PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
STONEHENGE ENGINEERING
CORPORATION; NATIONAL STONEHENGE
CORPORATION,
Plaintiffs-Appellees,
No. 98-2673
v.
EMPLOYERS INSURANCE OF WAUSAU,
Defendant-Appellant.
STONEHENGE ENGINEERING
CORPORATION; NATIONAL STONEHENGE
CORPORATION,
Plaintiffs-Appellants,
No. 98-2680
v.
EMPLOYERS INSURANCE OF WAUSAU,
Defendant-Appellee.
Appeal from the United States District Court
for the District of South Carolina, at Columbia.
Dennis W. Shedd, District Judge.
(CA-97-1569-3-19)
Argued: September 22, 1999
Decided: January 13, 2000
Before TRAXLER, Circuit Judge, HAMILTON, Senior Circuit
Judge, and Joseph R. GOODWIN, United States District Judge for
the Southern District of West Virginia, sitting by designation.
_________________________________________________________________
Affirmed in part, vacated in part, and remanded by published opinion.
Senior Judge Hamilton wrote the opinion, in which Judge Goodwin
joined. Judge Traxler wrote a separate opinion concurring in part and
dissenting in part.
_________________________________________________________________
COUNSEL
ARGUED: Charles Elford Carpenter, Jr., RICHARDSON, PLOW-
DEN, CARPENTER & ROBINSON, P.A., Columbia, South Caro-
lina, for Appellant. James Livingston Bruner, BRUNER, POWELL &
ROBBINS, L.L.C., Columbia, South Carolina, for Appellees. ON
BRIEF: Francis M. Mack, S. Elizabeth Brosnan, RICHARDSON,
PLOWDEN, CARPENTER & ROBINSON, P.A., Columbia, South
Carolina, for Appellant.
_________________________________________________________________
OPINION
HAMILTON, Senior Circuit Judge:
Two corporately related general contractors, Stonehenge Engineer-
ing Corporation and National Stonehenge Corporation (collectively
Stonehenge) brought this diversity action against Employers Insur-
ance of Wausau (Wausau) seeking indemnification, under three suc-
cessive standard commercial general liability policies issued by
Wausau to Stonehenge, for an amount Stonehenge agreed to pay to
settle a lawsuit against it alleging defective construction of condomin-
ium units. In its complaint, Stonehenge also alleged two bad faith
claims against Wausau, one asserting bad faith refusal to indemnify
and defend, the other alleging bad faith refusal to settle.
The district court granted Stonehenge's motion for summary judg-
ment on its breach of contract claim, i.e., its indemnification claim,
and granted Wausau's motion for summary judgment on Stone-
henge's two bad faith claims. On appeal, Wausau challenges the dis-
trict court's grant of Stonehenge's motion for summary judgment on
the breach of contract claim. Stonehenge cross appeals the district
court's grant of Wausau's motion for summary judgment on the two
2
bad faith claims. Stonehenge also assigns error to the district court's
refusal to award it interest for the period of time between the settle-
ment of the underlying lawsuit and the date of the entry of judgment
on its breach of contract claim.
We affirm the district court in all respects, except we vacate the
damage portion of the judgment in favor of Stonehenge and remand
for entry of judgment in a specified lesser amount.
I.
During the early to mid-1980s, Stonehenge constructed Phase III
of a condominium project known as "Yacht Cove" in Lexington
County, South Carolina on the shores of Lake Murray. Phase III con-
sisted of nineteen buildings, totaling 130 residential units. Thirty-two
of the units were known as "villa" units, while the remaining ninety-
eight units were known as "townhouse" units. Stonehenge completed
construction of Phase III in March 1987.
In approximately 1989, the owners of residential units constructed
in Phase III began experiencing problems with Phase III buildings.
For example, the owners noticed buckled siding, cracks in founda-
tions, and sagging balconies. As a result, the Yacht Cove Owners
Association (the Owners Association) hired G. Allen Moore (Moore),
a private building inspector, to inspect the buildings at issue and pre-
pare a report. On March 19, 1990, Moore submitted his report (the
Moore Report) to the Owners Association. The Moore Report identi-
fied defects in the balconies, roofs, foundations, basement walls,
porches, decks, handrails, pickets, stairs, siding, and flashing of Phase
III buildings. In the fall of 1996, Moore also identified defects in the
subflooring of Phase III buildings.
The Owners Association subsequently sent a copy of the Moore
Report to the developer of Yacht Cove, Equitable Real Estate Invest-
ment Management, Inc., which in turn sent a copy to Stonehenge on
September 25, 1990. Stonehenge investigated the alleged defects
identified in the Moore Report and responded in writing to the report
on November 12, 1990. In its response, Stonehenge completely
denied responsibility for the alleged defects on the basis that it con-
structed Phase III in accordance with the building code in effect for
3
Lexington County at the time of construction, and on the basis that
the damage identified in the Moore Report resulted from lack of
proper owner maintenance and/or owner alteration of certain portions
of Phase III buildings. Stonehenge admitted the existence of a "riser"
code violation on the front of a particular Phase III building, but attri-
buted its existence to settlement of the right corner of the adjacent
sidewalk.
On April 16, 1992, the Owners Association notified Stonehenge by
letter that if a representative of Stonehenge did not contact its attorney
within ten days, it would assume that Stonehenge did not intend to
voluntarily address the defects identified in the Moore Report, thus
requiring it to take legal action against Stonehenge. The record does
not disclose whether Stonehenge responded to this letter, but shortly
after receiving it, Stonehenge notified Maryland Casualty Insurance
Company (Maryland Casualty) of the Owners Association's claims.
Maryland Casualty insured Stonehenge under a commercial general
liability policy from July 1, 1986 to November 1, 1987. Of relevance
to this appeal, several other general liability insurance carriers succes-
sively insured Stonehenge under commercial general liability policies
from November 1, 1987 until November 1, 1995. Aetna Casualty and
Surety Company (Aetna) insured Stonehenge from November 1, 1987
to November 1, 1991. Home Insurance Company (Home) insured
Stonehenge from November 1, 1991 to November 1, 1992. Finally,
Wausau insured Stonehenge under three annual standard commercial
general liability policies for the time period November 1, 1992 to
November 1, 1995 (the Three Wausau Policies).1
_________________________________________________________________
1 Each of the Three Wausau Policies provides that Wausau "will pay
those sums that [Stonehenge] becomes legally obligated to pay as dam-
ages because of . . . `property damage' to which this insurance applies."
(J.A. 365, 422, 490). Each states that it applies to property damage only
if the property damage is caused by an "occurrence" that takes place in
the coverage territory and occurs during the policy period.
The term "occurrence" is defined by the Three Wausau Policies as "an
accident, including continuous or repeated exposure to substantially the
same general harmful conditions." (J.A. 375, 432, 501). Each defines the
term "property damage" as "Physical Injury to tangible property, includ-
ing all resulting loss of use of that property." (J.A. 376, 433, 502).
Finally, each provides that Wausau would have the right and duty to
defend any suit against Stonehenge seeking damages for which indemni-
fication coverage exists, and, in its discretion, the right to investigate any
occurrence and settle any claim or suit that may result.
4
After receiving notice of the Owners Association's claims against
Stonehenge, Maryland Casualty investigated Phase III buildings
under a reservation of rights and requested additional information
from Stonehenge. Maryland Casualty conducted an on-site investiga-
tion that revealed, inter alia, some problems with the lightweight con-
crete floors in two villa units, primarily in the kitchen area underneath
the vinyl flooring.2 On September 29, 1992, Stonehenge submitted an
extensive written response to a request by Maryland Casualty for
more information. In its response, Stonehenge stated that its first
notice of any problems with Phase III buildings was its receipt of the
Moore Report in September 1990.
Stonehenge notified Aetna of the Owners Association's claims on
October 21, 1992. Like Maryland Casualty, Aetna investigated the
claims under a reservation of rights.
On April 6, 1993, the Owners Association filed suit against Stone-
henge in the Court of Common Pleas for Lexington County, South
Carolina. The suit alleged that in constructing Phase III buildings,
Stonehenge was negligent and breached its implied warranty to per-
form work in a careful, diligent, and workmanlike manner. The Own-
ers Association sought 1.27 million dollars in damages, with the bulk
of this figure constituting the amount the Owners Association
believed would be necessary to re-side the exterior of every building
in Phase III and replace the light-weight concrete floors in every villa
unit.
By March 1996, the Owners Association could ill afford to pay the
ongoing fees generated by its attorneys, who had taken the case on an
hourly-rate basis, rather than on a contingency-fee basis. As a result,
the Owners Association offered to settle its suit against Stonehenge
_________________________________________________________________
2 The lightweight concrete floor installed in every villa unit was part of
a flooring system that included floor trusses spaced twenty-four inches
on center with five-eighth inch plywood spanning the trusses. A one and
one-half inch layer of lightweight concrete was then poured on top of the
plywood and then padding and carpet, vinyl, or wood parquet flooring
was placed on top depending upon the type of room. The lightweight
concrete floor had no function other than acting as a sound barrier.
5
for $400,000 with a "drop dead" date to accept the offer by April 11,
1996. Stonehenge refused the settlement offer.
Wausau did not receive notice of the Owners Association's suit
against Stonehenge or its pre-suit claims until late March 1996, just
after Stonehenge received the settlement offer. 3 By copy of a letter to
Aetna dated July 12, 1996, the claims adjuster at Wausau handling
Stonehenge's claim, Charles Gause, informed Stonehenge that Wau-
sau was not in a position to contribute to any settlement without the
following: "Evidence of `Property Damage' caused by an `Occur-
rence' which took place during our policy period or case law in South
Carolina which in some way requires us to contribute to a settlement."4
(J.A. 318).
A year later, with a trial set for March 17, 1997 rapidly approach-
ing, Wausau was asked again to participate in settlement discussions,
but Wausau refused for the same reason given before. Just prior to
trial and after extensive trial preparation, the Owners Association was
willing to accept $625,000 to settle its $1.27 million suit. Maryland
Casualty agreed to contribute $100,000, Aetna agreed to contribute
$300,000, and Home agreed to contribute $75,000. These figures rep-
resented the amount each carrier believed constituted its pro-rata
share of the proposed settlement figure.
On March 17, 1997, Stonehenge entered into a settlement agree-
ment (the Settlement Agreement) with the Owners Association. In
accordance with the Settlement Agreement, each Stonehenge entity
confessed judgment for $750,000 in favor of the Owners Association
on April 17, 1997. In accordance with the amounts each carrier
agreed to contribute toward the $625,000 settlement figure, Maryland
Casualty made a $100,000 cash payment, Aetna made a $300,000
cash payment, and Home made a $75,000 cash payment. This left a
_________________________________________________________________
3 Although Stonehenge makes some attempt in its brief to assert that it
notified Wausau earlier, the record contains no evidence to support its
assertion.
4 Notably, Wausau does not appear to dispute that the Phase III build-
ings suffered damage during the policy periods of the Three Wausau Pol-
icies as a result of Stonehenge's faulty construction of those buildings in
the early to mid-1980s.
6
balance of $150,000 still owed to the Owners Association pursuant to
the Settlement Agreement. Although Wausau had sufficient notice
and opportunity to participate in the discussions that led to the Settle-
ment Agreement, Wausau refused to participate.
The Settlement Agreement also provided that the Owners Associa-
tion could not execute upon the confession of judgment against
National Stonehenge Corporation. Furthermore, Stonehenge Engi-
neering Corporation would be liable for any balance due on the con-
fession of judgment it signed after it had exhausted or fully pursued
its rights of indemnification against Wausau.
The state trial judge reviewed the Settlement Agreement and found
that under the facts of the case, the Settlement Agreement was a "fair
and equitable resolution of the matter." (J.A. 29). Thereafter, the state
trial judge approved the Settlement Agreement and adopted it as his
order.
On May 28, 1997, Stonehenge filed the present diversity action
against Wausau, alleging three counts in connection with the Three
Wausau Policies. Count I alleged breach of contract, Count II alleged
bad faith refusal to indemnify and defend, and Count III alleged bad
faith refusal to settle. Stonehenge sought $250,000 in damages, pre-
judgment interest, punitive damages, attorney's fees, and costs. Wau-
sau answered, denying the complaint's material allegations.
The parties filed cross motions for summary judgment on the
breach of contract claim. On February 20, 1998, the district court
granted Stonehenge's motion for summary judgment on the breach of
contract claim and denied Wausau's cross motion for summary judg-
ment on the same claim. Wausau subsequently filed a motion for
summary judgment on Stonehenge's two remaining claims (bad faith
refusal to indemnify and defend and bad faith refusal to settle), which
the district court granted on June 5, 1998.
The parties stipulated that the amount of Wausau's allocated con-
tribution towards the settlement Stonehenge reached with the Owners
Association was a matter for the district court to decide. After the par-
ties submitted memoranda on the issue, the district court allocated
damages against Wausau in the amount of $190,500, representing
7
25.4% of $750,000. In making its determination as to this amount, the
district court found that the trigger period of coverage under the Three
Wausau Policies ended on March 17, 1997, the date Stonehenge and
the Owners Association executed the Settlement Agreement. Further,
the district court stated:
Yacht Cove alleged more than $1.3 million in damages
resulting from construction defects in the underlying suit,
but instead agreed to settle its claim for $750,000, thereby
capping all future damages arising out of the alleged con-
struction defects. The court finds that this figure, although
not based on actual damages, was not entered into collu-
sively and fraudulently and is a proper amount upon which
to calculate the allocation in the instant case. This settlement
amount necessarily took into account the uncertainty of liti-
gation and the expense of prosecuting the case to a verdict.
Moreover, it roughly approximated earlier settlement nego-
tiations. In addition, the trial judge in the underlying case
reviewed the settlement agreement and specifically found it
to be a fair and equitable resolution. Finally, the court's use
of the negotiated agreement in the underlying suit promotes
the public policy of encouraging settlement.
(J.A. 191) (footnote omitted). The district court entered final judg-
ment in favor of Stonehenge on its breach of contract claim on August
14, 1998.
Stonehenge filed a motion to alter or amend judgment and Wausau
filed a motion for reconsideration. The district court denied both
motions. Both parties noted timely appeals. Wausau appeals the dis-
trict court's entry of judgment in favor of Stonehenge on the breach
of contract claim. Stonehenge appeals the district court's entry of
judgment in favor of Wausau on the two bad faith claims. Further-
more, Stonehenge contends the district court erred in refusing to
award it interest at the South Carolina statutory rate for judgments of
14% per annum, see S.C. Code Ann. § 34-31-20 (Law. Co-op. 1987),
from the date of the confessions of judgment (April 21, 1997) until
the date of the entry of judgment in its favor on its breach of contract
claim (August 14, 1998).
8
II.
Wausau argued below and continues to argue on appeal that it is
not obligated under the terms of the Three Wausau Policies to indem-
nify Stonehenge for any portion of the confessions of judgment
because the record contains uncontradicted evidence showing that
Stonehenge had notice of the Owners Association's pre-suit claims
prior to the respective effective dates of the Three Wausau Policies
and had notice of the resulting lawsuit prior to the effective dates of
the second and third Wausau Policies. In support of its argument,
Wausau relies upon the known loss doctrine, which is a common law
affirmative defense to an insured's claim of policy coverage. See, e.g.,
United States Liab. Ins. Co. v. Selman, 70 F.3d 684, 690-91 (1st Cir.
1995) (applying Massachusetts law and recognizing that a majority of
courts treat the known loss doctrine as an affirmative defense to a
claim of coverage); 7 Lee R. Russ & Thomas F. Segalla, Couch on
Insurance § 102:8 (3d ed. 1996 & Supp. 1998). On this basis, Wausau
seeks reversal of the district court's entry of judgment in favor of
Stonehenge on Stonehenge's breach of contract claim.
Summary judgment is appropriate when there is no genuine issue
of material fact, and the moving party is entitled to judgment as a
matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986). We review de novo the district court's grant of
Stonehenge's motion for summary judgment in the face of Wausau's
assertion of the known loss doctrine as an affirmative defense, view-
ing the evidence in the light most favorable to Wausau. See Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Myers v. Finkle, 950
F.2d 165, 167 (4th Cir. 1991).
As most often stated, the known loss doctrine in common law
insurance jurisprudence excludes coverage of a loss to the insured of
which the insured had actual knowledge prior to the policy's effective
date or knew was substantially certain to occur. See, e.g., United
States Liab. Ins. Co., 70 F.3d at 690-91 (applying Massachusetts law);
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204,
1210 (Ill. 1992) (applying Illinois law); 7 Couch on Insurance § 102:8
(recognizing as general rule). The known loss doctrine seeks to pre-
vent the concept of an insurable risk from becoming a mere fiction
when the insured knows there is a substantial probability that it has
9
suffered or will suffer a loss covered by the policy.5 See United States
Liab. Ins. Co., 70 F.3d at 691; 7 Couch on Insurance § 102:8-9.
Because the known loss doctrine is an affirmative defense, the burden
of proving the doctrine's applicability rests with the party asserting it.
See O'Neal v. Carolina Farm Supply of Johnston, Inc. , 309 S.E.2d
776, 779 (S.C. Ct. App. 1983) (party asserting affirmative defense
bears the burden of proving it).
Both parties agree that the substantive law of South Carolina
applies to resolve whether the district court erred in granting Stone-
henge's motion for summary judgment on its breach of contract claim
in the face of Wausau's assertion of the known loss doctrine as an
affirmative defense. However, no South Carolina case exists applying
or addressing the known loss doctrine. Nevertheless, Stonehenge does
not deny that the doctrine exists as part of South Carolina's common
law. It does contend, however, that Wausau failed to carry its burden
of forecasting sufficient evidence, when viewed in the light most
favorable to Wausau, to prove the defense.
Because the parties are in agreement that South Carolina's substan-
tive law controls our resolution of this issue, we assume the same
arguendo. Furthermore, because no South Carolina case exists apply-
ing or addressing the known loss doctrine, we will assume, as the par-
ties appear to, that the Supreme Court of South Carolina would
recognize the existence of the known loss doctrine as part of South
Carolina's common law in its most commonly articulated form. Cf.
Hoechst Diafoil Co. v. Nan Ya Plastics Corp., 174 F.3d 411, 418 (4th
Cir. 1999) (holding that in predicting how a state's highest court
_________________________________________________________________
5 As the Third Circuit recognized in Pittston Co. Ultramar American
Limited v. Allianz Insurance Co., 124 F.3d 508, 516 n.9 (3d Cir. 1997),
the known loss doctrine has a few variants, often referred to as the doc-
trines of "known risk" or "loss in progress." In addition, it appears that
those terms are often conflated or used interchangeably. See, e.g., City
of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146, 1152-53 (2d
Cir. 1989) (discussing doctrine of "known risk"); Inland Waters Pollu-
tion Control, Inc. v. National Union Fire Ins. Co. , 997 F.2d 172, 174-75
(6th Cir. 1993) (describing "loss in progress" as variant of the "known
loss" doctrine). We believe that "known loss" best describes the doctrine
at issue here, and we will use that term throughout our discussion.
10
would decide an undecided matter of state law, a federal court may
seek guidance from all available resources, including other jurisdic-
tions).
Here, the insurable risk of loss at issue is the risk of Stonehenge's
liability to the Owners Association for property injury. Therefore, the
question before us is whether the evidence, when viewed in the light
most favorable to Wausau, establishes that Stonehenge (1) actually
knew that it was legally liable for the property damage claimed by the
Owners Association at the time one or more of the Three Wausau Pol-
icies took effect or (2) knew that such liability was substantially cer-
tain to occur. See United States Liab. Ins. Co. , 70 F.3d at 689-91.
We answer this question in the negative. When the record is
viewed in the light most favorable to Wausau, the evidence estab-
lishes that Stonehenge's receipt of both the Moore Report in Septem-
ber 1990 and the Owners Association's April 16, 1992 letter
threatening legal action against Stonehenge served to put Stonehenge
on notice that the Owners Association intended to hold it legally lia-
ble for the alleged defects in the Phase III buildings. Nevertheless,
such notice does not trigger applicability of the known loss doctrine,
as it does not establish that Stonehenge actually knew that it was
legally liable for the property damage claimed by the Owners Associ-
ation at the time one or more of the Three Wausau Policies took effect
or knew that such liability was substantially certain to occur.
Moreover, the fact that the Owners Association filed suit against
Stonehenge in April 1993, prior to the effective dates of the second
and third Wausau Policies, does not trigger application of the known
loss doctrine. In order to prevail at trial upon its claim of negligent
construction against Stonehenge, the Owners Association would have
to show the following by a preponderance of the evidence: (1) a duty
of care owed by Stonehenge to the Owners Association; (2) a breach
of that duty by a negligent act or omission; and (3) damage proxi-
mately resulting from the breach. See South Carolina Ins. Co. v.
James C. Greene & Co., 348 S.E.2d 617, 620 (S.C. Ct. App. 1986).
In order to prevail at trial upon its claim of breach of implied war-
ranty to perform work in a careful, diligent, and workmanlike manner,
the Owners Association would have to prove that Stonehenge did not
construct Phase III buildings in a careful, diligent, and workmanlike
11
manner. See Kennedy v. Columbia Lumber & Mfg. Co., 384 S.E.2d
730, 736 (S.C. 1989).
In Stonehenge's response to the Moore Report, Stonehenge attri-
buted the defects identified to inadequate owner maintenance and
third-party alteration of the original structures. With the exception of
the deterioration of the lightweight concrete floors in the villa units,
inadequate owner maintenance and third-party alteration of the origi-
nal structures constituted sufficiently viable defenses prior to the
effective dates of the Three Wausau Policies so as to prevent the con-
clusion that Stonehenge had knowledge that entry of a judgment
against it was substantially certain to occur.
As for the lightweight concrete floors, in 1992, four of the thirty-
two lightweight concrete floors constructed in late 1985 and early
1986 in the villa units had failed and were replaced. Specifically, the
lightweight concrete broke up in the high traffic areas and slightly
broke up in the other areas. The record establishes that Stonehenge
had knowledge of the problems with regard to the lightweight con-
crete floors in these four villa units by late August or early September
1992 and further knew of the obvious potential for problems with the
remaining twenty-eight villa units.
Such knowledge on the part of Stonehenge, however, does not
equate to knowledge prior to the effective dates of the Three Wausau
Policies that imposition of liability upon it for construction of the
lightweight concrete floors in all of the villa units was substantially
certain to occur. First, the Owners Association's expert witness did
not even inspect the buildings of Phase III until the spring of 1995,
which is after the effective dates of the Three Wausau Policies. Sec-
ond, prior to the depositions of the expert witnesses in this case,
which did not begin until mid-1995, the possibility that the light-
weight concrete itself was a defective product was not ruled out as the
sole cause of the cracking. If the lightweight concrete itself was a
defective product, and thus caused the cracking, the Owners Associa-
tion's negligence and breach of implied warranty claims could not
prevail.
In sum, Wausau failed to carry its burden of proffering sufficient
12
evidence to establish the affirmative defense of the known loss doc-
trine against Stonehenge's breach of contract claim. 6
III.
Wausau alternatively seeks reversal of the district court's entry of
judgment in favor of Stonehenge on Stonehenge's breach of contract
claim on the basis that an "occurrence," as that term is defined in stan-
dard commercial general liability policies such as the Three Wausau
Policies at issue here, did not take place during the time any of the
Three Wausau Policies were in force. Therefore, Wausau contends,
coverage was never triggered under any of the Three Wausau Poli-
cies. Wausau insists that according to South Carolina law, the period
of coverage under standard commercial general liability policies for
the progressive construction damage at issue here ended at the latest
in 1990 upon discovery of the damage to Phase III buildings. In sup-
port of its argument, Wausau relies upon certain language in this
court's decision in Spartan Petroleum, Co. v. Federated Mutual
Insurance Co., 162 F.3d 805 (4th Cir. 1998), addressing the South
Carolina Supreme Court's decision in Joe Harden Builders, Inc. v.
Aetna Casualty & Surety Co., 486 S.E.2d 89, 91 (S.C. 1997), which
examined the operation of the term "occurrence" in a standard com-
mercial general liability policy when the damage at issue is progres-
sive property damage.
We find Wausau's alternative argument without merit. In Joe
Harden, the South Carolina Supreme Court held that in the case of
progressive property damage, such as property damage caused by
faulty construction, the time of the "occurrence" for purposes of a
standard commercial general liability policy is not the time the
wrongful act was committed, but the time when the complaining party
was actually damaged, i.e., injury-in-fact, and continuously thereafter
to allow coverage under all policies in effect from the time of injury-
_________________________________________________________________
6 In addition to opposing Wausau's assertion of the known loss doctrine
on the merits, Stonehenge alternatively argues that Wausau waived its
opportunity to assert the affirmative defense before the district court by
failing to assert the defense in its answer. Because we have disposed of
Wausau's assertion of the known loss doctrine on the merits, we need not
and do not address Stonehenge's alternative waiver argument.
13
in-fact through the time of the progressive damage. See Joe Harden,
486 S.E.2d at 91; see also Spartan Petroleum, 162 F.3d at 808 (stat-
ing that according to Joe Harden, liability under a standard commer-
cial general liability policy is triggered when injury to the property
itself occurs and "can continue over several policy periods, thus trig-
gering more than one policy"). According to the South Carolina
Supreme Court, "this theory of coverage will allow the allocation of
risk among insurers when more than one insurance policy is in effect
during the progressive damage." Joe Harden , 486 S.E.2d at 91. Joe
Harden does not contain language even suggesting that the trigger
period for coverage under a commercial general liability policy ends
upon discovery of the property damage rather than continuing as long
as the progressive damage continues to occur.
For the proposition that the trigger period for coverage under a
standard commercial general liability policy ends in a progressive
property damage case upon the initial discovery of property damage,
Wausau relies upon certain language in Spartan Petroleum. In that
case, the insured, Spartan Petroleum Company, Inc. (Spartan Petro-
leum), leased a piece of real property and maintained an underground
gasoline storage system on it. See Spartan Petroleum, 162 F.3d at
806. The storage system leaked gasoline onto a certain parcel of adja-
cent property. The property owners of that parcel sued Spartan Petro-
leum for damages to their property caused by the gasoline
contamination. See id. at 807. The suit settled, and Spartan Petroleum
sought indemnification from Federated Mutual Insurance Company
(Federated) pursuant to a standard commercial general liability pol-
icy. See id. Federated refused to settle. See id.
Spartan Petroleum then sued Federated in federal court for breach
of duty to defend and indemnify. Spartan Petroleum won summary
judgment in its favor with respect to both duties. See id. We affirmed
the judgment of the district court as to Federated's duty to defend, but
reversed as to Federated's duty to indemnify. See id. at 813. We
remanded the case to the district court to determine when the contam-
ination reached the adjoining property, and thus, whether there was
an "occurrence" during the policy period. See id. at 811, 813.
To aid the district court on remand, we set out the proper method
of allocating damages in the event the policy applied: Federated's lia-
14
bility "would be a proportion of the . . . settlement equal to the period
the Federated policy or policies covered, divided by the total period
of damages." Id. at 813. We further explained that the total period of
damages "runs from the injury-in-fact--the time the contamination
migrated onto the [adjacent] property--`until the damage [was] com-
plete.'" Id. (quoting Joe Harden, 486 S.E.2d at 91). We then stated
that "[w]e take the time the damage was `complete' to be the time it
was discovered, which in this case is 1990." Id.
Wausau seizes upon this last quoted statement in Spartan
Petroleum in divining that we have interpreted Joe Harden to provide
that the trigger period of coverage in a progressive property damage
case always ends when injury-in-fact is discovered. Thus, Wausau
contends, the trigger period of coverage in the present case ended at
the latest in 1990 "when the damage at Yacht Cove was discovered,
not the date of settlement." (Wausau Br. at 21).
Wausau completely misconstrues our decision in Spartan
Petroleum with respect to when termination of the trigger period of
coverage in a South Carolina progressive property damage case
occurs. After reading the entire decision in Spartan Petroleum, one is
left with the clear understanding that our reference to "the time [when
the damage] was discovered" was case specific. Spartan Petroleum,
162 F.3d at 813. Apparently, immediately after the contamination was
discovered upon the adjacent property, the contamination was cleaned
up, thus stopping any further damage. See id. at 807. Thus, the dis-
covery of the contamination coincided with the completion of the
damage.
To read Spartan Petroleum as laying down a blanket rule that dis-
covery of damage ends the trigger period of coverage in a progressive
property case would completely undercut the thrust of the South Car-
olina Supreme Court's opinion in Joe Harden. Obviously, under some
circumstances, and especially in a defective construction case, deteri-
oration of or damage to the property at issue can continue to occur
despite discovery of existing defects or damage. Critically, in the
present case, Wausau does not appear to dispute that Phase III build-
ings continued to deteriorate during the effective dates of the Three
Wausau Policies as a result of Stonehenge's defective construction
practices. Therefore, under South Carolina case law, an "occurrence"
15
has taken place for purposes of the Three Wausau Policies. We, there-
fore, affirm the liability portion of the district court's entry of judg-
ment upon Stonehenge's motion for summary judgment on its breach
of contract claim.
IV.
Wausau contends that if we uphold its liability on Stonehenge's
breach of contract claim, we must vacate the district court's judgment
and remand for recalculation of the amount it owes Stonehenge in
indemnification. In this regard, Wausau first argues that the district
court's use of the $750,000 confessions of judgment figure in calcu-
lating its pro-rata share, instead of using the $475,000 figure actually
paid by the other carriers, violated our holding in Hitt v. Cox, 737
F.2d 421 (4th Cir. 1984), and therefore, amounted to an abuse of the
district court's discretion. Alternatively, Wausau argues that sufficient
evidence exists to establish that the $750,000 figure is the product of
fraud and collusion, and therefore, cannot serve as the basis for estab-
lishing the amount of indemnification it owes Stonehenge.
Although we find no evidence in the record suggestive of fraud or
collusion, we agree with Wausau that the district court's use of the
$750,000 confessions of judgment figure instead of the $475,000 fig-
ure actually paid by the other carriers conflicts with our holding in
Hitt. In Hitt, we held that a conditional settlement whereby the
insured party agreed to pay the injured party an additional $150,000
in damages if the liability carrier was held obligated to indemnify it
was unreasonable, and therefore, invalid because"the negotiating par-
ties no longer ha[d] adverse interests and their settlement is presump-
tively unreasonable." Id. at 426. The rationale for our holding in Hitt
is that an insured should not be allowed to seek indemnity from a lia-
bility carrier for "amounts that the insured does not expect to pay out
of its own resources." Id. (emphasis added). To allow full recovery
against the liability carrier "would set a precedent allowing any
insured left to defend himself not only to settle at a reasonable
amount, but to give away an additional amount up to the liability limit
of the policy conditional on a successful indemnity suit against the
insurance company." Id.
In the present case, all of the evidence points to the conclusion that
Stonehenge Engineering Corporation and National Stonehenge Cor-
16
poration never intended to pay the Owners Association any excess of
their respective confessions of judgment not covered by Wausau.
With respect to National Stonehenge, under express terms of the Set-
tlement Agreement, completely overlooked by the dissent, the Own-
ers Association agreed not to file or execute upon the confession of
judgment signed by National Stonehenge Corporation. Clearly, in this
circumstance, National Stonehenge Corporation did not expect to pay
any amount of the balance due on its confession of judgment out of
its own resources in direct contravention of our holding in Hitt.
Therefore, under Hitt, the district court abused its discretion by using
the $750,000 confession of judgment figure with respect to National
Stonehenge Corporation. We reach this conclusion despite the district
court's finding that the Settlement Agreement between the Owners
Association and Stonehenge was not the product of fraud or collusion.
Hitt does not appear to require the presence of fraud or collusion
between the insured and the injured party in order to prevent full
indemnification on a conditional settlement when the insured never
expected to pay the conditional amount out of its own resources.
Unlike National Stonehenge Corporation, the Settlement Agree-
ment did provide that the Owners Association could execute on the
confession of judgment signed by Stonehenge Engineering Corpora-
tion if Stonehenge Engineering was not successful in obtaining
indemnification from Wausau. In support of its argument that Stone-
henge Engineering Corporation knew that it would never pay any por-
tion of the balance of its confessed judgment out of its own resources
when it entered into the Settlement Agreement, Wausau directs this
court to a letter dated April 3, 1996, approximately a year before the
execution of the Settlement Agreement. The letter, from the corporate
attorney for Stonehenge Engineering Corporation to a Wausau
adjuster, states:
[P]lease be advised that Stonehenge Engineering Corpora-
tion is not financially able to contribute to a settlement of
this case. This Corporation has been a shell corporation for
over five years for reasons that are totally unrelated to this
or any other litigation. The [Owners Association] seem[s] to
have finally gotten the message that the idea of a judgment
against Stonehenge Engineering Corporation is not nearly so
scary as the plaintiffs would like it to be; therefore, plaintiffs
17
altered their settlement demands accordingly. Nonetheless,
I want to reiterate that Stonehenge is not in a position to
contribute to the funding of the $400,000 settlement. . . .
(J.A. 310). This letter was before the district court below. Wausau
also directs this court to the following statement in a footnote in the
district court's order denying Stonehenge's motion to alter or amend
judgment:
[The Owners Association] agreed not to execute the Confes-
sion against National Stonehenge. Although execution is
allowed against Stonehenge Engineering, that entity is prob-
ably judgment proof, a consideration certainly understood
by [Stonehenge Engineering's] counsel, who represented
[the Owners Association] in the underlying suit and was
privy to this information.
(J.A. 198 n.1).
We agree with Wausau that the district court abused its discretion
in using the $750,000 figure as a basis for apportioning Wausau's
pro-rata share of the damages caused by Stonehenge Engineering
Corporation. First, the letter to the Wausau adjuster is compelling evi-
dence that Stonehenge Engineering Corporation never expected to
pay a dime of the balance of its confessed judgment from its own
resources. Second, the record is void of contradictory evidence on the
issue. Indeed, the district court itself all but expressly recognized that
Stonehenge Engineering never expected to pay a dime of the balance
of its confessed judgment out of its own resources.
Because neither National Stonehenge Corporation nor Stonehenge
Engineering Corporation ever expected to pay the balance due upon
their respective confessions of judgment, Hitt counsels that we vacate
the damage portion of the district court's judgment in favor of these
two companies and remand this case to the district court for entry of
judgment in their favor in the amount of $120,650, representing
25.4% of $475,000.7
_________________________________________________________________
7 Contrary to the position taken by the dissent, the fact that the district
court and the state trial judge both found the $750,000 settlement figure
18
V.
In its cross appeal, Stonehenge contends the district court erred in
refusing to award it interest at the South Carolina statutory rate for
judgments of 14% per annum, see S.C. Code Ann. § 34-31-20 (Law.
Co-op. 1987), from the date of the confessions of judgment (April 21,
1997) until the date of the entry of judgment on its breach of contract
claim (August 14, 1998). Stonehenge requested such interest in its
post judgment motion to alter or amend judgment. In its order deny-
ing Stonehenge's motion to alter or amend judgment, the district court
stated:
The record is devoid of any evidence that either of the
plaintiffs can be held liable for post-[confessions of] judg-
ment interest by virtue of the underlying [confessions of]
judgment. To the contrary, the Settlement Agreement
between [the Owners Association] and the plaintiffs clearly
provides that [the Owners Association] can attempt to col-
lect against Stonehenge Engineering only the deficiency
remaining under the Confession of Judgment. The Settle-
ment Agreement makes no provision for the recovery of
interest.
(J.A. 198).
We fully agree with the district court's reasoning in refusing to
award Stonehenge interest from the date of the confessed judgments
to the date of the entry of judgment against Wausau on Stonehenge's
breach of contract claim. We, therefore, affirm the district court on
this point.8
_________________________________________________________________
to be a fair and equitable amount to settle the litigation between the
Owners Association and Stonehenge is completely irrelevant to the ques-
tion before us, i.e., how much indemnification is due Stonehenge under
the Three Wausau Policies. More specifically, the fact that the $750,000
settlement figure is fair and equitable has absolutely no bearing on the
issue of whether Stonehenge intended to pay out of its own resources the
excess of the confessions of judgment.
8 We also affirm the district court's grant of Wausau's motion for sum-
mary judgment on Stonehenge's two bad faith claims, the other subjects
of Stonehenge's cross-appeal. Our review of the evidence relied upon by
Stonehenge in support of these claims reveals they are without merit.
19
VI.
In conclusion, we affirm the liability portion of the judgment
against Wausau with respect to Stonehenge's breach of contract
claim. We vacate, however, the damage portion of that judgment and
remand for entry of judgment in favor of Stonehenge in the amount
of $120,650. We affirm the district court's refusal to award Stone-
henge interest from the date of the confessed judgments to the date
of the entry of judgment against Wausau on Stonehenge's breach of
contract claim. Finally, we affirm the district court's entry of judg-
ment in favor of Wausau on Stonehenge's two bad faith claims.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED
TRAXLER, Circuit Judge, concurring in part and dissenting in part:
I agree with Parts I, II, III, and V of the majority opinion, but
respectfully have a difference of opinion as to the amount Wausau
owes as discussed in Part IV. Unlike the majority, I believe Hitt v.
Cox, 737 F.2d 421 (4th Cir. 1984), is inapplicable to this case, and
therefore, I dissent.
I.
After experiencing substantial defects in the construction of the
"Yacht Cove" condominium project, the Yacht Cove Owners Associ-
ation ("Owners Association") sued the general contractors, National
Stonehenge Corporation and Stonehenge Engineering Corporation
(collectively "Stonehenge"), in state court and asserted actual dam-
ages in excess of $1.3 million as well as a right to punitive damages.
The damage to the condominiums began on April 1, 1985 and contin-
ued until March 17, 1997. Stonehenge contended (and later proved)
that insurance existed for a substantial portion of the damage period.
The breakdown of coverage was as follows:
7/1/86 - 11/1/87 Maryland Casualty Insurance Company
11/1/87 - 11/1/91 Aetna Casualty and Surety Company
20
11/1/91 - 11/1/92 Home Insurance Company
11/1/92 - 11/1/95 Employers Insurance of Wausau
These insurance companies were notified of the lawsuit, and all
except Wausau participated in the defense of Stonehenge. Despite
repeated requests, Wausau refused to defend Stonehenge or to be
involved in settlement negotiations.
On the day of trial, Stonehenge and the Owners Association
reached a settlement in which all of the insurance companies, except
Wausau, participated. The general terms were placed on the record in
open court and in relevant part were as follows: Stonehenge Engineer-
ing Corporation and National Stonehenge Corporation agreed to con-
fess judgment to the Owners Association in the amount of $750,000.
With regard to the payments, the attorney presenting the settlement
told the court:
We also believe that the position of one carrier[,] Employ-
er's Mutual of Wausau[,] and their denial of coverage to the
defendants has placed Stonehenge in a precarious position.
Three of Stonehenge's liability insurance carriers have
agreed to pay the plaintiff the sum of $475,000 as follows:
The Aetna Casualty Insurance Company will pay $300,000;
the Maryland Insurance Company will pay $100,000; and
the Home Insurance Company will pay $75,000.
When the $475,000 payment is made to the plaintiff, that
will be credited against the Confession of Judgment leaving
a balance on the Confession of Judgment of $275,000.
Stonehenge will give the three insurance carriers who are
contributing to the resolution of the case a release from the
Yacht Cove claim upon receiving these payments, and the
payments have been agreed to be made to the plaintiff
within 30 days from today: March 17th.
J.A. 24. At the conclusion of the presentation, the state trial judge
made a specific finding, based upon his review of the file and the doc-
umentation supplied by the parties, that the settlement was "a fair and
equitable resolution of the matter." J.A. 29.
21
The formal settlement documents were later signed memorializing
the oral presentation made in open court. In addition to the terms
related above, the Owners Association signed a covenant not to file
or execute on the Confession of Judgment against National Stone-
henge Corporation unless, in subsequent litigation,"Wausau success-
fully prove[d] and a [c]ourt of competent jurisdiction determine[d]
that either [Stonehenge Engineering] or [National Stonehenge] were
not named insureds or additional named insureds under the [three]
policies of insurance [issued from 11/1/92 to 11/1/95] or and [sic] no
recovery is made against Wausau." J.A. 342 (emphasis in original).
The Owners Association gave no such covenant to Stonehenge
Engineering, but did agree not to execute on the judgment against
Stonehenge Engineering until all efforts to secure payment from
Wausau had been completed and then only to the extent the judgment
was left unpaid after the action against Wausau. In order to protect
Stonehenge Engineering, the Owners Association agreed not to settle
with Wausau for an amount less than what Stonehenge Engineering
would owe under the Confession of Judgment, without prior approval
from Stonehenge Engineering.
II.
Stonehenge subsequently brought this lawsuit against Wausau
seeking, among other claims, payment by Wausau of the balance of
the judgment owed by Stonehenge to the Owners Association --
$275,000. Ultimately, on cross-motions for summary judgment as to
Stonehenge's breach of contract claim, the district court granted
Stonehenge partial summary judgment against Wausau, finding that
coverage did exist. The parties then stipulated that it was appropriate
for the district court to allocate the amount of damages owed by Wau-
sau. In so doing, the district court made a specific finding that the
$750,000 settlement "was not entered into collusively and fraudu-
lently and [was] a proper amount upon which to calculate the alloca-
tion." J.A. 185.
We review the grant of summary judgment to Stonehenge de novo,
viewing the evidence in the light most favorable to Wausau. See Hig-
gins v. E.I. DuPont de Nemours & Co., 863 F.2d 1162, 1167 (4th Cir.
1988). With regard to the allocation of damages by the district court,
22
we review the district court's legal determinations de novo, see
Neathery v. M/V Overseas Marilyn, 700 F.2d 140, 143 n.2 (4th Cir.
1983), and its factual findings for clear error, see Bonds v. Mortensen
& Lange, 717 F.2d 123, 125 (4th Cir. 1983).
III.
A.
Because of the impracticality of determining the actual amount of
damage that occurred during each insurance period, the parties pro-
posed various methods of allocation. As might be expected, Wausau
submitted a proposal to the district judge in which it would pay as lit-
tle as $33,125, while Stonehenge submitted a theory to justify as
much as $259,575. Only two cases were cited to the district judge --
Joe Harden Builders, Inc. v. Aetna Casualty & Surety Co., 486 S.E.2d
89 (S.C. 1997), and Sentinel Insurance Co. v. First Insurance Co. of
Hawaii, 875 P.2d 894 (Haw. 1994). With this information, the district
judge turned to the task the parties had given him.
He first had to determine an appropriate baseline for the allocation
of damages. Wausau itself proposed only three choices: $750,000--
the amount of the Confession of Judgment; $625,000--Stonehenge's
lowest offer to settle in 1997; and $475,000--the amount the other
three insurance companies had paid which Wausau viewed as the set-
tlement total. After reviewing the information, the district judge found
that the $750,000 was a proper amount upon which to calculate allo-
cation. Because there are ample reasons to justify the district court's
finding, I would accept it.
First, the judge noted that the agreed cap of $750,000 was in settle-
ment of an alleged claim of over $1.3 million in actual damages. Sec-
ond, the district court found as fact that the settlement amount was not
the result of any collusion or fraud, and as he reminded in his order,
the state trial judge had also found the settlement figure to be fair and
equitable. Third, the $750,000 figure approximated amounts which
had been discussed in prior settlement negotiations between the Own-
ers Association and Stonehenge. And lastly, the district judge pointed
out that the use of the settlement amount would result in Wausau
making a coverage payment roughly in proportion to the payments
23
previously made by the other carriers based upon the number of years
each had insured Stonehenge. Because each one of these reasons is
sound, I would uphold the district court's finding of $750,000 as the
proper basis for damages and the appropriate starting point in the allo-
cation process.
B.
Rejecting the district court's rationale for allocating damages based
upon the settlement amount of 750,000, the majority instead takes the
position that the basis for allocation of damages is $475,000, which
represents the total already paid by the other three insurance compa-
nies. I disagree for several reasons.
First, rejection by the majority of the Confession of Judgment
amount is based on Hitt v. Cox, 737 F.2d 421 (4th Cir. 1984). This
case, however, was never cited to the district court during the alloca-
tion process. Its use here concerns me for a number of reasons, not
the least of which is the fact that I do not believe it is dispositive of
our case.
In Hitt, the insured defendant settled the underlying lawsuit for
$500,000, but only agreed to personally pay the injured plaintiff
$350,000. The remaining $150,000 would only be paid if the insured
successfully obtained indemnification from its insurance company for
an amount up to the policy limits of $500,000. In other words, the
insured's legal obligation to pay the additional $150,000 was directly
contingent on its success in the indemnification action against the
insurance company. We condemned such an arrangement and denied
indemnification to the insured because, after settlement, the insured
would never be obligated to contribute another dollar from its own
pocket. Thus, the underlying premise of Hitt was that the insured had
fully extinguished its personal exposure through the settlement for
$350,000 and, therefore, had nothing to lose by guaranteeing the
injured party more money so long as the additional money would only
be paid if the indemnification suit against the insurance company pro-
duced it.
The obvious difference in the case before us is that National Stone-
henge and Stonehenge Engineering from the outset of the settlement
had personal liability for the entire settlement amount. The Confes-
sion of Judgment was a valid judgment against both National Stone-
24
henge and Stonehenge Engineering. National Stonehenge would be
obligated to pay the judgment personally if the contingencies
described in the settlement agreement came to pass.
For Stonehenge Engineering, the Confession of Judgment stands as
a very real liability as well. Stonehenge Engineering is not immune
from execution of the judgment if the action against Wausau fails or
falls short of providing funds with which to satisfy the Confession of
Judgment. Liability for the amount not paid by the three insurance
companies, $275,000, continues against Stonehenge Engineering.
Wausau nevertheless strains to invoke Hitt on the theory that nei-
ther National Stonehenge nor Stonehenge Engineering ever expected,
as a practical matter, to pay the judgment. In so doing, Wausau neces-
sarily first tries to focus our attention on events which developed after
the settlement. Specifically, Wausau wants us to view National Stone-
henge as having had no exposure at the time of settlement because
now it has been established that both National Stonehenge and Stone-
henge Engineering were insureds under the Wausau policies and the
district judge has determined there will be recovery against Wausau.
In light of these findings, National Stonehenge is now cleared of any
liability.
In Hitt, unlike the case before us, the insured's responsibility to pay
did not exist upon settlement, but arose only after indemnification liti-
gation was pursued against the insurance company and then only if
pursued to a successful conclusion. However, in circumstances like
these, the financial exposure of a party to a settlement must be deter-
mined as of the date of settlement and not in the light of how legiti-
mate uncertainties later resolve themselves. When National
Stonehenge settled the case with the Owners Association, National
Stonehenge was liable for the balance due with only filing of the
judgment and execution thereon withheld pending resolution of the
contingencies in a subsequent and separate court proceeding. The fact
that National Stonehenge was ultimately relieved of responsibility
does not change the fact that when it settled the case, National Stone-
henge had committed itself to liability. Consequently, I find no basis
in Hitt to disregard the settlement amount agreed to by National
Stonehenge.
Wausau also seeks to invalidate Stonehenge Engineering's liability
for the settlement by alleging that Stonehenge Engineering was insol-
25
vent and hence had nothing to lose by settling the case for any
amount. In making this argument, Wausau seeks to equate the insured
in Hitt with Stonehenge Engineering by claiming that neither had any
incentive to limit the amount of the settlement. From this Wausau
argues that the agreement to pay more than $475,000 was a sham and
that Hitt dictates that the excess be disregarded. In my opinion, this
extends Hitt far beyond its intended effect.
Hitt does not deal with the insolvency of a party to a settlement.
Rather, Hitt's reference to payment from an insured's personal
resources was, in my view, merely to contrast that payment from pay-
ment which would be legally due only after successful indemnifica-
tion actions against insurance companies. Nowhere in Hitt is there a
reason to condition payment by an insurance company of a settlement
amount on the personal resources of an insured. Yet Wausau wants
to read Hitt as authority for it to ignore the validity of a settlement
amount solely because its insured may have been unable to pay at the
time. I cannot agree. Accepting this argument, in my opinion, is tanta-
mount to changing the terms of the very insurance contract at issue.
Wausau agreed to pay on behalf of Stonehenge Engineering (and
National Stonehenge) "those sums that the insured becomes legally
obligated to pay as damages because of . . . `property damage' to
which this insurance applies." J.A. 365. Nowhere in the contract is the
solvency of the insured a condition of payment, nor is there any such
limitation on indemnification for a settlement. And, as has been
shown previously, the insureds had a legal obligation to pay the Con-
fession of Judgment.
Of course, an insurance company is not without protection. It has
long been established that "[w]hen the insured in a liability policy set-
tles a claim in litigation against him without trial, the questions which
are open for consideration in a suit by the insured to the policy
include those which relate to coverage, liability and the extent
thereof." Employers Mut. Liab. Ins. Co. of Wisconsin v. Hendrix, 199
F.2d 53, 57 (4th Cir. 1952). Thus, the reasonableness of a settlement
"is a proper subject of inquiry." Id. at 60; see also Hitt, 737 F.2d at
425. But in the case before us, the state trial court specifically con-
cluded that the settlement was fair and reasonable and, in partial reli-
ance thereon, the district court found that there was no evidence of
fraud or collusion. Hence, I see no reason, and certainly no basis in
the insurance contract, to disregard the settlement amount and leave
26
the insured at risk on the presumption that the insured will never want
to pay, or be able to pay, the judgment against it.
C.
Even if Hitt is somehow applicable, and Stonehenge Engineering's
fiscal status is relevant, we still should not enter judgment at this time.
There have never been any findings of fact as to the financial status
of Stonehenge Engineering -- it has never been litigated. If Wausau's
responsibility to pay is dependent on whether Stonehenge Engineer-
ing was solvent at the time it entered into the settlement, Stonehenge
Engineering is entitled to prove that it was solvent. Wausau asks us
to excuse litigation of this question before the district court and,
instead, to decide this factual dispute ourselves from the fragments of
evidence which happen to appear in the Joint Appendix. I cannot
sanction resolution of this issue in Wausau's favor when Stonehenge
Engineering has never had a chance, much less a need, to present evi-
dence of its solvency.
IV.
As stated previously, I agree with the district judge that the correct
damage basis is $750,000. After deciding this, the district judge pro-
ceeded to compute the proportion of damage Wausau should bear.
Specifically, after determining the period during which the damage
occurred, the judge found that Wausau's insurance coverage between
November 1, 1992 and November 1, 1995 accounted for 25.4 percent
of the total damage period. Then, utilizing the total damage figure of
$750,000, the judge determined that Wausau owed $190,500 from its
$1 million coverage.
The majority agrees that Wausau had coverage for 25.4 percent of
the damage period, but limits the judgment to Stonehenge to $120,650
-- a figure calculated upon what the three other insurance companies
collectively agreed to pay, in varied amounts depending upon their
respective coverage periods. I confess to being unable to understand
how the majority reaches this result.
As an initial premise, I am not so willing as the majority to pre-
sume that Maryland Casualty, Aetna, and Home Insurance, which col-
lectively had coverage for only a little over half of the total damage
period, agreed to pay the total amount of actual damages. Further-
27
more, if Hitt controls, as the majority believes, and any amount
agreed to be paid over and above the amount the other insurance com-
panies agreed to pay is "patently unreasonable" and "invalid," Hitt,
737 F.2d at 426, then it seems that no additional money should be
paid to Stonehenge, leaving Wausau with no obligation at all. Further,
if Wausau's responsibility is to be a percentage of the $475,000
already paid in full by the other insurance companies, requiring Wau-
sau to pay $120,650 will actually result in Stonehenge recovering an
amount over and above the $475,000.
These anomalies, in my judgment, show that the resolution the trial
judge reached was fair and eminently reasonable. The chart below
reflects his decision. A comparison of the amounts actually paid by
the other insurance companies to the allocations the district judge
used in his independent determination reflects the fairness of his deci-
sion.
EQUITABLE ALLOCATION OF DAMAGES OCCURRING
FROM 11/1/85 TO 3/17/97
__________________________________________________________________________
Carrier Dates of Number of Percentage Proportion Actually
Coverage Years of of Time of Damages Paid
Coverage There Was Due Per
Coverage District
Court
________________________________________________________________________
Initial Carrier 4/1/85 to 1.25 .106 79,500
or Stonehenge1 7/1/86
Maryland 7/1/86 to 1.33 .113 84,750 100,000
Casualty 11/1/87
Aetna 11/1/87 to 4 .339 254,250 300,000
11/1/91
Home 11/1/91 to 1 .085 63,750 75,000
Insurance 11/1/92
Wausau 11/1/92 to 3 .254 190,500 [120,650]2
11/1/95
Final Carrier 11/1/95 to 1.21 .103 90,750
or Stonehenge 3/17/97
___________________________________________________________________________
_________________________________________________________________
1 According to the district court:
The record does not identify the initial and final insurance carri-
ers during the trigger period. The identity of these carriers, or
28
Although the other insurance companies paid more in settlement
than would have been called for under the district judge's calcula-
tions, the differences are, in my opinion, minimal. If anything, Wau-
sau would obviously benefit financially from the fact that the
assessment of its responsibility was made with the cool reflection of
a district judge rather than in the heat of a state court battle with the
prospect of a large actual and punitive damage verdict staring it in the
face.
V.
In conclusion, I would accept the sum of $750,000 as a proper
basis for the allocation of Wausau's share of the damages, and I
would affirm the district court's method of computing the specific
sum due from Wausau. Therefore, I respectfully dissent from Part IV
of the majority's opinion.
_________________________________________________________________
whether any coverage even existed during those periods, is
immaterial for the purpose of establishing Wausau's equitable
share. The Court's calculation is based on proportioning dam-
ages throughout the duration of the entire trigger period. If the
plaintiffs did not have coverage in the first and last periods, then
they would be responsible for the damages that are apportioned
to those periods.
J.A. 192.
2 This amount reflects Wausau's share per the majority opinion.
29