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Contractors’ Uninsured Exposure Tool: Consent Judgments



By Mary Leigh Pirtle

The homeowners discovered significant water damage to their home during the construction phase and hired an inspector to analyze the amount of damage to the project.  The inspector determined that the damage was so extensive that the home should be demolished and rebuilt.  The contractor submitted a claim under his commercial general liability (“CGL”) policy for defense and indemnity against the homeowners’ potential claims. However, the insurance company concluded that the contractor was not covered under the policy.  

Settlement of Claims with contractor
The homeowners brought suit against the contractor, and the parties ultimately entered into a consent judgment and settlement agreement regarding the homeowners’ claims.  Under the terms of the agreement, the contractor agreed to a confession of judgment in favor of the homeowners in the amount of $1,545,121 and agreed to assign to the homeowners all of the rights and claims it held against the insurance company for defense, indemnity, and/or bad faith.  In exchange, the homeowners agreed to satisfy the judgment solely from the insurance company.  Once the agreement was entered, the homeowners brought suit against the insurance company, alleging it committed a breach of contract and bad faith for its failure to defend and indemnify the contractor.

The trial court granted the insurance company’s motion for summary judgment after determining there was no coverage under the CGL policy due to the applicability of multiple policy exclusions.  As a result, the trial court concluded that the insurance company had no duty to defend or indemnify the contractor.  

Contract terms govern
On appeal, the Supreme Court of South Dakota reviewed the specific language of the contract and each exception claimed by the insurance company.  After analyzing the specific language and the property damage alleged to be covered, the court agreed with the trial court’s determination that multiple policy exclusions applied to the damages that had occurred to the homeowners’ property.  Therefore, the court concluded no breach of contract had occurred because the insurance company had no duty to defend or indemnify the contractor under the CGL policy.  In regards to the homeowners’ claim of bad faith, the court stated to prove bad faith there must be an absence of a reasonable basis for denying the policy benefits and the knowledge or reckless disregard of the lack of a reasonable basis for denial.  The court found that the insurance company had a reasonable basis for denying coverage because multiple policy exclusions applied to the particular situation. Thus, the court concluded the insurance company did not act in bad faith in rejecting the homeowners’ request for defense and indemnity.  

Take away
Because the homeowners had entered into a settlement agreement and consent judgment with the contractor, which prevented them from executing a judgment against him, they were left without recourse after losing against the insurance company. While the potential viability of consent judgments are highly jurisdiction specific, it can be an excellent way for an insured, such as the contractor in this case, to avoid uninsured exposure and litigation expenses in defending against an injured plaintiff after the insurance company denies coverage.

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