D.R. Horton, Inc. Denver et al v. Travelers Indemnity Company of America, The et al

Filing 462

ORDER On Motions for a Determination of Law with Respect to Allocation. Ark Construction Services Brief on Allocation ECF No. 455 and Jorge Romero d/b/a Specialist Paints Motion for a Determination of Law Re: Allocation ECF No. 456 , joined by M id-Century Insurance ECF No. 457 , are hereby GRANTED insofar as they request a determination of law as to allocation; The allocation method shall be by equal shares among the subcontractors that have appeared in this case, either directly or thro ugh their insurers, with offsets for any prior contributions to DRHs defense fees and costs, as explained in this Order; andThis case remains set for an eight-day jury trial to commence on March 10, 2014, by Judge William J. Martinez on 1/17/2014.(ervsl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 10-cv-02826-WJM-KMT
THE TRAVELERS INDEMNITY COMPANY OF AMERICA, a Connecticut corporation,
TRAVELERS INDEMNITY COMPANY, a Connecticut corporation,
TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, a Connecticut corporation,
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, a Minnesota corporation, and
CHARTER OAK FIRE INSURANCE COMPANY, a Connecticut corporation,
Third-Party Plaintiffs,
v.
AAA WATERPROOFING, INC., a Colorado corporation,
ARK CONSTRUCTION SERVICES, INC., a dissolved Colorado corporation,
CONCRETE MANAGEMENT CORPORATION, a Colorado corporation,
COURMEG LANDSCAPING DESIGN, LLC, a Colorado Limited Liability Company,
D.A.S.H. CONCRETE, INC., a Colorado corporation,
DOVE CREEK ENTERPRISES, INC., a Colorado corporation,
FOSTER FRAMES, INC., a Colorado corporation,
J & K PIPELINE, INC., a Colorado corporation,
JORGE ROMERO, d/b/a SPECIALIST PAINT,
LEVEL MASONRY, INC., a dissolved Colorado corporation,
MID-CENTURY INSURANCE, a California corporation,
PROTO CONSTRUCTION AND PAVING, INC., a Colorado corporation,
R.G. INSULATION CO., INC., a trade name of G.H. & W, Incorporated, a Missouri
corporation,
TIG INSURANCE, a California corporation, and
ZURICH SPECIALTIES LONDON, LTD., a non-incorporated re-insurer,
Third-Party Defendants.

ORDER ON MOTIONS FOR A DETERMINATION OF LAW
WITH RESPECT TO ALLOCATION

This matter is before the Court on the Motion for a Determination of Law Re:
Allocation filed by Third-Party Defendant Jorge Romero, d/b/a Specialist Paint
(“Specialist”) (ECF No. 456), the Joinder in Specialist’s Motion filed by Third-Party

Defendant Mid-Century Insurance (“Mid-Century”) (ECF No. 457), and the related Brief
on Allocation filed by Third-Party Defendant Ark Construction Services, Inc. (“Ark”)
(ECF No. 455) (collectively the “Motions”). The Court hereby grants the Motions and
sets forth its ruling with respect to allocation below.
I. BACKGROUND
This case arises out of a 2003 state court action alleging construction defects
filed by the homeowners association for the Summit at Rock Creek, a residential
community for which Plaintiff D.R. Horton (“DRH”) was engaged as general contractor
(“Construction Defects Litigation”). Third-Party Defendants AAA Waterproofing, Ark,
Concrete Management Corp., Courmeg Landscaping Design, LLC, D.A.S.H. Concrete,
Dove Creek Enterprises, Foster Frames, J & K Pipeline, Specialist, Level Masonry, MidCentury, Proto Construction and Paving, R.G. Insulation, TIG Insurance, and Zurich
Specialties London, Ltd. (collectively the “Third-Party Defendants”) are either
subcontractors that performed work on the property at the Summit at Rock Creek, or
insurers of those subcontractors. DRH’s contracts with the various subcontractors
required each of them to carry a commercial general liability insurance policy naming
DRH as an additional insured party. Third-Party Plaintiffs The Travelers Indemnity
Company of America, Travelers Indemnity Company, Travelers Indemnity Company of
Connecticut, St. Paul Fire and Marine Insurance Company, and Charter Oak Fire
Insurance Company (collectively “Travelers”) are insurance companies that insured
other subcontractors, who are not parties to this action.
The Construction Defects Litigation was ultimately settled in March 2005 for
$39.5 million. In the course of litigation, DRH incurred approximately $1.2 million in
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fees and costs. During and after the conclusion of the Construction Defects Litigation,
DRH attempted to negotiate with Travelers and other subcontractors’ insurers regarding
the extent of their obligations for payment of DRH’s defense fees and costs. DRH
sought to recover the $200,000 deductible DRH paid, and the amount that DRH’s
insurer paid in defense fees and costs.1 In the Construction Defects Litigation, DRH
filed third-party claims and cross-claims against these subcontractors, some of which
resulted in settlement negotiations and agreements. In the course of its negotiations,
DRH collected payments from several parties to the case here, including Travelers, TIG
Insurance, and Mid-Century.2
On October 20, 2010, DRH filed this action against Travelers in state court.
(ECF No. 1-1.) Travelers removed the action to this Court on the basis of diversity
jurisdiction (28 U.S.C. § 1332), and subsequently filed counterclaims against DRH, as
well as third-party claims against the Third-Party Defendants. (ECF Nos. 1, 30, 37.) In
March 2013, DRH and Travelers settled their claims against each other. (ECF No.
412.) Thus, the only remaining claims are Travelers’ claims against the Third-Party
Defendants, in which Travelers seeks contribution from the Third-Party Defendants for
having paid more than its equitable share of DRH’s defense fees and costs in the
Construction Defects Litigation. (ECF No. 30 ¶¶ 71-89.)

1

DRH’s insurer assigned this claim for recovery to DRH.

2

DRH collected additional amounts from other parties. Mid-Century’s payments were
made as consideration for settlement agreements between DRH and Farmers Insurance
Exchange, of which Mid-Century is a subsidiary, on behalf of two subcontractors insured by
Mid-Century. (See ECF Nos. 457-1 & 457-2.)

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On October 31, 2012, the Court entered an Order which held that Travelers’
obligation to defend DRH was a joint and several duty. (ECF No. 397 at 16, 20.) The
Court’s Order also rejected Travelers’ proposal to allocate each subcontractor’s
obligation to contribute to DRH’s defense fees and costs based upon the
subcontractor’s relative underlying liability for the construction defects. (Id.) However,
the Order did not make a determination as to the proper allocation method.
Consequently, the instant Motions were filed on December 16, 2013, seeking a
determination of law as to the proper allocation of the subcontractors’ respective
obligations to contribute to DRH’s defense fees and costs. (ECF Nos. 455, 456, &
457.) Travelers filed a Response. (ECF No. 461.) No replies were permitted.
II. DISCUSSION
As the Court previously ruled, a liability insurer’s duty to defend is a joint and
several duty, such that an insurer who breaches this duty can be found liable for the
entire amount of defense fees and costs, and that insurer can then seek equitable
contribution from any co-insurers owing the same duty to defend. (ECF No. 397 at 16
(citing authority from California, Montana, New York, Texas, and Washington).)
Colorado law permits such pro rata equitable contribution from co-insurers of the same
loss. See Nat’l Cas. Co. v. Great Sw. Fire Ins. Co., 833 P.2d 741, 747-48 (Colo. 1992).
The parties here agree that no controlling precedent mandates a particular allocation
method under Colorado law, and that equitable principles govern the determination of
allocation. (See ECF Nos. 455 at 5-6; 456 at 5; 461 at 4.)

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The Motions before the Court seek a ruling on the method of allocating the
defense costs and fees incurred by DRH in the Construction Defects Litigation. The
parties raise two primary issues with respect to allocation, requesting that the Court rule
on: (1) whether allocation should be based on policy limits or equal shares, and (2)
whether such allocation applies to all 54 subcontractors that DRH implicated in the
underlying state case (or their respective insurers), or only the 23 subcontractors that
are represented as parties or by their insurers in this case. (ECF Nos. 455, 456, 457,
461.) Mid-Century seeks an additional determination of its obligations given its prior
settlements with DRH. (ECF No. 457 at 3-5.) The Court will discuss each issue in turn.
A.

Allocation
The parties have presented the Court with various methods of allocation from

which to select, focusing on the “equal shares” method and the “policy limits” method.
(See, e.g., ECF No. 455 at 6-11.) Travelers and the Third-Party Defendants all support
some variation of an equal shares allocation method. (Id.; ECF Nos. 456 at 5; 457 at 2;
461 at 13.)
The Court has little difficulty rejecting the policy limits-based allocation method in
this case. As Ark points out in its brief, such a system is not workable in this case,
because numerous parties failed to obtain the requisite insurance policies, making them
de facto self-insurers without policy limits upon which to base their allocation. (ECF No.
455 at 6-7.) The process of determining the allocation for such de facto insurers would
require the Court either to adopt an arbitrary policy limit for them, or to hybridize its
approach and assign a policy limit based on a time-on-the-risk determination of the

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scope of its de facto policy. This process would be just as time-consuming and
unreliable as Travelers’ previously proposed method of allocating by respective liability
for the underlying construction defects, which the Court rejected for lack of a workable
and reliable way to determine each subcontractor’s respective liability given the
settlement in the underlying case. (ECF No. 397 at 20.) As the policy limits-based
allocation method would be similarly unworkable here, the Court will not adopt such a
method.
Instead, the Court finds that an equal shares method will result in the most
equitable allocation in this case. While equal shares allocation has been applied in a
minority of jurisdictions, the circumstances of this case—in which each
subcontractor/insurer had a joint and several duty to provide a complete defense to
DRH, and no reliable method exists to tie allocation to liability or policy limits—militates
in favor of a holding that those subcontractors/insurers’ responsibility for equitable
contribution to DRH’s defense costs should be apportioned evenly.3 See Reliance Ins.
Co. v. St. Paul Surplus Lines Ins. Co., 753 F.2d 1288, 1291 (4th Cir. 1985); see also
Cont’l Cas. Co. v. Aetna Cas. & Sur. Co., 823 F.2d 708, 712 (2d Cir. 1987); Century
Indem. Co. v. Liberty Mut. Ins. Co., 815 F. Supp. 2d 508, 514 (D.R.I. 2011).
3

The parties appear to disagree on the correct interpretation of the Court’s Order
holding that the liability insurers’ duty to defend is a joint and several obligation. (See, e.g.,
ECF No. 456 at 8-10.) The Court’s Order referred to each insurer’s joint and several duty to
provide a complete defense to DRH, and concluded that any one insurer who breached that
duty could be found liable for the entire amount of DRH’s defense costs, which insurer could
then seek equitable contribution from other co-insurers. (ECF No. 397 at 16.) The Court did
not hold that each co-insurer owed a joint and several duty of contribution, such that the
monetary obligation could be shifted completely from the insurer seeking contribution onto any
other co-insurer, as that would inevitably result in a nearly interminable string of actions for
equitable contribution. This matter has endured long enough without such an invitation to
future litigation.

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However, though the parties agree on equal shares allocation, they disagree
upon how to allocate the shares, with Ark contending that the Court should assign one
share to each policy (or de facto policy), and the rest of the parties arguing for one
share per subcontractor. (See ECF Nos. 455 at 10-11; 456 at 7-8; 461 at 10-13.)
Because some subcontractors held multiple policies, a per-policy allocation would
increase the number of shares based on each insurer’s separate joint and several duty
to defend, but would arbitrarily assign subcontractors with de facto policies only one
share by default. In contrast, a per-party allocation would effectively assign fractional
shares to insurers of subcontractors that held multiple policies. Neither method
completely avoids arbitrary determinations. However, the Court finds persuasive
Travelers’ argument that, because each subcontractor (or its respective insurer) owed
DRH a complete duty to defend only once, a subcontractor that held multiple policies
should not be allocated multiple shares. (See ECF No. 461 at 11.) Therefore, the
Court concludes that the most equitable allocation method here is to divide the
contribution amounts into equal shares per subcontractor.
B.

Scope of Application
The parties also disagree about which subcontractors should be included in the

allocation. The Third-Party Defendants argue that allocation should be applied to all 54
subcontractors implicated by DRH in the Construction Defects Litigation. (ECF Nos.
455 at 5; 456 at 7-8.) In contrast, Travelers contends that allocation should apply only
to the subcontractors who are represented in the instant case, either directly or through
their insurers. (ECF No. 461 at 6-11.) Both sides of this dispute make overtures to the

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Court’s determination that each liability insurer—including subcontractors serving as de
facto self-insurers—has a joint and several duty to provide a complete defense. (See
ECF No. 397 at 16.)
The Third-Party Defendants argue that the joint and several duty to defend
means that every subcontractor should be allocated a share of the cost of defense,
regardless of whether Travelers chose to seek contribution from it in this action. (ECF
Nos. 455 at 5; 456 at 7-8.) This would effectively require Travelers to bear the shares
for all parties from whom it did not seek contribution. Travelers, unsurprisingly, objects
to this method, and further suggests that allocation to all subcontractors owing a duty to
defend would require the jury in this case to make a separate, time-consuming
determination of whether each non-party subcontractor had a duty to defend. (Id. at 89.) Travelers contends that the witnesses and exhibits currently proposed for trial by
the Third-Party Defendants will not establish the evidentiary bases needed for such
determinations. (Id.)
Travelers argues that its proposal, more than the Third-Party Defendants’,
follows from the Court’s Order holding jointly and severally liable all insurers owing a
duty to defend. Travelers points out that many non-party subcontractors did not owe
DRH a duty to defend, and that it dismissed some such parties from this case after
determining they did not owe such a duty. (ECF No. 461 at 6-11.) Necessarily, then,
Travelers’ proposal arbitrarily depends on Travelers’ decisions as to which parties owed
a duty to defend. However, the Third-Party Defendants’ method itself depends on
DRH’s prior litigation decisions in the underlying case, as DRH made a similar
determination in choosing to sue the subcontractors it believed owed it a duty to
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defend. (See ECF No. 455 at 3-4.) Thus, neither method completely eliminates such
potentially arbitrary determinations.
The Court declines to select an unworkable scope of allocation that would
potentially result in protracted argument and distraction from the remaining issues in
this case. As such, the Court finds that Travelers’ proposal of allocating only to
subcontractors represented in this case is the proper method here, as it most closely
adheres to the Court’s understanding of the parties’ obligations while remaining
workable and reliable.
This decision by no means represents a holding that all subcontractors not
named in this case necessarily owed no duty to defend or to contribute, but rather only
that, in applying its equitable powers in this matter, the Court will not consider allocation
to non-parties.
C.

Effect of Settlement
Finally, Mid-Century argues that it should not be deemed jointly and severally

liable for the entire cost of DRH’s defense, because it already contributed to such fees
and costs when it settled with DRH in 2009 on behalf of the two subcontractors it
insured. (ECF No. 457 at 3-5.) Mid-Century contends that, at most, it should be liable
only for equitable contribution in the amount of its equal share of those costs that
exceeds the amount Mid-Century already paid to DRH. (Id. at 5.)
Mid-Century’s arguments recollect those made by TIG Insurance in its motion for
summary judgment, in which TIG Insurance contended that its payment to DRH of over
$150,000 in defense fees and costs constituted more than its equitable share. (See

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ECF No. 354.) In denying summary judgment to TIG Insurance, the Court held that it
could not determine whether TIG Insurance has already contributed its equitable share
of defense fees and costs because an allocation method had not yet been selected.
(ECF No. 397 at 36.) However, the Court noted that the extent to which a party has
already contributed to DRH’s defense fees and costs would be considered when
calculating that party’s equitable share of the judgment. (Id. at 36 n.14.)
As the Court has now determined that an equal shares allocation is appropriate
in this case, a party that can demonstrate that it has already paid some amount to DRH
for its defense fees and costs will have its equitable share offset by the amount of such
payment. Thus, to the extent that Mid-Century can demonstrate that its settlement
payments to DRH constituted a contribution to DRH’s defense fees and costs, MidCentury’s equitable shares for those subcontractors will be offset by the amount of
those payments.
III. CONCLUSION
In accordance with the foregoing, the Court hereby ORDERS as follows:
(1)

Ark Construction Services’ Brief on Allocation (ECF No. 455) and Jorge Romero
d/b/a Specialist Paint’s Motion for a Determination of Law Re: Allocation (ECF
No. 456), joined by Mid-Century Insurance (ECF No. 457), are hereby
GRANTED insofar as they request a determination of law as to allocation;

(2)

The allocation method shall be by equal shares among the subcontractors that
have appeared in this case, either directly or through their insurers, with offsets
for any prior contributions to DRH’s defense fees and costs, as explained in this
Order; and
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(3)

This case remains set for an eight-day jury trial to commence on March 10,
2014.
Dated this 17th day of January, 2014.
BY THE COURT:

_________________________
William J. Martínez
United States District Judge

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