Why it matters: A New Jersey appellate panel ruled that an insured’s settlement of an underlying action involving alleged defective installation of windows was reasonable and ordered the insurer to pay the amount of the settlement. In this case, a condominium association sued Home Improvements by Randy (HIBR), a window installation company, after discovering water damage due to allegedly defective installation of windows in the association’s buildings. HIBR tendered the suit to three of its insurers that provided liability policies during the relevant time period. Two of the insurers provided a defense, but National Grange Mutual Insurance Company refused to participate. HIBR settled the underlying suit and assigned its rights in its insurance to the condo association, which then sued National Grange. A trial court ruled that National Grange was not required to pay the underlying settlement because the association had not demonstrated that the amount of the settlement was reasonable. But the appellate panel reversed, determining that the deal was reasonable. “In view of the probability of the association’s success and the size of the possible recovery at a potential trial, the association met its burden of showing that a reasonable factfinder could have found that a settlement for thirty percent of the damages that expert reports attributed to HIBR was reasonable,” the court said.

Detailed discussion: The Rockaway Condominium Association manages fourteen buildings and a clubhouse in an age-restricted residential condominium development in New Jersey known as Fox Hills. The first building was completed in 1999 and construction on the last building was completed in 2003. A few years later, an engineering company discovered substantial damage at Fox Hills resulting from continual exposure to moisture that had entered the buildings through defectively installed windows. The association filed suit against 77 entities alleging construction defects, product defects, and breach of contract.

One of the defendants was Home Improvements by Randy (HIBR), which was a subcontractor hired to install most of the windows at Fox Hills between April 2000 and March 2003. During the relevant time period, HIBR was covered by three insurance policies: one issued by Ohio Casualty Insurance Company, effective from 1995 through 2002; one issued by Zurich Insurance Company, effective from July 2003 through July 2004; and one (plus a separate umbrella policy) issued by National Grange Mutual Insurance Company, effective July 2003 through July 2007.

OCI and Zurich provided HIBR with a defense in the Fox Hills litigation, but National Grange denied coverage and refused to defend. Prior to trial in the underlying case, the parties stipulated that, between 1999 and 2007, water infiltrated each of the buildings and caused damage due to a variety of causes, including defectively installed windows. An engineering company provided a report attributing 30 percent of all water infiltration damage—or $4.5 million—to HIBR’s defective window installation.

HIBR eventually settled the claims against it for $1.9 million. Of this amount, HIBR settled its insurance claims against OCI and Zurich for $159,436 and $140,563, respectively. HIBR then assigned its claims for coverage of the remaining $1.6 million against National Grange to the Association.

The association then sued National Grange. At trial, the parties agreed to numerous stipulations, including the expert reports that attributed 30 percent of the damage to HIBR and the timeline for when the damage occurred.

National Grange moved to dismiss the association’s claims, arguing that the $1.6 million settlement amount was not reasonable in light of HIBR’s potential liability. National Grange also argued that HIBR’s settlement of its claims against OCI and Zurich for only $300,000 (combined) was unreasonable because the other two insurers paid far less than the amount being demanded from National Grange despite their having provided coverage for a longer period of time. The association countered that the expert reports showed that the water damage increased as time went on and peaked during National Grange’s coverage period. The trial court agreed with National Grange and granted its motion to dismiss.

The association appealed, and the appellate panel reversed, finding that the settlement was reasonable in amount and entered into in good faith, as required by New Jersey law. “The Association provided ample proof to determine the reasonableness of the HIBR settlement,” the court opined.

It was not contested that HIBR defectively installed windows at the development, causing substantial property damage, the court noted. While National Grange submitted no expert testimony on liability or damages, the association provided an expert report with “a spreadsheet detailing the exact amount of damages incurred by each injury to the property, the source of that damages amount if no invoice was available, and the parties responsible for each injury.” Examining the risk to the settling parties, the panel emphasized that expert testimony established HIBR was exposed to liability of up to $4.5 million. “The Association settled its claims against HIBR for $1.86 million, which amounts to approximately thirty percent of HIBR’s potential liability,” the panel wrote.

Moreover, the amount of the settlement that National Grange was required to assume was not unreasonable when compared to the settlement amounts of the other insurers, the court added, because the damage caused by HIBR’s defective installations manifested during 2005, within National Grange’s coverage period. “The damage did not manifest during the coverage periods of OCI or Zurich, and their liability exposure was consequently less” than National Grange, the panel opined.

“Given these proofs and [National Grange’s] refusal to settle or provide a defense, HIBR was bearing ‘the full burden of protecting its own interests’ at a trial with the Association,” the court said. “The extent of its liability was demonstrated by expert reports, ‘not mere allegations in the plaintiffs’ complaint.’ Although HIBR’s ‘actual liability’ was not fully established, more than the required potential liability was shown to exist here. In view of the probability of the Association’s success and the size of possible recovery at a potential trial, the Association has met its burden of showing that a reasonable factfinder could have found that a settlement for thirty percent of the damages that expert reports attributed to HIBR was reasonable.”

To read the decision in Fox Development Co. v. Praetorian Insurance Co., click here.