Although the U.S. has a reputation as a litigious society, inreality judges often encourage parties to a lawsuit to settle. Wheninsurers defend their insureds, settling a case is a reasonabletrial strategy to limit court costs and attorney fees. What happenswhen the plaintiffs reach an agreement with the defendant beforetrial not to pursue all available assets if they win? When ajudgment is rendered against the insured in the trial in which theinsurer doesn't participate, must the insurer provide coverage?

Case of construction defects

Glen and Marsha Hamel hired Terry Mitchell Builders, Inc., tofinish building a single family home in Flower Mound, Texas, whichit did in October 1995. In August 2000, the Hamels said theynoticed signs of water damage in the home. They sued the builder inApril 2002 for breach of implied warranty, negligence, DeceptiveTrade Practices Act violations and Residential ConstructionLiability Act violations, alleging that the builder had failed toperform its services in a good and workmanlike manner. The Hamelsalso alleged that the water damage had resulted from the home'simproper construction or the improper installation of a certainexterior stucco finish.

Great American Insurance Company insured the builder underseveral commercial general liability policies, one of whichexcluded property damage “arising out of” the stucco product. Thebuilder notified Great American of the Hamels' suit, but GreatAmerican declined to defend the builder, citing the policy'sexterior stucco exclusion because the discovery of the damage fellwithin that period.

Great American subsequently conceded that this position waserroneous and the insurer had wrongfully refused to defend thebuilder.

Settlement terms

A week before trial, the Hamels reached an agreement with thebuilder providing that, if they obtained a judgment against thecompany, they would only go after the assets in the company's name,excepting any “personal tools of the trade and truck.” When theagreement was executed, the company had no assets beyond theexcepted “tools of the trade and truck.”

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