The purpose of a settlement and release agreement is to fully and
finally dispose of a disputed matter. However, more and more often, a dispute
cannot be fully resolved where non-parties to the dispute have contributed
defense and indemnity amounts on behalf of one or more of the parties and have
reserved the right to seek recovery of those amounts in subsequent litigation.
In particular, insurance carriers are typically not part of the action and are
not signatories to the settlement agreement.
Who
owns the right to pursue the claim?
An essential step in any settlement negotiation, and one that is often
missed, is the determination of who owns the right to the claims being
asserted. The question becomes complicated where the parties to a dispute have
an underlying contractual relationship that includes a defense and indemnity
obligation and an insurance carrier has agreed to defend. So if a party is
being defended by an insurance carrier, does that party own the right to assert
and recover those fees, or does the carrier that actually paid the fees own the
right?
In many jurisdictions, in order for a party to pursue contractual
damages in the form of defense fees, that party has to actually incur the fees.
This concept pairs with the common law notion of subrogation, wherein a carrier
is subrogated to the rights of its insured to the extent of its payments. A
general liability insurer that has paid a claim to a third party on behalf of
its insured may have an equitable right of subrogation against other parties
who are legally liable to the insured for the harm suffered by the third party,
including defense and indemnification agreements. These rights are derived from
the contract of insurance and include its insured’s rights against tortfeasors
principally responsible for the loss and contractual indemnitors.
So
how can you limit potential reallocation actions?
In recognition of a non-party carrier’s putative rights, parties to the
underlying litigation have responded with a number of strategies to expand the
scope of the release agreement. For instance, the parties can:
- Include any carriers as part of the negotiations and add them as releasing entities to the settlement agreement;
- Include a requirement that the claimant defend and indemnify the settling parties as part of any settlement;
- Require a pre-settlement assignment of claims to the claimant and have the claimant release those claims as part of a settlement; and/ or
- Have the carrier intervene in the action or force the carrier into the action by way of a cross-complaint and include it in a global settlement.
Is counsel
well-versed in these types of settlement agreements?
The pitfalls for the novice in negotiating the
scope of a settlement agreement and release are plentiful. Counsel has to be
conversant with not only the claims against her client, but also who owns the
rights to those claims. Should there be known third-party claims, they have to
be discussed, bargained for, and, if possible, included in the settlement
agreement and release. Where the third-party claims are not part of the
settlement, counsel needs to understand the potential for a subsequent action,
advise her client on the risk, and negotiate release language to put the client
in the best-possible position should subsequent litigation be filed. Of course,
finding a neutral that understands non-party rights and the limitations in
settlement negotiations can significantly contribute toward the successful
resolution of the matter and substantially reduce the likelihood of future
litigation.
Are unknown claims going to be released as part of the
settlement?
Seeking a full and final resolution of the matter,
which would eliminate any future litigation arising from the subject matter of
the dispute, is a lofty goal. Typically, the parties must first acknowledge
that a general release does not release all known and unknown claims (pursuant
to public policy, common law, or statute). As such, the parties to the
negotiation must negotiate and specifically waive any limitations for unknown
claims. For instance, in California and many other jurisdictions, to obtain the
broadest form of release, the parties must set forth the limitations contained
in California Civil Code Section 1542 and specifically waive those provisions.
While including and waiving this provision in a settlement agreement is a good
step toward obtaining a full and final settlement among the signatories to the
agreement, it does not necessarily resolve claims of non-parties to the action.
In particular, a carrier’s potential rights against its insureds and its
derivative rights against third parties can provide the basis upon which a
subsequent action can be maintained against the settling parties. As such, the
parties to the release, the scope of the release, and third-party rights need
serious consideration by counsel when negotiating a settlement and drafting the
terms of the settlement and release agreement.
Stacy L. La Scala, Esq. is a mediator and arbitrator with JAMS
based in Orange, Calif. His practice focuses on a wide array of disputes,
including construction, insurance, business/commercial and professional
liability matters. He can be reached at slascala@jamsadr.com.
