Extinguishing Third-Party Liability as a Prerequisite to Contribution
The absence of a simple sentence in a release signed by the claimant after settling a liability claim is costing liability carriers millions of dollars in contribution recoveries across the country. By the time they discover the mistake, it is too late.
In contribution claims, a liability payment made by an insurer (either due to judgment or settlement) is recovered from a co-tortfeasor who did not contribute to the original settlement or judgment. Many states have determined that contribution from a co-tortfeasor is not allowed when there is a settlement that does not extinguish the liability of the co-tortfeasor. Therefore, whether to release a jointly liable third party when settling with your insured can be a tricky question. Depending on the state releasing a co-defendant or another liable party during settlement is likely a critical component to later seeking contribution from that party. Failing to arrange for the release of the party from whom contribution is sought may result in losing the ability to do so, even if the tortfeasor (contribution defendant) was ultimately responsible for the damage. Consider the following example:
Harry Homeowner hires Connie Contractor to install a water line from Harry’s house to the city water supply. Connie Contractor leaves several ditches and a sewer line uncovered during heavy rain, and the concentration of water backs up the sewer line in Nancy Neighbor’s house flooding her basement.
Who is responsible for Nancy Neighbor’s damages? Suppose that Homeowner is “responsible” because Nancy Neighbor called Harry Homeowner to warn him of the water and Harry Homeowner did nothing about it. Further assume that Connie Contractor is “responsible” because she was negligent in leaving the ditches and sewer line uncovered. Let’s also leave out the possibility of contractual indemnity which would likely play a role in construction cases such as this.
The idea behind joint and several liability is to make Nancy Neighbor whole. It is intended to address the inequities resulting from a tortfeasor being unable or unwilling to pay for all of Nancy Neighbor’s damages he causes. In such a situation, either the other defendants or the plaintiff must pay for the insolvent, non-paying defendant’s share. Perhaps Harry Homeowner does not have insurance or is insolvent. Joint and several liability is a way to hold Connie Contractor responsible for all of Nancy Neighbor’s damages, allowing Connie Contractor to pursue Harry Homeowner for some or all the claim he paid. Of course, this is a simple example, and the various forms of joint and/or several liability vary widely from state to state. But, it lays the factual foundation for a typical contribution action.
Contribution is a defendant’s way to get back the portion of damages he paid to the plaintiff that should have been paid for by someone else. This scenario arises in states that apply either pure or modified joint and several liability. In “pure” states, a single defendant may be held responsible for the entire amount of damages, despite their level of culpability. In “modified” states, a single defendant may be held responsible for the entire amount of damages if they are found to be at or above a specific percentage of fault. In either kind of state, the defendant who is made to pay the victim may then turn around and force a fellow responsible party to “contribute” their share of damages.
In the example above, suppose Nancy Neighbor obtains a judgment for $100,000 against Connie Contractor, and the jury concludes that Connie Contractor was 30% at fault and Harry Homeowner was 70% at fault. Connie Contractor pays Harry Neighbor the entire $100,000 and then pursues Harry Homeowner for $70,000, or 70% of the damages, because that is the level of responsibility attributed to Harry Homeowner.
But, what if Nancy Neighbor and Connie Contractor settle before trial? What claims should Connie Contractor include in the settlement release signed by Nancy Neighbor to ensure Connie Contractor can later pursue contribution directly from Harry Homeowner? The answer depends on the state you are in. Although it may seem counterintuitive to release a fellow tortfeasor when they are not paying anything and are not a party to a settlement agreement, it is sometimes required under state law to claim contribution. Arkansas, California[i], Delaware[ii], Florida, Hawaii, Idaho, Illinois, Iowa, Michigan, Nebraska, New Jersey[iii], North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Virginia, and Washington all require that the contribution defendant’s liability be released or extinguished in the original liability settlement.[iv]
In jurisdictions that require the contribution defendant to be released, it is imperative to do two things when negotiating a settlement. First, be sure that the settlement itself is reasonable. Many jurisdictions require that any settlement upon which contribution is being sought must be reasonable. This is a subjective standard and a court may be called on to determine if the underlying liability settlement in a contribution claim was reasonable. In the example above, it would probably be unreasonable for Connie Contractor to offer Nancy Neighbor $500,000 to settle a claim worth only $100,000. There is little incentive to overpay but using due diligence and properly evaluating the true value of the claim may be necessary in bringing a contribution action after settling a claim with the plaintiff.
The defendant/contribution plaintiff must make sure to extinguish entirely the liability of the co-defendant or co-tortfeasor. There is generally no exception for extinguishing only liability up to the amount of the settlement; it is an all-or-nothing proposition. In our example, let’s compare two settlement agreements between Connie Contractor and Nancy Neighbor:
- Nancy Neighbor agrees to release only Connie Contractor from all past or future claims that arose or may arise as a result of the previously-described water damage.
- Nancy Neighbor agrees to release Connie Contractor and Harry Homeowner from all past or future claims that arose or may arise as a result of the previously-described water damage.
In the states listed above, Connie Contractor would not be able to pursue contribution from Harry Homeowner in the first example, but she would be able to pursue contribution for Harry Homeowner’s share of negligence in the second example.
The consequences of failing to understand a state’s laws regarding contribution can be immense. A third party could be 100% responsible for payments you have made to a victim, but if you fail to release the third party, you could be left high and dry when seeking contribution from them.
The final piece of this puzzle is an important one. Once you obtain the plaintiff’s signature on a release, you will not be able to go back later and ask them to sign a new settlement agreement also naming the third party. Usually such agreements lack consideration — in other words the victim is not getting anything in exchange for modifying the agreement and releasing the third party. Contracts lacking consideration are void and will not satisfy the release requirement.
For these reasons, it is important to have an attorney who understands the complexities of each state’s laws review settlement agreements before you have them executed by the parties. Otherwise, you may be stuck footing the whole bill for someone else’s bad acts.
For more information regarding contribution actions and joint and several liability, our multi-state chart on those subjects may be found here. For questions on seeking contribution claims against a jointly-responsible party, contact Gary Wickert at [email protected].
[i] A settling defendant can recover equitable indemnity from a non-settling defendant to the extent the settling defendant has discharged a liability that the non-settling defendant should be responsible to pay. The right of contribution can be enforced in a separate lawsuit. Caterpillar Tractor Co. v. Teledyne Indus., Inc., 53 Cal. App.3d 693, 126 Cal. Rptr. 455 (Cal. Ct. App. 1975).
[ii] However, no separate contribution action is available if it could be enforced by cross-claim in the original action. 10 Del. C. § 6302.
[iii] Contribution allowed only if the settlement is elevated to a final judgment. N.J. Stat. § 2A:53A-3; Steele v. Kerrigan, 689 A.2d 685 (N.J. 1997).
[iv] In some states, such as New York, a settling tortfeasor is not entitled to contribution unless it is expressly provided for in the settlement agreement. N.Y.G.O.L. § 15-108.