Let the settling party beware… NJ enforces agreements

An insurer’s settlement of litigation is binding on its insured even where there is a substantial self – insured retention. During mediation of a claim by two boilermakers injured in a refinery explosion, the plaintiffs were offered $1.6 million. The parties agreed that a settlement would resolve all claims and cross claims pending in the litigation. However, the plaintiffs did not outright agree to the amount of the offer and continued to negotiate with the insurance adjuster – finally accepting $1.65 million.

At that point, the settlement of the cross claims began to unravel. The defendants in the case included the owner of the refinery and the company it contracted to provide maintenance services along with two of its subcontractors. The maintenance contractor assumed the defense of the refinery owner and then sought defense and indemnification from its two subcontractors. Despite contractual provisions requiring the subcontractors to name the owner and contractor as additional insureds on their CGL policies, both insurers denied that such coverage had been secured. While one of the insurers participated in the settlement, the other chose not to contribute.

The mediated settlement agreement included dismissal of all cross-claims including claims against both subcontractors for breach of contract. However, the contractor retained the right to pursue the non-participating subcontractor’s insurer in a separate declaratory judgment action.

On second thought, the contractor, who had a substantial self insured retention, became concerned that, in the event the declaratory judgment failed, it would have no recourse for breach of contract against its subcontractor once the cross-claim was extinguished. A fight to enforce the term of the settlement agreement requiring dismissal of the cross-claim ensued.

Even though the subcontractor had not contributed towards the settlement, the Appellate Division enforced the terms of the agreement requiring dismissal of the breach of contract cross-claim. In fact, the court considered this a non-factor in its decision.

Instead, the court focused on the right of the contractor’s insurer to settle the case. Absent express language in the insurance policy requiring the insured’s consent to settle, an insurer has the right to control the terms of the settlement so long as it proceeds in good faith. Thus, notwithstanding the contractor’s self insured retention, its right to pursue the cross-claim against its subcontractor was extinguished by its insurance adjuster’s settlement agreement.

See [i]Davis v. Valero Refining Co[/i], at http://www.judiciary.state.nj.us/opinions/a1337-10.pdf

If you have any questions or comments about this post, please contact Denise at dricci@wcmlaw.com.