Umbrella Insurer Failed to Show That Primary Policies Had Been Fully Exhausted, Court Rules

A federal district court in Colorado has ruled that National Union Fire Insurance Company of Pittsburgh, PA, was not obligated to reimburse Scottsdale Insurance Company for a portion of the $4.35 million that Scottsdale had contributed to the settlement of an underlying lawsuit against Northwest Construction Company.  

The Case 

The underlying lawsuit involved the construction of an apartment complex in Arapahoe County, Colorado, that was owned by Simpson Cherry Creek Limited Partnership. Northwest and a related entity, Coyote Ranch Contractors, L.L.C., served as the general contractor and/or construction manager for the project. 

Simpson sued Northwest for over $22 million, asserting claims of negligence and breach of contract arising from allegedly defective design and/or construction. Northwest’s primary insurer, CNA, provided it with a defense of the action. 

The suit was settled for $8.5 million, with CNA contributing $4 million; Scottsdale, an umbrella insurer, contributing $4.35 million; another primary insurer contributing $75,000; and Northwest itself contributing $75,000. In addition, Scottsdale agreed to pay $500,000 to CNA to facilitate resolution of certain related coverage disputes. National Union, a second umbrella insurer, did not contribute to the settlement. 

Scottsdale subsequently sued National Union, asserting that it was liable for at least $2,283,911 of the funds that Scottsdale had paid to resolve the Simpson action. National Union moved for summary judgment, arguing that Scottsdale could not show that the primary insurance policies underlying the National Union umbrella policies had been fully exhausted. 

The Court’s Decision 

The court granted National Union’s motion. It first observed that it was not disputed that there had been no “horizontal” exhaustion of the primary insurance policies. Then, it decided that Scottsdale had not met its burden of showing vertical exhaustion. 

In particular, the court focused on whether there had been vertical exhaustion of the CNA policy that underlay National Union’s umbrella policy. National Union contended that Scottsdale’s $500,000 payment to CNA precluded Scottsdale from being able to show that the policy limits under the CNA policy had been fully exhausted, characterizing the $500,000 as replenishment of policy limits of the CNA policies. 

The court found that the relevant factual question was how CNA had allocated the $500,000 it had received from Scottsdale.  Concluding that Scottsdale had not presented evidence on that subject, it granted summary judgment in favor of National Union. 

The case is Scottsdale Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 10-cv-01092-RPM (D. Colo. Dec. 3, 2012).