Who’s on First? The Insured Must Allocate

Double Recovery Not Allowed

When a contractor is faced with a massive judgment that must be satisfied it looks first to its subcontractors who agreed to defend or indemnify the insured. If inadequate to pay the full judgment the contractor then looks to its own insurers. If its own insurers have limited coverages it is incumbent on the insured to allocate the payments from the subcontractors and their insurers to items covered by the excess policy and not losses not covered.

In Satterfield And Pontikes Construction, Incorporated, Amerisure Mutual Insurance Company v. United States Fire Insurance Company, No. 17-20513, United States Court Of Appeals For The Fifth Circuit (August 2, 2018) 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.


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 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.

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.

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, $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.

S&P 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 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.

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.

U.S. Fire contended that S&P’s argument ignored 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.

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.

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 Subcontractor Settlements Are “Other Insurance”

S&P characterized the subcontractor settlements as the products of “contractual risk transfer mechanisms.” It defines “contractual risk transfer” as “[t]he use of contractual obligations such as indemnity and exculpatory agreements, waivers of recovery rights, and insurance requirements to pass along to others, but would otherwise be one’s own risk of loss.” S&P ignored the fact that insurance, by definition, is a contractual risk transfer from the insured to the insurer.

Regardless, easoning that the indemnity clauses in the subcontractor contracts were intended to “shore up leaks or gaps in insurance coverage,” S&P argues that U.S. Fire had no right, either contractual or equitable, to avoid paying the shortfall since the subcontractor indemnity payments were meant to be applied to the gaps in the U.S. Fire coverage.

The plain language of the policy allowed the appellate court to affirm the district court’s summary judgment order. An indemnity agreement falls under the plain language of the “Other Insurance” provision of U.S. Fire’s policy—which is very broad—because it is a mechanism by which an Insured arranges for funding of legal liabilities for which U.S. Fire’s policy also provides coverage. And settlement proceeds resulting from an indemnity agreement also count as “Other Insurance.”

The issue here is whether an insured can round up general settlements from its subcontractors, unilaterally decide that they will be allocated to uncovered damages, and then go after the insurers that would cover the damages if the loss was properly allocated to that policy.

Nonsettling parties should not be penalized for events over which they have no control. Where a settling party fails to allocate its settlement, the nonsettling party is entitled to a credit equaling the entire settlement amount.

No Texas case casts doubt on the district court’s conclusion that Texas law places the burden of proof on S&P to show that it properly allocated the settlement proceeds between covered and noncovered damages. S&P bears the burden to show that the subcontractor settlement proceeds were properly allocated to either covered or noncovered damages. If S&P cannot meet that burden, the appellate court must assume that all of the settlement proceeds went first to satisfy the covered damages under U.S. Fire’s policy. Although U.S. Fire agreed that S&P could reasonably settle its claims with the subcontractors, that does not mean U.S. Fire granted S&P permission to allocate all of those settlement proceeds to noncovered damages.

As the district court noted, U.S. Fire did not have power to structure the settlements to attribute the proceeds to one kind of damages or another.


Faced with a greater than $8 million judgment S&P, by not allocating the money it received from its subcontractors and their insurers, attempted to dip into its excess insurer’s funds and collect for damages – mold or attorneys fees – specifically excluded from the U.S. Fire policy. Its attempt was to obtain indemnity to which it was not entitled. The Fifth Circuit refused to allow S&P to obtain a double recovery.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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