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To Avoid Further Litigation On “Settled” Matters, It Is Essential That A Settlement Agreement Does Not Leave Loose Ends

January 14, 2022

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<p style="text-align: justify;">Settlement agreements typically signify the end of a legal dispute. However, to avoid a headache and potential for further litigation on “settled” matters, it is essential that the settlement agreement does not leave any loose ends. In <em><a href="">Cincinnati Insurance Company v. Acadia Insurance Company</a></em>, 2021 WL 6071718 (4<sup>th</sup> Dep’t 2021), a woman fell on property owned by 60 LBC, insured by Plaintiff Cincinnati Insurance. 60 LBC hired a contractor to clear snow and ice from the area where the woman fell. Pursuant to the snowplow contract, the contractor was required to defend and indemnify 60 LBC for any injuries and to list 60 LBC as an additional insured. As such, the contractor procured coverage from Defendant Acadia Insurance.</p>
<p style="text-align: justify;">Of course, the woman sued 60 LBC for negligence, and 60 LBC consequently requested  defense and indemnity from Acadia Insurance on the basis that it was an additional insured on the contractor’s policy. However, Acadia Insurance disclaimed coverage to 60 LBC on the ground that it was not an additional insured. Subsequently, in the litigation that ensued, 60 LBC was defended by Cincinnati Insurance. During the litigation, Cincinnati Insurance brought a third-party action against the contractor, asserting a breach of contract based on contractor’s failure to defend or indemnify 60 LBC and obtain coverage for 60 LBC as an additional insured.</p>
<p style="text-align: justify;">Eventually, the underlying personal injury action was settled in an agreement whereby the woman received $350,000 from the contractor (paid by Acadia) and $50,000 from 60 LBC (paid by Cincinnati).  After the settlement, Cincinnati commenced an action against Acadia for breach of contract, alleging Acadia breached the contractor’s insurance policy by disclaiming coverage to 60 LBC as an additional insured. Acadia moved to dismiss the complaint, contending that 60 LBC’s coverage claim against Acadia was encompassed in the settlement and was barred by <em>res judicata</em>.</p>
<p style="text-align: justify;">Upon review, the Appellate Division, Fourth Department held that that 60 LBC’s coverage claim against Acadia was not barred by <em>res judicata</em> because it was not encompassed in the settlement. The settlement made no mention of any claims directly against Acadia Insurance by 60 LBC or anyone else, nor did the stipulation of discontinuance. Essentially, Cincinnati Insurance’s cause of action against Acadia Insurance was considered to be separate and distinct from the disputes discussed in the settlement because Acadia Insurance was never sued for wrongly disclaiming coverage to 60 LBC. Therefore, since the settlement was inapplicable, the Fourth Department permitted Cincinnati Insurance—having paid $50,000 on behalf of 60 LBC—to proceed against Acadia Insurance on the coverage claim as a subrogee of 60 LBC.</p>
<p style="text-align: justify;">This alarming overlook by the party(ies) finalizing settlement left an insurer subject to further coverage litigation and significant exposure.  It is a painful lesson to learn, given the ability of the party(ies) to initially conclude the matter and mitigate loss when the underlying suit was being settled.</p>
<p style="text-align: justify;">Thanks to Drew Fryhoff for his contribution to this post. Should you wish to discuss, please contact <a href="">Thomas Bracken</a>.</p>


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