Insurance Company Pays Up, Resolving Unallocated Settlement and Defense Costs
On August 13, 2009, the City of Sterling Heights, Michigan received a check from United National Insurance Company for over $15.4 million, satisfying a judgment awarded by the federal district court for the Eastern District of Michigan and upheld on appeal by the Court of Appeals for the Sixth Circuit. Apart from this payment, United National and Sterling Heights will continue to litigate the amount of additional damages that the Sixth Circuit determined to be due to the City.
In 2003, after several years of litigation, the City settled for $31 million various civil rights and defamation claims brought against it by Hillside Productions, Inc., the owners and operators of the Freedom Hill Amphitheatre located in Sterling Heights. Since then, the City sought to recover this payment, as well as the costs of defending the Hillside claims, from its various insurance companies. Once the Sterling Heights’ litigation with Hillside ended, it found itself in a new lawsuit with its insurance companies, none of whom wanted to pay for the Hillside litigation. In 2005 and 2006, two of the City’s insurers settled with the City for $18.75 million, leaving only United National.
Throughout its dispute with the City, United National had contended that it was only responsible for defamation-related allegations, which the insurer argued represented only a small fraction of the total value of the City’s global settlement with Hillside. In addition to defamation, that settlement had also resolved numerous claims that the trial court determined were not covered by United National’s insurance policies, such as violations of Hillside’s civil rights. In 2006, the trial court ruled that at least one-third of the total value of the City’s settlement, defense costs, and consequential damages should be United National’s responsibility, using a pro rata time-on-the-risk formula, given that it was one of three insurance companies that provided insurance for claims that had been settled. In 2007, the City was awarded a judgment against United National that was worth in excess of $14.6 million.
United National appealed the City’s judgment, arguing among other things that the defamation-related claims could not reasonably represent one-third of the City’s settlement with Hillside. United National protested that allocation was not appropriate to resolving an insurer’s liability for an unallocated global settlement of several types of covered and uncovered claims. On March 31, 2009, the Sixth Circuit ruled handing a complete victory for Sterling Heights. The Sixth Circuit held that the one-third allocation was an appropriate means of estimating those damages relating to covered defamation allegations. The Court accepted the City’s arguments that pro rata allocation was “fair” due to the indivisibility of harm alleged by the underlying plaintiffs flowing from both uncovered and covered causes of action, the failure of the insurance company to participate meaningfully in the settlement process, as well as the “impossibility” of requiring the City to prove the value of its covered causes of action after the fact.
The City will now pursue an additional $875,000 in damages because the appeals court also accepted the City’s arguments that the trial court significantly undervalued the City’s consequential damages. The Court of Appeals agreed with the City that it should be entitled to consequential damages from the date United National breached its insurance policy, not the later date originally selected by the district court.