The Perils of Settlement Releases on Subsequent Litigation of Assigned Claims

A&T Siding v. Capitol Specialty Ins., No. 3:10-cv-980-AC, 2012 WL 707100 (D. Or. Mar. 1, 2012)

A siding subcontractor sued the CGL insurance carrier to recover amounts claimed due under a policy that was for the benefit of a condominium homeowners association.  This lawsuit arose when a general contractor was sued by the association for construction defects and the general contractor in-turn sued the subcontractor for negligent construction.  The subcontractor tendered its defense to Capitol and Zurich, each of which initially participated in the defense.  Capitol subsequently withdrew its defense because it decided the alleged defects and damage took place prior to inception of its policy.

The association settled with the subcontractor and Zurich and took an assignment of the subcontractor’s claim against Capitol, and sued Capitol in state court, alleging that Capitol had failed in its policy obligation to defend and indemnify the subcontractor.  Capitol argued that Stubblefield v. St Paul, 267 Or. 397 mandated Capitol’s release because the association had released the subcontractor from the judgment obligation.  The state court granted Capitol a summary judgment dismissal, rejecting the argument that Stubblefield had been statutorily overruled.

The association and subcontractor then signed an addendum to their original settlement, imposing on the subcontractor the obligation to pursue Capitol and on the association an agreement not to execute against the subcontractor until completion of the subcontractor’s case against Capitol.  The subcontractor filed its claim in state court and Capitol timely removed the case to federal court.

The federal court determined that the subcontractor could not recover its claim for indemnification as the addendum with the association did not remedy the prior release.  Thus the court struck the indemnification damages claim.  The court also struck the claim for punitive damages and the fiduciary duty claim (a duty to defend).

The court remanded the attorneys’ fee claim of the subcontractor to state court, finding that further discovery was required where the claim turns on whether the facts will show that the subcontractor’s defense costs are recoverable under Or Rev Stat. 742.061.