ignored this evidence. If Zurich appeals, policyholders may want to weigh in on the impact of the decision on them.