Court-Approved Settlement Establishes Liability and Presumptive Damages for Coverage Purposes

Mutual of Enumclaw Insurance Co. v. T&G Construction, Inc. (Wash. S. Ct., October 23, 2008).

T&G Construction, the siding subcontractor for a condominium development, installed the flashing and building paper incorrectly. The paper was “reverse lapped” and there were gaps, holes, and tears. Within a few years, water intrusion had caused rot, decay, and elevated moisture levels. The homeowners association sued the general contractor, which brought T&G into the litigation. T&G’s insurer, Mutual of Enumclaw (MOE), defended T&G under a reservation of rights.

While the litigation was pending, T&G’s attorney discovered that T&G had been administratively dissolved by the secretary of state more than two years before suit was filed. T&G moved for summary judgment based on a two-year statute of limitations for claims against a dissolved corporation. The trial court denied summary judgment because T&G did not notify the homeowners of the dissolution and there was evidence that T&G had notice of the defects before dissolution. Thus, application of the statute was an issue for the trier of fact.

MOE declined to participate in mediation, which resulted in T&G settling the claims against it for $3.3 million and assigning its rights against MOE. The parties sought a reasonableness determination from the trial court. MOE appeared and argued that the settlement was not reasonable because (1) the trier of fact was likely to find the statute of limitations applicable and (2) the siding problems could be corrected with “spot” or “surgical” repairs costing about $300,000. The trial court rejected those arguments and found the settlement was reasonable. On reconsideration, however, the judge reduced the settlement to $3 million.

Meanwhile, MOE had brought a declaratory judgment action against T&G on the issue of coverage. MOE alleged that T&G was not liable because the statute of limitations had run, that T&G breached the cooperation clause, and that the damages were not covered. The trial court in the coverage action ruled against MOE on all these issues. The court of appeals reversed, and the supreme court accepted review.

MOE contended that the liability suit did not resolve whether its insured was legally obligated to pay damages because there was no final decision as to statute of limitations. MOE conceded that an insurer ordinarily cannot relitigate liability defenses that belonged to its insured in the underlying action, but argued that the statute of limitations was different because it affected the court’s jurisdiction. The supreme court disagreed. The court held that a court has personal jurisdiction over a dissolved corporation by statute, and the statute of limitations does not affect subject matter jurisdiction. Further, the court held that, when the insurer had an opportunity to be involved in a settlement and the settlement is judged reasonable, “it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage.”

The supreme court found the allegation that T&G failed to cooperate to be “completely without merit” because MOE had notice of the settlement and had an opportunity to intervene in the reasonableness proceedings. Further, MOE did intervene and persuaded the judge to reduce the reasonable value of the settlement by $300,000.

Finally, MOE argued that the siding was not damaged, so the damages were not “property damage” covered by the policy, and that the “impaired property” and “your work” exclusions should apply. The supreme court held, “Removing and repairing the siding is simply part of the cost of repairing the damage to the interior walls and was properly treated as property damage by the trial court.” The court held that the exclusions were inapplicable if substantially all of the subsurfaces or interior walls were impaired. Unable to determine from the record if the trial court so found, the court remanded for further proceedings in the trial court.